Financial exclusion continue to persists in India's eastern, north-eastern, and central states

The government must do away with the interest subvention scheme and plough back the subsidy into a universal crop insurance scheme for small and marginal farmers, according to a recommendation from a panel constituted by the Reserve Bank of India (RBI).
The move can transform the agriculture sector and promote financial inclusion, according to the panel headed by Deepak Mohanty, executive director, RBI, said digitisation of land records for clear titles and credit linkage are necessary to establish evidence of cultivation. The committee. “A universal crop insurance scheme covering all crops should be introduced starting with small and marginal farmers with a monetary ceiling say of Rs 200,000. The insurance should be mandatory for all agricultural loans,” according to the report.
The panel cited the example of fertiliser subsidies, which increased from around Rs. 18,500 crore billion in 2005-06 to Rs. 73,000 crore in 2015-16. While fertiliser subsidy has succeeded in achieving its objective of increasing fertiliser consumption in agriculture, it has also led to some distortions and may not be financially sustainable in the long run, for example, rich households could benefit more from the subsidisation than their poorer counterparts.
Analysts differ

“Replacing the interest rate subvention scheme with a subsidy for insurance may not be appropriate,” said Madan Sabnavis, chief economist, CARE Ratings.
“There is a specific purpose of subvention where farmers receive loans at a lower cost with the government paying the balance. By changing the same to insurance, the purpose is lot. Besides, an insurance works for the farmer when the crop fails, while subvention helps even under normal circumstance,” he said.
In order to ensure actual credit supply to the agricultural sector, the committee recommended introduction of Aadhaar-linked mechanism for Credit Eligibility Certificates. Women were being excluded from the scheme and banks should make special efforts for opening of accounts of women, according to the report.
“Given the government’s emphasis on the welfare of the girl child, the Committee suggests that the government can consider a welfare scheme — Sukanya Shiksha — that can be jointly funded by the central and state governments.” The scheme will link education with banking habits by crediting a nominal amount, in the name of each girl child belonging to the lower income group who enrols in middle school and make it incumbent on the school and the lead bank and its designated branch to open a bank account for social cash transfer.
This scheme can also have the benefit of lowering school dropout rates and empower the girl child, according to the central bank panel.
While the committee recognised that substantial progress has been made in terms of access of financial products and services especially after the launch of the Jan Dhan Yojana, there were significant gaps in terms of usage, inadequate ‘last mile’ service delivery, and exclusion of women as well as small and marginal farmers and very low formal link for micro and small enterprises.
Mobile technology

The Mohanty panel also noted significant financial exclusion continue to persists in the north-eastern, eastern and central states to achieve near-universal access.
It has asked for a change in the banks’ traditional business model through greater reliance on mobile technology for ‘last mile’ service delivery, given the challenges of topography and security issues in some areas.
The committee reviewed flow of credit to the micro, small and medium enterprises and suggested ways to bridge the information gaps that plague these entities. It recommended a system of unique identification for all MSME borrowers and the sharing of information with credit bureaus.
Multiple guarantee agencies, both public and private, that can provide credit guarantees in niche areas need to be encouraged and the role of counter guarantee and re-insurance companies should be explored in order to deepen the credit guarantee market.
“Giving guarantees and counter guarantees for loans to MSMEs are a good step that will improve the flow of funds, we should realize that to enable the same we already have a subsidy scheme for MSMEs to provide guidance to banks on creditworthiness of MSMEs. This has been rolled back sharply this year by the government. This should also be revived to improve flow of funds to MSMEs. While creating new products is welcome we should not disband old structures which have worked well,” said Mr. Sabnavis of CARE Ratings.