Financial Inclusion in India and Its Challenges

Financial inclusion entails delivery of banking services to large sections of society, at an affordable cost.

Financial Inclusion in India and Its Challenges

[pib] NITI Aayog and Mastercard Release Report on financial inclusion

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Report on ‘Connected Commerce: Creating a Roadmap for a Digitally Inclusive Bharat’

About the report

  • NITI Aayog and Mastercardtoday released a report titled ‘Connected Commerce: Creating a Roadmap for a Digitally Inclusive Bharat’.
  • The report identifies challenges in accelerating digital financial inclusion in India and provides recommendations for making digital services accessible to its 1.3 billion citizens.
  • The report highlights key issues and opportunities, with inferences and recommendations on policy and capacity building across agriculture, small business (MSMEs), urban mobility and cybersecurity.
  • This report looks at some key sectors and areas that need digital disruptions to bring financial services to everyone.

Key recommendations in the report include:

  • Strengthening the payment infrastructure to promote a level playing field for NBFCs and banks.
  • Digitizing registration and compliance processes and diversifying credit sources to enable growth opportunities for MSMEs.
  • Building information sharing systems, including a ‘fraud repository’, and ensuring that online digital commerce platforms carry warnings to alert consumers to the risk of frauds.
  • Enabling agricultural NBFCs to access low-cost capital and deploy a ‘phygital’ (physical + digital) model for achieving better long-term digital outcomes.
  • Digitizing land records will also provide a major boost to the sector.
  • To make city transit seamlessly accessible to all with minimal crowding and queues, leveraging existing smartphones andcontactless cards, and aim for an inclusive, interoperable, and fully open system such as that of the London ‘Tube’.

Financial Inclusion in India and Its Challenges

Microfinance Institutions

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Role of microfinance in India and challenges sector faces

The article highlights the important role played by the microfinance sector in furthering financial inclusion in India and suggests measures to achieve holistic development of the sector.

Important role played by microfinance

  • No other form of financial services has had the kind of far-reaching impact, in terms of fostering financial inclusion, as microcredit has.
  • Access to small, collateral-free loans for economically productive purposes has helped transform the lives of millions at the bottom-of-the-pyramid—especially women.
  • Over the past decade, India’s microfinance industry has grown at a compound annual growth rate of 26% to reach 2.36 trillion.
  • It has helped 50 million economically vulnerable Indians, 99% of them women, live a life of dignity and financial independence.
  • Assuming that these 50 million people who took a loan to start a small business employed at least one other person, it translates into 50 million additional jobs in the country.
  • This creates a ‘network effect’ that has a social impact at scale.

Evolution of microfinance industry

  • Recommendations of the Malegam Committee, which became regulations, and practices such as relying on credit bureau data to assess a borrower’s creditworthiness have helped the industry immensely.
  • The vital role that microfinance plays in the last-mile delivery of financial services was acknowledged.
  • Subsequently, eight out of the 10 small finance bank licences granted were also given to microfinance institutions.
  • RBI has sought to undertake a comprehensive review of the sector again, after 10 years, to better align the regulatory framework with the sector’s current realities.

Steps for development of sector

  • First, Entities should promote financial literacy through group meetings of borrowers.
  • Second, organizations should complement their microcredit operations with social development projects and community-connect initiatives.
  • Third, prospective borrowers’ indebtedness and ability to repay dues should be assessed properly.
  • Fourth, loans must be given only for income-generation purposes.
  • Fifth, every microfinance organization should devote time and resources for capacity building at the grassroots.
  • Sixth, rather than focusing on taking over the existing debt of a borrower, or lending to her further, institutions should focus on bringing new-to-credit customers into the fold.

Consider the question “How can microcredit stimulate financial inclusion in India? Suggest the measures for the development of microfinance sector in India.”

Conclusion

There is much more that we, as a nation, collectively need to do in order to bring a vast population of unbanked and underbanked Indians into the fold of formal financial services.

Financial Inclusion in India and Its Challenges

National Pension System (NPS)

Note4Students

From UPSC perspective, the following things are important :

Prelims level : NPS

Mains level : Various pension schemes in India

The National Pension System (NPS) will no longer compel investors to convert 40% of their accumulated retirement corpus into an annuity.

An annuity is a long-term investment that is issued by an insurance company and is designed to help protect you from the risk of outliving your income. Through annuitisation, your purchase payments (what you contribute) are converted into periodic payments that can last for life.

Why such a move?

  • Poor yields on annuities and high inflation are translating into negative returns.
  • Since annuities are taxable, deducting the tax and factoring in inflation means annuities are yielding negative returns.

Try this PYQ:

Q.Who among the following can join the National Pension System (NPS)?

(a) Resident Indian citizens only

(b) Persons of age from 21 to 55 only

(c) All-State Government employees joining the services after the date of notification by the respective State Governments

(d) All Central Governments Employees including those of Armed Forces joining the services on or after 1st April 2004

National Pension Scheme (NPS)

  • NPS is a government-sponsored pension scheme. It was launched in January 2004 for government employees.
  • It was extended to all citizens of Indian on a voluntary basis from May 2009 and to corporates in December 2011 and to Non-Resident Indians in October 2015.
  • PFRDA is the statutory authority established by an enactment of the Parliament, to regulate, promote and ensure orderly growth of the NPS and pension schemes to which this Act applies.
  • The scheme allows subscribers to contribute regularly in a pension account during their working life.
  • On retirement, subscribers can withdraw a part of the corpus in a lump sum and use the remaining corpus to buy an annuity to secure a regular income after retirement.

Who can join NPS?

