Draft Report of the High Level Group on Services Sector

6.1 Introduction

The importance of the financial sub-sector goes beyond the output and employment it directly generates, given its critical role in enabling broader economic activity, whether in industry, agriculture or other services. The financial sub-sector provides products for mobilizing household and corporate savings, credit for producing and consuming goods and creating long-term assets, transaction banking for facilitating economic activity and insurance for risk mitigation, long-term savings and social security. The perspective of this report is therefore not only the growth of the financial sector, but its effectiveness in its larger role as an agent of economic change. Driven to a significant extent by the liberalization measures of the 1990s, the sector has witnessed robust growth. However, its penetration in India remains low relative to many markets, with bank credit/ GDP at under 50.0%, overall insurance premium/ GDP at under 5.0% and general insurance premium/ GDP at under 1.0%.
In accordance with its mandate the Group examined the different aspects influencing the performance of the financial services sub-sector and with a view to suggesting short-term and long term policy measures to improve and sustain its competitiveness in the coming years. At the outset the Group considered it important to review the status of financial inclusion in India i.e. the extent of access to and utilization of financial services by households and businesses that are geographically dispersed and vary widely in terms of income and other indicators. Studies reveal that despite the policy and regulatory directives towards financial inclusion, 41.0% of the adult population is un-banked. Further, there exists a significant urban-rural divide in the access to banking facilities and credit, with only 39.0% and 9.5% of the adult rural population having bank accounts and loan accounts respectively, as compared with 61.0% and 14.0% in urban areas¹⁴. Clearly, there is a need to rethink our approach to financial inclusion from the prescriptive approach adopted thus far to a more market-based approach that achieves the desired level of penetration in a sustainable manner.
At the opposite end of the spectrum lie the increasingly complex and sophisticated financial services needs of large businesses that are operating in a globalised environment. The ability of the existing Indian financial sector to meet these requirements is constrained by the relatively small size of Indian financial intermediaries that limits their risk-taking capability, regulatory restrictions on products and services that may be offered and the absence of liquid and deep markets in several segments in India.
An analysis of measures needed for the financial sub-sector in India must be centred on enhancing the ability of the financial sub-sector to address this continuum of financial services needs. For sustaining and enhancing the competitiveness of the financial sub-sector the Group was of the view that it was imperative to consider permitting freer foreign participation in the Indian financial sector, and empowering the Indian financial sector participants in general, and the public sector participants in particular, to compete in a globalised environment.
This report seeks to recommend the key measures that taken together would help in meeting the objectives of achieving greater financial inclusion, serving emerging customer needs and enhancing global competitiveness.