banks to open one branch each in a rural and semi-urban centre for every license given for an urban centre. Currently, banks have to open at least 25 per cent of their branches in rural areas. This policy has led to an element of cross subsidisation as banks are required to open branches in unprofitable areas in return for permission to locate in profitable areas. This policy has enabled better spatial coverage of bank branches in India relative to many other comparable countries. Interest rate policy While in the early years the RBI prescribed interest rate caps on all priority sector loans, the caps were removed as part of the general liberalisation of interest rates for all loans. However, ceilings were still applied at the base rate for loans below US$1,000. Since 2010 all caps have been removed. Despite this, the political environment does not allow public sector banks to make loans to priority sectors at rates far above their base rates. This, coupled with high transaction costs, inhibits banks from lending to the smaller ticket size borrowers even within priority sectors. Instead, banks prefer to fulfill their priority sector obligations by lending to non-banking companies through assignment or securitisation of loans qualifying as priority sector; as such, indirect loans are also treated as priority sector. It seems to be the case that greater political sensitivity is needed to the fact that the poor and excluded need timely credit rather than rates that are below the market determined ones. State intervention for reduction in transaction cost and risk cost works out far more efficient and equitable than providing capital or interest rate subsidies. The role of the financial system Competition from new players in the private sector entering the banking system in the 90s has made both state and foreign banks more efficient and conscious of the need to modernise in order to preserve margins. In the FI space, banks follow a board-driven policy and are free to adopt any delivery model they choose. A huge number of basic banking accounts have been opened by banks that have increased their number of points of delivery significantly in the last five years. These accounts show low levels of usage and do not seem to be demand driven. Banks have not yet found a business model in the mass retail sector and this could be due to the implicit ceilings on rates of interest and charges for small customers. F i n a n c i a l i n c l u s i o n Mobile banking Unlike in many African and some South East Asian countries, mobile banking has not taken off in India. Many ascribe this to the policy followed by the regulator, which has insisted on a bank-led model and in which telecom companies have not shown much enthusiasm. Urban co-operative banks Another segment of the banking sector whose main clientele are those who do not access mainstream banks is the urban cooperative banking sector – small community banks, like credit unions, catering to local people. Poor governance and dual regulation plagued the sector for years. The crisis in the early 2000s promoted the RBI to bring in a tighter regulatory framework that has now brought stability to the sector. Microfinance Two important initiatives in the financial system that have facilitated FI in India are the direct bank self-help group linkage model and the rise of non-banking micro-finance companies. Self-help groups (SHGs) are groups of 15 to 20 poor women, from fairly homogenous and cohesive backgrounds, who save regularly and use the savings to lend to members of the SHG. The RBI has permitted banks to open bank accounts for SHGs despite such groups lacking official registration. Banks have also made loans to the groups using group guarantees as collateral. The experience with recovery in such groups was very good and bank support to such groups grew significantly between 1998 and the mid-2000s. Another group that has experienced significant growth is private micro finance institutions (MFIs) especially after the RBI registered them as non-banking companies and allowed bank lending to these companies to be treated as priority sector lending. MFIs also lend to SHGs or joint liability groups (JLGs) against group guarantee and currently they assist 26.8 million such groups all over the country. MFIs leverage private equity funds to get funding from the banking system for their activities. The role of NGOs NGOs have played a very important role in FI by showing that the financial needs of the poor, if approached through an appropriate institutional mechanism, can be met to their advantage and can Commonwealth Governance Handbook 2014/15 87 Figure 1: Key indicators for financial inclusion India (2005) India (2013) Brazil (2013) China (2013) Commercial bank branches per 1,000 km2 23.17 35.68 8.45 9.32 ATMs per 1,000 km2 5.93 38.96 23.16 55.75 Outstanding deposits with commercial banks (% of GDP) 47.3 69.98 45.92 156.62 Deposit accounts with commercial banks per 1,000 adults 611 1,197.57 1,153.52 40.44 Commercial bank branches per 100,000 adults 9.02 12.16 47.7 7.85 ATMs per 100,000 adults 2.31 13.27 130.74 46.94 Outstanding loans from commercial banks (% of GDP) 31.2 55.14 47.15 101.38 Loan accounts with commercial banks per 1,000 adults 100.99 147 2,358.2 Source: IMF, no date.
CEP template 2012
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