Microfinance Focus, December 21, 2011: Micro-Credit Ratings International Limited (M-CRIL) in its review of financial inclusion policy and practice in India - ‘Promoting Financial Inclusion’ states that while some effort has been made to develop a facilitating regulatory framework, it has not yet gone far enough to overcome the substantial cost implications there are in outreach to large numbers of people.

As a result, the institutions responsible for providing financial services do not yet perceive the financial inclusion business as really sustainable.

As of March 2009, the total number of credit accounts with banks was around 110.1 million, covering 18.3% of the adult population. Overall, there were around 517 million deposit accounts with banks, 86% of the country’s adult population.

But, a sizeable number of savers have multiple accounts in urban and metropolitan centres so this does not give the true picture of savings services for the financially excluded, the report says.

Self Help Groups and Microfinance Institutions taken together (and after accounting for overlap) cover around 60 million households, some 50% of the 120 million financially excluded households in India.

The report says that while there has been a significant set of regulatory and promotional efforts which could be expected to have a substantive impact on financial inclusion, in practice, each measure has been constrained by overemphasis on prudential aspects by regulator.

For instance, the BC model met with limited success for four years before the decision to liberalise it was taken. Even today, its future success is yet to be determined given the non-existence of an established replicable business model. Use of the no frills account is minimal despite its linkage to government welfare payments

Microinsurance is yet to be rolled out in a big way outside the limited confines of microcredit cover.

The funds allocated to promote financial inclusion are administered within the traditional framework and do not sufficiently emphasise innovation.

The cooperative credit system too has undergone several rounds of revival and yet its true potential remains to be tapped.

Over the past 4-5 years, as financially inclusive policies have been put in place financial institutions have started experimenting with different models for reaching the excluded and for offering various services to the target population. It is now time to roll out implementation on a large scale. However, there continue to be issues that negatively impact on progress towards financial inclusion.

Perhaps the price of prudence in the regulation and promotion of financial services for low income families is substantial welfare foregone. Perhaps this price is substantially higher than the cost likely to be incurred on regulation and supervision of a more dynamic system of inclusion through the formal financial system risk associated with a bolder, more experimental approach. It is a matter of consideration for all stakeholders involved, says the report.