������������
Financial Inclusion: An Introspection
F
Economic and Political WeeklyFebruary 3, 2007356disparitiesin provision of banking facili-ties. The number of offices of commercialbanks showed a phenomenal increase from8,262 in 1969 to 60,220 in 1991. Theaverage population per branch of 64,000in 1969 improved to 14,000 in 1991. Theshare of rural and semi-urban branches,which formed 63 per cent of the totalnumber of branches in 1969, increased to77 per cent by 1991.As opening of branches per se did notensure adequate credit utilisation of de-posit resources in the respective regions,a credit-deposit (CD) ratio of 60 per centwas stipulated for rural and semi-urbanbranches to ensure that there was nomigration of credit from rural to urbanareas. As credit to priority sectors need notflow to the lower strata of occupationalgroups, the concept of “weaker sections”in priority sectors was introduced to safe-guard the interests of this group. Targetswere also laid down for the priority sectors– priority sector advances should consti-tute 40 per cent of aggregate bankadvances.Similar targets were laid for ensuring flowof credit to “agriculture and allied activi-ties” and the weaker sections thereof and“rural artisans, village craftsman andcottage industries” within the small-scaleindustrial sector.2 Regional Rural Banks(RRB) were inducted into the bankingscene in 1975 with a view to further enhancethe flow of credit to rural areas, withparticular reference to small and marginalfarmers, labourers, artisans, small entre-preneurs. Thus the branch licensing policyof the commercial banks, with a thrust onopening of branches in rural and semi-urban areas, credit policy measures toenhance the flow of institutional credit topriority sectors and the weaker sectionsthereof, and the multi-agency approach torural credit financed the rural sector in abig way in the second phase. An elementof subsidisation for some of the prioritysectors was also introduced during thisphase, linking concessionality in interestrates with the size of advances, though thenumber of such slabs of loan sizes wasreduced from time to time.The third phase, the era of banking sectorreforms, which was an integral part ofeconomic reforms, has continued since1991-92 and with a view to augment thefinancial strength of the commercial banks.These measures covered a gradual reduc-tion in the cash reserve ratio (CRR) andthestatutory liquidity ratio (SLR) to enhanceloanable funds of the commercial banks,introduction of prudential norms such asthe Capital Adequacy Ratio (CAR), provi-sioning for bad and doubtful debts,recapitalisation of banks, deregulation ofinterest rates and linking market rates toSLR investments in governmentsecurities.Credit deposit ratios in the post-reformperiod were generally in the range of50-60per cent, much lower than those inthe 1980s. The balance sheet structure andthe portfolio behaviour of commercialbanks had undergone radical changesduring this period. In particular, the dif-ferential in interest rates between creditandinvestment in government securities,which were linked to market rates, gotnarrowed down; commercial banks de-ployed funds in risk free governmentsecurities on a larger scale, in preferenceto lending to the real sectors of the economy.The credit obligations to the prioritysectorscontinued despite these constraints.The reduction in SLR and CRR, whichwere aimed at enhancing loanable fundsof the commercial banks, did not, ipsofacto, raise the CD ratios, in view of theopportunity costs foregone with referenceto lending and investments. The cost ofloanable funds also underwent changes –the interest rate differential between pri-ority and non-priority sectors narroweddown, reducing thereby the hitherto pre-vailing interest subsidy to the prioritysectors. The linkage between interest ratesand size of loans with different slabs wasremoved in the mid-1990s. Effective April1998, only two slabs were made effective,the cut-off point being Rs 2 lakh. For creditlimits over Rs 2 lakh, banks were allowedthe freedom to fix their lending rates, whilefor credit limits less than or equal to thecut-off point, the lending rate was not toexceed the prime lending rate (PLR).The third phase of the time period wasassociated with high interest rate regimeup to 1997 and softening of interest ratesduring the latter