It is very clear that banking penetration in India is woefully inadequate on all fronts — branch penetration, deposit and credit activity are much lower than the benchmarks. Financial inclusion is a stated objective of the Reserve Bank of India (RBI) policy and the indicator usually used to measure the coverage of banking services is average population per branch. If we look at this statistic at an aggregate level, we find considerable disparity across the states. Manipur has the lowest branch penetration with one branch covering 33,000 people, while Nagaland and Bihar come second and third at 26,000 and 25,000 people per branch respectively. All the three states have had significant law-and-order problems that constrain the growth of economic activity. The next three states with lagging branch penetration are Assam, Chhattisgarh and Uttar Pradesh.
At the top end, we find the small states of Chandigarh, Goa and Himachal Pradesh; the four southern states also fare much better than the national average boosted by good connectivity, diversified state economies and high education levels. The two states that have made maximum progress over the last decade are Tripura and Madhya Pradesh, covering on an average 5,000 more people per branch.
However, it’s time now to move beyond branch-based statistics. The Rangarajan Committee defined financial inclusion as "the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low-income groups at an affordable cost". Given the limitations of using the brick-and-mortar model for spreading banking services, the RBI has been paving the way for adopting diverse modes including banking correspondents and encouraging mobile-based transactions. Budget 2010-11 has, in fact, set a target of providing banking facilities to all habitations with a population over 2,000 within two years, using such modes. The thrust on financial inclusion has so far reduced the number of unbanked blocks from 129 in June 2009 to 93 in June 2010, but the problem continues to be acute in the north-east, Jammu and Kashmir, Jharkhand, Chhattisgarh and Bihar.
Ultimately, it is expected that the success of the new measures will show in the rise in penetration of rural deposit and credit accounts with banks. The difference between rural and urban India is stark: there are 978 deposit accounts for every thousand people in urban areas, while in rural areas, this is just 245. When it comes to accessing credit, there are 42 accounts per 1,000 people in rural India whereas urban areas average 161 accounts per 1,000 people.
Though bank penetration needs to be stepped up for the country as a whole, the government’s aim of inclusive growth will not be achieved unless the gap between rural and urban India is reduced.(Click for graph)
Indian States Development Scorecard is a weekly feature by Indicus Analytics that focuses on the progress in India and the states across various socio-economic parameters.
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