  • Any Indian citizen between 18 and 60 years can join NPS.
  • The only condition is that the person must comply with know your customer (KYC) norms.
  • An NRI can join NPS. However, the account will be closed if there is a change in the citizenship status of the NRI.
  • Now, any Indian citizen, resident or non-resident and OCIs are eligible to join NPS till the age of 65 years.

Financial Inclusion in India and Its Challenges

Digital lending

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Digital lending and challenges

Digital lending has been on the rise in India. However, there are several concerns about the model. The article discusses these concerns and suggests the policy approach.

3 digital lending models

  • Presently, there are three digital-lending models, seen through the regulatory-approach lens:
  • 1) Bank/NBFC-owned digital platforms operating under the direct regulatory purview of RBI.
  • 2) Fintech companies’ proprietary digital platforms, working in partnership with banks/NBFCs.
  • Being mere intermediaries, these platforms are not required to seek any registration with RBI, and are only indirectly regulated through RBI’s outsourcing guidelines applicable to Banks/NBFCs.
  • 3) Peer-to-peer (P2P) lending platforms, which usually involve the otherwise unregulated retail lenders.
  • RBI has mandated such platforms to seek registration as NBFC-P2P; thus, they are directly regulated by RBI.

Issues with digital lending

  • The specific issues are unauthorised lenders, exorbitant rates of interest, use of coercive repayment methods, and non-consensual collection or use of user data.
  • These issues entail serious adverse implications for borrowers and have systemic implications, hampering the rise of legitimate fintech players.

Steps taken

  • With a view to curb such practices, RBI, in 2020, issued a notification to Banks/NBFCs mandating additional disclosures/compliances, and an advisory to borrowers warning them against such platforms.
  • Following the notification, Google removed several such loan apps from its PlayStore.
  • The Digital Lenders’ Association of India (DLAI) also issued guidelines to help borrowers identify such unscrupulous platforms.
  • In the regulatory pipeline on this front is the report of the working group on digital lending, constituted by RBI in January 2021.

Framing effective policy solutions

  • Given the significant contribution of legitimate fintech players, it is important to ensure that any policy solutions to address such issues do not impede the growth of such players.
  • The key to this lies in adoption of light-touch regulation, along with the effective implementation of the already proposed regulatory initiatives.
  • For instance, the primary cause of the rising supply of unauthorised lending platforms is the existing credit information asymmetry that genuine lenders face in respect of small borrowers.
  • Here, operationalising and on-scale implementation of RBI’s proposed ‘Public Credit Registry’ and the ‘Open Credit Enablement Network’ (an infrastructure protocol enabling digital low cost lending to small borrowers through access of consented data) would lead to increased participation of legitimate players and curb proliferation of unauthorised lenders.
  • Another foundation for framing effective policy solutions lies in leveraging the interdependence and impact of each individual constituent of the digital lending ecosystem, on other constituents.
  • Apart from lenders/platforms/borrowers, these constituents also include the digital lending industry associations, consent managers and technology developers.
  • Regulators and industry associations working together can provide the necessary foundations for addressing these issues.
  • Other solutions spear-headed by industry associations could be to establish ‘certification system’ based maintenance of a repository of lending platforms for easy identification of genuine players.
  • Similarly, on the data protection aspect, a structural solution through coordinated efforts of various digital lending constituents is required.

Consider the question “Examine the factors aiding the growth of digital lending in India. What are the challenges the sector face? Suggest the measures to deal with these challenges.”

Conclusion

For the continued development of the Indian digital lending economy, it is important to implement policy solutions that adequately protect the borrowers from malpractices, while, at the same time, do not dampen innovation in this fast-evolving sector.


Source:-

https://www.financialexpress.com/opinion/soft-touch-regulation-for-digital-lending/2215702/

Financial Inclusion in India and Its Challenges

Payment banks

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Payment Banks and Small Finance Bank

Mains level : Paper 3- Challenges in financial inclusion

The article highlights the important role Payment Banks could play in furthering the financial inclusion in India.

Financial inclusion and challenges

  • Interventions, especially the JAM trinity—Jan Dhan accounts, Aadhaar and Mobile phones—have accelerated digital and financial inclusion in India.
  • Four of every five Indian adults have a registered bank account.
  • Financial inclusion is not only about opening accounts, it encompasses access to credit, insurance and micro-investment products in a simple and safe way.
  • This remains a challenge for ‘weaker sections and low-income groups’.
  • For instance, only 16% of micro, small and medium enterprises (MSMEs) have access to formal credit amid an estimated debt demand of 69.3 trillion.

High-technology, low-cost banking to accelerate financial inclusion

  • In 2014, Nachiket Mor committee recommended setting up “high technology—low cost” banking models to accelerate financial inclusion to the last mile.
  • Subsequently, the Reserve Bank of India licensed ‘vertically differentiated banking systems’, such as Payments Bank (PBs) and Small Finance Banks (SFBs).
  • SFBs have grown profitably thanks to the yield spread between deposits and lending.
  • Most of them started off as micro finance institutions with a ready asset base, and after converting into SFBs, they have got a better liability franchise but continue to operate in niche geographies.
  • On the other hand, PBs have shown strong growth in revenues, while operating at a larger scale than SFBs.
  • The high-tech PB model has shown more rigour than the cost-heavy branch-based SFB model in terms of its impact on inclusion.

