A practical agenda in financial inclusion: What RBI Governor Dr Rajan needs to do?

Dr Rajan’s first task would be to ensure that the RBI puts out a proper working definition of financial inclusion. Without proper baseline data, quoting facts and figures is meaningless as then, we would not be able to attribute whether financial inclusion occurred because of something we did consciously or it was simply an accident and/ or act of GOD

There is a lot that Reserve Bank of India (RBI) governor Raghuram Rajan can do to bring transparency to the financial inclusion process. I say this, notwithstanding the issues that I have already raised about composition of the Committee  and the conflicts of interest of its members.  Let me start with the definition of financial inclusion and data pertaining to the same, as my first article of a series that will look at measurement of financial inclusion and related aspects.
 

Without a clear definition of financial inclusion and good ground level data, much of what we say in terms of inclusiveness in the financial sector is analogous to writing on water. Additionally, without proper baseline data, quoting facts and figures is meaningless as then, we would not be able to attribute whether financial inclusion occurred because of something we did consciously or it was simply an accident and/or act of GOD. 
 

Having an internally consistent definition of financial inclusion is very critical. And generating data based on the same is even more important. Together, these can form the basis for our opinions and judgements, which in turn can shape policy and subsequent implementation appropriately.
 

It therefore follows that we first need a reliable and valid definition of financial inclusion in terms of type of products and services (for example, it could be loans, savings, insurance, remittance, literacy and financial education services, ombudsman services etc) accessed through different institutions (Banks, Insurance Companies, SHGs, MFIs, Business Correspondents, Cooperatives etc) by various kinds of mutually exclusive individuals/households from different segments of society (especially, low income and excluded groups).
 

Please note that some of these financial inclusion services could be one time services (like going to an ombudsman), others (like loans) may be repeat services and some others like savings accounts (or pension accounts) could even be continuous long-term services. Likewise, several institutions may combine to form a channel – for example, I could get a loan from an SHG that is linked to a bank which has been refinanced by a DFI like NABARD. I could also get a loan from an MFI that has borrowed from a DFI (SIDBI) and is on-lending to me. The permutations and combinations are endless here but please note that the above distinction between channels and institutions is very important for determining correct outreach of financial inclusion!
 

In fact, the real outreach of our financial inclusion services through the various channels and institutions is not transparently known today. This is because there is overstatement of outreach figures through double and triple counting as sometimes data of different institutions within a channel is added up to give an incorrect outreach figure.
Sometimes, people have genuinely accessed services through different channels as well. This again provides an exaggerated picture of total outreach and penetration with regard to financial inclusion.
 

Given the above, Dr Rajan’s first task would be to ensure that the RBI puts out a proper working definition of “financial inclusion” and ensures that all stakeholders promoting and/or looking at financial inclusion use the same consistent definition. Otherwise, outreach figures on financial inclusion would be meaningless and cannot be evaluated or compared in a serious manner.
 

A second important task for Dr Rajan is ensure that proper data (which can then become a baseline going forward) is available with regard to financial inclusion. Here, the priority task would be to know ASAP:

  1. How many mutually exclusive individuals and mutually exclusive households have been financial included in any given financial year?

And when we say financially included, we need to be able to disaggregate this figure in terms of services/products accessed by these mutually exclusive individuals/families through different channels (and their institutions) and across various regions/states in India. If this basic data becomes available, then, we can analyse the data to get better analytics about the rural-urban divide, demographics and so on
 

As someone who has worked in over 540 districts of India over the last 25 years, I can say that the data with regard to SHGs needs to be more transparently and accurately estimated. What is lacking is objectively verifiable data on the number of well functioning SHGs, their demographics with transactions on loans and savings, overlap of members across SHGs (many SHGs have dual membership or in some cases, I have even seen membership in three to four SHGs) and the like. Likewise, we lack transparent and accurate data with regard to MFIs and their clients as well. There is so much of overlap in clients across MFIs (as evident from the 2010 AP crisis). Similarly, clients appear to be shared significantly across the MFI, the SHG Bank linkage, Cooperative and other models. All of these lead to significant exaggeration in outreach data. Further, data on KYC, priority sector lending including to agriculture, BC models, insurance services and pensions also have their problems and thereby contribute to outreach exaggeration.
 

Thus, given that there is so much double and triple counting and exaggeration in the outreach data, it is imperative that we know the real outreach in terms of mutually exclusive individuals first and as mutually exclusive households next. I hope Dr Rajan will set in motion appropriate processes so that transparent data which can lend itself to objective field verification is publicly available. We need to know how many mutually exclusive individuals/households have been reached by various financial inclusion efforts and this would also entail significant coordination with other regulators like IRDA and PFRDA, which again, Dr Rajan would need to ensure through appropriate mechanisms. 

  1. And once we have the above basic data, we can then get to understand whether people who were financial included in a given year continued to be included in the subsequent years?