period. Thus it may beobserved that the interest element subsidyfor SBA was abolished, and the differen-tial in the cost of funds between the SBAand the large borrowal accounts (LBA)tended to become narrower.3 The cover-age of the priority sectors too underwentsubstantial modifications in the 1990s withmany new sectors and segments addedthatwould indirectly affect the share ofcredit to the traditionally deemed prioritysectors when the concept was first intro-duced.4 The branch expansion of commer-cial banks, which showed considerableexpansion in rural and semi-urban areasin the first two phases, did not show similartrends in the third phase of the time period.The share of branches in the two categoriesdeclined over a period of time, with aconcurrent increase in the share of urbanand metropolitan branches. This phase wasalso characterised by mergers and amal-gamation of banks, diversification of ac-tivities of commercial banks and conver-sion of term lending institutions into banks.The share of priority sectors moved in therange of 37-39 per cent of the total non-food credit in recent years. The CD ratiowas in the range of 50-60 per cent in thethird phase, lower than that observed inthe previous two phases.5 The progress ofcommercial banking at different time pointsin the three phases mentioned above, ispresented in Table1.It may be observed that there was aconsiderable widening and deepening ofcredit by commercial banks over thedecades.Even so, the moot question is howfar thepolicies adopted from time to time enabledthe weaker sections of different occupa-tional groups in accessing institutionalcredit, and whether the reliance on non-institutional sources has been reducedaccordingly. The results available from theAIDIS surveys of the NSSO revealedseveral interesting features, which will bediscussed subsequently. At this juncture,mention may be made of two innovations,viz, microfinance initiated by the NationalTable 1: Progress of Commercial Banking (Scheduled Commercial Banks)19691981198519911995200020012002200320042005No of offices826235707513856022062367654126591966190665356718868355Of which rural andsemi-urban517526127400014655046345471414715947127471624721247485(62.6)(73.2)(77.9)(77.3)(74.3)(72.1)(71.5)(71.2)(70.9)(70.3)(69.5)Population peroffice (‘000s)6419151415151516161616Share of priority sectoradvances (per cent)15.035.639.939.235.837.438.538.237.138.838.1Deposits as per centof national income15.534.439.448.151.753.558.960.765.368.568.3Credit-deposit ratio77.565.566.160.654.753.353.553.856.956.164.9Investment-deposit ratio29.335.135.437.738.636.637.138.741.343.841.6Source:Reserve Bank of India: Publications on Basic Statistical Returns of Scheduled CommercialBanksin India.
Economic and Political WeeklyFebruary 3, 2007357Bank for Agriculture and Rural Develop-ment (NABARD) in 1992, and the KisanCredit Cards ( KCC) scheme introducedin 1998, which were oriented towardsenhancement of timely and cost-effectivecredit. KCCs are issued to farmers by bankson the basis of their landholdings to pur-chase agricultural inputs whenever needed.As per the AIDIS, 2002-03, only 2.6 percent of rural households and 0.2 per centof urban households reported to have aKCC – the average amount of credit wasRs 16,270 per rural household andRs16,933 per urban household. Thesurveyof SBA, 2004 conducted by the RBI6furnished details of credit outstandingagainst KCCs. According to this survey,about 19 per cent of the SBA used KCCwith a share of 18 per cent of the total creditoutstanding against SBA – the averageoutstanding credit was Rs 26,284.7 As thedata on landholdings are collected fromthe cultivator households applying forKCC, it would be useful to evolve aninformation system linking the landhold-ings and KCCs, with a view to examinehow far farmers with different sizes oflandholdings benefited from the scheme.During the last decade, microcreditprovided by banks emerged as a majorpolicy tool of financial assistance in theareaof rural credit, particularly to the poorsections of society. The linkage of self-help groups (SHGs) with banks initiatedby NABARD in 1992 showed progressover time, the details of which are giveninTable 2. Several initiatives and strategieshave been adopted by NABARD to fine-tune the working of the system and furtherwiden the reach of this finance to the poor.This is also