Taking Financial Markets to the Masses

PS: This essay was chosen among the top 10 essays of the country by The Money Life Magazine

"Please understand Your Excellency, that India is two countries in one: an India of light and an India of darkness. The ocean brings light to my country. Every place on the map of India near the ocean is well off. But the river brings darkness to India-the black river”
- Balram Halwai in The White Tiger

While the world was rah-rah ing about the Indian economic miracle, Arvind Adiga’s brutal depiction of India’s dark belly evoked extreme reactions. While the novel reportedly blew the socks off Western critics, several Indophiles declared it inauthentic, wiping off the stains of the ugly truth with the euphoria of globalised India they are well acquainted with. The reactions aren’t surprising considering the economic growth miracle we are witnessing today post liberalization in 1991. Gone are the days of ‘hindu rate of growth’. Indians are making their presence felt everywhere from Davos to Cannes. In such times, is it possible that we could have overlooked the dark India, remaining silhouetted against the celebrations of the resurgent India?
Shashi Tharoor once pointed out that ‘any truism about India can be immediately contradicted by another truism about India. Sounds confusing? To make sense of all of this, let us revisit India’s tryst with globalisation.
India’s struggle against imperialism led us embrace socialism unlike other South Asian economies. It however drove our economy to a chaotic traffic jam[i]. It took us an unprecedented balance-of-payment crisis to realize how badly our economy was caught in this chaos. Indian leaders had no choice but to press the green signal and welcome liberalization. However, only those who are driving ahead with the gears of their education will move ahead first. The majority of Indian population, burdened by their karma of deprivation, is unable to move ahead in the newly opened globalisation highway.

So the million dollar question is, how do we ensure that the ‘dark India moves ahead in the sprawling globalisation highway? What would help them is a flyover built exclusively to lift and lead them towards the highway. What could be that flyover for the 370 million [ii]of India’s poor who are facing some sort of deprivation everyday? Wait, did I hear subsidies? Our socialist genes have ensured that subsidies remain our collective Pavlovian reaction towards problems plaguing the masses. The results are quite obvious. If not subsidies, what else then? Fortunately, after several years of misguided direction, government of India (and various other countries too) have discovered Financial inclusion as the biggest force that would lift the masses from poverty.
The Committee on Financial Inclusion, appointed by the Government of India, defines it as “the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost”
Before we analyze this definition, let us understand how critical financial inclusion is for a country like ours, where more than 60 % of our population depends on agriculture for livelihood. For this purpose, let us revisit the singur-Nano debacle, leaving aside the controversy of land acquisition for industrialization.

When a bunch of economists met the farmers in Singur to understand why they weren’t willing to sell their land, they said that a large chunk of cash was not very useful to them as they didn’t have the skills and temperament to invest it profitably in non- agricultural uses. They were worried that a lump sum received from selling the land might be frittered away by themselves or family members. The economists concluded that the absence of good insurance mechanisms and financial instruments together with low levels of human capital make switching to alternative occupations costly.[iii]

This case-study offers several lessons for us to understand the Indian perspective on financial inclusion. It helps to understand why our country’s transition from the agriculture sector to the non-agriculture sector is progressing in snail’s pace, having taken us 46 long years to reduce the percentage of GDP dependent on agriculture from 42.8 to 17.5 percent[iv]. The controversial land acquisition dimension in this case study helps us understand the Indian context in the global challenge of establishing capitalism in the developing world, as propounded by the Peruvian economist, Hernando de Soto, in his path-breaking book, “The Mystery of Capital”.
Soto states that the main problem of development is not that the poor in the third world lack capital, but many lack the legal title to the assets they already hold. This is true especially in the Indian scenario where most of the farmers owning marginal holdings of land, already unable to exploit economies of scale, are further crippled by their inability to monetize or collateralize their property. Singur-Nano debacle also points the depressing fact that in the absence of a formal financial system, land is not just an asset, but a pension plan [v]they could bank on. It’s indeed a shame that even after liberalization; land markets continue to remain shackled. After all only in India, registration of land doesn’t always equate with legal guarantee of title.

Indian Govt. realizing the importance of financial inclusion stated in its 11th five year plan that its major goal is to work for financial inclusion. National Rural Financial Inclusion Plan (NRFIP) was launched with a clear target to achieve complete financial inclusion by 2015. This plan aims to serve fifty percent of the financially excluded (280 mn) population by 2012 through regional and semi-urban branches of commercial and regional rural banks.

