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Role of Government in Financial Inclusion

Financial inclusion means a group of people should take part in growth activities and help to increase economic growth of the country. We cannot say that financial growth has been achieved by opening a bank account, granting huge loan to a single person and closing the account. First, many people have to open an account in a bank, save money regularly so that loans to needy people may be granted on regular basis. It is a process ensuring easy access and usage of financial system for the rich and poor in the country.

The Indian Government wishes that the poor people should be benefited by financial inclusion. They have to be given loans for trading activities or paying back the loan...

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... from money lenders. The Reserve Bank of India permits for financial inclusion by allowing banks to grant loan to non-registered bodies, subject to certain norms.

The Government needs to take on a leadership role and focus the attention of the financial services industry and community-based financial institutions on this issue. Promoting financial inclusion requires action by a range of Government departments, including those involved in tackling poverty, protecting consumers and promoting employment and economic growth. Promoting financial inclusion needs to be a key part of the Government’s overall agenda to promote financial inclusion. The Government of India has decided to set up a National Mission on Financial Inclusion (NaMFI) to promote inclusive growth in the country through universal access to finance by the poor and vulnerable groups within a specified time frame. Government has also provided Financial Inclusion fund.

Objectives:

• To make people aware about what the Financial Inclusion is all about. • To give knowledge about what the government is doing for our country related to financial inclusion. • To know about the various financial sectors taking part in helping for the concept of financial inclusion.

Financial inclusion means a group of people should take part in growth activities and help to increase economic growth of the country. We cannot say that financial growth has been achieved by opening a bank account, granting huge loan to a single person and closing the account. First, many people have to open an account in a bank, save money regularly so that loans to needy people may be granted on regular basis. It is a process ensuring easy access and usage of financial system for the rich and poor in the country.

The Reserve Bank of India (RBI) today said that financial inclusion is not restricted merely to opening of bank accounts and should imply provision of all financial services like credit, remittance and overdraft facilities for the rural poor. “The accounts must be operational to provide benefits beyond deposit of money like availability of credit, remittance facility and overdraft among others”, D. Subbarao, Governor of RBI said here.

Financial Inclusion is a key dimension of the overall strategy “Towards Faster and More Inclusive Growth”. If the intention is to promote ‘more inclusive growth’, then the definition of Financial Inclusion cannot stop at opening a short-duration account in the name of an individual or group. Growth cannot be achieved by transferring a lump sum of money into this account as proof of one loan given, closing both the account after the loan is drawn (or letting it remain dormant) as well as the file itself after the loan is repaid and the subsidy adjusted. Financial inclusion is not a one-off event. In terms of finance provision, it means that hitherto excluded people – either as individuals or as groups – now have access to credit on a regular basis for as long as they continue to abide by the terms of such a credit relationship.

For Financial inclusion to promote growth, it has to move from “opening an account” in the Bank, to regular savings and finally to a relationship which enables the borrower to access loans on a regular basis. If this definition is accepted, it follows that despite the plethora of schemes that have been promoted by various governments from pre-IRDP days to the current SGSY, the SHG (Self Help Group) -Bank Linkage Programme is the only formal-sector scheme till date that regards excluded people as regular customers who can take loans again and again, as against being one-time beneficiaries who have to fall back on their own resources once their turn to benefit from the government scheme is over. Who can take part in financial inclusion?

The Indian Government wishes that the poor people should be benefited by financial inclusion. They have to be given loans for trading activities or paying back the loan from money lenders. The Reserve Bank of India permits for financial inclusion by allowing banks to grant loan to non-registered bodies, subject to certain norms. By watching the functioning of group activities, the loan may be sanctioned to individuals or groups. The savings, repaying capacity and cash flow are the main criteria.

The weaker section of India, still hesitate to take part in financial inclusion. The low income people should be approached by banks personally. They should be asked to open bank account for saving purpose. Small loans may be granted for them to encourage cash flow. At an affordable cost, the low income group should be allowed credit facility. The financial facilities should be arranged for poor people living in rural and semi urban areas. The poor people in urban area should not be left out. By opening microfinance branches in urban areas, the needs of poor people there may be considered favorably.

Growth due to financial inclusion:

The world is watching eagerly the growth in Indian economy. The growth rate is increasing year after year. The Government of India is very keen on financial deepening. There is a slight decrease in population growth in India. The common people in India enter share market and start investing money. The economic grow is healthy in India now. Due to globalization, many people involve in trading activities. A rapid growth is noticed in corporate sector. The rich people in India have become richer. The medium range people are striving hard to find place in the list of rich people. Most of the common people in India have got some arrangement for livelihood and due to grant of housing loan, many people in India are living in own house.

