1Namrata Patil Dadhich&2Dr. Manish Tanwar
1Research Scholar, Rajasthan Technical University, Kota (Rajasthan), India
2Associate Professor, B.J.S. Rampuria Jain College, Bikaner (Rajasthan), India
Abstract
Despite the growth of banking sector tremendously in the last two decades, thereare parts which are still untouched, ignorant and unrecognized. And these are the areaswhich have disadvantaged people with low power of liquidity and Funds.Reserve Bank of India has taken a big step for creating a way to tackle the problematic unbanked area, by granting license to eleven payments banks and ten small banks in the year 2015. The Indian banking sector has made major revolution in banking rules and regulationsto cater different level of customers and make appropriate changes in the model of delivery which was not previously followed by the commercial banks. The need of the hour was to do something that will let financial inclusion happen. This paper will discuss the benefits of restructuring banking policiesfor indoctrinating financial inclusion. It also states on the problems faced by disadvantaged people for not getting required amount of help form the government and how these reforms can contribute to this critical growth issue.Financial Inclusion have become a matter of great interest for bureaucrats, regulatory and supervisory authority, researchers, market makers, entrepreneurs and other public who are interested in the specific banking reforms.With the need of dashing and foolproofframework on financial inclusion, a thrust of its compellingrenovative power to fast-trackgrowthhave been witnessed. Financial inclusion system provides the individuals and firms to access the financial resources, so that they can plan after retirement life, finance children education, children marriage, create capital for their business, and plan for contingencies.
Keywords:Small FinanceBank,Financial Inclusion, Development, Unbanked Area.
- Introduction
What is Financial Inclusion
Despite the growth of banking sector tremendously in the last two decades, there are parts which are still untouched, ignorant and unrecognized. To meet the demand of financial assistance for disadvantaged people the constituency has developed a flexible and accessible banking structure. By the introduction of LPG (Liberalization, Privatization and Globalization) Model in 1991, Indian economy has drastically developed and has been proved very progressive for the Indian Financial System. But we can still find a huge area of unbanked or informally banked. If we see the percentage wise at the unbanked area or informally banked then there is 90 percent and more of small business do not have access to formal financial banking and around 60 percent population is disadvantaged to receive the minimal banking facilities. The idea of financial inclusion and financial development of the economy asks for permission on allowance of all the financial help and services to all the nook and corner of the country. If we want our Indian economic system to develop and grow then we need to allow financial Inclusion to penetrate in all levels of society. India is a developing country and it can only grow if we develop and provide ample opportunities to the MSMEs (Micro, Small and Medium Enterprises) via Inclusive financing. According to Economic Times ‘Most powerful engine of India’s growth: Service MSMEs’. Economic times further stated that not only is the service sector the largest contributor to the Indian Economy, it has also been the fastest growing among the three compared to its contribution of 58% to the economy today. Not only do service MSMEs contribute mightily to the overall GDP growth, they have a powerful, multiplier impact on the local economies. One of the major problem is that, these MSMEs face
- ‘Lack Of Capital” Since most of MSMEs do not have hard assets they do not qualify for sizable credit lines to invest for growth,
- Lack of sustainable work –The biggest problem most businesses have is they do not have enough customers and enough work to cover their fixed costs and earn an income.
The whole scope of inclusive growth is based on upliftment of the financially weaker section of the society (financially excluded) and also to get to the grass root of the problem.
As India is a developing country, It is has always been under surveillance and fenced by many rules and restrictions.
India has lots of barriers of exclusion In India the barriers of exclusion have limitedthe number of banks in the vicinity, lack of supply chain management in the banking system, absence of clear customer generation model it is very difficult to bring small customer towards these financial facilities and convert them into long term customer. With this we know that disadvantaged people have less knowledge about technology and hence there was always a demand for attention to develop and invest in technology, there is now the need to add more and more small customers and disadvantaged people to the banking system which should be cost effective and need to bring large amount of people under financial literacy. However, setting up of the committee on financial inclusion, few alterations in banking policies, use of internet technology, mobile banking tremendous improvement in financial literacy (where small customers are made aware of the functions and fundamentals of banking) and hence as a result the disadvantaged are experiencing better living and also becoming independent because of financial inclusion.
