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Insights into Editorial- From Plate to Plough: How to expand inclusion

Insights into Editorial- From Plate to Plough: How to expand inclusion

01 February 2016

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Financial inclusion and financial literacy have been important policy goals for quite some time. Inclusion has been emphasized by various governments since independence. There is a long history of financial inclusion in India. For the present government, financial inclusion is an important policy pillar to ensure inclusive development.

What is ‘Financial Inclusion’?

It has traditionally been understood to mean opening new bank branches in rural and unbanked areas. Nowadays, however, financial inclusion is seen to be something more than opening bank branches in unbanked areas to take formal financial services across the length and breadth of the country.

  • Simply put, financial inclusion aims to mainstream financial services for the masses, especially credit at affordable costs from institutional sources.

Brief Background:

Various governments have tried to promote financial inclusion in the country through various policy measures. It is in this regard that the bank nationalisation took place.

  • There have been some successes during 1951 to 1991, when the share of outstanding debt of rural households to institutional sources increased from 7.2% in 1951 to 64% by 1991.
  • But thereafter, the period of economic reforms showed a dismal performance, with the share of institutional sources declining from 64 to 56% during 1991-2013. This is one of the biggest lapses of the economic reforms.

Jan Dhan Yojana (JDY):

Realising the importance of financial inclusion, the incumbent government took a bold step by introducing the Jan Dhan Yojana (JDY).

  • Looking at the speed at which the bank accounts have been opened, one can easily say that the scheme has been a massive success. It has already found its place in the Guinness Book.
  • So far, around 20 crore bank accounts have been opened, and more than Rs30,000 crore deposits received under JDY.

For the Jan-Dhan Yojana to succeed the following steps should be considered:

  • The business correspondent model should be extended to include entities such as kirana shops, corporates and others. It is obvious that BCs need to be properly remunerated and have the full support of banks. Banks have tied up with common service centres (CSCs) as BCs.
  • Insistence on KYC (know your customer) norms has hindered the opening of new accounts even in urban areas. Great significance is, therefore, attached to e-KYCs. The Aadhaar can play an extremely useful role.
  • Since mobile banking through phones is to play an increasingly important role in a scenario where physical bank branches will be few, greater co-ordination between mobile telephone companies and banks will be necessary.
  • It goes without saying that State governments’ support will be crucial.
  • Commercial viability will be the key to the programme’s success. Past experience suggests that without proper incentives, the facilities on offer will not be used by the really needy. Banks will be saddled with a large number of dormant accounts.

Challenges before the government:

Now, the real challenge before the government is to prevent these accounts from remaining dormant. Hence, to ensure that JDY remains active and relevant in fulfilling its objective, the PM had asked the RBI to prepare a roadmap for financial inclusion and to fulfill this objective a committee was formed.

  • The RBI Committee on Medium-Term Path on Financial Inclusion submitted its report to the government in December 2015.
  • The committee emphasised the role of a holistic strategy involving players like telecom operators, biometric systems, payment banks and land registrars for “last mile” service delivery.

Key recommendations made by the committee:

  • Phase out of interest subvention scheme.
  • Open more accounts for females.
  • Implement a new welfare scheme for girl child — Sukanya Shiksha.
  • Step up financial inclusion in north-eastern, eastern and central states.
  • Link Aadhaar to each individual credit account.
  • Use low-cost solution based on mobile technology for ‘last mile’ delivery.
  • Recommends commercial banks to open specialised interest-free windows with simple products.
  • Recommends RBI to take lead in creating a geographical information system to map banking access points.
  • Suggests more ATMs in rural centres.

Analysis of key recommendations:

Phasing out of Interest subvention scheme:

The interest subvention scheme was introduced in 2006-07, with the objective of providing substantial and cheap loans — at 7% interest (upper limit of Rs 3 lakh), and if payment is regular, gradually lowered to 4%. Some states have extended loans even at zero interest rate to farmers.

  • This has resulted in a significant increase in short-term agricultural credit, with actual disbursements consistently surpassing targets. This is hailed as a grand success and the subsidy on account of it has increased from Rs 3,283 crore in FY12 to Rs 13,000 crore in FY16.

But this could be deceptive and a potential agri-credit scam. Why?

There’s reasonable evidence that a significant proportion of crop loans granted at subvented interest rates isn’t reaching target beneficiaries.

  • A farmer who receives loans at a concessional rate of 4% can easily deposit at least a part of it in fixed deposits in the bank, earning about 8% interest, or even becoming a moneylender to offer loans at 15-20% interest to those who don’t have access to institutional sources of finance.
  • A bigger proof is the fact that short-term credit from institutional sources reached 110% of the total value of agricultural inputs in 2014 (NAS 2015), and at the same time, the data also showed that 44% loans were from non-institutional sources in 2013.
  • This suspicion is reaffirmed when one looks at the month-wise disbursement of agricultural credit, which spiked to 62% cent of annual disbursement in the last quarter of 2014, with no corresponding spike in agri-production activities.
  • Also, there is no evidence to show that the Centre’s interest subvention scheme has reduced farmer indebtedness.

Hence, the RBI committee recommended phasing out the interest subvention scheme, and has asked the government to move towards universal crop insurance. The latest crop insurance scheme is expected to cost the Centre around Rs 9,000 crore. This could easily be financed by releasing funds allocated to interest subvention.

Income support:

The report also states that meaningful financial inclusion will be elusive without social cash transfers from government-to-person (G2P). Recognising large leakages in welfare and anti-poverty schemes, many countries have moved from price support to income support.

  • However, India uses price policy (subsidised inputs) to support farmers and PDS grains for consumers. Such policies are inefficient and at times regressive, as they promote leakages and sub-optimal use of scarce resources.
  • Recent policy interventions utilising DBT in LPG subsidy have seen good success. Similar efforts are needed for food and input subsidies.


If implemented properly, Jan Dhan Yojana can be a gamechanger in alleviating poverty at a much faster pace than has been the case under economic reforms. Challenges of implementation will remain unless the government displays the same vigour and perseverance as it did in opening accounts under this scheme.