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Issue Debate #10 Financial Inclusion - from private Banks to Small Payment Banks

edited September 2015 in Issue Debates
Issue Debates Archives

The goal is financial inclusion is paramount in order to eradicate poverty. In the light of this briefly state the steps taken by the govt to reform banking system. How can small payment banks espouse the cause of Financial Inclusion?

Reading List:-

1. http://indianexpress.com/article/opinion/columns/why-supreme-court-judgment-on-aadhaar-calls-for-an-appeal/

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  • Financial inclusion of the poor is envisaged to institutionalise the traditional informal borrowing and lending operations they were accustomed to. It opens them to the credit and insurance markets and provides avenues for safe deposit of their savings and remittance facilities with the ultimate aim of providing them an opportunity of coming out of the vicious cycle of poverty.
    Some of the banking sector reforms taken by the government are:
    1. Priority sector lending: 40 percent of loan advances to go to sectors such as small scale industries, weaker sections, Agriculture etc.
    2. Expansion of banking infrastructure: in the form of white label ATMs to provide withdrawal facilities and Banking Correspondents for basic banking services
    3. PM Jan Dhan Yojana: envisages a comprehensive facilitation of banking to the poor. Opening up of bank accounts, overdraft of rs 5000, accidental and life insurance covers etc. It is thus an integral portion of the JAM Trinity in the rural areas.
    4. Licenses to 10 small and 11 payment banks.
    - These banks will expand basic banking infrastructure to the rural sector
    - Payments banks will accept deposits and remittances facilities. This will thus help rural urban migrants to transfer money within the formal banking system
    - Small banks will do borrowing and lending operations in a small geographical area. They have to provide 75% of their loans to the priority sector and 50% of small loans (under 25 lakhs). They can thus help in undoing in the deeply entrenched informal money lending activities prevalent in the rural areas.
    - However questions have been raised about the financial viability of such institutions. Entities will have to innovate their financial products to the needs of the area
    - Financial literacy remains a huge hurdle to any initiative and progress on this front has been slow.
  • edited September 2015
    Banking sector reformation with the aim of providing financial inclusion has been a priority target for the GoI. It has been helped in its efforts by various initiatives undertaken by RBI.
    The need for reforms, stems from the inadequate progress achieved until now.

    1.) Reducing govt shareholding in public sector banks in line with p.j. nayak comm. recommendations. This will increase autonomy, make them competitive and much more insulated from the inefficient political interference.

    2.) Extension of priority lending sectors. Now loans to social infra. sector, renewable energy and medium enterprises will be treated as psl.

    3.) Setting up MUDRA bank (Budget - 2015), as the regulator of MFIs. In addition it will also extend cheap credit to MFIs and NBFCs, which will further extend loans to MSMEs at low rates.

    4.) Various financial inclusion schemes such as pmjdy, pmsby, kvp, apy, swabhiman, swavalamban (list is endless) etc. In addition govt. has extended facilities like allowing no-frills accounts, relaxing KYC norms.

    5.) On the recommendations of Nachiket Mor committee on fin. inclusion, RBI has initiated the process of setting up payment and small finance banks, which are possible game changers.

    6.) GoI has put in motion the process of implementing FSLRC recommendations. Although this does not have a direct bearing on financial inclusion, yet any measure that makes our financial sector efficient, aids the process.

    ---- payment banks:

    Recently RBI has granted the licenses for 11 payment banks. Although payment banks are considered to be a poor and handicapped [:-)] cousin of small finance banks, still they possess huge potential.

    1.) Deposits facilities provides a safe avenue for rural poor to park their money instead of keeping it in physical form at home. Linking payments of various services such as elect. bill, phone recharge through this account streamlines and brings the rural poor into the banking net.

    2.) Remittance services a huge aid in rural areas of states like Kerala, punjab, gujarat etc.

    3.) payment banks are going to be much more embedded in the rural landscape than small banks, because of their penetrative and much more localised nature.

