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A New Account

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Financial Inclusion is one of the most popular subjects for economists to write on given that successive governments have spoken about access to finance being the major lacunae in India's development model. However, with a lot of literature on the subject, the challenge is really to bring in something fresh. T.A. Bhavani and N.R. Bhanumurthy have done so and done so well. They provide a different perspective to measure inclusion and its progress since reforms. The book is aimed at policy-makers, bankers and academics, and the study shows that there has been significant advancement in the evolution of the financial system in terms of structures, systems, products and depth.

The authors have their reservations, too, and make a global comparison to begin with. They chose the UK, China and Brazil. The British banking system, though, is more advanced than any of the other countries, and in relative terms, India's system is the smallest of the four. This also means, its financial access is not that deep in a global context. More importantly, financial access is lower in India than in Brazil.

The authors do not look at data after 2002, which is understandable given its availability. But one can assume that there should have been substantial improvements over the past 10 years. They show that around two-thirds of households did not have bank accounts. During 1992-2002, there appeared to be greater reliance on moneylenders as formal systems declined. The proportion of productive investments of households financed through informal systems was high in, say, agriculture and unorganised manufacturing. By 2004-05, the next time when a review was done, farming and services still lagged, while industries did well. Clearly, banks had a bias.
 
The sectors or regions that tend to get excluded suffer from higher production and behavioural risk. While the former is linked to their profession, the latter is more due to lack of information availability — a challenge even today. Getting hold of reliable data and processing it increases transaction costs. The logical corollary is that we need to reduce this risk, and hence cost, to enable better flow of credit.  This is where our policy-makers have faltered, note the authors.

We do not have too many schemes where the risk is absorbed by the government. Further, borrowers complain not just of the cost, but also timely availability of capital, which, at times, is more critical when investment is reckoned. Also, banks generally achieve their priority sector targets but not the sub-targets, and often insist on farmland as collateral. The authors' solutions are to enable decision-making at the village level where information is being stored. Also by linking loans to savings accounts could create a buffer. A more innovative solution is to have priority-sector lending certificates that can be traded, which may make some banks specialise in the unorganised segment.

(This story was published in Businessworld Issue Dated 09-07-2012)


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