Need for structural intervention

  • If we intend to make a real move ahead on the inclusion front, PBs will have to play a larger role.
  • However, to realize their full potential, they need certain structural interventions:

1) Liabilities

  • PBs can take deposits only up to 1 lakh, which limits their ability to augment profit that can be further deployed to enhance efficiencies.
  • For a few segments, such as self-help groups and MSMEs, the savings account limit blocks the adoption of highly-accessible bank accounts.
  • Since the model has matured, it would be prudent to enhance the deposit limit to 5 lakh and benchmark it to Deposit Insurance and Credit Guarantee Corporation limits.
  • Banking Correspondents (BCs) are a critical link in driving financial inclusion.
  • PBs could offer low-value and simple fixed or recurring deposit products and sell to consumers through their BC distribution network, thus improving their viability.

2) Assets

  • Currently, there is no national-level lender with the risk appetite for thin-credit consumers.
  • PBs can evolve new micro-lending models through their BC networks and mobile apps and create an alternate credit score for these consumers.
  • Allowing micro-lending by PBs could be a starting point. Thereafter, regulators may consider a transition path for them to become SFBs, or even Universal Banks.

3) Working together for collective impact

  • PBs have an edge in technology and reach, while traditional players have a trust legacy.
  • For collective impact on inclusion, two options can be evaluated with safeguards in place.
  • One, PBs could co-originate loans with traditional institutions so that capital requirements are shared.
  • Two, they can originate credit and allow it to mature, or securitize and turn it into a market-linked instrument.
  • This could accelerate credit formalization.

Conclusion

We must remind ourselves that there is no one-size-fits-all solution to achieve complete financial inclusion for the diversified needs of our people. An enabling framework needs to be in place. Payments Banks, in particular, have the potential to bridge India’s financial inclusion gaps.

Financial Inclusion in India and Its Challenges

[pib] Framework for Regulatory Sandbox

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Regulatory sandbox

Mains level : Paper 3- Regulatory sandbox

The International Financial Services Centres Authority (IFSCA) has introduced a framework for Regulatory Sandbox to tap into innovative Fin-tech solutions.

Try answering this simple question:
Q.What is Regulatory Sandbox? What are its salient features?

Regulatory Sandbox

  • A regulatory sandbox usually refers to live testing of new products or services in a controlled/test regulatory environment for which regulators may permit certain regulatory relaxations for the limited purpose of the testing.
  • The objective of the sandbox is to foster responsible innovation in financial services, promote efficiency and bring benefit to consumers.
  • It provides a secure environment for fintech firms to experiment with products under supervision of a regulator.
  • It is an infrastructure that helps fintech players live test their products or solutions, before getting the necessary regulatory approvals for a mass launch, saving start-ups time and cost.

Its inception

  • The concept of a regulatory sandbox or innovation hub for fintech firms was mooted by a committee headed by then RBI executive director Sudarshan Sen.
  • The panel submitted its report in Nov 2017 has called for a regulatory sandbox to help firms experiment with fintech solutions, where the consequences of failure can be contained and reasons for failure analysed.
  • If the product appears to have the potential to be successful, it might be authorised and brought to the broader market more quickly.

What is the new framework?

  • IFSCA has introduced a framework for “Regulatory Sandbox”.
    Under this Sandbox framework, entities operating in the capital market, banking, insurance and financial services space shall be granted certain facilities and flexibilities.
  • It will experiment with innovative FinTech solutions in a live environment with a limited set of real customers for a limited time frame.
  • These features shall be fortified with necessary safeguards for investor protection and risk mitigation. The Regulatory Sandbox shall operate within the IFSC located at GIFT City (Gandhinagar).
  • IFSCA shall assess the applications and extend suitable regulatory relaxations to commence limited purpose testing in the Sandbox.

Other propositions

  • As additional steps towards creating an innovation-centric ecosystem, the IFSCA has proposed the creation of an “Innovation Sandbox”.
  • It will be a testing environment where Fin-tech firms can test their solutions in isolation from the live market.
  • This would be based on market related data made available by the Market Infrastructure Institutions (MIIs) operating in the IFSC.
  • The Innovation Sandbox will be managed and facilitated by the MIIs operating within the IFSC.

Back2Basics: GIFT City, Gandhinagar

  • GIFT city is India’s first operational smart city and international financial services centre (much like a modern IT park).
  • The idea for GIFT was conceived during the Vibrant Gujarat Global Investor Summit 2007 and the initial planning was done by East China Architectural Design & Research Institute (ECADI).
  • Currently approximately 225 units/companies are operational with more than 12000 professionals employed in the City.
  • The entire city is based on concept of FTTX (Fibre to the home / office).The fiber optic is laid in fault tolerant ring architecture so as to ensure maximum uptime of services.
  • Every building in GIFT City is an intelligent building. There is piped supply of cooking gas. India’s first city-level DCS (district cooling system) is also operational at GIFT City.

Financial Inclusion in India and Its Challenges

National Strategy for Financial Education

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not Much

Mains level : Financial education

The National Strategy for Financial Education (NSFE): 2020-2025 documents has been released by the Reserve Bank of India (RBI).

Try this question for mains:

Q.What is the role of Financial Education in ensuring financial inclusion in India?

What is the Strategy?

  • The NSFE for the period 2020-2025, the second one after the 2013-18 NSFE, has been prepared by the National Centre for Financial Education (NCFE) in consultation with all the Financial Sector Regulators (RBI, SEBI, IRDAI and PFRDA.
  • Other stakeholders include (DFIs, SROs, IBA, and NPCI) under the aegis of the Technical Group on Financial Inclusion and Financial Literacy (TGFIFL) under the Chairmanship of Deputy Governor, RBI.

