Financial inclusion is as vital as water or primary education, and for that reason, it qualifies to be termed as a ‘quasi-public good.’ This acknowledgment has made financial inclusion a strategic policy objective for policymakers and development stakeholders. The Reserve Bank of India (RBI) has been acting in an intimately mainstream role in regards to spreading financial inclusion in India. Following a long tradition of emphasising on access to finance, India witnessed access to credit by the poor elevating from 7% in 2004 to 20.5% in 2009, owing to the microfinance sector adding 9.9 million (subscriber) clients. There is also the tradition of the poor getting served by non-banking entities such as post offices in India, leading to a subscription of over 60.8 million savings accounts as of March 2007.
When discussing the history of financial inclusion in India, a vital reference should also be made to the positive effect of it on rural poverty. This is ignited via new branching regulation in India that incentivises banks to serve the population based in the underserved (unbanked) areas. Historically, the seeds of financial inclusion were first sowed in India with the initial advent of branching regulation of India in the 1970s and 1990s requiring banks to operationalise 4 branches in unbanked locations for 1 new branch operationalised in an urban area; then followed the establishment of over 30,000 bank branches in rural areas of India, positively tackling rural poverty and financial inclusion. Research indicates that the expanding base of rural banks in India led to minimisation of poverty in rural areas and increase in non-agricultural employment.
The government also rightly intervened in the rural financial markets during the 1970s and 1980s by providing subsidised credits to board clients who were primarily funded via donors and government budgets. In these periods, the justification for government interventions in rural credit markets was stimulating the acceptance of the green revolution technologies—in the 1960s—and augmenting small farmer-led farm investments; commencing the promising first generation wave of financial services delivery. In the second generation, the financial services delivery was commenced about forty years ago by Nobel Laureate Professor Mohammed Yunus, Director, Grameen Bank (in 1976), as a tool of poverty minimisation in developing countries via the “group-lending” model. The present initiative to broaden the financial services in the third generation has its roots around twenty to thirty years ago. In India, as of 2013, with over 900 million mobile phones, there are a mere 250 million bank accounts. It can be learned from the erstwhile bank branching regulations the mounting cost of this expansion policy nullified the aggregate benefits; therefore, there is a massive scope of reaping social benefits from technology-enabled, cost-friendly branch expansion.
The RBI, in Q2 2017, issued afresh branch expansion norms, so as to also disqualify cash depositing counters, ATM kiosks, and mobile branches to be considered regular bank outlets. The new guideline norms have the RBI directing the banks to open a minimum of 25% bank branches in a year in the unbanked rural areas. The RBI has issued permission to all domestic scheduled commercial banks (excepting Regional Rural Banks or RRBs) to open mini branches or banking outlets in the country without seeking prior permission for the same from the RBI. The RBI issues these new norms for branch expansion to make available to the unbanked population in the rural areas a fixed point of service delivery where cheques encashment, cheque withdrawal, and deposit acceptance services are provided either by the bank staff or the business correspondents. These regulations are poised to boost the nascent initiatives of payment banks and small finance banks in regards to making banking accessible to rural India.