Promoting Financial Inclusion - United Nations Development ...

savings, and this has ultimately affected
their sustainability and profitability.
Recent information on PACS shows
that the borrowings of PACS were
almost double their deposits.
• High risk portfolio: The high number
non-performing assets (NPA) of PACS
has accentuated the inadequacy of the
cash flow (coupled with low savings
mobilization) to fulfil the credit needs of
members. The cause of NPAs has been
weak governance and management of
these institutions. The NPA of PACS
have been increasing over the years -
from 26.9% in March 2007 to 36.6% in
March 2008 and 59.2% in March 2009
[NAFSCOB 2009].
• Decreasing diversity of members: The
absolute number of members of PACS
has seen a continuous rise over the
years; however the share of rural artisans,
SC/STs as a percentage of members
has declined. In 2002–03, 6.1% of the
members were rural artisans, whereas
in 2007–08, the proportion dwindled
to 3.6%. Also the members who
receive credit are mainly farmers. This
suggests that many members of other
communities (SC/ST) and rural artisans
are not able to obtain credit from PACS.
Finally, the RRBs have been specifically
discouraged from functioning as small
banks with a local interest, in the belief
that imitating the processes of large banks
will somehow make them professional and
viable whereas what is really required are
reforms in governance and management
and changes in their operational structure
by returning them to the small regional
level banks they once were – perhaps not
limited to 3 districts but likely to be viable
in a 10-15 district operational area. A
historical opportunity to turn them into the
small banks recommended by the Raguram
Rajan Committee appears to have been
foregone.
5.5 CONCLUSIONS—WHAT ARE
THE CHALLENGES AND HOW
CAN THEY BE OVERCOME?
It is apparent from the discussion in this
section that the task of increasing and
maximising financial inclusion faces major
challenges. These cover a range of issues
including:
• The social exclusion of low income
families which results in the barriers of
illiteracy, inhibition and poor physical
access; it limits awareness, ability to
overcome prejudice about their bankworthiness
and enhances the transaction
costs incurred by them in using the
financial services available in the
country.
• The small value of accounts and
transactions expected by the banking
system from financially excluded families
which results in high cost of operations
and limits the incentive to serve them.
• The lack of understanding of products
and services appropriate to the needs of
low income families resulting in static
approaches like the no frills account
where it has become apparent that mere
availability is not the issue.
• Limited experience with business
models suitable for small value accounts
and doorstep service delivery resulting in
the slow adoption of mechanisms such
as the business correspondent model.
• Historical problems such as the
governance issues facing the cooperative
credit system and RRBs which need
a substantial effort to discipline and
reorient thinking, an effort that requires
political will in short supply in a system
that is geared to populist thinking on
account of frequent elections at various
levels of government.
It is apparent that there is a huge task
ahead in overcoming these challenges
to financial inclusion. Most efforts are
PROMOTING FINANCIAL INCLUSION 39