Promoting Financial Inclusion - Can the Constraints of Political Economy Be Overcome?

31 Dec 2011
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Summary

In collaboration with the Federation of Indian Chambers of Commerce and Industry, the paper outlines the constraints and challenges of financial services; impact of government and regulator policies to promote financial inclusion; and product-specific challenges in enabling greater access to financial services.


Inclusive economic growth has been one of the priority agendas of the Government of India (GoI) over the past decade. It is widely acknowledged that inclusive economic growth cannot be accomplished without achieving fi nancial inclusion for the nearly two-thirds of India’s population who are unbanked. In order to develop a strategy for achieving fi nancial inclusion and, therefore, inclusive economic growth the GoI set up two committees to discuss issues and recommend action.


In 2006, the Committee on Financial Inclusion under the Chairmanship of Mr C. Rangarajan (Chairman, Economic Advisory Council to the Prime Minister) was to suggest:


A strategy to extend fi nancial services to small and marginal farmers and other vulnerable groups, including measures to streamline and simplify procedures, reduce transaction costs and make the operations transparent.


Measures including institutional changes to be undertaken by the fi nancial sector to implement the proposed strategy of fi nancial inclusion.


A monitoring mechanism to assess the quality and quantum of fi nancial inclusion including indicators for assessing progress.


In the following year, the Planning Commission constituted a High Level Committee on Financial Sector Reforms under the Chairmanship of Dr Raghuram G. Rajan, Professor, Graduate School of Business, University of Chicago.1 While its focus was on identifying emerging challenges in meeting the fi nancing needs of the Indian economy as a whole, several of its recommendations also emphasized the need for and strategies for achieving fi nancial inclusion.


Over three years have gone by since the reports of these two committees were completed. This report reviews the progress of fi nancial inclusion in the context of the recommendations of these committees, in light of the initiatives of the central government, RBI and NABARD for promoting fi nancial inclusion. It analyzes the initiatives of regulators and banks in promoting fi nancial inclusion and explores issues, challenges and factors that hinder the progress of fi nancial inclusion.


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