We have to see whether there is growth of small and medium enterprises and whether they are able to withstand in tough situations. The financial deepening bothers about these issues. The needs of every citizen should be considered and fulfilled by the Government. That is the main aim of financial inclusion. Still banks are trying to accelerate the rate of deposit mobilization. The momentum in financial inclusion activities will increase only when there is a steady growth of deposit mobilization. The Government of India is concerned about triggering financial inclusion in rural areas, in particular. The development activities should be spread evenly throughout the country. The encouragement of banking habit among less privileged people should be given top priority.

Financial inclusion plays a major role in driving away poverty from the country. In India, a day will come when all the Indians will have bank account and everybody will take part in financial inclusion.

The Government’s overall strategy for promoting financial inclusion

Government policy has an important role to play in promoting financial inclusion, Which can be defined as the ability of individuals to access appropriate financial products and services? The Government needs to take on a leadership role and focus the attention of the financial services industry and community-based financial institutions on this issue. Promoting financial inclusion requires action by a range of Government departments, including those involved in tackling poverty, protecting consumers and promoting employment and economic growth. Promoting financial inclusion needs to be a key part of the Government’s overall agenda to promote financial inclusion. In the 2004 Spending Review, the Government announced the establishment of a Financial Inclusion Fund to support initiatives to tackle financial exclusion and the creation of a Financial Inclusion Taskforce to monitor progress. The Spending Review also committed the Government to seek progress in three key areas by:

• working with the banks to identify a target for reducing the number of people without a bank account; • working in partnership with the private and voluntary and community sectors to develop models which made more affordable loans available; and • increasing the capacity to provide free face-to-face money advice for vulnerable consumers facing debt problems.

The Financial Inclusion Taskforce was established by the Treasury to advice Government and others on progress towards tackling financial exclusion and was launched in February 2005. The Taskforce’s terms of reference, defined by HM Treasury, cover three priority areas identified by the Government. These are: access to banking, affordable credit and free face-to-face money advice.

The terms of reference of the Taskforce are to:

• Report to HM Treasury and the banking industry on progress towards the shared goal of halving the number of adults in households without a bank account, and of having made significant progress in that direction within two years; • Monitor provision of banking services to the financially excluded, including access, and report to the banks and HM Treasury on findings; • Consider ways in which the capacity and skills of volunteers and staff within third sector lenders can be enhanced;

• Monitor the increase in provision of affordable credit by third sector institutions. This information could then be used by HM Treasury and the DWP to inform the distribution of financial support to third sector lenders and evaluate outcomes; • monitor the scheme whereby, under certain circumstances, loan repayments could be made by deduction from benefits and make recommendations to HM Treasury and the DWP following the outcome of the evaluation of the scheme; • Identify areas of best practice, and gaps, in the provision of free face-to-face money advice. India to set up

Financial Inclusion Mission: The Government of India has decided to set up a National Mission on Financial Inclusion (NaMFI) to promote inclusive growth in the country through universal access to finance by the poor and vulnerable groups within a specified time frame.

New Delhi: The Government of India has decided to set up a National Mission on Financial Inclusion (NaMFI) to promote inclusive growth in the country through universal access to finance by the poor and vulnerable groups within a specified time frame.

Releasing the recommendations of the Committee on Financial Inclusion, its Chairman Dr. C. Rangarajan said that financial inclusion is a prerequisite for poverty reduction and social cohesion in the country. According to him, the primary objective of the NaMFI would be to extend the scope of activities of the organized financial system to include within its ambit people with low incomes. The National Sample Survey Organization (NSSO) data reveal that 45.9 million farmer households in the country (51.4 per cent), out of a total of 89.3 million households do not access credit, either from institutional or non-institutional sources.

Further, despite the vast network of bank branches, only 27 per cent of total farm households are indebted to formal sources of which one-third also borrow from informal sources.

The committee also recommended that demand side efforts need to be undertaken including improving human and physical resource endowments, enhancing productivity, mitigating risk and strengthening market linkages.

However, while the committee primarily focused on improving the delivery systems, both conventional and innovative, the committee suggested that the task of financial inclusion must be taken up as a mission mode financial inclusion plan at the national level.

According to the committee, the NaMFI will be responsible for suggesting the overall policy changes required for achieving the desired level of financial inclusion, and for supporting a range of stakeholders in the domain of public, private and NGO sectors in undertaking promotional initiatives.

It also stated that a National Rural Financial Inclusion Plan (NRFIP) will be launched with a clear target to provide access to comprehensive financial services, including credit, to at least 50 per cent of financially excluded households.

It includes 55.77 million by 2012 through rural and semi-urban branches of Commercial Banks and Regional Rural Banks (RRBs).

The remaining households, with such shifts as may occur in the rural and urban population, have to be covered by 2015, the committee added.

Semi-urban and rural branches of Commercial Banks and RRBs may set for themselves a minimum target of covering 250 new cultivator and non-cultivator households per branch per annum, with an emphasis on financing marginal farmers and poor non-cultivator households.

