Sudip Bandyopadhyay’s Blog

I still remember an incident which took place a few years back when my next door neighbor’s son needed a large sum of money for admission to an engineering college.

He had only a few hours to complete the formalities within the deadline. They made a few phone calls to his uncle in London and within 15 minutes they collected the money from the neighborhood Western Union outlet after the uncle remitted money from Britain to our small town in the outskirts of Kolkata.

Another shocking and quite different incident took place recently. My driver in Mumbai wanted to urgently send money to his wife in his native village in Bihar for some immediate need. The poor guy was running from pillar to post trying to figure out how to ensure that the funds reached his wife within 24 hours. Unfortunately, he cannot use money transfer agents as they cannot be used for domestic remittance.

Since his illiterate wife doesn’t have a bank account and the village where his family stays, in any case, doesn’t have a bank branch within 10 kilometers, he had no other option but to ask his family to borrow money from his village money lender at an exorbitant interest rate for a week. Ultimately, he remitted money through a postal money order and he is hoping that his money reaches his wife within seven days.

Financial inclusion is one of the main planks of India’s drive to wipe out poverty – equal to the efforts put in to build physical infrastructure. Government experts define the policy as the “delivery of financial services at an affordable cost to the vast sections of the disadvantaged and low-income groups.” Officials estimate that more than half of Indian rural households - about 46 million homes – do not have access to credit.

“Inclusive growth demands providing financial services to this un-banked population.””

Two thirds of the country’s population doesn’t have a bank account and this situation is not expected to change dramatically in the near future. Inclusive growth demands providing financial services to this un-banked population.

The attempt by the government is now rightly moving towards using alternate non-banking channels to route financial services into the interiors of the country. As a part of this process it would be only appropriate if the domestic remittance market is opened to recognized money transfer agents who already are authorized to receive inward remittance from abroad.

In fact, it is quite paradoxical that a person sitting in India can receive remittance from anywhere else in the world but not from other locations in India. So a person in London can remit money to a person sitting in a remote village in Bihar by using the services of Reserve Bank of India-approved, private money transfer players, while a person sitting in Mumbai cannot do the same. The only option open to him is to use the postal department’s money order service and borrow in the meantime if necessary.

The problems in India’s rural sector are well documented and the lack of remittance services is but one of the many inequities that plague this part of the country and keep its inhabitants outside of mainstream finance

Consider some of the others.

About 72% of the country’s 1.14 billion people live in rural areas, yet agriculture produces only about 21% of gross domestic product, according to the World Bank. That leaves the majority of the population living off a small chunk of the economic pie. While the government has claimed it can end poverty by 2040, at present, more than 250 million Indians live on less than $1 a day.

Small and marginal farmers, with two hectares (five acres) of land or less, comprise three quarters of the nation’s farming households but own less than one quarter of its farmland. In the poorest states, such as Bihar, small and marginal farmers comprise about 96% of those working the land, according to industry experts.

A lack of transport and other infrastructure forces these farmers to sell their produce to village “aggregators,” the middlemen, at less than market value. With a better knowledge of prices than many of their poorly educated clientele, the middlemen dupe farmers into steep discounts. They also double up as money lenders, providing farmers with credit for seeds and equipment, often at crippling interest rates.

This is where micro-finance and non-bank financial companies can play a huge role so that financial inclusion reaches the remotest levels of the country and India can truly progress.

**** This article was originally published in The Wall Street Journal. http://online.wsj.com/article/SB125549894649484331.html