Key recommendations

  • The strategy recommends the adoption of a multi-stakeholder approach to achieve financial well-being of Indians.
  • The document has recommended a ‘5 C’ approach for dissemination of financial education in the country. These include an emphasis on:
  1. development of relevant content in the curriculum in schools, colleges and training establishments,
  2. developing capacity among the intermediaries involved in providing financial services,
  3. leveraging on the positive effect of the community-led model for financial literacy through appropriate communication strategy, and
  4. enhancing collaboration among various stakeholders

Other objectives

  • The strategic objective is also towards improving usage of digital financial services in a safe and secure manner; as well as bringing awareness about rights, duties and avenues for grievance redressal.
  • To achieve the vision of creating a financially aware and empowered India, certain strategic objectives have been laid down including:
  1. Inculcating financial literacy concepts among various sections of the population through financial education to make it an important life skill
  2. Encouraging active savings behaviour and developing credit discipline

Financial Inclusion in India and Its Challenges

[pib] Atal Pension Yojana:  Marking 5 Years of Implementation

Note4Students

From UPSC perspective, the following things are important :

Prelims level : APY, NPS, PFRDA

Mains level : Old age security concerns addressed by APY

The flagship social security scheme ‘Atal Pension Yojana’ (APY) has completed five years of successful implementation.

Five years of successfull implemention of APY is a significant feat. A statement based prelims question on terms of enrolment of the APY can be asked.

Atal Pension Yojana

  • APY is a government-backed pension scheme, primarily targeted at the unorganised sector.
  • It is a social security scheme launched by the government on 9th May 2015 to provide a defined pension between Rs 1,000 to Rs 5,000.
  • It aims of delivering old age income security particularly to the workers in the unorganised sector with a guarantee of minimum pension after 60 years of age.

Terms of enrolment

  • APY can be subscribed by any Indian citizen in the age group of 18-40 years having a bank account and its uniqueness is attributable to three distinctive benefits.
  • First, it provides a minimum guaranteed pension ranging from Rs 1000 to Rs 5000 on attaining 60 years of age,
  • Secondly, the amount of pension is guaranteed for a lifetime to spouse on death of the subscriber.
  • And lastly, in the event of the death of both the subscriber and the spouse, entire pension corpus is paid to the nominee.

Success of the scheme

  • The scheme has now 2.23 crores enrolment.
  • Apart from remarkable enrolments, the scheme has been implemented comprehensively across the country covering all states and UTs with male to a female subscription ratio of 57:43.

About PFRDA

  • Pension Fund Regulatory and Development Authority (PFRDA) is the statutory authority established by an enactment of the Parliament.
  • It aims to regulate, promote and ensure orderly growth of the National Pension System (NPS) and pension schemes to which this Act applies.
  • NPS was initially notified for central government employees recruits w.e.f. 1st Jan 2004 and subsequently adopted by almost all State Governments for its employees.
  • NPS was extended to all Indian citizens (resident/non-resident/overseas) on a voluntary basis and to corporates for its employees.

Financial Inclusion in India and Its Challenges

National Strategy for Financial Inclusion (NSFI)

Note4Students

From UPSC perspective, the following things are important :

Prelims level : National Strategy for Financial Inclusion (NSFI)

Mains level : Financial inclusion in India

The Reserve Bank of India (RBI) has chalked out an ambitious strategy for financial inclusion of all till 2024.

National Strategy for Financial Inclusion (NSFI)

  • Financial inclusion is increasingly being recognised as a key driver of economic growth and poverty alleviation the world over.
  • The strategy aims to strengthen the ecosystem for various modes of digital financial services in all Tier-II to Tier VI centres to create the necessary infrastructure to move towards a less-cash society by March 2022.
  • One of the objectives of the strategy includes increasing outreach of banking outlets of to provide banking access to every village within a 5-km radius or a hamlet of 500 households in hilly areas by March 2020.
  • RBI said that the aim was also to see that every adult had access to a financial service provider through a mobile device by March 2024.
  • With the aim of providing basic of financial services, a target has been set that every willing and eligible adult, who has been enrolled under the PM Jan Dhan Yojana, be enrolled under an insurance scheme and a pension scheme by March 2020.
  • The plan is also to make the Public Credit Registry (PCR) fully operational by March 2022 so that authorised financial entities could leverage the same for assessing credit proposals from all citizens.

Financial Inclusion in India and Its Challenges

[op-ed snap] Small and inclusive

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Small Finance Banks

Mains level : Financial Inclusion

Context

INDIA’S central bank has been criticized for being conservative in lifting entry barriers for new players in the banking sector.

On tap licensing

  • It has been three years after the RBI approved licenses to 10 small finance banks.
  • It has now issued the final guidelines for licensing such banks throughout the year or on tap.

Guidelines

  • The bar has been raised for new entrants in terms of higher capital requirements — Rs 200 crore from Rs 100 crore earlier.
  • Stiffer prudential norms on a continuing basis.
  • Mandatory requirement to list after three years when the net worth tops Rs 500 crore.

Benefits

  • The new approach to granting differentiated licenses to small finance banks and payment banks is welcome.
  • In the current context, established full-service large banks are scaling back their franchises to reduce expenditure.
  • There is also the impact of the planned mergers of some of the state-owned banks.

Small banks

  • Small finance banks have the potential to provide an alternative to some of the existing institutions.
  • Their mandated focus on small and medium businesses, the informal sector, small and marginal farmers will increase financial inclusion.
  • It also serves a variety of unserved clients in the hinterland and tier three and four cities and towns.