    4.) Indirectly payment banks will also add to financial literacy.

    Sorry my answer is much more in the form of a staple answer, rather than in the required for/against nature of the debate.

    Na mai padheya, Na mai likheya
    Par mai duniya, toh badha sikheya
  • In my opinion, Payment bank & Small Finance bank play vital role in Financial Inclusion of India because India's large portion of population face the Finance Problem like bank account, financial literacy etc For instance if a person do not have bank account, he is not able to save his money hence either spend money or take risk to keep in house. majority of Financial Institution like Govt bank, Private Bank, NBFC etc all mainly have branches in cities and in small towns however most of our population lives in rural area where these facilities does not exist. Similar problem also exist with small & medium Enterprises like they does not have financial resources from Financial Institutions hence they take money from money lander at high interest rate. Our GoI has taken many steps for providing Financial Service like MFI, Gramin banks etc but still lost of work pending hence our Govt taken initiative like giving license to Payment Bank, Small Finance Bank so that easily & deepen the financial services in rural areas & for small business shall provided. This action is part of Financial Inclusion part of India like Jan Dhan Yojana.
  • A payment like any other normal bank can perform all other function except lending money.Further deposit for now is maximum upto tune of 1 lakh per individual. Thus idea is to target weaker section of society and bring them into formal finance sector.

    How payment banks will play role in financial inclusion can be understood first by understanding problem of customers and end users who are mainly weaker and vulnerable sections of society and also understanding problems of present financial institutions.

    Firstly due to no last mile connectivity, many poor migrant laborers, farmers etc resort to practises like savings mostly in form of golds,cash hidden in house, turning to money lenders and informal sector. By which they not only miss the security provided by formal financial sector but also are vulnerable to vicious cycle high lending rates besides other abuses like bonded labourer among many. Since there is very little left as saving, no investment is possible in various insurance schemes concerned with life,health, agriculture etc.

    In spite efforts made in past and with measures like priority sector lending,banks have mostly refrained from entering rural sector because of history of defaulting loans, thus adding to already existing woes of NPAs, besides that the rural sector is not profitable too, thus most of PSL by banks are done in other areas, living poor farmers, migrant labourers and villagers at perils of informal lending sector.

    To address the issue, RBI recently gave licenses to 11 small payment banks.
    By keeping the lending option away, these banks have been insulated from defaulters and for last mile connectivity transaction through mobiles will be encouraged and promoted. Thus the additional cost physical infrastructure and manpower can be reduced making business more profitable for banks and including more vulnerable sections into formal finance sectors.
    Thus payment banks can be a game changer in government scheme of Jan Dhan and JAM trinity. However the success to a large extent depends on actual work at ground and proper implementation.
  • India has nearly 70% of its population living in the rural areas,most of these people are excluded from the mainstream-politically,socially and financially.While the government has initiated many welfare and empowerment programmes to bring them at par with the mainstream both politically and socially, a lot needs to be done in the area of financial inclusion.This would have benefits like better delivery of services to them and better availability of credit through which they could increase their income levels which ultimately would result into poverty eradication.

    Some of the steps taken by the government in this area are:

    *Opening of regional rural banks and schedule commercial banks with facilities like concessional rate of interests for the poor and targeting certain deprived sections.
    *Capitalising on the post office banks due to their reach and capacity in schemes like mgnrega through which the beneficiaries can avail their payments.
    *New schemes like pradhan mantri Jan dhan yojana with an aim to include at least one person per household with the banking sector.
    *Provisions under the priority sector lending to provide credit to the agricultural sector,self help groups,msme's etc.
    *For increasing awareness and making people understand the banking sector better the govt has also deployed bank saathi or baking correspondents in the rural areas.

    Recently govt also announced giving license to small and payment banks to operate,this is a welcome move as it would help in further enhancing the reach of banking sector.
    The provisions under these banks which could increase financial inclusion are:
    *25% branches in rural areas.
    *Lending activities mainly to be carried on for the marginalised sections by the small banks.
    *Remittances would be provided by the payment banks.
    *Demand deposit facilities are also available so as to encourage savings.

