People's Democracy

Financial Inclusion: Meeting The Challenge

Rana Mitra

THE present scenario in the banking sector confirms the worst fears expressed by the critiques of liberalisation, including the organised trade union movement in the banking industry like the Bank Employees Federation of India (BEFI). They had warned about the shift in the banking policy towards ‘class banking’ from the lauded concept of ‘mass banking’ and its consequent fall-out in pushing people out of whatever little institutional banking coverage they enjoyed since the days of nationalisation of banks.

We may remember that the proponents of so-called liberalisation, including Narasimham of the famous ‘Narasimham Committee - I and II’ at that time made a vaunted claim that the policy of financial sector liberalisation, as part of empowering the process of liberalisation, privatisation and globalisation (LPG) in the economy, would help in releasing the animal spirit of entrepreneurship in the country. While painting a rosy picture like this, they had also claimed that the banking industry in India, instead of being confined within the four walls of the brick-and-mortar structure of the public sector banks, would land at the doorstep of the ‘aam admi’ (commoners) through a policy of more inclusive capitalist growth strategy bordering on the principles of laissez faire. We were persuaded to forget the historic significance of Comrade Lenin’s teachings that in the age of imperialism, competitive capitalism gave way to monopoly,  “…. The concentration of production; the monopolies arising there from; the merging or coalescence of the banks with industry – such is the history of the rise of finance capital and such is the content of that concept…” (‘Imperialism, The Highest Stage Of Capitalism’, V I Lenin). But, alas, just within a span of a decade and half of implementation of the LPG policies, there is a groundswell of opposition from the vast majorities of people – backed up by powerful working class movement – in different countries rejecting the essence of this disastrous policy at the hustings. Now the proponents of LPG are mouthing the words like ‘inclusive growth’, ‘growth with equity’, ‘financial inclusion’ in order to arrest the people’s growing disillusionment about the mode of capitalist accumulation in the age of finance capital. However, even after being aware of the real motive of these policy makers to mask the ugly face of capitalist exploitation in the age of neo-liberal economy by giving such slogans of ‘inclusiveness’, the organised trade union movement in the country, particularly of bank employees, must recognise the immense importance of allying themselves with the masses by translating into reality whatever little scope exists to turn the system in favour of the common people.

FINANCIAL EXCLUSION THROUGH REFORMS

There was little doubt that given the basic nature of growth of neo-liberal economy, firmly rooted in a structure of elitism, financial sector reforms would only strengthen the deeply entrenched bias against anything called ‘mass banking’ or ‘cross subsidisation’. The net result of this basically inequitable growth strategy completely debunks the claims of market fundamentalists about the efficiency of uncontrolled market forces to allocate resources (read credit) in every sectors of economy in dire need of funds. The accompanying tables capture the picture of havoc wrought by the financial sector reforms since 1991 in obliterating to a significant degree the gains of nationalisation of banks.

Table: 1

Relative share of borrowing of cultivator households (per cent)

(Source: AIDIS, 2002, NSSO, 59th Round, 2003 as quoted in a paper titled ‘Economic Growth, Financial Deepening and Financial Inclusion’ by Dr Rakesh Mohan, Deputy Governor, RBI placed at the Annual Bankers’ Conference, 2006, at Hyderabad on November 3, 2006)

So, it is seen that the stranglehold of the rural money lenders, which was progressively brought down from 69.7 per cent in 1951 to 16.1 per cent  in 1981 and to 17.5 per cent in 1991 in the relative share of borrowings by the cultivator households, has leap-frogged again to 26.8 per cent in 2002 as per the All India Debt and Investment Survey (AIDIS), 2002. As a percentage of borrowings of cultivator households, non-institutional sources have increased from 30.6 per cent in 1991 to 38.9 per cent in 2002, whereas, borrowings from institutional sources have decreased from 66.3 per cent in 1991 to 61.1 per cent in 2002. It is to be noted that almost in the same period in the last decade, the rate of agricultural growth has slowed down, particularly in the arena of food-grains production, with production of cereals, pulses and oilseeds suffering a significant fall. This, coupled with the policy of the government of India to allow unbridled imports by even lowering the average tariff well below WTO stipulation, has pushed Indian farmers on a ruinous course forcing them to commit suicides in large numbers in at least 31 districts in five states. The problem on the farm front in the country is aptly reflected in the data provided by the National Commission on Farmers (NCF) in its fifth and final report. It says that the average monthly income of farmer household has become only Rs 2115, which does not cover the average per capita monthly consumption expenditure of Rs 2770. Households with landholding of 4 hectare and above alone have a surplus of income over expenditure.

This situation is further aggravated by the problem of financial exclusion in the form of outright crash of rural credit-deposit ratio, plunge in the number of small borrowers’ accounts of less than Rs 25,000, closure of rural bank branches, increasing concentration of banking business in the top 100 deposit centres of the country etc. A part of the above pathetic decline in outreach of formal banking structure is aptly captured in the accompanying tables number 2 and 3.

Table 2 reveals that with the sole exception of Northern and Western Rural Region (which recorded only insignificant increases in the rural credit-deposit ratio), all other rural regions suffered badly. Among the representative states, rural West Bengal, Tripura, Madhya Pradesh saw drastic cuts signifying a growing trend of financial exclusion.

Table: 2

Credit-Deposit Ratio in the Rural Areas (per cent)

(Source: Extracted from Table No 5, published along with “Metamorphic Changes in the Financial System”, EPW Research Foundation, EPW, March 19, 2005, p. 1273)

Table: 3

 Regional Level Indicators of Scheduled Commercial Banks (Population per office)

(Source: Extracted from Table: 6, published along with a paper titled “Economic Growth, Financial Deepening and Financial Inclusion” by Dr Rakesh Mohan, Deputy Governor, RBI placed at the Annual Bankers’ Conference, 2006, at Hyderabad on Nov 3, 2006)

BASEL I AND II vis–a-vis FINANCIAL EXCLUSION

Expectedly, the logic of operation of finance capital ensured that the growing trend of financial exclusion for the masses as exhibited in the accompanying tables was associated with the diversion of credit to the speculative sectors, leading to financial bubbles as reflected in stock market and real estate booms. This tends to implant the seeds of subsequent strain on the financial system endangering financial stability. The repeated incidents of scam in the stock market in the decade of 1990s and early 2000 corroborate this trend. Interestingly, Bank for International Settlements (BIS)-dictated BASEL I norms of allotting capital based on perceived risk weights has accentuated the problem of financial exclusion. BIS recommendation for risk weight for claims on Non-OECD institutions with a residual maturity of less than and up to one year is 20 per cent, whereas, claims of over one year have a recommended risk weight of 100 per cent. Clearly, for international banks, this makes short-term lending to banks outside the OECD region more profitable than long-term lending. This particular stipulation has been kept unchanged in the BASEL II norms. As Indian banks are too eager to follow in the foot-steps of international banks in subscribing to the norms of BASEL I and II, the trend is likely to aggravate a further move of concentration of finance in favour of short-term speculative lending, signifying further financial exclusion. In this situation came the verdict of the country’s general election in 2004, rightly perceived as a watershed, forcing the policy makers to rethink their strategy, especially because of the crucial influence of the Left at the centre.

(To be continued)