Role of Panchayats in Promoting Financial Inclusion and Making India a $20 Trillion Economy

“Role of Panchayats in Promoting Financial Inclusion and Making India A $20 Trillion Economy”

Dr T Prabhakara Reddy*

Introduction

Ensuring economic development and making India a trillion economy requires social inclusion and achieving high growth rates from all the sectors. Achieving high GDP, per capita income, consistent and high growth rates from all sectors is a necessary condition for ensuring $20 trillion economy but not a sufficient condition for benefiting the marginalized sections and making them partners of development. Besides, it has been demonstrated that high growth rates are experienced through surplus transfer from agriculture to other sectors, initially, which is channeled through banks and resulted in investments in industry and service sectors. Hence, in order to make India a $20 trillion economy it is essential to have widespread financial inclusion and financial deepening for which the emergence of strong, democratic sub national governments is indispensable which in turn enables successful planning and implementation of economic development in the countryside. Therefore, decentralization is seen as necessary by the community, governments and international partners in making India a developed country with high growth rate.

In addition, it is important to examine the levels of participation of community in the development process; be it preparation of plans, ensuring gender equity, and monitoring the implementation of programmes. Besides, not only the opening of bank accounts by each family or household it is equally important to make them aware of financial transactions happening while the programmes are implemented in a village that would result in transparency and whole-hearted support from the public. Hence promoting financial inclusion through banks and Panchayats in convergence would go a long way in changing the life style of the people in the countryside.

Constitutional Backing of Panchayati Raj Institutions

Article 40 of the Constitution of India requires that “the State shall take steps to organize village Panchayats and endow them with such power and authority as may be necessary to enable them to function as units of self-government.

In Ninth Five Year Plan, democratic decentralization has been given a boost with the enactment of the 73rd and 74th Constitutional Amendments which are milestones in the history of democracy wherein several steps have been taken to rejuvenate the Panchayati Raj Institutions and Urban Local Bodies by assigning necessary powers to them. Consequent to this, most of the state governments/UTs have enacted enabling legislations, providing for elected bodies at the village, intermediate (taluka) and district levels with adequate representation from the weaker sections and of women. Most of the states have constituted State Election Commissions and State Finance Commissions as stipulated in the Constitutional Amendment Acts.

Need for Financial Inclusion

Majority rural poor do not have bank accounts and habit of saving is also limited. Financial inclusion in fact, enables a family to save money in bank account and withdraw as and when required instead of keeping at home which is susceptible for unnecessary spending. Secondly it is equally important to have an account with banks for the purposes of receiving MGNREGS wages and other government benefits through banking transactions. Further, it needs to be mentioned that active support from Panchayats is essential for financial institutions and banks to implement not only financial inclusion but also extending loans to the rural poor either for agriculture or for other purposes.

Given the changing situation of payment to labourers through bank or post office accounts, scholarships to students and pensions to old age people and widows and others possessing a bank account is essential and in some cases compulsory. The following lines of Rajan committee had clearly mentioned the need for financial inclusion and financial deepening. The Rajan Committee had opined that the inclusion, growth and stability are the three objectives of any reform process and in the specific context of inclusion. He further emphasized that about 90 per cent of Indian households should have a deposit account by the end of 2011.

Experts’ Opinion

The high powered Nachiket Mor Committee on Comprehensive Financial Services for Small Businesses and Low Income Households set up by the RBI found that 60 per cent of the rural and urban population did not have a functional bank account. “India’s financial inclusion indicators, particularly in banking, put it below the median of countries and bank accounts are a first step to inclusion.

According to a report by global consulting firm Frost & Sullivan, India’s continued growth can only be assured “if steps are taken to ensure that social and economic development is inclusive”. Financial inclusion has moved into public consciousness only over the past decade or so. Financial inclusion can no longer be treated as a fringe subject. It has to be recognized as an important part of the mainstream thinking on economic development. In fact, financial deepening is the basic prerequisite for achieving India a trillion economy which presupposes social inclusion.

