Deprecated (16384): The ArrayAccess methods will be removed in 4.0.0.Use getParam(), getData() and getQuery() instead. - /home/brlfuser/public_html/src/Controller/ArtileDetailController.php, line: 73
 You can disable deprecation warnings by setting `Error.errorLevel` to `E_ALL & ~E_USER_DEPRECATED` in your config/app.php. [CORE/src/Core/functions.php, line 311]
Deprecated (16384): The ArrayAccess methods will be removed in 4.0.0.Use getParam(), getData() and getQuery() instead. - /home/brlfuser/public_html/src/Controller/ArtileDetailController.php, line: 74
 You can disable deprecation warnings by setting `Error.errorLevel` to `E_ALL & ~E_USER_DEPRECATED` in your config/app.php. [CORE/src/Core/functions.php, line 311]
Warning (512): Unable to emit headers. Headers sent in file=/home/brlfuser/public_html/vendor/cakephp/cakephp/src/Error/Debugger.php line=853 [CORE/src/Http/ResponseEmitter.php, line 48]
Warning (2): Cannot modify header information - headers already sent by (output started at /home/brlfuser/public_html/vendor/cakephp/cakephp/src/Error/Debugger.php:853) [CORE/src/Http/ResponseEmitter.php, line 148]
Warning (2): Cannot modify header information - headers already sent by (output started at /home/brlfuser/public_html/vendor/cakephp/cakephp/src/Error/Debugger.php:853) [CORE/src/Http/ResponseEmitter.php, line 181]
Notice (8): Undefined variable: urlPrefix [APP/Template/Layout/printlayout.ctp, line 8]latest-news-updates/financial-inclusion-the-overzealous-state-is-smothering-the-agenda-ms-sriram-14220.html"/> LATEST NEWS UPDATES | Financial Inclusion: The overzealous state is smothering the agenda-MS Sriram | Im4change.org
Resource centre on India's rural distress
 
 

Financial Inclusion: The overzealous state is smothering the agenda-MS Sriram

It would be great if the enthusiasm on the financial inclusion agenda gets a pause from the frantic do-gooders . Too many people appear to be enthusiastic about serving the poor - and the kindness is killing.

Back in 1956, we discovered that cooperatives were a great instrument to reach out to the poor. These were peoples' institutions, local and would be responsive to the problems of their members.

A set of wise men figured out that the poor were too poor to set up institutions of their own and, so, it was essential for the state to pumpprime the process through a model of 'partnership'.

Thus, it was decided that the state would pump in the initial capital and provide the management and, over a period of time, the people would take over. Cooperatives functioned fairly well till the 1970s, garnering a significant chunk of the rural lending cake.

In some parts, developed local leadership and enterprise. In most other places, they functioned like public sector undertakings. The state, in its wisdom, thought that credit cooperatives should distribute rations, provide fertilisers and be the last point of delivery for all state benefits, slowly infusing costs without resultant profits, but all with the good intention of being kind.

In 1989, the state showed its full-fanged kindness and announced an agricultural debt waiver , which killed the sector - almost. Cooperatives have since never been able to regain their institutional share and stature in the rural credit pie.

Many committees and taskforces later , the deliverance for the cooperatives came from the Vaidyanathan committee that suggested the state could revive cooperatives where it was feasible as a one-time measure, provide a business-friendly legal framework and get off the back of the cooperatives to their own fate.

While there was a small window of hope for the institutions to revive, there came a second stroke of kindness: the second waiver conceived and delivered by the then-finance minister P Chidambaram, thereby taking away the hope of any revival. The banks, in the meanwhile, were trying to discover what they could do with the rural portfolio.

There were priority sector requirements, there was pressure to open rural branches. In the mid-1970 s, a new breed of rural banks was introduced. While the state played around with the banks by setting targets for its rural development programmes, putting a cap on interest rates and directing subsidies, it was unable to kill the banking system with its kindness because there were other lines of business that delivered profits.

The state almost succeeded in sending the regional rural banks to the intensive care unit, but they did come back through a revival plan, but partly by intensive treasury operations when the interest rates were falling and by restricting, to the extent possible, deployment of credit where they were meant to deploy.

The banks continue to mouth platitudes and work in the area of inclusion. The state continues to kill that part of the portfolio with its kindness: an interest cap on agricultural loans at 9%, a further subvention of 3% and a further incentive for prompt repayment, with the state governments also jumping in making agricultural lending almost interest-free.

Not the best way to run a bank, and certainly not the kindest way to achieve growth. Institutions cannot grow when there is a haemorrhage. The private sector tried to find its solution through the microfinance route. The state looked at the initiatives possibly with admiration, vicariously appreciating that somebody took up its job commercially.

In its magnanimity, the state tolerated excesses. The yo-yo meant that if the state was not effective, the market would find a solution, and it did, to a limited extent. But at scale, it was hurting the clients. The sledgehammer fell in Andhra Pradesh, the Reserve Bank of India followed suit with Malegam, and the Centre looked helpless.

The microfinance Bill (revised) is still in the process of building up a Lokpal-like history. In mid-1980 s, Indonesian banks were required to pay around 15% on deposits and collect 12% on loans. The subsidies were killing and the benefits were not trickling down. The financial reform programme corrected this anomaly , by providing market-based financial system with effective protection.

The Bank Rakyat Indonesia (BRI) turned around and became one of the most successful models of inclusive banking. When the 1997 financial crisis hit Indonesia along with the other east Asian economies, BRI's microfinance business survived, thrived and delivered profits; a case where the socalled loss-making , risky and vulnerable segment bailing out the mainstream.

It was a good case of inclusion, with insulation from external events. It was at that time India was discovering its self-help group (SHG) movement , where communities got together to operate on market-based principles, asking for nothing but to be treated as any other clients with the privileges of a bank account, access to a loan and to transact with the banks. We were ahead of the curve.

Twenty-five years later, circa 2012, the finance minister has showered kindness on the SHGs, by introducing a subsidy for these loans, making effective interest rates on deposits higher than loans and demonstrated that what we could have taught the world is irrelevant, that we cannot learn from international experiences and the only way to move forward is to move backward. Inclusion can rest in peace.