placed under the ambit of thepriority sectors. The SHGs financed by thebanks accounted for hardly 1-2 per centof the total number of SBAs in recentyears, with a share of hardly 1-4 per centof the total outstanding credit against SBAs,though the average amount per SHGprogressively increased from Rs 16,815 in1999-2000 to Rs 42,626 in 2004-05.NGOs and SHGs are another categoryof financial intermediaries in the informalfinancial sector, assisting the householdsector through borrowings from banks.Even though the above data throw light onthe reach of microcredit to the rural poor,itis necessary to further develop informationsystems in this area by collecting data onthe sources and uses of funds and also theinterest rates charged by these intermedi-aries. The National Statistical Commis-sion (NSC) recommended that a survey onfinancial aspects of NGOs and SHGs invo-lved in microfinancing should be conductedby NABARD at quinquennial intervals.8IIThe last two AIDIS surveys of the NSSOfor the reference periods ended June 30,1991and June 30, 2002, revealed interest-ing features on the status of the debt ofrural and urban households9 owed to insti-tutional and non- institutional sources,which could be a barometer of the degreeof financial inclusion in the two sectors.It may be observed from Table1 that theproportion of households reporting debt toinstitutional agencies declined in both ruraland urban areas in 2002 compared to 1991albeit marginally. Concurrently, the pro-portion of households reporting indebted-ness to non-institutional sources had goneup from 9.8 per cent in 1991 to 15.5 percent in 2002 in rural areas, while it re-mained the same in urban areas. Theproportion of households reporting debt toboth the sources together was much higherin 2002 in rural areas (26.5 per cent),compared to that of urban households (17.8per cent).These trends are reflected in theshare of institutional debt to total debt. Theshare of debt owed to institutionalagenciesshowed a decline from 64.0 per cent to 57.1per cent in 2002 in rural areas, while inurban areas it increased from 70 per centin1991 to 75 per cent in 2002. Thus it isevidentthat a major segment of the house-holds both in rural and urban areas wereoutside the ambit of debt from the formalsources.The share of debt of households owedto each of the credit agencies under insti-tutional and non-institutional sources overthe last five decades gives further insightinto the above aspects.It may be observed from Table 4 thatthe share of non-institutional sourcesformed the bulk of the total debt of ruralhouseholds in the decades covering theyears 1951-1971, which gradually declinedin the subsequent years. The share ofcooperativespicked up from 1971 onwards;it was in the range of 20-30 per cent inTable 2: SHG-Bank Linkage ProgrammeTotal SHGBank LoanAverage AmountFinanced by Banks(Cumulative)Per SHG (Rs)(Cumulative)(Rs Crore)(1) as Per Cent of (2)(1)(2)1999-00114.78193168152000-01263.83481182312001-02461.481026222332002-03717.362049285632003-041079.093904361792004-051618.48689942626Source: Reserve Bank of India, Trend and Progress of Banking in India, 2004-05.Table 3: Incidence of Indebtedness (ProportionReporting) of Households toInstitutional and Non-Institutional Agencies and Share of Institutional Debt in Total Debt(Per cent)Rural HouseholdsUrban HouseholdsInstitutionalNon-AllInstitutionalInstitutionalNon-AllInstitutionalDebtInstitutionalSourcesDebt to TotalDebtInstitutionalSourcesDebt toDebtDebtDebtTotal Debt(Per Cent)(Per Cent)199115.69.823.464.011.89.419.370.0200213.415.526.557.19.39.417.875.1Source: NSSO (1998a, 1998b, 2005).Table 4: Share of Debt Owed to Different Credit Agencies byRural and Urban Households (In Per cent)Rural HouseholdsUrban Households195119611971198119912002198119912002Institutional7.117.329.261.264.057.159.970.075.1Of which cooperatives2.910.420.128.621.627.317.517.220.5Commercial banks_0.32.228.033.724.522.521.629.7Non-institutional92.982.770.838.836.042.940.130.024.9Of which moneylenders*68.660.836.916.917.529.612.510.214.1* Covers both agricultural and professional moneylenders.Note:Data for Table 4 are collected from various publications on the subject listed under RBI(1956,1963,1986) and NSSO (1998 a, 1998b and 2005). Only important credit agencies are listedhere. For urban households, data are available from 1981 only.