The Experience of Telangana State

Some of the commercial banks such as Andhra Bank, SBH and others have already commenced financial inclusion on an experimental basis in rural areas of Telangana wherein the Business Correspondent plays an important role. Secondly, the rural poor not only have bank accounts they are receiving their NREGS wages and scholarships to their children through the same conduit which ensured transparency in transactions and convenience. Further, it has resulted in some kind of confidence among the poor as it has given them some recognition and status symbol as that of richer sections who hold a bank account. Hence, it is going to be one of the pre-requisites for obtaining crop insurance and loan from banks, therefore, rural people are keen in opening a bank account. Further, the banks which are experimenting financial inclusion felt that the PRIs should stand as a facilitator in all these activities is seen from many circles.

Methodology of the Study

We have considered Karimnagar district which is a fast growing district in terms of level of development owing to the availability of irrigation in substantial parts of the district coupled with industries like NTPC, Singareni Colliries and others. Further, it is convenient for us to visit given the acquaintance with local people although it is away from the state capital. Two contiguous mandals are taken for study viz., Chigurumamidi and Husnabad which are characterized as backward in terms of agriculture and other aspects. The pertinent point is that the villages selected are backward economically while the district is relatively developed.

The study was conducted in a rapid rural appraisal mode by interviewing individuals who opened bank accounts recently to understand their perceptions and experiences about the use of it. Secondly, we have also interacted with the business correspondents who arde working in the same villages towards financial inclusion and tried to elicit their opinion about the initiative and the challenges if any.

Results and Discussion

We have visited six villages in Karimnagar district of Telangana state which are not having a bank branch and interviewed the business correspondents and the bank account holders (100) and tried to elicit their opinions (consider the table-1). It was like a rapid rural appraisal wherein we interviewed the people in the villages randomly by visiting houses with the help of BCs.

It was revealed that the BC model helped them in opening the bank account through which they are able to receive the old age and widow pensions, MGNREGS wages immediately after the work done and regular savings and withdrawals for emergent and other purposes without any hassle (consider the table-1). Women (96 per cent) who opened bank accounts are quite happy and contended with the use of banking transactions because they are able to save money and spend judiciously avoiding unwarranted expenditure.

There has been an enhanced awareness among rural people who happen to know the significance of having a bank account and operate them in daily life. It was also told that the bank account is giving them a kind of status in the village (92 per cent). Some account holders opined that they are getting services any time from BC (65 per cent), however, it was felt that it is equally important to link them to some institution at the village in level which makes them accountable and answerable for anything (consider the table-2).

About 80 per cent of people who were interviewed informed that the drive towards Jan Dhan Yojana and Jan Suraksha Yojana becomes successful when Panchayat is involved at the local level for educating and implementing the financial inclusion and other initiatives of the Government (consider the table-2). Presently the BC model is confined to some families whose understanding is relatively better and it all depends on the efforts of BC. If it is institutionalized through Gram Panchayat then the financial inclusion becomes wide spread and successful and the opening of bank account more than one by one person can be eliminated.

It was observed that the banks are insisting for opening a bank account while applying for crop insurance or loan in the villages (40 per cent). It is clear from the data that it is a great success (98 per cent) in so far as the payment of wages under MGNREGS is concerned which reduced the delay in payment ultimately. Besides, women were of the opinion that they are able to save their wages in the bank account and withdraw as and when they need as opposed to squandering away the money in a day or two by the family.

BCs informed (100 per cent) that the opening of a bank account by a rural family is very difficult unless they are convinced. They opined that had there been any compulsion laid down by the government that one should have a bank account when applying for a particular programme or a benefit and support from Panchayat or any other institution for that matter would make our task easy and the drive towards financial inclusion becomes complete in the villages.

All in all, it is like mutually benefiting initiative with the rural people having opened the bank account and learning to save systematically while bankers are able to achieve the targets. It has become an efficient conduit for transferring the money to the beneficiaries of housing without any pilferage in housing programmes.

