Urgent need for RBI to focus on quality and impact of financial inclusion efforts

While Dr Raghuram Rajan, the new governor of RBI emphasising on inclusive growth and development is good news, the central bank needs to focus on quality and impact of financial inclusion services that would be easy to access and  compatible with the needs of customers

Dr Raghuram Rajan, the governor of Reserve Bank of India (RBI) in his inaugural speech, talked about the central bank’s “two other important mandates; inclusive growth and development, as well as financial stability. As the central bank of a developing country, we have additional tools to generate growth – we can accelerate financial development and inclusion. Rural areas, especially our villages, as well as small and medium industries across the country, have been important engines of growth even as large company growth has slowed. But access to finance is still hard for the poor, and for rural and small and medium industries. We need faster, broad based, inclusive growth leading to a rapid fall in poverty.”


This needs to be strongly appreciated as it brings into focus the critical issues of quality and impact of financial inclusion, which have hitherto been ignored so far. But before we get to this, let us first understand the scope of financial inclusion in India, as of today. Typically speaking, the scope of financial inclusion (FI) in India involves the following and related services (not exhaustive):

  1. Access to accounts: a) Savings (No frills etc); and b) Current accounts.
  2. Access to  deposits: a) Fixed deposits; and b) Recurring deposits
  3. Access to transaction banking: a) Use of cheques, demand drafts and other such instruments; b) Receiving of social security (NREGA and other) payments through bank accounts; c) Transfer of money through RTGS or NEFT and remittance services; d) Debit cards and ATM usage; e) Credit cards including KCC and GCC; f) Bill payments through technology banking - mobile banking, internet banking etc
  4. Access to credit facilities: a) Typical priority sector loans for agriculture and allied areas etc; b) Post harvest, post production loans; c) Loans for marketing of agricultural and other produce etc; d) Traditional working capital limits; e) Traditional MFI loans under priority sector; f) Traditional SHG bank linkage program loans; g) Loans from specialised credit and other cooperatives; h) Traditional MSME loans backed by credit guarantee from Government of India; i) Housing/mortgage loans; and j) Various kinds of overdraft facilities and so on;
  5. Access to risk management services: a) Life insurance; b) Health insurance; c) Asset insurance; d) Crop and weather insurance; e) Livestock insurance; f) Other such products such as credit insurance; and g) Micro-pensions
  6. Access to other Services: a) Deposit insurance; b) business facilitators (BF) and business correspondents (BC); c) financial literacy services and credit counseling (FLCC) centers; d) grievance redressal, ombudsman and legal aid services; e) credit bureau; and f) Other services

The above services can be acquired through various institutions such as (but not limited to) the following: Commercial Banks, Regional Rural Banks (RRBs), Cooperative Banks, Local Area Banks (LABs), Post Offices, State Cooperatives, Mutually Aided Cooperatives, Multi-State Cooperatives, Investment Grade NBFCs, NBFC MFIs, BCs/BFs, Other MFIs, SHGs and so on. Not all services can be provided by all institutions but that is an issue that I deal with later, in a separate article


Having set the broad context, I want to emphasise the fact that we urgently need comprehensive baseline data regarding the number/proportion of mutually exclusive individuals/households (among low income people) and mutually exclusive small businesses who have accessed the above financial inclusion services from various institutions in any given year! Apart from serving as an important baseline, such data would also help us understand which of these financial inclusion services and institutions are preferred by different groups of low income people. So, this is an important task for the RBI under Dr Rajan. Therefore, instead of wasting time on organizing yet another financial inclusion committee and managing its cumbersome administration, the RBI would perhaps serve the nation better by setting in motion processes that would help in the above. That is not all.


When we say (or imply) that financial inclusion would lead to inclusive growth and therefore, the RBI must enhance its thrust on financial inclusion, I would like to transparently understand from Dr Rajan and the RBI as to what is the relationship between financial inclusion and inclusive growth? Put differently, I am yet to understand ‘how access to a savings account or credit bureau or even a loan or some form insurance would facilitate inclusive growth’? In fact, this unabashed support for MFI priority sector loans, as part of RBI financial inclusion drive that started in 2005, led to disastrous growth in the Indian micro-finance sector in subsequent years (especially, April 2008 – March 2010). This irresponsible growth of MFIs culminated in what is now famously called as the 2010 AP micro-finance crisis, which, as its ultimate impact has resulted in the financial exclusion of thousands of low income people it sought to financially include (in the first place). This needs to be noted by everyone.


