Role of Commercial Banks towards Financial Inclusion

The whole process of financial inclusion will not be possible without the contribution of banks. Banks are the key pillars of India’s financial system. Public have immense faith in banks. Share of bank deposits in the total financial assets of households has been steadily rising (presently at about 40%). Banks enjoy considerable goodwill and access in the rural regions. There are 32600 branches in rural India (about 50% of total), and 14400 semi-urban branches. 196 exclusive Regional Rural Banks in deep hinterland are present. Rural and semi-urban bank accounts constitute close to 60% in terms of number of accounts.

Given the above facts India should formulate its strategy in a manner that the next phase of growth in rural areas should be facilitated by banks.

Lending to agricultural activities and small scale industry is in the priority sector for lending of the commercial banks. This obligation can be strategically utilized to willingly create a market for banking products. This will add value to their balance sheet and will act as another channel for financial inclusion of ill-banked rural areas. To achieve the said objective banks should take the following steps-

Build staff capacity

Bank should encourage greater interaction between financial sector and rural development staff to ensure that financial sector expertise is included on any rural project that has a finance component.

Help improve the enabling environment

Bank with policy expertise and influence with governments should work to (i) enhance the transparency and efficiency of court systems and strengthen land and property registries; (ii) eliminate government interest rate subsidies for agricultural lending; (iii) remove policy biases against the agricultural sector, e.g., price controls on staple crops; and (iv) invest in communications, physical infrastructure, and services such as health and education.

Build on existing institutional infrastructure

Enhance and optimally utilize existing infrastructure rather than create new and costly delivery mechanisms that may never be viable. Financial services designed for the poor could be introduced through existing agricultural development banks that meet basic pre-conditions

Determine the appropriate role for subsidies

Instead of subsidizing interest rates to the end-clients, bank should use grants to build institutional capacity and promote innovation. Bank should also resist political pressure to include targeted or subsidized credit in agricultural projects.

Explore possibilities of technology

Where appropriate, bank with experience in technical innovations could help reduce the costs of operating in rural areas and improve services provided to rural clients by introducing new technology. Examples include ATMs linked to smart cards, and mobiles to peer group leaders. A careful cost-benefit analysis of any technology and assessment of institutions’ information systems should be conducted prior to commitment.

Fund innovations in delivery mechanisms and products

Bank should offer flexible grant funding to financial institutions seeking to adapt or introduce new financial products, or to reduce delivery transaction costs. Innovative solutions are especially needed to better fit the income and investment cycle of agricultural activities. For example, important non-credit financial services include domestic and international money transfers to help smooth seasonal income flows, and deposit services to access in times of low income or high expenditure. Bank should also explore ways to support financial institutions to build on trader and processor client knowledge and introduce more diverse and transparent financial services for farmers.

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