Policy Options

As a Responsibility of Panchayats

Just like 29 functions assigned to Panchayats as per 73rd Constitutional Amendment Act, they would be assigned the responsibility of facilitating opening bank accounts for all in the village with a focus on poorer sections who do not know the significance of it. The Panchayat would undertake awareness generation and publicity about the financial inclusion and ensure that all the households of a village open a bank account and use the same for financial transactions such as payment of wages under MGNREGS, pensions and scholarships among others.

Further, in order to make it a successful initiative at the village level there are challenges like infrastructural needs such as broadband services for which ensuring electricity facility is a must. As we know many of the villages are still not electrified in the countryside apart from availability of uninterrupted power supply is a problem even in states like Telangana. It is a real challenge in villages of Telangana when there is no electricity facility for five to six hours in a day although Panchayat is given the responsibility of distributing the electricity in the village. The problem is further compounded due to lack of availability of electricity leave alone rural electrification and distribution. More than anything the moral support and counter guarantee of activities of BC outlets by Panchayat would go a long way in achieving the financial inclusion in the near future.

Convergent action with Banks and Panchayats

According to RBI Annual Report 2012-13 (p77); “for financial inclusion to succeed it is important that quality services are provided through the new ICT based BC outlets. Therefore, an intermediary low-cost brick and mortar structure is required between the base branches and BC locations. This will provide timely support to BC outlets and ensure close supervision of BC operations and give them credibility and increase people’s confidence in BC services. Hence, banks have been advised to plan for an increase in the proportion of branches that cover unbanked villages”.

Therefore, it is important to have a convergent action between BC outlets and Panchayats locally which results in improving credibility and people’s confidence on the former. It is equally essential to have an institution which supports the activities and ensures the supervision of business correspondents who came into existence recently as an experiment in view of financial inclusion. Of course ICT based services would improve the swiftness in activities and smooth functioning of the BC outlets provided an institution which provides backing support at the grassroot level for all their activities and money transactions. In fact, it was found, in our study, that not many are believing the activities of BC outlets as the chit fund companies and others have cheated them previously.

Hence, there is a need for the banks and Panchayats to work in convergence and ensure collective action in helping the below poverty line population and others. It was felt that the institutions like panchayats and banks should work together in convergence in such a way that the selection of beneficiaries under government schemes and programmes are done in an objective manner and the needy would get timely support.

Need for bank account for obtaining crop insurance and loans

It would be a necessary condition that all the farmers and tenants have a bank account in order to obtain the crop insurance and loans from banks. Therefore, financial inclusion gain momentum and Panchayats have a role in ensuring the same as they are the local elected representatives who are aware of situation of almost all the families in the village. Of course some are having Kisan credit cards and bank accounts which gave them a kind of loan eligibility while others who do not have bank accounts are finding it difficult.

Besides, the Land Licensed Cultivators Act, 2012 had tried to provide loan eligibility card (LEC) to some of the tenants in the combined Andhra Pradesh state but it was unsuccessful. One of the important recommendations of a recent study that the farmers and tenants need to be given LEC along with opening bank account enable them to secure bank loan without much difficulty.

Implementation of Government Schemes through Panchayats

It should be mandated from now on that the implementation of government programmes and schemes presupposes that the individuals or households have to possess bank accounts which might become one of the pre-requisites selecting the beneficiaries by Panchayat. More importantly, for implementing the direct benefit transfer the government of India is contemplating to have bank account which is a basic mechanism for transferring the money to the individual.

Hence, financial inclusion and financial deepening in rural areas is a necessity in so far as implementing the DBT and other government programmes, crop insurance and bank loan among others.

Conclusions

The role of Panchayats in promoting financial inclusion has been four-fold; as a responsibility of Panchayats, convergent action with banks, and other institutions at the local level, creating awareness among people that the bank account is mandated for obtaining crop insurance and bank loan and finally benefit under government schemes or programmes such as housing and other benefits. Therefore, financial inclusion which is a first step towards financial deepening has to be implemented in a convergence approach involving the local self-governing institutions which represent the participatory democracy in the countryside.

*Director, Vidya Bhawan Institute of Local Self-Government and Responsible Citizenship, Udaipur, Rajasthan, India Mobile: 9783827754/9676137754

References

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Table-1: List of villages and Business Correspondents Interviewed