Financial Inclusion in India Sumit

8/8/2019 Financial Inclusion in India Sumit

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FINANCIAL INCLUSION IN INDIA

Financial inclusion is the delivery of banking services at an affordable cost to the vastsections of disadvantaged and low income groups. As banking services are in the

nature of public good, it is essential that availability of banking and payment services tothe entire population without discrimination is the prime objective of the public policy.According to Dr. C. Rangarajan The process of ensuring access to financial servicesand timely and adequate credit where needed by vulnerable groups such as weakersections and low income groups at an affordable cost.

The Indian economy is growing at a steady rate of 7% to 8.5% in the last five years orso. Most of the growth is from industry and services sector. Agriculture is growing at alittle over 2 %. The potential for growth in the primary and SME sector is enormous.Limited access to affordable financial services such as savings, loan, remittance andinsurance services by the vast majority of the population in the rural areas and

unorganized sector is believed to be acting as a constraint to the growth impetus inthese sectors. Access to affordable financial services especially credit and insurance enlarges livelihood opportunities and empowers the poor to take charge of their lives.Such empowerment aids social and political stability. Apart from these benefits, FIimparts formal identity, provides access to the payments system and to savings safetynet like deposit insurance. Hence FI is considered to be critical for achieving inclusivegrowth; which itself is required for ensuring overall sustainable overall growth in thecountry.The approach to FI in developing countries such as India is thus somewhat differentfrom the developed countries. In the latter, the focus is on the relatively small share ofpopulation not having access to banks or the formal payments system whereas in India,we are looking at the majority who are excluded.FI can be thought of in two ways. One is exclusion from the payments system i.e. nothaving access to a bank account. The second type of exclusion is from formal creditmarkets, requiring the excluded to approach informal and exploitative markets. Afternationalization of major banks in India in 1969, there was a significant expansion ofbranch network to unbanked areas and stepping up of lending to agriculture, smallindustry and business. More recently, the focus is on establishing the basic right ofevery person to have access to affordable basic banking services.The financially excluded sections largely comprise marginal farmers, landless laborers,oral lessees, self employed and unorganized sector enterprises, urban slum dwellers,migrants, ethnic minorities and socially excluded groups, senior citizens and women.While there are pockets of large excluded population in all parts of the country, theNorth East, Eastern and Central regions contain most of the financially excludedpopulation.

Reasons for financial exclusion

There are a variety of reasons for FI. In remote, hilly and sparsely populated areas withpoor infrastructure, physical access itself acts as a deterrent. From the demand side,lack of awareness, low incomes/assets, social exclusion, illiteracy act as barriers. From


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the supply side, distance from branch, branch timings, cumbersome documentation andprocedures, unsuitable products, language, staff attitudes are common reasons forexclusion. All these result in higher transaction cost apart from procedural hassles. Onthe other hand, the ease of availability of informal credit sources makes these populareven if costlier. The requirements of independent documentary proof of identity and

address can be a very important barrier in having a bank account especially for migrantsand slum dwellers.

Population Per Bank Branch (SCBs)(Thousand)

YEAR RURAL URBAN TOTAL

1969 82 33 63

198120 17 19

1991 14 16 14

2001 16 15 16

2007 17 13 16

Source: Report on Currency and Finance 2006-08 (BSR of SCBs)

Earners Having a Bank Account-2007(Per cent of Total Earners)

annual income(Rs.) Urban Rural Total400000 98 96.3 97.6

All 61.7 38 44.9

Source: Report on Currency and Finance 2006-08 (BSR of SCBs)


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Recent measures

The period 1969 to 1991 saw a huge increase in the branch outreach in India as theaverage population covered by a bank branch fell from 64,000 to 13,711. In 1991 alongwith reforms for liberalising and opening the economy, financial sector reform aimed atderegulation, increased competition and strengthening the banking sector throughrecapitalisation and adoption of prudential measures. The Indian banking industry todayis quite robust and strong to be able to take on the challenges of achieving greaterfinancial inclusion.Pursuant to this, the Reserve Bank has undertaken a number of measures with theobjective of attracting the financially excluded population into the structured financialsystem. In November 2005, banks were advised to make available a basic banking no-

frills account with low or nil minimum balances as well as charges to expand theoutreach of such accounts to vast sections of the population. Banks are required tomake available all printed material used by retail customers in the concerned regionallanguage.In order to ensure that persons belonging to low income group, both in urban and ruralareas do not encounter difficulties in opening bank accounts, the know your customer(KYC) procedures for opening accounts has been simplified for those persons withbalances not exceeding Rs 50000/- (about GBP 600) and credits in the accounts notexceeding Rs.100000/- (about GBP 1200) in a year. The simplified procedure allowsintroduction by a customer on whom full KYC drill has been followed.Banks have been asked to consider introduction of a General purpose Credit Card(GCC) facility up to Rs. 25000/- at their rural and semi urban braches. The credit facilityis in the nature of revolving credit entitling the holder to withdraw upto the limitsanctioned. Based on assessment of household cash


