Misunderstanding Financial Inclusion

After sixty years of independence the Indian banking system has come to the slow recognition that financial inclusion is important as a social good. It has yet to understand that it is a vital first step for steady national economic growth. This misunderstanding has a hoary class heritage which places the centrality of economic welfare in the interests of the wealthy, whose actions in self interest would result in a trickle down effect to sustain the vast masses of the poor. The greater the support to the people at the top, through tax cuts, veiled subsidies, and special benefits, the greater the national growth, and the better the survivability of the masses. In this reading, the masses of the poor are seen like beggars, incapable of economic initiatives to help themselves, let alone the nation.

Recently, the government sent a strong signal that it is unwilling to be the sole cash provider for the public sector banks [PSBs], which have racked up huge non-performing assets with defaulting corporates, while being unable and unwilling to reach out to the poor because of high administrative costs. Dissolving government-held equity into private hands may improve financial efficiency of the PSBs, but this measure is quite unlikely to increase financial inclusion since private players would want to minimize risks even more. The RBI is planning to licence small banks as a way of increasing outreach lower down the class hierarchy and into rural areas, but as the chairperson of the SBI has warned these private units would find it hard to enlarge business, update technology usage, and also maintain a profit margin all at the same time.

Certainly these small private banks may offer competition to local moneylenders, and also mop up some deposits that might otherwise go into chit funds and similar instruments. Some will also act as banking correspondents of the big banks. But it is unlikely that financial inclusion will be achieved by them, if this is to mean reaching significant amounts of much needed credit on time into the hands of farmers and their associations, self-help groups, and petty businesses in the informal sector. Adventurism by micro-finance institutions led to disaster some years ago in Andhra Pradesh. Similar mishaps will occur if the RBI and its bodies are slack in regulating these new small banks. However, firm regulation on the other hand, plus the necessity to maintain workable profits, will result in these entities restricting credit supply to the needy, and increasing the interest burden on the poor. The poor after some experimentation may decide to continue business with known local moneylenders.

The best route for sizeable financial inclusion would be for the SBI and other national banks to own a controlling interest in new small banks created for the specific purpose of serving the poor, and cut administrative costs by staffing them with specially trained local village youth. Middleclass city-based managers would not know local realities, and ultimately limit ‘banking’ to ‘moneylending.’ Local village managers would know local realities, and work with the community to employ the money to the best advantage.

Such an approach to extend financial inclusion to poor communities can be safely monitored by empowered constitutional PRI bodies, which as of now exist only in name. Such demand-side management would blazon out a growth path for wealth to gush up to the top from economically creative communities at the grassroots. This idea is far from new, for it goes back almost 80 years.

Demand-side management of the economy has been thoughtlessly discredited by the  Chicago School eggheads, and Reaganomics, to which we owe much of the world’s ills. This happened despite the well-known work of the great British economist, John Maynard Keynes, and the successful practical application of his theories, first in the New Deal of the 1930s created by Franklin Delano Roosevelt to restart the American economy, and later in the Marshall Plan to revive the destroyed economies of war-torn Europe after World War II.

The elite ideology that continues to prop up state support for the wealthy all around the world, despite rapid and catastrophic boom and bust cycles is founded not only in class self interest, but also based in the real intellectual isolation of economic decision makers from the world inhabited by the masses. It is such intellectual isolation that resulted in the great revolutions, but the elites of the world nowadays control massive firepower, and disperse disaffected people with the help of charitable organizations, handouts, loan mafi, food coupons and gamesmanship. It is India’s tragedy that top economists from Montek Singh Ahluwalia to Raghuram Rajan continue to be mesmerized by the elitist notion that wealth trickles down from the top. This is no more than bad economics and selfish ruling-class ideology, thrust upon us by Americans as part of their hegemonic power-play.