Financial inclusion: Rural credit architecture needs an overhaul

Increasing the outreach of banks to cover the rural borrower with low credit needs has been one objective the nation has been pursuing religiously since 1950s, till date. But the reality of financial inclusion is eluding more than half the population

Deputy Governor of the Reserve Bank of India KC Chakrabarty, at an inaugural function of a rural branch of a public sector bank in Karnataka on 28 June 2013, said banking services in rural areas help to usher economic revolution that changed the profile of the village and the life of its residents. Mr Chakrabarty said: “You must be wondering why I have come to a village to inaugurate a bank branch. When a bank opens its branch in a village, it creates economic revolution; it goes closer to the people with various services. This revolution could be successful if the bank, its employees, and the people work together.”

Mr Chakrabarty said Canara Bank was trying to bring in a revolution by opening its branch in the village and offering technology-enabled services to the people. Banking services were being brought to the doorsteps of people by introducing new services such as the Samruddi Card, an Aadhaar-enabled debit card that enables cash withdrawal at micro-ATMs with the help of business correspondents of the bank. He said new technologies had enabled banks to offer new services and products to their customers, which would help improve economic activities.

Citing the Aadhaar Samruddi Card as an example, the executive from the public sector bank who also spoke on the occasion, said that the bank was determined to provide to rural people all schemes, products and facilities that were available to urban consumers.

From this happy scenario, let me take you to a report published by the Business Standard, on the same day (28 June 2013) quoting from a recent CRISIL study, which highlighted the following:

  • The bottom 50 districts in India (out of 632) have just three banks per 100,000 of population
  • Slightly more than 50% of the population just has a simple savings bank account. 
  • Financial inclusion is also the key critical parameter for the new banking licenses to be issued.
  • Although the trend is improving at the grass-root level, financial inclusion is lower than desirable.    
  • Just one in two Indians has access to a savings bank account and just one in seven Indians has access to bank credit. 
  • There are merely 684 million savings bank accounts in the country with a population of 1.2 billion.
  • The picture, in fact, looks bleaker if one excludes western and southern India. Financial penetration is the highest in the southern region.

The CRISIL study conducted on the basis of three parameters—branch, deposit and credit penetration —across the 632 districts in India shows the bottom 50 districts have just three banks per 100,000 of population, just half of the 7.6 bank branches on an all-India level. These districts have just 2% of the total bank branches in the country. Besides, they also have just 4,068 loan accounts per 100,000 of population as compared to an all-India level of 11,680 accounts. 

Lack of awareness, low incomes, poverty and illiteracy are among the key factors that lead to a low demand for financial services and, consequently, to exclusion.

RBI in its recent guidelines for new banking license has insisted that 25% of the branches have to be opened in un-banked rural centres.

Government and RBI are aware of the situation. Policy announcements have been focusing on improving education while in actual implementation there are imbalances. As regards efforts by the central bank, the following excerpt from RBI’s Monetary Policy Statement (2012) is relevant:

“Roadmap for Provision of Banking Services in Villages with Population below 2,000”

In pursuance of the announcement made in the Monetary Policy Statement of April 2010, the roadmap to provide banking services in every village with a population above 2,000 was finalized by state level bankers’ committees (SLBCs). Under the roadmap, 74,414 villages with population above 2,000 were identified as unbanked, which were allocated to various banks, including regional rural banks (RRBs) for providing banking services by March 2012. Banks have covered 74,199 (99.7%) of these unbanked villages. Now the challenge is to cover all the unbanked villages of the country. Accordingly, it is proposed:

  • To mandate SLBCs to prepare a roadmap covering all unbanked villages of population less than 2,000 and notionally allot these villages to banks for providing banking services in a time-bound manner.”

The RBI’s discussion paper on new banks (August 2010) had also, initially, generated some debate on financial inclusion which was one of the stated purposes of having more banks in the private sector. Perhaps increasing the outreach of banks to cover the rural borrower with low credit needs has been one objective the nation has been pursuing religiously since 1950s (when State Bank of India was established), till date (now SBI has come out with the facility to an open an account with one rupee!). But the reality of financial inclusion is eluding more than half the population and geographical area.

The banking system has done a commendable job in this direction in comparatively literate and affluent geographical areas through the network of rural branches, rural financial institutions (RFIs) including cooperatives, Regional Rural Banks(RRBs) and rural branches of commercial banks. The focus shifted midway, somewhere during 1990s to urban and metropolitan lending. Rise in rural deposits and urban credit created imbalances and certain bypass routes were allowed for banks to achieve their priority lending targets. Like Mutual Funds (MFs) investing in schemes of other MFs to pair risks, banks started searching for other intermediaries like microfinance institutions (MFIs) for providing credit to small borrowers. MFIs, in some cases borrow from banks at low rates and lend at up to three times the borrowing rates, in the same area where bank branches function. So as long as banks source rural deposits, they should also shoulder the responsibility of providing credit in rural areas at reasonable interest rates.

The situation calls for a review of the entire rural credit architecture for an overhaul. The changes necessary may include:

  • Reviving the role of Rural Financial Institutions ( RFIs) including rural and semi-urban branches of commercial banks, cooperatives and Regional Rural Banks which have strayed away from their mandated responsibilities,
  • Identifying costs for financial intermediaries that cannot be factored into interest costs and specifying the agency which should meet them, if the activity has to remain bankable,
  • Without going back to the abandoned “regulated interest rates regime”, working out and specifying broad bands within which ultimate lending rates should remain when bank funds are sourced for the purpose, and
  • Reducing the number of bypass routes allowed for priority sector lending to the minimum. 


Such a review may be necessary at this stage, irrespective of who gets a license for a new commercial bank.


(MG Warrier is a former general manager, Reserve Bank of India, Mumbai.)

Atul Asthana
1 decade ago
Use rural post-offices for banking. And provide banking license to post-offices.
Technology enable post-offices
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