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flows, the limits are sanctioned without insistence on security or purpose. Interest rateon the facility is completely deregulated.A simplified mechanism for one-time settlement of overdue loans up to Rs.25,000/- hasbeen suggested for adoption. Banks have been specifically advised that borrowers withloans settled under the one time settlement scheme will be eligible to re-access the

formal financial system for fresh credit.In January 2006, banks were permitted to utilise the services of non-governmentalorganisations (NGOs/SHGs), micro-finance institutions and other civil societyorganisations as intermediaries in providing financial and banking services through theuse of business facilitator and business correspondent (BC) models. The BC modelallows banks to do cash in cash out transactions at the location of the BC and allowsbranchless banking.Other measures include setting up pilots for credit counselling and financial education. Amultilingual website in 13 Indian languages on all matters concerning banking and thecommon person has been launched by the Reserve Bank on 18 June 2007.

At the regional level, a forum called the State Level Bankers Committee (SLBC) hasbeen in operation since nationalisation. SLBC is a group of bankers and governmentofficials and is convened by a bank having major presence in the State called the SLBCconvenor bank. It meets quarterly and reviews the banking developments in the State.At the district level, the district level committee functions; it is headed by the DistrictCommissioner and is convened by a designated lead bank for the district. In early 2006,one district in each State was identified by the SLBC for 100 per cent financial inclusion.So far, SLBCs have reported having achieved 100 per cent financial inclusion in theUnion Territory of Puducherry and in some districts in Haryana, Himachal Pradesh,Karnataka, Kerala and Punjab. Reserve Bank proposes to undertake an evaluation ofthe progress made in these districts by an independent external agency to draw lessonsfor further action in this regard.In the districts taken up for 100% financial inclusion, surveys were conducted usingvarious data base such as electoral rolls, public distribution system, or other householddata, to identify households without bank account and responsibility given to the banksin the area for ensuring that all those who wanted to have a bank account were providedwith one by allocating the villages to the different banks. Mass media was deployed forcreating awareness and publicity. The banks used different approaches to communicatethe advantages of having a bank account. Bank staff or their agents who are usuallylocal NGOs or village volunteers would contact the people at their households. Rationcard / Electoral ID cards of the families were taken for fulfilling the simplified KYCnorms. Photographs of all the persons who opened bank accounts were taken on thespot by a photographer accompanying the bank team. In most States, the product usedfor launching the program for financial inclusion is the No frills accounts. In one Statethe farmers credit card or KCC is being used ensuring first to credit rather than savings.In other States no frills account was followed by small overdraft facility or a generalpurpose revolving credit upto pre-specified limit. Recognizing the need for providingsocial security to vulnerable groups, in some cases in association with insurancecompanies, banks have provided innovative insurance policies at affordable costcovering life, disability and health cover.


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Cooperative banks and regional rural banks being local level institutions are well suitedfor achieving financial inclusion. These banks are being revived and strengthened withincentives for better governance. Being local institutions they are ideally suited forachieving FI.The role of an efficient payments system for FI cannot be overstressed and we efforts

are being made to bring about Improvements in the payments system especially in therelatively less developed parts of the country.

One of the ways in which access to formal banking services has been provided verysuccessfully since the early 90s is through the linkage of Self Help Groups (SHGs) withbanks. SHGs are groups of usually women who get together and pool their savings andgive loans to members. Usually there is a NGO that promotes and nurture these groups.National Bank for Agriculture and Rural Development has played a very significant rolein supporting group formation, linking them with banks as also promoting best practices.The SHG is given loan against guarantee of group members. The recovery experience

has been very good and there are currently 2.6 million SHGs linked to banks touchingnearly 40 million households through its members. Banks provide credit to such groupsat reasonable rates of interest. However the size of loans is quite small and used mostlyfor consumption smoothening or very small businesses. In some SHGs, credit isprovided for agricultural activities and other livelihoods and could be several times thedeposits made by the SHG. Most of the SHGs have been linked to public sector banksin view of the latters dominant presence in the rural areas.Extending outreach on a scale envisaged under NRFIP would be possible only byleveraging technology to open up channels beyond branch network. Adoption ofappropriate technology would enable the branches to go where the customer is presentinstead of the other way round. This, however, is in addition to extending traditionalmode of banking by targeted branch expansion in identified districts. The BusinessFacilitator/Business Correspondent (BF/BC) models riding on appropriate technologycan deliver this outreach and should form the core of the strategy for extending financialinclusion. The Committee has made some recommendations for relaxation of norms forexpanding the coverage of BF/BC. Ultimately, banks should endeavour to have a BCtouch point in each of the 6,00,000 villages in the country.The foreign banks and private sector banks have approached the access issue througheither setting up relatively lower cost non bank companies for providing small valueretail loans or have partnered with micro finance institutions that provide financialservices to the relatively higher risk segments of the population. Microfinance has drawnattention to an entire sector of borrowers who had been previously poorly served by theformal financial sector and MF has demonstrated how to make lending to this sector aviable proposition. However the rates of interest charged are quite high, typically 24 to30 per cent, mainly on account of the high transaction cost for the average loan size thatcan be quite small. Compared to the informal sector, perhaps the rates are lower, butissues are raised whether these rates are affordable in the sense whether they wouldleave any surplus in the hands of the borrowers and lead to higher levels of living.