Performance of SFBs

  • The RBI’s review of the performance of small finance banks shows that they have achieved their priority sector targets and attained the mandate for furthering financial inclusion.
  • These banks account for less than 0.5% of total deposits and less than 1% of total advances.
  • Many of them have been growing their loan books at a good clip. 

Limitations

  • Their challenge is in building a franchise.
  • There are also the challenges of ensuring relatively low-cost operations by diversifying their loan portfolios and lowering the old legacy loan stock and wholesale deposits. All these can get costly. 
  • They need to put in place robust technology platforms and modern risk management systems.

Way ahead

  • Experience has shown that a competitive banking system can help foster a more inclusive financial sector. 
  • Small finance banks could occupy the space being gradually vacated by some of the bigger banks.
  • They can complement them in segments such as micro and small businesses and the informal sector.
  • Their success will depend on asset quality, the level, and standards of governance and regulatory oversight.

Back2Basics

Small Finance Banks

  • The small finance bank shall primarily undertake basic banking activities of acceptance of deposits and lending to unserved and underserved sections including small business units, small and marginal farmers, micro and small industries and unorganized sector entities.
  • There will not be any restriction in the area of operations of small finance banks.

Financial Inclusion in India and Its Challenges

[op-ed snap] India scores on financial inclusion

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing much

Mains level : Financial Inclusion in India

Context

According to the report, Global Microscope report on inclusion, by the Economist Intelligence Unit (EIU), India has the fifth most conducive environment among emerging countries for inclusive finance.

Facts of report

    • Only Columbia, Peru, Uruguay and Mexico are ahead of India. 
    • The EIU’s analysis takes four basic parameters into account: 
      • whether non-banks can issue e-money
      • the presence of financial service agents
      • proportionate customer due diligence
      • effective financial consumer protection
    • Of the 55 countries assessed, only four scored perfectly across all four enablers.  India is among them.

India – Financial Inclusion

    • Amartya Sen has famously once remarked that “poverty is the deprivation of opportunity”. 
    • Former US president Bill Clinton, on a visit to an Indian village, was quoted as saying all that India’s poor needed was “education and some credit”. 
    • It’s the credit part that financial inclusion initiatives aim to provide. 
    • The poor opened bank accounts under the government’s Jan Dhan Yojana. In 2011, only 40% of Indian adults had an account, according to the Global Findex report; now almost 80% have one.

Way ahead

    • It remains unclear whether poverty itself is being alleviated as a result of such inclusion. 
    • At least it’s possible for the government to directly reach a vast chunk of the population with cash transfers. 
    • Such handouts could help bridge gaps in people’s ability to use these accounts. 
    • Over time, if rural incomes witness an uptrend and non-financial inclusion goes up, India could fulfill the objective of the whole exercise.

 


Back2Basics

Financial Inclusion in India: Need and future; PMJDY; Payment Banks and Small Banks

Financial Inclusion in India and Its Challenges

[op-ed of the day] Governing India through fiscal math

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing Much

Mains level : Concerns with maintaing Strict Fiscal Deficit approach

Note- Op-ed of the day is the most important editorial of the day. Aspirants should try to cover at least this editorial on a daily basis to have command over most important issues in news. It will help in enhancing and enriching the content in mains answers. Please do not miss at any cost.

CONTEXT

While it is important for a government to pursue a sound economic policy, including management of the public finances, it is yet another matter to make a fetish of any one aspect of it. The latter appears to govern this government’s approach to policy when the fiscal deficit is given pride of place in its self-assessment.

Thread of fiscal discipline

  • Soon after the Budget for 2019-20 was presented, one of the Finance Minister’s predecessors remarked that “fiscal prudence rewards economies”.
  • It figured in the most recent Economic Survey, and its anticipated magnitude for 2019-20 was the final statement in the Budget speech that had followed.
  • The Finance Minister had commenced the speech saying how the government was committed to fiscal discipline.

Fiscal discipline

  • In the context, “fiscal discipline” is understood as taking the economy towards the 3% of the gross domestic product.
  • Actually, the point is two-fold:
    • whether the fiscal deficit should be the sole index of fiscal management
    • what a reduction in the deficit would achieve.

Not always a perfect measure

While a sound fiscal policy is highly desirable, the magnitude of the fiscal deficit is not always and everywhere — think here of the state of the economy — a good measure of soundness.

 Overall imbalance in the Budget

  • First, the fiscal deficit reflects the overall imbalance in the Budget.
  • Embedded in the accounts of the government is the revenue account which is a statement of current receipts and expenditure.
  • A fiscal deficit may or may not contain within it a deficit on the revenue account, termed the “revenue deficit”.
  • The possible embeddedness of a revenue deficit within a fiscal deficit muddies the waters somewhat.
  • For movements in the overall, or fiscal, deficit by itself tell us nothing about what is happening to the revenue deficit.
  • A revenue deficit implies that the government is dissaving.
  • Therefore, unless the revenue deficit is kept explicitly in the picture, we cannot deduce the soundness of economic management from a mere reduction in the fiscal deficit.

Rewards yet to be seen

  • A revenue deficit of the Central government is relatively recent, having been virtually non-existent till the 1980s.
  • After that a rampant populism has taken over all political parties, reflected in revenue deficits accounting for over two thirds of the fiscal deficit such as the case today.

Implications of Revenue deficits

  • Revenue deficits have become structural in India by now.
  • This has three implications:
    • That the public debt is only bound to rise;
    • we are permanently borrowing to consume,
    • And leaving it to future generations to inherit the debt.

