Mentors Comments:

• Source: https://indianexpress.com/article/opinion/editorials/rbi-small-and-inclusive-6157145/
• Mention any fact/ report on the state of financial inclusion in India.
• Give reasons behind poor reach of financial network.
• Discuss the idea of differentiated banking and how it provides a solution to the issues of banking in India.

Extent of Financial Exclusion in India

• According to the World Bank’s Global Financial Inclusion Survey (2012), only 35% of adults in India had access to a formal bank account and only 8% borrowed from institutional and formal sources.
• As per Census 2011, only 58.7% of households are availing banking services in the country. However, as compared with previous Census 2001, availing of banking services increased significantly largely on account of increase in banking services in rural areas.
• According to the World Bank ‘Financial Access Survey’ Results, in our country, financial exclusion measured in terms of bank branch density, ATM density, bank credit to GDP and bank deposits to GDP is quite low as compared with most of developing countries in the world.
• At present, only about 5% of India’s 6 lakh villages have bank branches. There are 296 under-banked districts in states with below-par banking services.

Challenges to financial inclusion in India:-

• Failure of government schemes:-
  • Jan Dhan Yojana:-
    • Only 33 per cent of all beneficiaries were ready to use their Rupay cards.
    • Merely opening physical accounts as flag posts of financial identity won’t help unless they are actively used by people for managing their money.
  • Financial literacy:-
    • India is home to 17.5 per cent of the world’s population but nearly 76 per cent of its adult population does not understand basic financial concepts.
  • Insurance policy issues:-
    • On account of lack of awareness and failure of institutions to guide them, people buy insurance policies without planning and give up midway because they don’t have money to pay premium.
  • Access to Credit
    • But despite the strong growth, only 200 million borrowers have had access to credit from formal channels This is the reason why the credit penetration index of CRISIL Inclusix remained low
    • There is also a large degree of self-exclusion due to the existence of informal credit sources meeting their convenience.
  • Digital Connectivity issues:-
    • When most of the rural areas still not having even a reliable internet facility it is difficult to push for a cashless economy.
  • From the demand side, the reasons are low income, poverty and illiteracy and lack of awareness.
  • From the supply side branch proximity, timings, cumbersome documentation and procedures,
    attitude of the bank staff and language.
  • Remoteness from the financial institutions: 
    • Usually, banks are locating their branches in the high densely populated areas for covering its cost of operations.
    • Unfortunately, people are scattered in rural India.
    • Low penetration of financial services, less efficiency of business correspondents also limits the success of financial inclusion.
  • The complex financial services market offers a wide range of products however lack of awareness restricts the use of these products.
  • Flexibility in terms of financial communication is the biggest roadblock to true financial inclusion in India.
  • Low and Irregular income:
    • Income level is one of the prominent factors that hinder the underprivileged from availing services from banks.
    • Majority of the people’s income level in the rural area is low and irregular too. A major portion of people is in seasonal employment. Hence, income level decides people’s saving and investment avenues.
  • High Cost:
    • Nowadays banks are operating for profit under the competitive environment. They levy charges for different transactions like minimum balance requirement, charges for usage of ATM services, processing fee etc. People are already suffering from low and irregular income.
    • Therefore paying these kinds of excessive charges make them more burdened.
  • Lack of proper Documents:
    • As per the norms of the banks, it is mandatory to submit legal documents at the time of opening an account.
    • Majority of the poor people like migrants, tribes etc cannot access the formal financial services due to lack of having any legal documents. Getting a legal document is an expensive and time-consuming process.

Differentiated Banks:

• Differentiated banks are banking institutions licensed by the RBI to provide specific banking services and products.
• It is a system refers to the system of different licenses for different subcomponents of the banking sector such as Limited Banking License, Commercial Banking License etc. A differentiated license will allow a bank to offer products only in select areas.
• Main aim for giving license to differentiated banks is to promote financial inclusion and payments.
• The term differentiated banks indicate that they are different from the usual universal banks. The universal banks like SBI, Canara Bank etc. can give almost all products and services. On the other hand, the differentiated banks can give only selected products like credit, payments, deposit etc., with RBI regulations.
• Differentiated banks licensing was launched in 2015. The differentiated banks are of two types-payment banks and small finance banks.

Small Finance Banks (SFBs)

• They are niche banks that focus and serve the needs of a certain demographic segment of the population.
• The objectives of setting up of small finance banks will be to further financial inclusion by (1) the provision of savings vehicles (2) supply of credit to small business units; small and marginal farmers; micro and small industries; and other unorganised sector entities, through high technology-low cost operations.
• SFBs was recommended by the NachiketMor committee on financial inclusion.

Payment Banks:

• The objectives of setting up of payments banks will be to further financial inclusion by providing (1) small savings accounts (2) payments/remittance services to migrant labour workforce, low-income households, small businesses, other unorganised sector entities and other users.
• They will not lend to customers and will have to deploy their funds in government papers and bank deposits.

Challenges to Differentiated Banks:

• Small Banks have to compete with existing public sector banks and RRBs.
• Micro Finance Institution (MFI)/NBFC are specialised in micro-lending operations with limited exposure to banking operations; that means they have to hire, train talent from the banking industry.
• The cost of deposit mobilisation will be higher for these banks as they cover rural and underserved segment.
• Low revenue of Payment banks means they can’t undertake any lending businesses and the income stream is initially restricted to charges on remittances and efficiency of operations.
• Required to invest minimum of 75 per cent of its “demand deposit balances” into government securities. This limits their ability to earn from the deposit base as well.
• Banks are already offering most services that payments banks can and hence, for payments banks to offer a new and differentiated proposition will not be easy.
• Other saving instruments like Kisan Vikas Patra, gold bonds etc have better returns than payment banks.
• Experience from Jan Dhan Yojna has shown that many such no-frill accounts have remained dormant, thus affecting the viability of the banks.

Way Forward:

• Both Payments Banks and Small Finance Banks are ‘niche’ or ‘differentiated’ banks with the common objective of furthering financial inclusion.
• India’s domestic remittance market is estimated to be about Rs 800-900 billion and growing. With money transfer made possible through mobile phones, a big chunk of it, especially that of the migrant labour could shift to this new platform.
• Payment bank can also play a significant role in implementing the government Direct Benefit Transfer scheme, where subsidies on health care, education and gas are paid directly to beneficiaries’ account.
• Payment banks have proved hugely popular in other developing countries. In Kenya, the most cited success story, Vodafone M-Pesa is used by two in three adults to store money, make purchases and transfer funds to friends, relatives etc.