When every Indian has a bank account

'Rather go to bed without dinner than to rise in debt' is one among the many quotes that has dissuaded individuals from borrowing. Attributed to Benjamin Franklin, it reflects the wisdom of yesteryears. But the present attitude to debt has changed dramatically. A case in point is the new vision for financial inclusion unveiled by the RBI-appointed committee, which targets to achieve universal access to banks in India. This change looks to be a change for the better, as debt has significantly improved the living conditions of the borrowers by making tomorrow's income available to them today.

We don't have to look far for the benefits of borrowing. A few decades back buying a house for a salaried employee was a task undertaken only in his fifties. The fortunate few were those who had accumulated enough money in their provident fund accounts and bought their homes by availing PF loans. For the less fortunate employees, living in their own home entailed a wait till retirement to get their gratuity, reclaim their PF savings and commute their pension. Buying a home while in their thirties or forties was Mission Impossible for most in the middle class.

What changed this to Mission Possible is the favourable environment created for the home finance companies in 1980s and 1990s. Making home loans accessible and affordable dramatically changed the lives of the urban middle class. Facilities earlier available to people in their sixties were now provided to them in their thirties and forties, as they could leverage their future income.

Families owning their own residence at younger ages radically changed their lives. In addition to providing a sense of security to family members, it also gave them ownership over an asset rapidly appreciating in value that could be leveraged in many ways. It was a source of risk capital to the budding entrepreneur or a security to be pledged for funding overseas higher education of their children, both of which have the power to move them into a different economic orbit.

However, like those of most other human inventions, the benefits of borrowing at affordable costs too has remained outside the reach of the poorer sections of our society. According to the latest data available, 60 per cent of Indian households and around 90 per cent of small businesses do not have access to the formal banking system. Their vulnerability makes them easy targets for moneylenders who charge exorbitant interests of 2-3 per cent per month. These large and needy sections remaining outside the reach of the banking system is not always due to lack of efforts or policy initiatives by those in power; in fact, this is despite the substantial and sustained efforts made by them.

Attempts to bring the poor within the banking system date back to as early as the 1980s. Loan melas, more popularly known as Poojari Loans - after the Minister of State for Finance who initiated and supported this initiative, marked an important milestone in making banks accessible to the poor. Ration cards issued by the state governments were adequate for availing these loans. Despite good intentions, this initiative failed as bankers did not buy into the concept as viable lending practice. Compounding the fact, many borrowers also misused these loans and did not repay.

Thirty years after the Poojari Loans, the newly-appointed RBI Governor Raghuram Rajan set up a committee to come up with a blueprint for providing banking facilities to the small businesses and low-income households. Working on a short timeline, this committee was required to outline a vision and the strategy for achieving universal banking access In India. In the first week of January 2014, this Committee submitted its report to the Governor which is available on the RBI website for public comments.

A multi-dimensional vision has been articulated by this committee for providing universal banking in India. Taken together, all elements if the vision seem to provide a comprehensive solution. It outlines a time bound plan for universal banking in India by leveraging the strong foundation on both the demand side and the supply side. The Unique Identity Cards initiative which seeks to provide every Indian with an identity, and is expected to cover the entire country by 2016, is the demand side platform intended to be leveraged.

On the supply side, an electronic banking outlet is envisaged across the length and breadth of India that will leverage the Bharat Broadband Network linking all the village panchayats using optical fibre network and is expected to be operational by 2014.

The vision also envisages that every Indian adult will have a full service, safe and secure electronic bank account by January 2016. Access to these accounts will be available to every resident within a 15-minute walking distance. The objective of providing this access is to enable small businesses in every district and every sector in India to have access to banking credit while at the same time providing every household with access to investing their savings in financial assets that will give returns in excess of consumer price inflation.

Down the line, this access is also expected to provide life and general insurance cover to individuals against all major risks faced by them. The vulnerability of this large customer base to being misled is recognized by the vision and it outlines a legal system to protect them against inappropriate products being sold.

Looked at from the prevailing state, the vision for universal banking access does look very ambitious, as every vision should. The urgency for this ambitious vision is also clearly brought out in the report by correlating the link between bank credit and economic development using global data. 2012 data reveal that high income countries have a bank credit to GDP ratio of 200 per cent, while the ratio for middle income countries stands at 100 per cent. India with a bank credit to GDP ratio of 75 per cent has a long way to go, if we need to alleviate poverty in India.

While few would disagree with the need for such an ambitious vision on providing universal banking in India, there could and will be differences on the methods used to realise this vision and the timeline in which it could be realized. In view of the importance of financial inclusion in eradicating poverty in India, this report requires much more public discussion and debate, given its potential.

To an optimist, universal financial inclusion could be the catalyst that could accelerate the pace at which other essential services like right to education, right to food and right to health care could be translated from legislative acts into accessible services on the ground, transforming people's lives for the better.