Present state of financial inclusion in India

The first step towards taking financial markets to the masses began way back in 1969 when the commercial banks were nationalized. This opened the gates of rural banking to the dark India. Since then, our government has been lumbering along in its ambitious journey towards taking financial markets to the masses. Here is a sneak peak at the achievements made so far.
· RBI’s “No Frills” account initiative has seen 28.23 million account holders[vi]
· Reduction in transaction costs incurred in opening bank accounts by reducing the stringency of the “Know your Consumer” norms.
· The number of ATMs has increased to 44,857 (as on May 31, 2009) following the lifting of restrictions to open new ATMs[vii]
· The branches of commercial banks and regional rural banks have increased from 8,321 in the year 1969 to 68,282 branches as at the end of March 2005.[viii]

In the light of these achievements, let us look at where we stand today. In the first-ever index of financial inclusion prepared by ICRIER (International Council For Research on International Economic Relations) to find out the extent of reach of banking services in 100 countries of the world, India has been placed 50th position, ranked below Kenya and Morocco. The Index of Financial Inclusion is based on three basic dimensions: banking penetration, availability of the banking services and usage of the banking system. It is pertinent to note that India ranks 29th with and 50th without the dimension of banking penetration. This shows that despite fairly decent banking penetration, evident from the number of rural bank branches constituting 39.7 % [ix]of total-bank branches, the availability of banking services is abysmally low, indicated by the index score of 0.075[x], which is the lowest among the three dimensions. These depressing figures could turn even worse, if one takes into account the dubious assumption that an individual can have only one bank account.

The Scope of Financial Inclusion
Before we analyze various factors involved in financial inclusion, let us first look into the perceived scope of financial inclusion in India. The focus of financial inclusion in India at present, as pointed by several researchers, has been confined to ensuring a bare minimum access to a savings bank account without frills, to all[xi]. This is quite evident from the list of achievements brought under spotlight by RBI.

So what differentiates the Indian scope of financial inclusion from other countries who are progressing towards the same goal?

India Vs the rest of the world- A comparative study
A quick glance at the Indian definition of financial inclusion mentioned above, points out that we have not given due importance to financial education. It will serve no purpose if the government simply provides financial services without educating the masses about financial markets. The under privileged should also be able to invest confidently in financial products designed exclusively for them and make informed choices, fully aware of the risks and opportunities. A research study conducted on financial inclusion in Gulbarga, a district that had been declared 100% financially included, pointed the same truth when it concluded that “…opening bank account without accompanying training or marketing may simply result in additional costs for the bank without any benefits to the community[xii]. Compare this with the United Kingdom, whose Financial Inclusion Task Force has identified access to free face-to-face money advice as one of the priority areas for financial inclusion. For a country like ours which is deeply entrenched in age old traditions of austerity and self sacrifice, financial education should carry the onerous responsibility to create a paradigm shift to change the attitude towards financial markets.

With the Indian Govt. ambitiously announcing the right to Education and the right to food security in recent times amidst fanfare, it is tempting to wonder how it would be if it also brought in its legislation, the universal right for every citizen of India to possess a banking account. While this sounds fool hardy to be true, considering the vast majority of people in India without access to proper banking channels, we can indeed learn from the experiences of France, Belgium and Canada which have pioneered in providing such initiatives.

The financial service providers’ perspective
This analysis would remain biased if it viewed financial inclusion only from the perspective of the common man. Let us now shift gears and look at the challenges faced by the financial service providers. They would obviously look into managing the risk of default first, before they break their head over the high transaction cost.

While the success of Grameen bank and several other microfinance institutions have discarded the earlier notion that it is highly risky to provide financial services to the poor, it will be prudent on the financial service providers’ part to assess the risk that will be borne by the financial institution. Fortunately, technology has met the challenges effectively faced in assessing and mitigating the risks, thereby benefiting the customers indirectly by reducing the rate of interest. In addition to the traditional approach of allocating adequate financial capital, banks have also minimized risks by miniaturizing the financial institutions into small joint liability groups, which would collectively bear the risks.

While the service providers remain fairly confident over managing the risk, transaction cost remains to be one of the biggest challenges in implementing such solutions for the underprivileged. Rangarajan Committee Report on Financial Inclusion in India correctly pointed this out when it stated that “Affordability” is one the key aspect in an inclusive financial system.

Technology has been quite effective in reducing the transaction cost by linking rural areas with decrepit infrastructure, thanks to innovative models like Bank-In-a-Box and branchless banking. The cost is further reduced by leveraging the existing networks such as post-offices and co-operative societies. In spite of all of the benefits, technology hasn’t made inroads fully into the private sector banks. Why should this be so? The answer to this puzzle lies in one word: Sustainability. Private sector banks continue to look at these services as a social obligation to be fulfilled, bound by priority sector lending requirements.