In the initial stages, however, the committee felt that some funding support is required for promotional and developmental initiatives.

It will lead to better credit absorption capacity among the poor and vulnerable sections and for application of technology for facilitating the mandated levels of inclusion. The committee has, therefore, proposed the constitution of two funds with National Bank of Agriculture and Rural Development (NABARD) with an initial corpus of Rs. 500 crore each to be contributed in equal proportion by Government of India, Reserve Bank of India and NABARD.

The funds include Financial Inclusion Promotion & Development Fund and the Financial Inclusion Technology Fund.

It further added that adoption of appropriate technology would enable the branches to go where the customer is present instead of the other way round.

The business facilitator and business correspondent (BF/BC) models riding on appropriate technology can deliver this outreach and should form the core of the strategy for extending financial inclusion, the committee said.

The committee has made some recommendations for relaxation of norms for expanding the coverage of BF/BC; while ultimately, banks should endeavor to have a BC touch point in each of the 600,000 villages in the country.

To help in extending financial inclusion, procedural changes like simplifying mortgage requirements and exemption from stamp duty for loans to small and marginal farmers have to be made.

Also, other changes include providing agricultural and business development services in the farm and non-farm sectors, respectively. RRBs account for 37 per cent of total rural offices of all scheduled commercial banks and 91 per cent of their workforce is posted in rural and semi-urban areas. They account for 31 percent of deposit and 37 per cent of loan accounts in rural areas, besides have a large presence in regions marked by financial exclusion of a high order. Significantly, the more backward the region the greater is the share of RRBs which is amply demonstrated by their 56 per cent share in the north-eastern, 48 per cent in central and 40 per cent in eastern region.

However, there has to be a firm reinforcement of the rural orientation of these institutions with a specific mandate on financial inclusion. With this end in view, the committee has recommended that the process of merger of RRBs should not proceed beyond the level of sponsor bank in each state.

The Self Help Group (SHG) Bank Linkage Programme can be regarded as the most potent initiative since independence for delivering financial services to the poor in a sustainable manner, according to the committee. The Programme has been growing rapidly and the number of SHGs financed increased to 29.25 lakh on March 31, 2007.

Many states with high incidence of poverty have shown poor performance under the Programme. NABARD has identified 13 states with large population of the poor, but exhibiting low performance in implementation of the Programme.

The committee has recommended that NABARD should open dedicated project offices in these 13 states for up scaling the SHG Bank Linkage Programme. The state governments and NABARD may set aside specific funds out of the budgetary support and the Micro Finance Development and Equity Fund (MFDEF), respectively, for the purpose promoting SHGs in regions with high levels of exclusion.

The committee has recommended amendment to NABARD Act to enable it to provide micro finance services to the urban poor.

Appreciating the role of NGOs, the committee has said that there is a need to evolve an incentive package which should motivate these NGOs to diversify into other backward areas.

The committee observed that there are segments within the poor such as share croppers, oral lessees and tenant farmers, whose loan requirements are much larger but who have no collaterals to fit into the traditional financing approaches of the banking system.

To service such clients, it recommended that Joint Liability Groups (JLG’s), an up gradation of SHG model could be an effective way.

The committee has recommended that adoption of the JLG’s concept could be another effective method for purveying credit to mid-segment clients such as small farmers, marginal farmers and tenant farmers, thereby reducing their dependence on informal sources of credit.

The inclusion committee has said that Micro Finance Institutions (MFI’s) could play a significant role in facilitating inclusion, as they are uniquely positioned in reaching out to the rural poor.

It has also recommended that greater legitimacy, accountability and transparency will not only enable MFI’s to source adequate debt and equity funds, but also eventually enable them to take and use savings as a low cost source for on-lending. There is a need to recognize a separate category of Micro finance-Non Banking Finance Companies (MF-NBFCs), without any relaxation on start-up capital and subject to the regulatory prescriptions applicable for NBFCs. Such MF-NBFCs could provide thrift, credit, micro-insurance, remittances and other financial services up to a specified amount to the poor in rural, semi-urban and urban areas.

Though the network of commercial banks and RRBs has spread rapidly and now they have nearly 50,000 rural and semi-urban branches, their reach in the countryside both in terms of the number of clients and accessibility to the small and marginal farmers and other poorer segments is far less than that of cooperatives.

Referring to micro-insurance as a key element in the financial services package for the poor, the committee said that it is becoming increasingly clear that micro-insurance needs a further push and guidance from the regulator as well as the government.

The committee concurs with the view that offering micro credit without micro-insurance is self-defeating; therefore, it suggested a need to emphasize linking of micro credit with micro-insurance. To sustain and accelerate the growth momentum, the government has to ensure increased participation of the economically weak segments of population in the process of economic growth.

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