International borrowing

  • Of late an entirely new dimension has been added to fiscal management, but here again the appropriateness of conducting economic policy by reference to the magnitude of the fiscal deficit remains the issue.
  • In the last Budget the government has signalled its intention to borrow in foreign currency from the international market.
  • This is an innovation alright as the Government of India has so far never borrowed in the international markets, leaving it to public sector organisations and the private corporate sector to do so.

Justification of the move

  • In the Budget speech of the 17th Lok Sabha, the Finance Minister justified the move in terms of the very low share of foreign debt to GDP.
  • The proposal has received criticism, some of it focussing on the consequences of exchange rate volatility.

Concerns with it 

  • Benefits have been flagged too, such as that Indian sovereign bonds will attract a lower risk premium because the price of the foreign-currency-denominated sovereign bond will now be discoverable.
  • This though ignores the biggest lesson from the global financial crisis of 2007, that the market cannot be relied upon to price risk correctly.
  • And, both arguments overlook the foreign exchange constraint.
  • Dollar-denominated debt has to be repaid in dollars.
  • Right now our reserves are fairly high but this could change.
  • Oil prices could go back to where they were, the trade war initiated by U.S. President Donald Trump holds little prospect for faster export growth, and portfolio investment may flow out.
  • While these are only possibilities, they point to the need to ultimately base your borrowing plan on expected dollar earnings.
  • The opportunity offered by low global interest rates right now is not matched by the likelihood of robust export growth.

Conclusion

  • In the final analysis though, it is not the risk of exchange rate depreciation or stagnant exports or even capital flight that is the issue; it is the rationale for borrowing.
  • With revenue deficits the overwhelming part of the fiscal deficit, we would be borrowing to finance consumption.
  • Dollar denominated sovereign debt is just a matter of shifting this borrowing overseas.
  • That is the real issue.

 

Financial Inclusion in India and Its Challenges

Kisan Vikas Patra

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Kisan Vikas Patra

Mains level : Not Much


  • In view of falling interest rates, the government has increased the time period by 1 month for doubling the money invested in Kisan Vikas Patra (KVP) to 9 years and 5 months.

Kisan Vikas Patra (KVP)

  • KVP is a saving certificate scheme which was first launched in 1988 by India Post wherein invested money doubled during the maturity period.
  • It was discontinued in 2011 and later reintroduced in 2014.It is considered a part of the National Small Savings Fund.
  • The amount (Principal) invested in KVP would get doubled in 112 months. The rate of interest is 7.6% from 29th June 2019
  • KVP certificates are available in the denominations of Rs 1000, Rs 5000, Rs 10000 and Rs 50000.
  • The minimum amount that can be invested is Rs 1000. However, there is no upper limit on the purchase of KVPs.

Refund conditions

  • KVP does not offer any income tax benefits to the investor.
  • The amount of KVP can be withdrawn after 118 months (9 years and 10 months).The maturity period of a KVP is 2 years 6 months (30 months).
  • Premature encashment of the KVP certificate is not permissible. The certificates can only be encashed in event of the death of the holder or forfeiture by a pledge or on the order of the courts.

Financial Inclusion in India and Its Challenges

[pib] Various loan schemes for weaker sections

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Various schemes mentioned

Mains level : Credit facilities for EWS in India

  • In terms of RBI guidelines on Priority Sector Lending (PSL) a target of 40 percent of Adjusted Net Bank Credit (ANBC) or Credit Equivalent amount of Off-Balance Sheet Exposures (OBE), whichever is higher has been mandated for lending to the priority sector.
  • This has been mandated for all domestic Scheduled Commercial Banks and Foreign Banks with 20 branches and above.

Various schemes for benefitting poor people are as under:

Pradhan Mantri Mudra Yojana (PMMY)

  • It provides access to institutional finance to unfunded micro / small business units by extending loans upto Rs.10 lakh for manufacturing, processing, trading, services and activities allied to agriculture.
  • These loans are given by Commercial Banks, RRBs, Small Finance Banks, Cooperative Banks, MFIs and NBFCs.
  • The borrower can approach any of the lending institutions mentioned above or can apply online through its portal.

Pradhan Mantri Awas Yojana – Urban (PMAY-U)

  • The mission aims to provide assistance to all States/UTs in addressing the housing requirement of urban poor including EWS/ Low Income Group (LIG).
  • This scheme is converged with other schemes to ensure houses have a toilet, Saubhagya Yojana electricity connection, Ujjwala Yojana LPG gas connection, access to drinking water and Jan Dhan banking facilities, etc.

Central Sector Interest Subsidy Scheme (CSIS)

  • It is an unique Scheme which pivots around the vision that no student desiring to pursue higher education is denied of the opportunity if he/ she is financially poor.
  • This Scheme benefits all categories of EWS students for pursuing professional/ technical courses in lndia and intends to provide affordable higher education.
  • Under this scheme full interest subsidy on educational loans upto Rs 7.50 lakh is available during the period of moratorium on loans availed under the Indian Banks’ Association (IBA) Model Education Loan Scheme from Scheduled Banks.

Deendayal Antyodaya Yojana- National Rural Livelihoods Mission (DAY-NRLM)

  • It aims at promoting poverty reduction through building strong institutions of the poor, particularly women and enabling these institutions to access a range of financial services and livelihood services.
  • DAY-NRLM has a provision for interest subvention, to cover the difference between the Lending Rate of the banks and 7% per annum, on all credit availed by women Self Help Groups (SHGs)
  • It permits a maximum loan of Rs. 3 Lakh per SHG.
  • Further there is also provision of additional interest subvention of 3% for all prompt payee SHG accounts in selected 250 districts.

