Consumer Psyche

K. Seetha Prabhu examines Financial Inclusion as a path to rural recovery in WSJ... read on...

To be sure, the global financial crisis and related emerging issues such as the large scale return of migrants who have lost their jobs in towns, prospects of a drought in many parts of the country due to insufficient and irregular rainfall, and the continuing rise in the prices of commodities for daily consumption have cast a shadow on prospects of rapid growth that is difficult to ignore.

In these times of distress, what could have offered succor is a well-established and functioning financial sector that offers a range of products suited for the rural clientele and enables and supports those with meager incomes to tide them over tough times and secure their livelihood. The crisis may offer just the incentive needed to forge a much more active financial sector that will lead a resurgence of the rural sector and, in turn, the entire economy.

There is much to be done. While India aggressively pursued bank nationalization way back in 1969 to widen the reach of banks leading to a network of around 70,000 bank branches, the country continues to flounder on all the indicators of financial inclusion - ease of access, availability and usage of the formal financial system. The overall reach of the banking system has been unsatisfactory. The latest report of the Reserve Bank of India, released last month, indicates that only 59% of the adult population has bank accounts. For the insurance sector the picture is dismal. The insurance density ratio -- defined as the volume of premiums to population -- was only 33.2 in India in 2006. In Europe, it is over 30 times higher.

In rural India, the picture is even grimmer. The RBI study shows that among the 89.3 million farmer households in the country, more that half do not access credit either from institutional or non-institutional sources. Only 27% of farm households borrow from formal sources of credit. Despite several measures to expand banking services to rural areas, rural branches of banks continue to be avenues for deposit collection rather than the active deployment of credit for productive use. The cooperative banking system is also in a state of disarray which limits its reach. In 2006, around half of the Primary Agricultural Credit System, which comprises grass-root-level institutions catering to the credit needs of farmers, was loss-making and the situation has only deteriorated further since. The situation in the poorer states with larger rural populations is even worse.