Inclusive rural financial services for UN global goals

(The author is a Professor of Management and Economics, formerly at IIBM (RBI) Guwahati. He can be contacted at m.bibhas@gmail.com)

Dr. Boidurjo Rick Mukhopadhyay

(The author, international award-winning development and management economist, formerly a Gold Medalist in Economics at Gauhati University)

The World Bank defines financial inclusion as a "means that individuals and businesses have access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit and insurance – delivered in a responsible and sustainable way." The practice of financial inclusion has diversified strategic implications, firstly, it helps fight poverty and boosts shared prosperity in communities, and secondly more at a national level supports about 7 of 17 sustainable development goals (SDGs). Between 2011 and 2017, 1.2 billion adults worldwide have access to a bank account. Since 2017, 69% of the world's adults had an account. Digital financial services, albeit including rural connectivity, are now functional in more than 80 countries. India has achieved significant success on this score in the past decade. At the same time, 1.7 billion adults were still unbanked in 2017, and half of the unbanked people included women in poor households in rural areas or the unemployed population.

The inter-linkages that rural banking has with SHG / SGSY group formations, financial inclusion as well priority sector financing plus expansion of branch network, among others, have had a significant impact. The countries that have reportedly and continually delivered on this score are India, Bangladesh, Philippines, Vietnam, Sri Lanka, and Ghana, among others. Various other forms of institutional arrangements have also been noticed given the diversified use of loans in rural regions. In 2004, USAID introduced the Rural Savings Promotion and Enhancement of Enterprise Development (Rural SPEED) programme in Uganda to stimulate economic growth and increase access to financial services in rural areas. The rural Ugandans had new options for savings accounts and agricultural loans, as well as innovative ways to access and transfer their money. They opened more than 300,000 new savings accounts to fund farming operations and other agri SMEs. The number of new savers in rural Uganda grew by 321,000, exceeding the programme target by 7 per cent.

For banks engaged with financial inclusion targets remain focused on A) Adequate credit flow to productive sectors, B) Preventing liquidity crunch as well as C) To level out loan portfolios. The banks are increasingly aware as to even out their loan portfolios so as to ensure adequate credit flow to the productive sector while prescribing deposit mobilization to head off a possible liquidity crunch. Rebalancing is a pre-emptive step. Efforts are on to rebalance the credit portfolios to see that the productive sectors are not denied credit as otherwise there remains the possibility to suffer from a liquidity crunch. Already the overheating signs have been noted.

Significant growth is noticed in sectors like housing, personal loans, commercial real estate, and credit cards, which, in turn, have been witnessing significant credit growth. In India, Banks were also asked by the regulators to rebalance their portfolios to make sure that the productive sectors, agriculture, in particular, are not deprived of due share. This, no doubt could help foster the very growth of the economy and bring in high growth momentum. To sustain a credit growth of 25 per cent the banks are to ensure that the deposits grow by at least 25 to 30 per cent. For economies like India, it is clear at this moment that the overall deposits growth in the recent past had been trailing behind credit growth and the crucial need is there to catch up at the earliest.

The importance of financial inclusion

Inclusive growth is the current compulsion of a sound public policy. True, there has been a convergence in the business interest of the banking community in financial inclusion. Though there have been weaknesses – undercapitalized commercial banks, problem-ridden [but with potential] cooperative banks - yet the very aspect of financial inclusion has been running well in tune with the financial sector reforms financial inclusion is to be treated as a business investment.

Additionally, the real need is there for the banks to focus on small loans to the farm sector and SMEs along with smaller liabilities since the large corporates have already steadily gotten disintermediated and begun to directly access the financial markets. However, the practice is already there and banks are in the process of financial inclusion very much-opening and operating rural branches, rural coverage, agri-lending, SHG bank linkages, the social onus of banks, etc. Banks are to move to the masses as a natural process of financial inclusion. It is a fact that to ensure stability on the liabilities side of the business, banks are to focus on expanding the retail deposits base. This obviously includes taking deposits from rural and semi-urban regions of the country.

Nonetheless, to bring the farmers under the ambit of financial inclusion the increasing role of commodity exchanges in the matter of providing forward market linkages and price discovery is being largely felt. This very process could succeed if banks and exchanges work together. Active market support providing is what is urgently awaited.

Alongside, banks and financial institutions have been intervening in the Forex as well as in the stock markets and now need to extend active participation in the commodities market. Introducing specialised financial products and reaching out to farm households with holdings of less than one hectare could definitely extend the outreach. The growth process should be widespread as well as sustained.

Following a micro-approach

A credit-plus mechanism could help repay the loans easily. No one can dwell better than banks on inclusive growth and as such the crucial need is there to percolate intensively among the poor. It should not be forgotten that banks are one of the wheels of development- other wheels have to move simultaneously - viz. rural electrification, marketing, storage, communication, technical consultancy, etc. Otherwise, a lower rate of growth would go on repeating just.

A crucial need is there to implement farm modernization programmes as well as bolster productivity, efficiency and profitability. The dimensions of land use also call for a new look. Simply asking the banks to double the flow of credit to the agri-sector is necessary but not sufficient. The government's efforts are definitely on but a scientific updated approach is still urgently awaited.

Business can come with

the social onus

Business processes must become more mature and the institution must be able to deliver higher performance-spatially, temporally, hierarchically and functionally. Obviously, to achieve the same the starting point is A) Designing - the comprehensiveness of the specifications as to how the process is to be executed; B) Performers - people executing the process based on skill and knowledge; C) Owner - people shouldering the responsibility for the process as well as the results; D) Infrastructure - information/MIS that support the process; and finally, E) The metrics - the measures the company uses to track the process's performance.

The challenge, therefore, remains three-fold: acquiring the right technology, deploying it optimally and remaining cost-effective whilst delivering sustainable returns to shareholders. Therefore, managing technology in order to reap the maximum benefits remains a key challenge for Indian banks. Another aspect that several studies have looked at is how the perception of rural banking develops from the customers' perspective. One research conducted in Bangladesh shows that components such as service time, waiting for time, perception and coverage as well as financial sustainability of rural banks could determine the quality of services that they provide in the hands of rural banks' patrons as they access the banks for savings and withdrawals and loan portfolio.

Technical skills training

Training, monitoring and other supporting services should tackle change management aspects and banks have to assume higher updated responsibilities in the arena of extending technical assistance, ably backed by monitoring and evaluation throughout the entire process, which, in turn, could help promote the building of sustainable micro-level associations and of self-help-groups, so that these associations in the course of time, will be able to take over functions which are related to planning and to technical assistance (decentralization).

It is a tough job for which systematic planning by the real knowledgeable planners, and not the so-called micro-expert having low-level knowledge and poor analytical skills who could effectively make use of regional planning techniques. Finally, the conventional studies on rural societies, at least in the area of development studies, have tended to analyse the roles of communities by perceiving a rural community as an organization. This perception is definitely useful when focusing on only one economic activity, i.e., agricultural production. There are newer approaches that could be adopted to evaluate the multi-functional roles of communities in analysing modern-day complex socio-economic situations in rural areas. The financial world today has to count on the fast-evolving rural-urban business environment.