Deendayal Antyodaya Yojana – National Urban Livelihoods Mission (DAY-NULM)

  • It is a centrally sponsored scheme to reduce poverty and vulnerability of the urban poor households by enabling them to access gainful self-employment and skilled wage employment opportunities.

Differential Rate of Interest (DRI) Scheme

  • Under the DRI Scheme, banks provide finance up to ₹15,000/- at a concessional rate of interest of 4 percent per annum to the weaker sections of the community for engaging in productive and gainful activities.

Financial Inclusion in India and Its Challenges

Financial Stability and Development Council (FSDC)

Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Everything about FSDC

Mains level: Mandate of the FSDC


News

  • The Sub-Committee of the FSDC has discussed ways to address challenges pertaining to the quality of credit ratings in the wake of the IL&FS defaults crisis.

Against faulty Credit Rating

  • Credit rating firms, currently regulated by the SEBI had come under sharp criticism from the RBI recently for failing to identify financial troubles in various companies, especially in the case of IL&FS, which commanded AAA rating just before it started defaulting.
  • RBI officials had expressed concerns over the inability of rating agencies’ to assess credit risk and take timely rating actions.

About  FSDC

  1. FSDC is an apex-level body constituted by the Government of India to create a super regulatory body as mooted by the Raghuram Rajan Committee in 2008.
  2. Finally in 2010, the then Finance Minister of India, Pranab Mukherjee, decided to set up such an autonomous body dealing with macro prudential and financial regularities in the entire financial sector of India.
  3. An apex-level FSDC is not a statutory body. No funds are separately allocated to the council for undertaking its activities.

Composition

  1. Chairperson: The Union Finance Minister of India
  2. Members:
  • Governor Reserve Bank of India (RBl),
  • Finance Secretary and/ or Secretary, Department of Economic Affairs (DEA),
  • Secretary, Department of Financial Services (DFS),
  • Secretary, Ministry of Corporate Affairs,
  • Chief Economic Advisor, Ministry of Finance.
  1. Other members include chairman of SEBI, IRDA, PFRDA and IBBI

Responsibilities

  • Financial Stability
  • Financial Sector Development
  • Inter-Regulatory Coordination
  • Financial Literacy
  • Financial Inclusion
  • Macro prudential supervision of the economy including the functioning of large financial conglomerates
  • Coordinating India’s international interface with financial sector bodies like the Financial Action Task Force (FATF), Financial Stability Board (FSB) and any such body as may be decided by the Finance Minister from time to time.

Financial Inclusion in India and Its Challenges

[op-ed snap] Ensure a minimum income for all

Note4students

Mains Paper 3: Economy | Inclusive growth & issues arising from it.

From UPSC perspective, the following things are important:

Prelims level: UBI

Mains level: Debate surrounding Universal Basic Income


News

Context

  • The idea of a universal basic income (UBI) is gaining ground globally.
  • It has supporters among the political left and right, and among proponents as well as opponents of the free-market economy.

Working of the UBI

  • The UBI is neither an antidote to the vagaries of market forces nor a substitute for basic public services, especially health and education.
  • Besides, there is no need to transfer money to middle- and high-income earners as well as large landowners.
  • However, there is a strong case for direct income transfers to some groups: landless labourers, agricultural workers and marginal farmers who suffer from multi-dimensional poverty.
  • These groups have not benefited from economic growth.
  • They were and still are the poorest Indians. Various welfare schemes have also failed to bring them out of penury.

Credit Alternatives

  • A case in point is the access to institutional credit issued by banks and cooperative societies.
  • According to NSSO data from the 70th round, institutional credits account for less than 15% of the total borrowing by landless agricultural workers; the figure for marginal and small farmers is only 30%.
  • These groups have to borrow from moneylenders and adhatiyas at exorbitant interest rates ranging from 24 to 60%.
  • As a result, they do not stand to benefit much from the interest rate subsidy for the agriculture sector. Likewise, the benefits of subsidised fertilizers and power are enjoyed largely by big farmers.
  • In urban areas, contract workers and those in the informal sector face a similar problem.

Alternative Schemes

  • A UBI requires the government to pay every citizen a fixed amount of money on a regular basis and without any conditionalities.
  • Crucial to the appeal for such a demand for a UBI — is that millions of people remain unemployed and are extremely poor, despite rapid economic growth in the last three decades.
  • The government has already unfolded a limited version of the UBI in the form of the PM Kisan Samman Nidhi Yojana (PM-KISAN) which promises ₹6,000 per annum to farmers who own less than 2 hectares of land.

How UBI will work?

  • An income support of, say ₹15,000 per annum can be a good supplement to their livelihoods — an amount worth more than a third of the average consumption of the poorest 25% households, and more than a fourth of the annual income of marginal farmers.
  • This additional income can reduce the incidence of indebtedness among marginal farmers, thereby helping them escape moneylenders and adhatiyas.
  • Besides, it can go a long way in helping the poor to make ends meet.
  • At high levels of impoverishment, even a small income supplement can improve nutrient intake, and increase enrolment and school attendance for students coming from poor households.

Better productivity

  • In other words, income transfers to the poor will lead to improved health and educational outcomes, which in turn would lead to a more productive workforce.
  • It seems to be a good idea to transfer the money into the bank accounts of women of the beneficiary households.
  • Women tend to spend more of their income on health and the education of children.
  • The effect of an income transfer scheme on unemployment is a moot point. In principle, cash transfers can result in withdrawal of beneficiaries from the labour force.