As per Economics times, ‘At the heart of the financial inclusion initiative was a 2015 central bank move. In September that year, the Reserve Bank of India (RBI) awarded 10 small finance bank licenses, and eight of them were given to microfinance companies such as Disha Microfin, ESAF Microfinance and RGVN (North East) Microfinance. The other two are AU Financiers, the sole asset financing company to get the coveted license, and Capital Local Area Bank, which was the first to begin its banking operations.Upgrading the system and stabilising it took longer than what we anticipated. Connectivity in the rural areas is still a concern.’
According to financial express “To establish financial inclusion and making loan available to the borrowers, the Reserve Bank of India granted in-principle licenses to set up small finance banks to 10 applicants, all microfinance companies.”In simple ways we need to kill the boundaries made by normal big banks and start financing the unbanked so that more and more people are benefitted by financial inclusion concept.In fact, even among the various microfinance applicants, the central bank seems to have left out large players and chosen to go with those with more modest sizes.
In the Annual Report of AU SFB 2015-2016, 2017-2018 it is clearly stated that
About 190 million Indian adults still don’t have a bank account, second only to China, despite the account ownership more than doubling from 35 percent in 2011 to 80 per cent in 2017, a World Bank report said.
The Global Findex Report released on Thursday said there has been a rapid increase in financial inclusion with the number of account holders in the country having risen from 35 per cent of the adults in 2011 and 53 per cent in 2014 to 80 per cent in 2017.
Based on data given above, it is estimated that rural India had only 7 branches per 1,00,000 adults in 2011 in sharp contrast with most of the developed and even BRICS economies having over 40 branches.
An inclusive development and growth of the economy requires the extension of financial services to all sections of the society. In a developing country like India, the growth is accelerated by entrepreneurship, which can in turn be encouraged by improving financial opportunities to MSMEs. As per a research estimation by KPMG, by the year 2020, the MSME contribution to GDP is expected to increase from current 8 per cent to 15 per cent and the generate employment levels to the extent of 50% of the overall employment, more than doubling the current MSME workforce of 106 million across agricultural, manufacturing and services sectors.
Aim of the study
According to Times of India ‘India has 19 crore adults without a bank account despite the success of the ambitious Jan Dhan Yojana, making it the world’s second largest unbanked population after that of China’, as per the World Bank.
It is apparent from the discussion in this section that the task of increasing and maximizing financial inclusion faces major challenges. These cover a range of issues including;
- Social exclusion of low income families results in illiteracy, inhibition and poor physical access. It also confinescognizance, ability to overawedpreconception about their worth of banks and boosts the dealoutlayssustained these families for using the financial facilitiesaccessible in the nation.
- The small value of accounts and transactions expected by the banking system from financially excluded families results in high cost of operations and limits the incentive to serve them.
- The lack of understanding of products and services appropriate to the needs of low income families results in static approaches like the no frills account where it has become apparent that mere availability is not the issue
- Limited experience with business models suitable for small value accounts and doorstep service delivery results in the slow adoption of mechanisms such as the business correspondent mode.
- Historical problems such as the governance issues facing the cooperative credit system need substantial efforts to discipline and reorient thinking. The predictableelongatedprime time that will be desirable by actions such as monetaryliterateness programmes to make a transformation. The overview of theseinitiativehas been a praiseworthyaction and it has the probable to transmute the monetaryfacilitiesdomain. It is ostensible that there is aenormousmissiongaining in incapacitating the encounters to penetrate financial inclusion.
Resolutions to the Problems
To avoid the depletion of financial resources and of financial institutions including MFIs/NBFC is breathers to a large extent on the capability to offer a full range of financial products. According to the Huffpost online post news dated 11/02/2010, ‘The jeopardiesobtainable by credit only establishments, transactions with ultra-low financial revenuecustomers, were fetched to the frontthroughout the so-called ‘Andhra crisis’The story covers a microfinance crisis in the southern Indian state of Andhra Pradesh, triggered by sensationalized newspaper accounts of suicides among over-indebted clients of some of India’s biggest microfinance institutions (MFIs): SKS Microfinance, Spandana, Share, and others. These cases underscore rising debt stress among possibly tens of thousands of clients, brought on by explosive growth of microfinance organizations in southern India. In the quest to meet their growth targets, loan officers often sell loans to clients already indebted to other organizations. The reports offered an opening for the state government, which runs a rival self-help group (SHG) program, to pass a restrictive ordinance severely curtailing the MFIs. The crisis threatens microfinance not only in Andhra Pradesh, but nationwide, as the Reserve Bank of India moves toward removing the priority sector designation that has fueled the sector’s growth (by making it advantageous for banks to lend to MFIs).