Most people assume financial inclusion is a one time or static phenomenon. On the contrary, it is dynamic one where people float in and float out of the financial inclusion eco system. It is very similar to concept of floating population in big metros like Delhi or Mumbai!
 

Take the case of all the clients who had their loans waived off as part of the farmers’ loan waiver scheme some years ago! After the waiver, several of these clients were classified as defaulters by the respective banks and hence, they could not regain access to the formal financial services that they once had been able to access. Likewise, as a previous Moneylife article (Financial inclusion of sugarcane farmers in modern-day India) showed, many sugar cane farmers who were once included (by virtue of having got a bundled loan for sugarcane) were subsequently excluded for reasons mentioned in the article. The same is the case with the 2010 AP micro-finance crisis where most of the clients in AP who did not pay back at the height of the crisis are now classified as defaulters (both in general terms as well as in the credit bureau) – as a consequence, no formal or quasi formal financial system will touch them hereafter. In fact, the erstwhile IRDP (Integrated Rural development Program) had included millions of people way back in the 1980s but many of these people left the financial ecosystem for various only to be re-included through some other scheme/program later. While I could give many more examples, the key issue here is that anyone who is included financially need not stay included always.
 

The above also implies that the linkage cited between ‘financial inclusion’ and ‘inclusive growth’ is at best tenuous because of the following aspects:

  • Not all people who are financially included stay that way all the time. They float in and out of the financial eco system due to circumstances beyond their control and this is especially true of low income people in the urban informal sector and the rural poor 
  • Not all financially excluded people are poor and vulnerable. Fox example, a large number of medium sized traders and farmers in small shanty towns tend to be excluded for the formal financial system but they are not necessarily poor or vulnerable. And it is such people who have a better chance of staying financially included, once they have gained access to a formal financial service
     

 To summarise, the larger point that I am trying to make are the following:

  1. We are in urgent need of a proper working definition of financial inclusion that can lend itself to reliable and valid measurement,
  2. We require data on mutually exclusive individuals and households who have been financially included (in a given year),
  3. We also need to have data on how many such mutually exclusive individuals and households who were financially included in a given year stayed included in the subsequent years, and
  4. Lastly, we also need data on how many new mutually exclusive individuals and households enter the financial inclusion eco system in any given year?

And all of this data must be capable of disaggregation by products/services, channels (and their institutions), states/regions and so on. Only then will we be able to make meaningful analysis of all the hype surrounding financial inclusion.
 

(Ramesh S Arunachalam has over two decades of strong grass-roots and institutional experience in rural finance, MSME development, agriculture and rural livelihood systems, rural and urban development and urban poverty alleviation across Asia, Africa, North America and Europe. He has worked with national and state governments and multilateral agencies. His book—Indian Microfinance, The Way Forward—is the first authentic compendium on the history of microfinance in India and its possible future.)

Comments
SuchindranathAiyerS
8 years ago
"Inclusion" is a political Congress mantra like "secular" and "Garibi Hatao". From different laws for different folk based on vote banks to different entitlements for different folks based on vote banks. It all about divide and rule. Definitions, accurate statistics, dictionaries, indeed, any clarity would upset the Congress apple cart!
Krishnaswami CVR
8 years ago
while agreeing with the author, the systematic error is abundant in all the areas of statistics. Thus he had raised a larger picture.

when we say, financial inclusion, to me it is very simple as i have those low earners may not have bank accounts. Thus if those low earners are tabulated today, ( should be available in our General Census) and if we review after a gap of one year, we may reasonably conclude that inclusion has been there or not.
Krishnaswami CVR
8 years ago
while agreeing with the author, the systematic error is abundant in all the areas of statistics. Thus he had raised a larger picture.

when we say, financial inclusion, to me it is very simple as i have those low earners may not have bank accounts. Thus if those low earners are tabulated today, ( should be available in our General Census) and if we review after a gap of one year, we may reasonably conclude that inclusion has been there or not.
Ramesh S Arunachalam
Replied to Krishnaswami CVR comment 8 years ago
Thanks Sir

Points well taken but Financial inclusion is not just bank accounts and it much more complex than that. That is why the RBI needs to put a proper definition of financial inclusion in terms of type of products and services (for example, it could be loans, savings, insurance, remittance, literacy and financial education services, ombudsman services etc) accessed through different institutions (Banks, Insurance Companies, SHGs, MFIs, Business Correspondents, Cooperatives etc) by various kinds of mutually exclusive individuals/households from different segments of society (especially, low income and excluded groups).

The issues with data are therefore much more complex and also, all the models of financial inclusion have tended to shroud the data as well. Besides, there have been many frauds like ghost clients etc and data mis-representation has also occurred - in fact past moneylife articles cover these aspects and I will provide the citations tomo. Therefore, it is time that the RBI offers a comprehensive definition and backs the same with a transparent process to get the data. In fact, the priority sector lending data supplied by banks has so many problems and I will writing about all of these in a series of articles. thanks again for your comments sir and I have taken note of the points and will use them as appropriate in my future writings
Free Helpline
Legal Credit
Feedback