To make the provision of financial services self sustainable, govt. should first ensure that masses are perceived as lucrative customers by the banks. It has to shed its socialist vestiges by removing the constraints which restrain the market forces. It behooves the government to create a favorable ecosystem by implementing market friendly policies like removal of interest rate ceilings and creation of adequate infrastructure to facilitate the entry of service providers into these under served markets. Companies should also strive to look beyond philanthropic compulsions and look for sustainable ways to provide these services. Several companies have realized the vast potential and have begun to take steps towards the right direction. ABN Amro bank, earlier this year, won the Dun & Bradsheet award for the "Best Bank in the Foreign Banks category- Priority Sector Lending". Meera Sanyal, Country – Executive- India, in her recent visit to a B-School in Mumbai, passionately talked about how social initiatives such as rural financing scheme are changing the lives of rural women. It was heartening to see her priding on her bank’s contribution for the under privileged along with several micro-credit institutes.

It is high time we all ensure that India’s jugaad energy- the much talked about pro-poor innovation energy of our rural masses –is not frittered away and put to right use by supporting entrepreneurs to build a better future.

The changing trends of microfinance

When Mr. Vikram Akula, Founder and Chairman, SKS Microfinance, the largest microfinance institution in the country and the fifth largest globally in terms of client base, announced his company’s IPO plans, it marked a new beginning in the micro-finance industry. What started as a small scale movement to promote financial inclusion, has now grown exponentially. Despite the crisis, the portfolio and client outreach of microfinance industry grew by 97% and 60% respectively, implying a gross portfolio of more than Rs. 11,700 crore and 17.9 million active borrowers. [xiii] They have uplifted the lives of several women and have paved way for deepening of financial markets. Several venture capitalists have now begun to invest in these burgeoning institutions. Sequoia Capital, the Silicon Valley based venture capital fund, has recently invested $11.5 million in SKS Microfinance, the first of its kind in the microfinance industry. While the increase in investment in such firms will benefit the poor customer by expanding their breadth of services and also reducing effective rate of interest, skeptics have begun to doubt the long term viability of this trend. The recent criticism against Banco Compartamos, the popular Mexican bank, following its highly successful IPO, has forced several critics to conduct reality check on microfinance industry based on a stand alone case. Will Microfinance institutions stand up to the expectations of their investors and their large clientele? Wouldn’t there be a conflict of objectives? These questions will find their suitable answers depending on how far these new trends will impact the industry in the long run.


It is necessary to understand financial inclusion not as an end but as a means to lift the masses out of poverty. While several countries have shown tremendous results in their journey towards bringing financial markets to the masses, we are yet to see visible benefits in our country. Is it too difficult for us to realize that it’s just the absence of light which causes darkness and nothing else? The moment financial service providers, government and all other stake holders who can influence the lives of the under privileged understand this kernel truth, the dark India shall be liberated from their karma of deprivation and poverty they’ve suffered for so long.

[i] Interim thoughts blog by Neelakantan, One way – Globalisation.
[ii]Arjun Sen Gupta Committee Report,2004
[iii] No way out of this plot - Sanjay Banerji, Maitreesh Ghatak Financial Express , September 30, 2009.
[iv] Development Data Group, The World Bank. 2008. 2008 World Development Indicators Online. Washington, DC: The World Bank.
[v] No way out of this plot - Sanjay Banerji, Maitreesh Ghatak Financial Express , September 30, 2009.
[vi] CMIE publication 2007-08, as on 31st December 2008
[vii] CMIE publication 2007-08, as on May 31, 2009 - Presentation by Dr. K.C.Chakrabarty, Deputy Governor, Reserve Bank of India
[viii] 100% Financial Inclusion: A Challenging Task Ahead – Dr. Reena Agrawal
[ix] Number of rural bank branches – 31,727 constituting 39.7% of total bank branches (as on June. 31,2009) (Source: CMIE publication 2007-08)
[x] Working Paper No. 215, Index of Financial Inclusion, Mandira Sarma, June 2008, Indian Council for Research on International Economic Relations
[xi] 100% Financial Inclusion: A Challenging Task Ahead – Dr. Reena Agrawal
[xii] Financial Inclusion in Gulbarga: Finding Usage in Access, Minakshi Ramji, Center for Microfinance, January 2009
[xiii] Microfinance: Swimming Fully Clothed! VC CIRCLE, Eric Savage and Abhishek Fogla, August 1, 2009