According to one definition, “Financial inclusion is delivery of banking services at an affordable cost to the vast sections of disadvantaged and low-income groups. Unrestrained access to public goods and services is the sine qua non of an open and efficient society. As banking services are in the nature of public good, it is essential that availability of banking and payment services to the entire population without discrimination is the prime objective of the public policy.”

Financial inclusion agenda aims to provide savings, credit, money transfer, insurance, pension, and advisory services on money matters, etc. to those who currently don’t have access to these services.

The need for financial inclusion across the world arises from the fact that there are vast populations, especially in developing countries, but also in developed countries, that have no access or very restricted access to financial services provided by formal, regulated institutions.

In India, millions of financially excluded people exist despite a good penetration of banking services – public-sector banks and their regional rural bank (RRB) subsidiaries and primary agricultural cooperative societies (PACS), etc.

Many of the financially excluded people in India and elsewhere rely on exploitative moneylenders and informal markets for obtaining credit and other services.

In India, most of the financially excluded belong to the unorganized sector or informal economy. So their inclusion into the formal financial system is a part of a larger agenda for inclusion in terms of their legal rights and the rights to participate in the market economy.

The financial inclusion agenda is broadly being promoted by the government as well as private microfinance institutions (MFIs).

The government is patronizing self-help group (SHG)-bank linkage program, whereby public sector banks open bank accounts of SHGs of women in rural areas, and lend them money without collateral; SHGs then on-lend to their members.

The MFIs, on the other hand, are private for-profit or non-profit organizations that lend without collateral to groups of people (joint-liability groups) and sometimes individuals in rural and urban areas at interest rates that cover their cost of operations. There are concerns here on interest rates.

Financial inclusion has already become an important part of the government and RBI pronouncements.

Governance Now gathered a young but very knowledgeable panel of experts --- K. Natarajan, Manager- Member Affairs & Standards, Sa-dhan, Radhika Agashe, Associate Director, ACCESS Development Services, Gunjan Grover, Senior Analyst, M-CRIL, Pushkal Gupta, Product Manager, Ujjivan --- to discuss the following issues.

1. The government has tried unsuccessfully to pass a microfinance bill to provide a regulatory framework for the sector, but so far no national policy for financial inclusion has been announced a la UK. We have had committee and commissions on the workers and enterprises in the informal sector. We have also had a lot of focus on farmer s and other financially excluded people in rural areas; Why can’t government come up with an integrated policy on ‘economic inclusion’ of people in the informal economy, both in rural and urban areas. This policy should include measures to provide access to financial services to the excluded people.

2. Why are public-sector banks not able to reach the excluded despite their reach through regional rural banks, at least in opening bank accounts that will allow savings? What are merits and demerits of SHG-bank-linkage program?

3. What will it take – business facilitators, correspondents, etc – for banks to reach the unbanked? Is business correspondent model working? What are the constraints?

4. Why do we need private MFIs for the excluded? Why should there be a separate set of financial intermediaries for those who are currently excluded? How valid are concerns on interest rates charged by private MFIs?

5. Why do we need MFIs in urban areas, where there is very good penetration of banks?

6. Shouldn't MFIs also have a role to play in livelihood promotion in rural as well as urban areas?

7. What about cooperative institutions. SHG are also modeled on coops. Shouldn’t states try to make it easy in terms of regulation for the people to turn SHGs into cooperative and to run those coops?

8. How to expand money transfer, insurance and financial advisory services to the excluded? What should be the role of post offices?

9. If we are going to have private MFIs, shouldn’t they be also allowed to take deposits and provide other services? What about their regulation? Apart from NBFCs, what kind of legal structures should be permissible?

The round-table was conducted in two sessions (a) various models of microfinance (MFIs, SHG-bank linkage, coops, etc) and (b) policy and regulation for financial inclusion.

Tomorrow: Gunjan Grover, Senior Analyst, M-CRIL, speaks on some of the important issues and moral hazards of microfinance.