India’s  growth during the current year will record a substantial improvement over last year. Though IMF has recently upgraded its forecast of GDP for the year 2010-11 to 9.5% . The international community is optimistic in their projections of our growth rate. Behind this optimism is the robust growth of private investment which has been an important driver of growth.

India has to return to some of the urgent measures that will promote and sustain the growth process under the unique model of inclusion that espoused. Financial inclusion is a key determinant of sustainable and inclusive growth. It can unlock the vast hidden potential of savings, consumption and investment propensities of the poorer sections of our society. It provides credit to meet contingent expenses and undertake income-generating activities. Further, it is necessary to connect the banked and unbanked sectors and enable the unbanked to become vibrant and productive participants in the economic growth process.

Going by indicators of financial inclusion  a lot to be concerned about. Although we have made remarkable progress in terms of extension of banking services since nationalization of banks in 1969, the position regarding access to formal banking systems is far inadequate in terms of scales of extension required. Only 5% of around 6,00,000 habitations in the country have a bank branch. Just about 40% of the population across the country has bank accounts. The average population per bank ratio is around 13500, which is the same as in 1991. The average of course masks large variations across the country especially in the North East Region and this is a matter of even greater concern.

For the Indian growth story to become sustainable, encompassing financial inclusion is a must. It is also important that each of the stakeholders in the growth process understand the immense value of inclusive growth. For the private sector too there are immense opportunities to be reached at the “bottom” of the pyramid. This is the segment of the economy that is serviced primarily by informal channels of financial intermediation. The private sector should be able to discover where these opportunities lie. They should also be able to integrate these opportunities with their business strategy and business model for future growth.

Recognising the importance of financial inclusion in the growth process, both the Government and the Reserve Bank have made important interventions. Last year, the Reserve Bank totally freed location of ATMs from prior authorization. The RBI took a further big step by freeing branch opening in towns and villages with population below 50,000. This was done in recognition of the fact that brick and mortar branch is not necessarily essential for extending the outreach of banking services. The phenomenal success of ATMs has made the banking sector develop more innovative delivery channels to build on cost and service efficiencies such as tele-banking, call centres, Internet banking, etc. However, the above could not have been possible without another important intervention, i.e. the Centralised Core Banking Solution (CBS) which has revolutionised the banking sector. So far, around 80 per cent of public sector bank branches have adopted CBS.

The advancements in technology have given a new dimension to our efforts towards financial inclusion. A range of new devices such as hand-held devices, mobile phones, electronic transfers, biometric fingerprints, and seamless connectivity have allowed wider dispersal of banking services without invoking traditional brick and mortar facilities. It is also relevant here to acknowledge the potential of the Unique Identification Number (UID) that Mr Nandan Nilekani and his team are working on. The UID will be a powerful instrumentality for helping the financially excluded to establish their identity to meet the banks’ KYC norms. The UID is powerful illustration of harnessing technology to the benefit of the common man. The Aadhar scheme of universal identification is expected to include a component of financial services as well and will be a powerful instrument for meeting banking norms for customer verification.

The technology initiatives by banks and the efforts of the RBI have made the banking system in India comparable with the best in the world. The people in general, including those in the corporate sector are able to reap the benefits of this on a day-to-day basis. One of the significant benefit of this is that the wage payments under the largest poverty alleviation programme of the Government of India, MNREGA can be made in a safe, sure and swift manner through banks. This has opened up new possibilities and has given financial inclusion a new meaning.

Banks have been asked to draw up Financial Inclusion Plans within a given time frame. It has been decided to provide appropriate banking facilities to habitations having population in excess of 2000 by March 2012. As a village-to-village robust electronic remittance system is presently not available in all parts of the country, this can be provided by building suitable infrastructure to connect the systems of various banks which are presently involved in Electronic Benefit Transfer (EBT) through the medium of Business Correspondents.

The efforts of the government for financial inclusion would be incomplete and difficult to accomplish without new ideas, initiatives and innovations of the private sector. Some in the corporate sector already have a vision of “Fortune at the bottom of the Pyramid” and believe in the possibility of “eradicating poverty through profits”. However, this entails out of the box thinking and a complete redesign of the conventional business model. It also involves re-thinking products and re-thinking supply chains for delivery.

There are several areas where private sector can play a role. The important areas include- design of physical products such as the various devices and instruments; innovation in design of software to run these devices in safe and secure manner; design of financial products and services that are relevant to the poor. Another important area, I believe is the training and capacity building, which will be a formidable exercise to take this initiative forward. Banking correspondents need to be fully aware of their role and be able to provide a reliable and trustworthy service in order that financial inclusion objectives can be achieved through them.

The private sector may like to evolve a business plan to tap and develop local talent, adopt innovative ways of overcoming challenges including those relating to knowledge and infrastructure. One private sector initiative that comes to my mind in this context is the e-Choupals. Conceived as an efficient supply chain aimed at delivering value to its customers around the world on a sustainable basis this initiative of the private sector has helped unshackle the potential of the Indian farmer who was trapped in a vicious cycle of low risk taking ability, low investment, low productivity, weak market orientation, low value addition, low margin, etc. While the farmers benefit through enhanced farm productivity and higher farm gate prices, the company benefits from the lower net cost of procurement (despite offering better prices to the farmer) having eliminated costs in the supply chain that do not add value.

It is such win-win strategies that will drive financial inclusion and inclusive growth in the coming years. Our mission on financial inclusion will be incomplete if we do not protect the consumer who is in a vulnerable condition due to poverty and marginalization. Risk mitigation strategies, building trust and developing confidence, and raising awareness will be central to the task of financial inclusion. The Government is committed to providing an enabling environment to make this happen whether it is for the banks or the private sector.

Source : Based on the Union Finance Minister, Shri Pranab Mukherjee addressing the “Financial Inclusion Summit” organized by Confederation of Indian Industry (CII) in Delhi