The blame for this unfortunate situation falls most squarely on the MFIs that failed to restrain aggressive growth even as the market became increasingly saturated. Investors must also swallow a big spoonful of blame. Becausethey paid dearly for shares in the MFIs, they need fast growth to make their investments pay off.
The divvying up of blame doesn’t stop there, however. Perhaps the most important target is the public sector policy environment that has treated microfinance institutions as orphan children of the financial sector rather than helping them to build solid foundations. In fact, the environment in which MFIs have grown up could almost have been expressly designed to promote over-lending..Organizedarrangements which empower a full suite of products and services to low-income sections work for the clients, and just as well work for the long-term sustainability of the institutions. To this level, the move towards SFBs will benefit NBFCs/MFIs to capture the unbanked area and provide liquidity to low income group. In addition, the transformation to SFB will allow the MFIs/NBFCs to work without constraining factors such as the margin cap and qualifying asset criteria.An added rationale for MFIs/NBFCs to transform into an SFB is that the markets in which they primarily operate are unbanked and present a business opportunity as long as client centric products can be loaded onto low cost delivery platforms.
Identification of unstated needs and wants by unbanked areas
RBI guidelines mention that preference will be accorded to institutions that focus on thefollowing aspects:
- Geography: Underserved regions of north east, east and central regions of India
- Banking penetration: Unserved and underserved populations; 25 per cent of branches must be in unbanked villages with population less than 9,999
- Segment: Target segments of small businesses, unbanked sector, low income households and farmers
- Products: Credit and savings
Geography and Banking Penetration
In terms of preferred geographies, as compared to rest of India, Low Income States (LIS) comprising Bihar, Chhattisgarh, Jharkhand, Madhya Pradesh, Orissa, Rajasthan, Uttar Pradesh, and North East States (NES) comprising Assam, Arunachal Pradesh, Nagaland, Manipur, Meghalaya, Mizoram, Tripura present opportunity for expansion on account of poor banking penetration.
Benefits of SBFs
RBIs step to licensing the best MFIs in turn will let way to more deposits and eventually subside the cost of funds and allow to loan at more rational rates than they do now.
Microfinance organizationspresentlyelevated their funds from banks for on-lending. According to RBI norms issued in February permitslarge microfinance corporations with aallowance of credit book of Rs. 100 crore and above to charge banquet on their price of resources to clienteles. For small microfinance corporations, this rate is static at 12%. This means the typical interest rate in the microfinance corporationis fixed. Adapting to small finance bank would help these MFIs to cut down their cost of backingsignificantly. According to the chief managerial officer of MFIN, if the fully loaded cost of funds for a small finance bank comes to 10%, with a banquet of around 6%, they could offer micro-loans at around 16%, a massive drop level.
Conclusion
Small Finance Bank is the fitting step taken by the Government of India and RBI to bring the inaccessible un-banked and the under-banked community under the realm of formal banking system. Citizens of India -Rural/Semi urban have started building confidence on this and these banks are also providing good rate of returns on investment, thenother traditional bank. Most of these entities were working as MFIs for a long period of time; they are in a better position to understand the credit needs of this category. Therefore, authorities can efficiently execute microcredit programmes through Small Finance Banks. In our country, more than half of the population belongs to low-to-middle income group and are residents in unbanked area. The economic development of the nation is possible only through uplifting this particular category. Banks will need to build their competencies to effectively act as their own ANM. To build a strong network, banks have to address these challenges in a cost-effective manner. In no time we will be able to see the changes physically and mentally in banking systems where common man is able to rely freely on for his daily banking.
References
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