ON BROADENING access to finance, the report makes some valuable observations. Financial inclusion is not only about credit, but involves providing a wide range of financial services, including saving accounts, insurance and remittance products. A focus on credit can lead to undesirable consequences such as over-indebtedness and inefficient allocation of scarce resources. (It already has led to such consequences in India). 

 

Efforts at financial inclusion need to move away from sectors to segments of people that are excluded. Sector-specific approaches result in benefits that often accrue to non-poor recipients, as in the case of subsidised agriculture credit. (In India, it has benefited the big farmers; in addition, they do not pay any tax on their income from agriculture).

 

It recommends withdrawal of interest rate caps on small loans since hidden costs are applied by the lender in such cases. It thus results in the exclusion of the very poor and reduces the attractiveness of the loan. In the circumstances, the report suggests market-based pricing of such loans. 

 

As for the co-operative sector, the report faults its top-down financing structure. Loan assessment and monitoring in the co-operative movement in India has been much more lax, in part because of the easy availability of refinance from outside and because of limited control exercised by those whose funds are being employed. Hence co-operatives play a smaller role than they can.

 

In the priority sector, dilution of norms has also contributed to a reduced focus on underserved segments. The bulk of increase in credit to agriculture is accounted for by increase in indirect finance to agriculture, which includes activities that can be considered commercially viable. It quotes the example of loans to housing. Housing loans were introduced into the priority sector framework in the 1990s to spur the development of this market. The ceiling on housing loans eligible for priority sector treatment was initially set at five lakh rupees; this limit was rapidly increased to Rs 20 lakh by 2006. To qualify for a housing loan of Rs 20 lakh, an individual needs an annual income of at least four lakh rupees per year. Surely this is not the category of borrowers that need to be targeted via mandated lending!

 

A new strategy for increasing access to financial services warrants a vibrant ecosystem that supports financial inclusion. Towards this end, the report proposes the adoption of a two-track approach to creating an inclusive banking structure, viz, the creation and promotion of small finance banks and strong linkages between large banks and small local entities to facilitate the retailing of large banks’ financial products to small clients.