Promoting Financial Inclusion - United Nations Development ...

needs of the creamy layer of large farmers,
traders and, where relevant, production
activities. The engagement of banks with
low income families has been essentially in
response to directed programmes such as
Integrated Rural Development Programme
(IRDP) and, more recently, KCC and no
frills accounts along with a plethora of
schemes for marginal farmers, youth, and
micro-enterprises. All of these are high cost
activities and are often seen as obligations
upon the normal business of the bank. In
some cases, in order to boost their priority
sector lending; banks also enter into buyouts
of MFI portfolios.
Thus, as the discussion in this report
illustrates schemes to promote financial
inclusion have had limited impact. When
there is some traction, as in the case of the
KCC, it is the upper band of the target
clientele that has reaped benefits. The banks’
lukewarm response to these schemes has
also affected the momentum of their rollout
to some extent. However, if bankers
saw significant business potential in these
activities a more dynamic rollout with
real momentum would be possible. Thus,
even the untested and unproven business
correspondent model remains limited to
technology service providers opening nofrills
accounts that are mostly dormant.
In this context, as an institution whose
promoters have been engaged with issues
of microfinance and financial inclusion for
more than three decades, M-CRIL has a
deep understanding of the issues. The two
key problems emerging from this report
and M-CRIL’s overall experience are set
out in the following sub-sections.
were required to cross-subsidize financial
inclusion activities.They had to offer small
value services to low income families at the
lowest interest rates in the system. The wellknown
differential rate of interest scheme
(requiring banks to lend at 4% interest,
well below their cost of funds) still exists,
although it now accounts for a minuscule
proportion of their total portfolio. Even
after general interest rate deregulation in
the late 1990s, interest ceilings (defined
as the prime lending rate, the minimum,
‘risk free rate’ to be charged by the bank)
continued to exist for small value accounts.
As a result it has become ingrained in the
public mind that ‘loans for the poor’ should
be subsidized. The reality of credit rationing
resulting from such subsidies is however lost
on the average observer.
In the past months, all interest rate
regulation has been abandoned. This change
must be welcomed in that it constitutes
official recognition that bankers must be
allowed to determine the parameters of
their own business. However, all circulars
from the RBI and the government
continue to retain the underlying message
of reasonableness. While there is no case for
profiteering from those affected by poverty,
it most likely implies some element of crosssubsidization
must continue. This would
inevitably result in a higher than optimal
FIGURE 6.1 Yields in the Banking System.
6.2 THE IMPACT OF INTEREST
RATE DE-REGULATION
It has been repeatedly observed in this report
that low transaction volumes in small value
accounts entail very high proportionate
costs for the banks. For many years bankers
42 PROMOTING FINANCIAL INCLUSION