Promoting Financial Inclusion - United Nations Development ...

price for those provided services on a viable
basis and a lower than optimal volume for
those receiving subsidized services.
It is notable that the rural banking system
(consisting of the DCCBs and RRBs) has
not had to follow interest rate regulation
for around a decade now. Yet, at no point
has it felt free to charge much more than
the commercial banks for the apparently
more inclusive services it provides. A study
by M-CRIL in 2008-09 showed that the
average yields of DCCBs and RRBs were
not significantly more than the 10.5%
average yields of commercial banks (in
2007-08) despite the RRBs operating
expense ratios that were significantly higher
(see Figure 6.1). While DCCB operating
expense ratios were lower this was largely
on account of most origination expenses
being borne by the loss making PACS.
Hence as it turns out the lower yields of
the cooperative banks actually come at
the expense of the target population that
they are trying to protect as it is ultimately
members who must bear the losses of the
PACS.
There is no evidence so far of bank
managements charging higher interest on
financial inclusion products despite the
higher costs of such services. This limits
the business potential of financial inclusion.
Thus, the services available remain limited
in volume (small value SHG loans and nonfunctional
no-frills accounts) and lacking
in innovation. Ultimately, as a result, low
income families continue to remain excluded
and the legendary, rapacious moneylender
flourishes in providing the only real financial
services available to low income families.
6.3 PRUDENCE IN REGULATION
AND PROMOTION IS
PERHAPS A CASE OF ‘NO
RISK, NO RETURN’
The discussion in the earlier sections has
shown extensively how financial regulators
and the government in India have opted for
prudence in relation to financial inclusion
rather than bold, even adventurous,
experimentation. While the easing of KYC
norms and the launching of an extensive
financial literacy programme are excellent
long term measures, some examples of
the limitations of a cautious approach are
discussed below.
1. The prevailing environment of low
cost, cross-subsidized inclusive finance
products to improve the availability of
financial services to low income families
have proved to be a detriment to
volumes as well as to experimentation
and innovation.
2. In an effort to regulate the business
relationship between financial service
providers and clients, the business
correspondent model was constrained
for four years on pricing and by
stipulations on who could and could not
be a correspondent. The prevention of
microfinance NBFCs from playing the
role of BCs continues to be a limitation
on outreach, since it is these institutions
that have a financial relationship with the
largest number of low income families, as
well as on the functioning of MFIs since
they continue to have a uni-dimensional
‘credit only’ relationship with their
clients. A more holistic relationship
would not only protect such families as
borrowers) but would also create a more
secure savings environment for them.
3. Similarly, in the case of the microinsurance
regulation there are significant
rules governing the relationship
between the insurance company, their
agent and the client. Again microfinance
NBFCs are allowed to be distributors
of insurance but not agents resulting in
significant, and unproductive, attempts
at regulatory arbitrage rather than a
direct concentration on the rolling out
of products to large numbers of clients.
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