Therefore, in my opinion, for us to come to some meaningful conclusion with regard to the relationship between financial inclusion and inclusive growth, we need data on two important parameters: a) the quality of the financial inclusion services delivered; and b) how access to the various financial services have been of some benefit to these mutually exclusive low income individuals/households, small businesses and others? Both of these critical issues are very rarely talked about even globally and transparent data on these aspects is almost non-existent! And both quality and impact are very important and much wastage of precious national resources has occurred (especially, in India) because of our lack of attention to these.


Therefore, it is about time that we started to understand quality and impact of financial inclusion, with a focus on the following:

  1. Ease in accessing financial inclusion services: How easy is it for a low income individual/household or small business to access the concerned financial inclusion service (s)? What are the physical and psychological barriers to access? What procedural aspects and cost related issues (both affordability and transactions cost) prevent the financial inclusion service (s) from being accessed by the target segment?
  2. Compatibility of financial inclusion services: How tailor made (adaptability) are the concerned financial inclusion service(s) to needs of the customers? Do the service attributes meet the needs of the customers? Are customer needs considered when financial inclusion service(s) are being developed and introduced?
  3. Actual usage of various financial inclusion services: What can be said about the actual usage of the concerned financial inclusion service (s)? How regularly are they used? What is the frequency of usage? For what length of time are the various services used?
  4. Impact of different financial inclusions services: What is the impact of the different financial inclusion services? Have they reduced vulnerability in the livelihoods of the customers or enhanced their ability to cope with crisis situations, life cycle events and emergencies? Have they acted as a consumption smoothing mechanism? Have they helped in improving productivity in their livelihood and so on?

While the first three aspects given above (ease of access, compatibility and actual usage) relate to the quality of financial inclusion services, the fourth one concerns the impact of financial inclusion. And it should be noted that these are just starter variables and not necessarily exhaustive.


To summarise, financial inclusion services must be easy to access and should be compatible with the needs of the customer and if both of these are true, there will be greater usage of the concerned financial inclusion services (other than for the one time services). It is under such circumstances that we can expect some tangible impact (ceterus paribus) on the livelihoods of the customer or productivity of the small business and so on and so forth.


Therefore, unless we have some understanding about the quality of financial inclusion and the related issue of impact, making unsubstantiated claims about financial inclusion leading to inclusive growth is certainly not appropriate! If indeed, the RBI is serious about financial inclusion as an instrument to achieve inclusive growth, it must start to focus more on ‘quality and impact’ of financial inclusion services (as part of its larger mandate) rather than just look at the mere numbers that it has so far been emphasizing! And I hope that Dr Rajan’s presence at the helm will spur quick action on these fronts at the RBI in the near future!


(Ramesh S Arunachalam has over two decades of strong grass-roots and institutional experience in rural finance, MSME development, agriculture and rural livelihood systems, rural and urban development and urban poverty alleviation across Asia, Africa, North America and Europe. He has worked with national and state governments and multilateral agencies. His book—Indian Microfinance, The Way Forward—is the first authentic compendium on the history of microfinance in India and its possible future.)

8 years ago
Financial inclusion has reached such crazy proportions that it has become mere tokenism as there is no clarity at the grass roots level
nagesh kini
8 years ago
An extremely well written brief.
The Governor ought to stick to his inaugural speech of taking forward on his mandate of inclusive growth and financial stability. We've had enough of the so-called 'High Powered Committees' that spend hours writing minutes. No further Cammittees please.
In RBI appointed Damodaran Committee, its Chairman dilly dallayed in signing its report that required a RTI query to affix his signature!
Ravi Saini
8 years ago
There should be special cell within RBI to invite NBFC's to help bringing in non Repatriation basis investment in the country. We are ready to volunteer such initiative as we have the right answers. Ravi saini

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