Encourages employment

  • The income support suggested above is not too large to discourage beneficiaries from seeking work.
  • In fact, it can promote employment and economic activities. Moreover, such a scheme will have three immediate benefits.
  • One, it will help bring a large number of households out of the poverty trap or prevent them from falling into it in the event of exigencies such as illness.
  • Two, it will reduce income inequalities.
  • Three, since the poor spend most of their income, a boost in their income will increase demand and promote economic activities in rural areas.

Income Transfer: A better Alternative?

  • Nonetheless, an income transfer scheme cannot be a substitute for universal basic services.
  • The direct income support to the poor will deliver the benefits mentioned only if it comes on top of public services such as primary health and education.
  • This means that direct transfers should not be at the expense of public services for primary health and education.
  • If anything, budgetary allocation for these services should be raised significantly.
  • Programmes such as the MGNREGS should also stay. With direct income support, the demand for the programmes will come down naturally.
  • However, in the interim, it will serve to screen the poorest in the country and give them a crucial safety net.

Targeting beneficiaries

  • The Socio-Economic and Caste Census (SECC) 2011 can be used to identify the neediest.
  • Groups suffering from multidimensional poverty such as the destitute, the shelter-less, manual scavengers, tribal groups, and former bonded labourers are automatically included.
  • The dataset includes more than six crore landless labourers.
  • It also includes many small farmers who face deprivation criteria such as families without any bread-earning adult member, and those without a pucca house.
  • The other needy group, small farmers, missing from the SECC can be identified using the dataset from the Agriculture Census of 2015-16.
  • The Aadhaar identity can be used to rule out duplications and update the list of eligible households.

Limited corpus: The only hurdle

  • As an approximation, the number of eligible households is 10 crore.
  • That is, even in its basic form, the scheme will require approximately ₹1.5 lakh crore per annum.
  • The PM-KISAN Yojana can be aligned to meet a part of the cost.
  • Moreover, the tax kitty can be expanded by reintroducing wealth tax.
  • Nonetheless, the required amount is beyond the Centre’s fiscal capacity at the moment.
  • Therefore, the cost will have to be shared by States. States such as Telangana and Odisha are already providing direct income support to their farmers.

From Jan Dhan to Jan Suraksha: A Journey towards Financial Inclusion and Security


The budget 2015-16 had announced 3 Social Security Schemes:

#1. Pradhan Mantri Suraksha BimaYojna (PMSBY)
#2. Pradhan MantriJeevan Jyoti Bima Yojana (PMJJBY)
#3. Atal Pension Yojana (APY)

Why the schemes?

  • India faces the biggest challenge of providing banking facilities and insurance coverage to all
  • Having access to institutional finance has so far remained a far cry to a vast chunk of rural population
  • As of May 2015, only 20% of India’s population has any kind of insurance and only 11% has any kind of pension scheme
  • Insurance is a way of managing risks & give necessary protections in case of financial loss
  • When one has an insurance policy, certain rights and protections are derived out of it to the person and his family
  • There is a dire need for providing social security at a very nominal cost to the millions and economic empowerment of the poor Answer in comments.>
  • PMJDY is a major step to bring people across the country closer to institutionalized finance, and save them from the clutches of informal financiers
  • However, most of the PMJDY accounts had zero balance initially. The government aims to reduce the number of such zero balance accounts by using these schemes Answer in comments.>

PMSBY & PMJJBY:


 


 

  • Implementation: The scheme will be offered by all Public Sector General Insurance Companies and all other insurers who are willing to join the scheme and tie-up with banks for this purpose
  • Govt Contribution: Various Ministries can co-contribute premium for various categories of their beneficiaries from their budget or from Public Welfare Fund created in this budget from unclaimed money
  • Auto-debit: The premium amount will be auto debited from subscriber’s bank account
  • The schemes will be linked to the bank accounts opened under the Pradhan Mantri Jan Dhan Yojana scheme

Criticisms of PMSBY:

  • Private banks have complained that the Govt should focus on upper middle class instead of the poorer section
  • Western scholars have argued that financial inclusion is a myth and serving such large number of people would only increase the burden and work-load of public sector

Criticisms of PMJJBY:

  • The banks have complained that revenue received will be very low
  • Some bankers have claimed that amount they are receiving is not sufficient to cover the service costs
  • Insurers have also pointed out that no health certificate or information of pre-existing disease is required for joining

Atal Pension Yojana

  • It focuses on the unorganized sector where nearly 400 million employees representing more than 80% of all employees are engaged Answer in comments.>
  • The aim is to make sure that needy people could get fixed amount when they get old
  • It is the improved version of Swavalamban scheme, launched in 2010-11, which has been found lacking in clarity with regard to pension benefits at the age after 60

Features:

  • All citizen of India aged between 18-40 years are eligible
  • A guaranteed minimum monthly pension will be provided to the subscribers varying from Rs. 1000 to Rs. 5000 per month
  • The pension amount depends on contribution by subscriber
  • Government of India will guarantee the minimum benefit of pension
  • Most interesting part of the scheme is that the government will contribute 50% of the contribution made by the subscriber or Rs. 1000 whichever is lower
  • However, contribution by the govt is available for only those who are not income tax payers and are not covered by any Statutory Social Security Schemes
  • Bank account holder of Any Bank account is eligible

Suraksha Bandhan drive- Spreading the social security message

  • Aim: To take forward the Govt’s objective of creating a universal social security system in the country, targeted especially at the poor and the under-privileged
  • Participating Banks supported by the participating Insurance Companies are carrying out local outreach, awareness building and enrolment facilitation under the drive
  • Public service organizations supported by peoples representatives are participating in these efforts through various outreach activities such as enrolment drives, camps etc. in large numbers during this period
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