    Since the criteria for getting a license for these banks is wider in scope than other banks and msme's,telecom companies,people with required expertise etc can open them,thus with more knowledge about the local area requirements, these banks would facilitate in achieving this agenda.

    But with all these,there is also need to financially literate the people and for improving efficiency,the JAM trinity should be implemented on larger scale with supporting missions like the digital India mission.All these steps would help in bringing the marginalised sections into the mainstream.
    " The more you sweat in peace , the less you bleed in war."
  • Financial Inclusion is meant to bring in the poor, vulnerable and weaker sections of the population into the main stream and provide them affordable ,safe ,secure banking and other services there by insulating them from the clutches of moneylenders and others who were exploiting them. It has been the priority of many governments and some of the measures to reform banking sector include.

    1.Nationlisation of banks in 1969 and 1980
    2.Creation of Nabard to provide agricultural credit etc
    3.Setting up of Regional rural banks and local area banks, co operative banks.
    4.Priority sector lending to various sectors
    5.RBI guidelines on various lendings and especially mandatory requirement of setting up 25% of branches in rural areas
    6.No frill accounts and opening of basic accounts
    7.Allowing foreign and private banks for more efficiency
    8.Interest subvention schemes for formal sector lending

    Apart from these the recent govts have taken up initiatives like
    1.PM Jan dhan yojana for opening of at least one account for each household with additional facilities like overdraft, life and general insurance covers, rupay card etc
    2.various other insurance schemes also bought under banking ambit like PM Jan suraksha for accidental and PM jeevan jyothi for life insurance products.
    3.Even pension scheme is brought under formal banking through Atal pension yojana
    4.Setting up of Mudra bank for MSMEs
    5.Licence to new commercial banks, small banks , payment banks for more penetration of formal credit
    6.Innovative mechanisms like white label led ATM's , Banking correspondents , JAM trinity etc

    The setting up of small and payment banks is to reach the large no of people who are unable to get into any formal sector lending. The many advantages include

    1.These banks with their limited exposure are largely Insulated from large NPAs faced by commercial banks.
    2.As these operate through limited staff or payment banks operate through retail outlets it will help in reducing transaction costs thereby providing formal services with low cost.
    3.Also these can be encouraged as alternative means of cash to pay various services there by increasing economic activity
    4.Helps large number of migrant workers to do banking services and remittances without any delay and safely
    5.Allows weaker sections to achieve financial literacy and encourage savings and investments and earn interests on deposits
    6.As small banks operate locally they can provide loans for local specific requirements and needs and adopt accordingly.
  • This is true that financial inclusion of small private bank will bring more economic reform. Let's consider few issues that exists currently with respect to banking system;
    Issues with financial bank: major financial banks are not in approach of most of the rural poulation, may be because of long list of formalities it requires before it helps poor in rural areas. The fact can't be denied that still India is majorly depending upon rural formers to full fill the food grains. Hence it is mandatory that banking reform is needed to help the poor farmers.
    Issue with non financial bank: though RBI has given the permission to these banks to help the poor brining more financial inclusion. But said can not be achieved until it give loans or subsidy to poorer. This is clearly visible that these banks are more helpful for rich population than the poorers . One way to achieve the goal by the means of SHSs.
    Political interferences: political interferences are clearly visible to dominate the banks decision in the above cases. A long list of approvals are needed hence promoting the corruption.
    Way to go: seeing on the above issues , RBI has brought the small banks to small payment banks. This step will help the banks to reach the maximum population of country. For the growth of nation everyone has to be in range of banks in case need. Small pay,net bank will help the population to release the fund without much documents. Remember the maslows need hierarchy theory. Until everyone has the basic necessities full filled, we can not think of being the developed nation. Everyone participation is needed. On the other hand the regularity authority of small pay,eat bank is to have clear on these banks so that they can not get diverted from their real motive for what they brought into picture.
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