Prevalence Of The British Raj:

The British Raj prevailed in India from 1858 to 1947. During this so-called ‘Crown Rule’, the land revenue system prevailed. The land tenure policies led to the establishment of The Zamindari System, The Mahalwari System and The Ryotwari System.

The excessive taxes through ‘zamindars’ or tax collectors led to the economic drain of India while British machine manufactured cheap goods led to the destruction of Indian handicrafts and cottage industries.

Financial Exclusion:

During this phase, very limited industrialization (if any) took place. Scattered banks were established which were non-exclusive and non-accessible for the masses. The major mode of financial transaction was majorly through individuals possessing financial capital. However, those possessing financial capital such as merchants, moneylenders and ‘banyas’ were not interested in capital formation. They were only interested in financial gain. This was a nation as a whole (excluding certain parts) that faced financial exclusion.

Nationalization And Subsequent Liberalization:

After India attained Independence in 1947, situations changed dramatically. With the nationalization of the RBI and the Banking Regulation Act, facilitation of banking development was swift and sudden. The nationalization of private banks led to the slowdown in the growth of the Indian bank sector which grew at a rate of 4% per year. However, with the liberalization of the 1990s, the Indian banking sector began to perform well again with thousands of private banks being given access to set up branches throughout the country.

With these moves, the Indian banking sector attained mobility. Nevertheless, there were still farmers and other poor sections of society which did not have access to proper credit facilities. In order to improve the health of the farmer, financial stability and the alleviation of poverty, the RBI proposed the idea of Financial Inclusion.

Defining Financial Exclusion:

Financial Inclusion is nothing but providing financial services to the lower strata of society who do not have access to such amenities, at a low and affordable rate which would inculcate in them the habit to save.

The Importance Of Financial Inclusion In Context Of The Indian Economy:

Capital formation –

The inability to investment among the poor occurs from an inability to save. Financial inclusion helps these individuals by providing them opportunities to invest and save. With the formation of a strong banking system, it is also expected that more money would be saved than spent in land, buildings, etc; which would bolster capital formation.

Formal credit facilities for the poor –

Even though The Zamindari System and The Ryotwari System is at an end, there are still thousands of people living in villages and urban slums who lack access to a formal credit system. They still rely upon friends and relatives for financial aid. Financial Inclusion has opened up avenues for the poor to procure credit facilities at nominal rates.

Substituting government subsidies and welfare programs –

Government initiatives such as Minimum Support Price (MSP) and subsidies do no reach the targeted individuals in society. In other words, these programs have failed to provide support to those who need them the most. Providing direct cash transfers to bank accounts makes for a much more better approach.

Conclusion:

In order to promote Financial Inclusion, the Government has been supporting:

• The establishment of a no-frills account.
• Human-less and leakage free payment transfer through EBT.
• Providing banking services through correspondents.

All these schemes are aimed at developing the health of the poor and assisting him in his ‘microfinance’ investment endeavors by providing him with credit. It also aims at developing the untapped potential of the lower strata of Indian society which would help in capital building and capital formation.

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Source: AllBankingSolutions.com