0 10203040 060 08090100
Economic and Political WeeklyFebruary 3, 2007359the occupational groups, and exercises ofthis type can be attempted for studying theconcentration of units and credit .The survey results provide further in-sight into the occupationwise interest diffe-rentials between LBA and SBA. This isa weighted average rate of interest, usingamounts outstanding against each occupa-tion in the different interest rate ranges asthe weights. It may be observed that theaverage cost of SBAs worked out to be10.9 per cent, as against 13.4 per cent inrespect of LBAs, interest rate differentialwas 2.5 percentage points. This was broadlythe case in respect of the occupations, viz,“agriculture”, “personal loans” and “retailtrade”. The interest cost of transportoperatorswas broadly the same for the twocategories. The cost of SBAs under hous-ing was lower at 8.9 per cent, comparedto 12, 5 per cent for LBAs. Thus it wouldappear that the interest cost of SBAs wasrelatively low, as the interest rates thereofare pegged to the PLR, while banks havethe freedom to charge different interestrates for LBAs in a deregulated environ-ment (Table 9).The BSR information system on bank-ing statistics provided valuable tabulationsaccording to different classifications inrespect of LBAs, each with a credit limitof more than Rs 2 lakh. Similarly, theperiodical SBA survey results throw lighton various aspects of SBAs, supplement-ing the BSR information system. Thepriority sectors are diffused in both thesources. The number of segments/sectorsunder priority sectors has increased con-siderably during the last decade. It wouldbe advantageous to sift such accounts foreach of the occupations in the two systemsand generate special tabulations for eachof the segments in the priority sectors. Inthe existing system, it is not possible toidentify all the priority sectors in the twosystems of information. The importance ofsuch tabulations stems from the fact thatthere is an asymmetry of distribution ofthese accounts between SBAs and LBAsamong different occupational groups. Thusthe cost of borrowed funds even withina specific segment of the priority sectorwill vary widely, depending upon thedistribution of the borrowal accounts inthe two categories. The informationsystemon half-yearly returns on prioritysector advances, which is also in thedatabase of the RBI, has a different objectof monitoring the targets laid down foreach of sub-sectors from time to time. Inview of the above, it is felt that the borrowalaccounts under priority sectors for each ofthe occupations should be identified inboth SBA survey and LBA of the BSRsystem, and a profile of the priority sectorsregenerated with the same classifications.IVIn retrospect, credit policies over thedecades were oriented towards encourag-ing the flow of institutional credit to prioritysectors and to the weaker sections thereof,though concessionality of interest cost tothese sectors was somewhat de-emphasisedin the post-reform period. As the prioritysectors cover a wide spectrum of unitsspread over both SBAs and LBAs, it wouldbe useful to sift such accounts with suitablecodes in the BSR system and also in theSBA surveys, with a view to generate theexisting BSR tabulations for each of thepriority sectors. In view of the importanceTable 8: Distribution of SBAs by Credit Limit as on March 31, 2004CreditPercentageCum Per CentPer Cent ShareCum Per CentAverageShare in Noof No ofin Total CreditShare inAmountof AccountsAccountsOutstandingTotal CreditOutstandingOutstandingAccount (Rs)≤ 25005.15.10.40.419902500-50007.312.41.11.540165000-1000013.525.93.75.2717810000-150009.935.84.09.21076215000-2500020.055.812.521.81643325000-5000020.576.320.342.12602950000-750006.983.210.152.23846175000-1000006.789.914.967.158453100000-1500005.695.513.780.864868150000-2000004.5100.019.2100.0111248Total100.0100.0Source: ‘Survey of Small Borrowal Accounts’, RBI Bulletin, July 2006.Table 9: Average Interest Cost According To OccupationSBA LBAInterestDifferentialAgriculture10.513.32.8of whichDirect finance10.513.02.5Industry10.913.82.9Transport operators13.914.00.1Professional and other services12.713.81.1Personal loans11.013.62.5of whichLoans for consumer durables14.816.92.1Loans for housing8.912.53.6Trade11.511.0-0.5of whichRetail trade11.513.62.1Finance10.714.03.3Other occupations10.613.52.9Total10.913.42.5Source: ‘Survey of Small Borrowal Accounts, 2004’, RBI Bulletin, July 2006.Table 7: Profile of Small Borrowal Accounts (1999-2005)End MarchSmall BorrowalAll AccountsPer Cent Share ofAccounts (SBAs) SBAs in All AccountsNOANOANO1999509978828217311523053824257311497.523.120005285610274519439543704600818462097.222.3200150456106294210675236453843410282596.419.7200254130125649232125638865599311633696.019.2200356527145057256625949175596912707395.019.2200461900162700262846639088031213259793.218.52005711061998802811077151115246814937892.217.3Notes:(i) N: No of SBAs (in ’000) O: Amount outstanding (Rs crore) A: Average amount outstandingper account (Rs).(ii) From March 1999 onwards, all borrowal accounts, each with credit limit of Rs 2 lakh or less, areclassified as SBA. Data are provided only from 1999, in view of the change in the cut-off point for SBAs.Source:RBI: Various issues of Basic Statistical Returns of Scheduled Commercial Banks in India.
l��
