VOL. 2, NO. 1, March 2013 International Journal of Economics, Finance and Management ©2013. All rights reserved. http://www.ejournalofbusiness.org 94 Financial Sector Reforms: The Way to Socio-Economic Inclusion Rajesh Pal Department of Economics, Mahatma Gandhi Kashi Vidyapith, Varanasi – 221002, U.P., India ABSTRACT The immediate question, of course, is whether we need a new generation reforms at all. There are two ways of answering this. First on the retail side, financial services are not reaching the majority of Indians. The single most frequently used source of loans for the median Indian household is still the moneylender. Second on the wholesale side, the financial sector is not able to meet the scale or sophistication of the needs of large corporate India, as well as of public infrastructure, and does not penetrate deeply enough to meet the needs of small and medium-sized enterprises in much of the country. The negligence of credit to priority sectors called for nationalization of commercial banks in1969. The broad aims of nationalization were “to control the heights of the economy and meet progressively and serve better the needs of the development of the economy in conformity with the national policy and objectives. The period after 1964 was aptly described as the phase of innovative banking or revolutionary phase. To do away with the persistent deficiencies of the banking system, the scheme of social control was introduced in 1967. The starting point for a vibrant ecosystem for financial inclusion is to ensure that the organizational structure supports and creates institutions that can reach the poor. Keywords: Big bang approach , Rural Internet Kiosks, Virtual banking, Universal Banking, social control. 1. INTRODUCTION It was not everyone who could take up the banking business. Only men belonging to the Vaishya caste could take up the money-lending profession. When a creditor sued the debtor for recovery of money, it was the duty of king to ensure that the creditor got back his money. Manu permitted the king to employ all means, fair or fouls, to recover the dues, e.g., torturous punishment like killing the debtor’s wife, children and cattle, or obstructing his movements. Manu held the view that a defaulter could not absolve himself of his debt burden even by his death. Chanakya said that sons should pay with interest the debt of a deceased person or co- debtors or sureties. As regards the responsibility of a spouse to pay for the debts incurred, wife was exempted from the debt burden of her husband if she had not given her assent to his borrowings. However, the debt incurred by a wife, her husband was liable for repayment. Perhaps, this was the background in which one of the committees on rural indebtedness concluded that the ‘the Indian farmer is born in debt, lives in debt and dies in debt’ (Reddy, 2002: 65). The role of interest rates was explicitly recognized and they were prescribed by almost all Hindu law givers – Manu, Vasistha, Yajnavalkya, Gautama, and Kautilya. A common base number was 15 per cent per annum – what the banker- economist Dr. Thingalaya calls the Hindu rate of interest. According to Manu and Vaisistha, the interest rates were not to vary depending on the risk involved or the purpose for which the money was borrowed. But, they were directly linked to the caste classification of the borrowers. Brahmin was to be charged two per cent, Kashtriya three per cent, Vaishya four per cent and Shudra five per cent per month. However, according to the system proposed by Chanakya, interest rate structure was risk-weighted since the rate of interest increased with the risk involved in the borrower’s business (Reddy, 2002: 66). An efficient, articulate and developed financial system is indispensable for the rapid growth and thereby inclusion of the excluded section and sectors of the society and economy of any country. The process of economic development is invariably accompanied by a corresponding and parallel growth of the financial organizations. Before nationalization of banks in 1969, it was large scale industries, large borrowers, established business houses, have access to bank credit while the priority sectors such as the small scale industries, small borrowers, agriculture and exports were not receiving their due share. The negligence of credit to priority sectors called for revolutionary changes in the structure, operation policies and practices of commercial banks in India during 1964-90. The period after 1964 was aptly described as the phase of innovative banking or revolutionary phase. The control of major banks by the established and leading business houses was yet another weak element of the banking system. To do away with the persistent deficiencies of the banking system, the scheme of social control was introduced in 1967. The main elements of social control were: organizational changes, National Credit Council, and Agricultural Finance Corporation Ltd. National Credit Council was set up in December 1967 with the following objectives: a. To assess the demand for bank credit from the various sectors of the economy; b. To determine priorities for the grant of loans and advances or for investment having regard to the availability of resources and the requirements of the priority sectors, particularly in agriculture, small scale industries and export; c. To co-ordinate lending and investment policies between co-operative and commercial banks and specialized agencies to ensues the optimum and efficient use of the overall resources; and