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C Rangarajan: The Two Pillars of Financial Inclusion

by C. Rangarajan Banks are in the best position to lead financial inclusion. They have just got more teeth from the banking correspondent model and a sharper focus on self-help groups
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+ Comment no !mail "rint The nationalisation of major commercial banks in #$%$ as an important landmark in Image: the history of financial inclusion. &t as felt that the nationalised banks can make a big Amit Verma push into the rural areas. To some e'tent( this has happened. But the fact remains that 8r. C. despite a very focussed e'pansion of branches in the rural and semi-urban areas( e Rangarajan( have not been able to reach out to the poor farm households and therefore a re-think has chairman of started no as to hat more can be done. the "rime 0inisters )n important development in the last #*-odd years has been the organisation of Self!conomic +elp ,roups -S+,s. or small groups of people ho could borro from the banking )dvisory system. &n some ays the S+,s movement has been a success. But it is also seen that it Council is concentrated much more in the South and therefore there is a regional disparity in terms of the gro th of the S+,s. /e need to look for an organisational mechanism that ould combine the idespread opening of the branches of the rural areas and the S+, movement. There are multiple institutions involved in financial inclusion. There are the rural branches of commercial banks( rural branches of regional rural banks( the micro finance institutions -01&s. and some not-for-profit societies. /e should encourage all types of institutions in this mission but & think that the banking-linked programme ould be the most important( because banks have the resources. &f the banking system can find the appropriate delivery system( then that ould be the most ideal thing. &t is in this conte't that the scheme of business correspondents becomes e'tremely important. Surely( there are some problems relating to the BC model. 2ne is about ho should bear the additional costs of introducing such a ne tier of operation. +aving business correspondents implies e'tra costs. These costs may not be very high 3 they ould be much lo er than hat the banks ill have to bear if they ere doing the business directly 3 but nevertheless there is an additional cost. )s far as the borro er is concerned( he cannot be asked to pay different rate just because the loan passes through a business correspondent. There can only be one rate at hich the bank can lend hether it lends directly or through a business correspondent. Therefore the banks ill have to decide as to ho to bear these additional costs. The committee on financial inclusion( appointed by the government under my chairmanship( had indicated that at least *4 percent of the financially e'cluded households must be covered by 54#5 through rural and semi-urban branches. Can e achieve that6 To me( it depends on ho ell the BC model takes off. 2ther ise too( it is possible because if you look at the numbers( it is doable given that e have 74(444 rural and semi-

urban bank branches. But the t o pillars of financial inclusion 3 the S+,-bank linkage and the BC 0odel 3 can make a huge difference. Dr. C. Rangarajan is the chairman of the Prime Ministers Economic Advisory Counci . !e is a former R"I #overnor and #overnor of Andhra Pradesh. This article appeared in the 1orbes &ndia maga9ine of #$ :ovember( 54#4

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