The evolution of financial inclusion programming in India can be read as sequential
negotiations between an activist state and an often more reactive business side (specifically,
owners of financial capital) about where capital goes, to whom and at what price, and thus ultimately the terms on which business contributes towards social policy.37
The state has actively pushed financial inclusion, albeit until recently more through ad hoc measures and policies – such as SHG and MFI promotion – than through explicit strategies. Only in India’s 11th and 12th Five Year Plans (2008; 2013) did ‘inclusive growth’ and
‘financial inclusion’ come to feature prominently (Arun and Kamath 2015: 275). But different governments and levels of government have at least since the early 1990s used sticks and carrots – such as subsidies, legal obligations and public banking – to entice the financial sector to do more business with poor and rural populations. As Rao and Anand (cited in Arun and Kamath 2015: 276) say, ‘the idea of financial inclusion had existed in essence, albeit, without the nomenclature, even before the [2008–2013] reforms’.
The central government’s Priority Sector regulation, originally introduced in 1972 and expanded throughout the 1970s and 1980s, has also massively encouraged the push for financial inclusion. It stipulates that banks in India must allocate at least 40 per cent of their net credit (32 per cent for foreign banks) at preferential rates to certain targets, among which are agriculture, small businesses, infrastructure, self-employed persons, education, housing, microcredit and disadvantaged social groups. Priority Sector rules, a salient feature of India’s financial system, have long been a sticking point in negotiations between financial actors and the state, particularly due to the costs they entail for banks (Nathan Associates 2013). Banks thus warmly welcomed microfinance and financial inclusion as counting towards Priority Sector targets, because of the reliable and easy returns that could be earned relative to other areas. Indian banks became keenly involved in financial inclusion particularly through loans to MFIs (Chen et al. 2010), but could also meet their targets by subscribing to bond issues from NABARD, which channelled capital onward to MFIs or into the SHG system. MFIs in turn have consistently lobbied to retain ‘Priority’ status, because it ensured access to abundant cheap capital (Mader 2013).
There is no single key forum of interaction or policy dialogue between the state and other actors over financial inclusion in India. A key broker in negotiations about how financial inclusion is to work, however, has been the RBI, which has increasingly pushed for a bank- led model for achieving financial inclusion, through no-frills accounts, correspondent banking, new branches and relaxation of norms. This comes after many years of support for SHGs and microfinance; in 2000, for example, the RBI freed all MFIs registered as for-profit non- bank financial companies (NBFC) from key regulations, including minimum capital or liquidity requirements, on the condition that they refrain from deposit-taking. This state support for MFIs led to the rapid expansion of commercial credit-driven microfinance in the 2000s. Contrasting with the heavy-handedness of Priority Sector rules, until recently the Indian central government has pursued a decidedly hands-off approach to regulating financial inclusion itself. Instead of regulating microfinance, for instance, successive governments emphasised MFIs’ self-regulation, use of industry standards and voluntary codes of conduct. These rules were developed by industry representative bodies such as the Microfinance Institutions Network (MFIN) and Sa-Dhan, often at the behest of government (Rozas and Sinha 2010). The representative bodies, meanwhile, have resisted attempts to regulate MFIs and insisted on the sector’s capacity to self-regulate, even in the face of multiple crises culminating in 2010 (Arunachalam 2011; Mader 2013).
Only in its recent massive drive for universal financial access (programmes such as
Swabhimaan and PMJDY) has the state again clearly taken the legislative initiative, albeit to actively push or enforce (not contain) financial expansion. The PMJDY Mission Document
37 Whether financial inclusion is actually effective, ineffective, or harmful is another question (see, for instance, Mader 2015,
describes the initiative as a ‘national mission’ encompassing different stakeholders, including central government departments, the RBI, banks and bank associations, NABARD, and regional and local governments and banking committees (GoI 2014: 34–44). PMJDY depends on the compliance of the banking sector, but it is unclear what, apart from sheer legal stipulation, incentivises banks to offer accounts and services to the poor. The
consequences of denying service or other instructions are unclear. A notice published by the Ministry of Finance announced:
This is to inform all concerned that if anyone wishes to open an account under
PMJDY, he/she may visit to the nearest bank’s Branch / Bank Mitrs [agent office] and can open his/her account… if anyone is facing any problem/difficulty in opening of bank accounts, he/she may write to Mission Office, PMJDY or can register his/her grievance/complaint online on our website pmjdy.gov.in (write to us) or call at the numbers listed below.38
PMJDY is effectively financial inclusion by decree, but without transparent enforcement. This may nonetheless work, because India’s financial sector remains strongly state-dominated (Shimizu 2010).39 Public sector banks account for more than two thirds of all banking sector assets (down from more than 90 per cent in 1980). Likely because of the more direct
capacity for government control, the vast majority of the PMJDY roll-out has gone ahead through public sector banks and (also government-led) regional rural banks.