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For commercial banks, the lower cost of funding, advantages of size and scale givesscope for cross subsidization and their interest rates are more competitive compared tothe MFIs, but they have not been as successful in dealing with the last mile issue. Thepartnering with SHGs and MFIs with reasonable cost of funding by the banks has beenseen as a more optimal approach till now. As indicated earlier, a recent important

regulatory measure is the permission given to banks to use post offices, cooperativesocieties, non government organizations set up as trusts or societies, as businesscorrespondents (agents) for doing branchless banking after conducting due diligence onsuch intermediaries. Agency risk is sought to be minimized by using well respected localorganizations and use of IT solutions for tracking transactions in the bank accounts.Many banks are exploring the use of this model to increase their outreach and deliverdoorstep banking services at lower cost. The viability and scalability of the model wouldrequire some flexibility in charging of interest rates or services charges to cover costs.

The use of IT solutions for providing banking facilities at doorstep holds the potential forscalability of the FI initiatives. Pilot projects have been initiated using smart cards for

opening bank accounts with bio metric identification. Link to mobile or hand heldconnectivity devices ensure that the transactions are recorded in the banks books onreal time basis. Some State Governments are routing social security payments as alsopayments under the National Rural Employment Guarantee Scheme through suchsmart cards (see pictures below). The same delivery channel can be used to provideother financial services like low cost remittances and insurance. The use of IT alsoenables banks to handle the enormous increase in the volume of transactions formillions of households for processing, credit scoring, credit record and follow up .

Conclusion

It is becoming increasingly apparent that addressing financial exclusion will require aholistic approach on the part of the banks in creating awareness about financialproducts, education, and advice on money management, debt counseling, savings andaffordable credit. The banks would have to evolve specific strategies to expand theoutreach of their services in order to promote financial inclusion. One of the ways inwhich this can be achieved in a cost-effective manner is through forging linkages withmicrofinance institutions and local communities. Banks should give wide publicity to thefacility of no frills account. Technology can be a very valuable tool in providing access tobanking products in remote areas. ATMs cash dispensing machines can be modifiedsuitably to make them user friendly for people who are illiterate, less educated or do notknow English.

Financial inclusion can be made a viable project by fully exploiting the synergy built inthe programme between the informal sector and the formal sector comprising banks,government and development agencies. Financial inclusion, can certainly emerge as acommercial profitable business provided banks use innovative programmes andmodels, leverage technology, increasing the range of services (e.g., insurance productsand remittance facility) and generate high volumes.Financial inclusion can be enhanced by leveraging efficient database management and


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technology to reduce overall cost and incremental cost of transactions throughinstallation of cash dispensers/low cost ATMs in select rural branches, connection ofboutique/kiosk to the central server in villages, automatic kiosks for bill pay/chequedeposit, automated loan processing for small loans, etc. Essentially a synchronizedattempt by the government and apex bodies has to be made to create meaning and

value in the lives of millions of unbanked Indians.Financial inclusion through the self help group model has already proved the efficacy &viability of financial inclusion through Micro-credit as a 'win-win' proposition to the ruralpoor/urban poor and the financial institutions. The portfolio has a high demand for creditand has proved to be good for the Banks as well with a high recovery rate.The bank is expanding its reach through branchless banking, using BusinessCorrespondents (BCs). As a natural corollary, business correspondent model underfinancial inclusion will be viable if taken up for, apart from providing savings productsand payments of social security benefits of the government (like NREGP), bankextends/ sells other products like micro credits, recurring deposits and remittancefacility, insurance products through the BC model.

To sum up, banks need to redesign their business strategies to incorporate specificplans to promote financial inclusion of low income group treating it both a businessopportunity as well as a corporate social responsibility. They have to make use of allavailable resources including technology and expertise available with them as well asthe MFIs and NGOs. It may appear in the first instance that taking banking to thesections constituting the bottom of the pyramid, may not be profitable but it shouldalways be remembered that even the relatively low margins on high volumes can be avery profitable proposition

SUBMITTED BY:

SUMIT PATRA.TPS BROLL NO.-18113SIVA SIVANI INSTITUTE OF MANAGEMENTSECUNDERABAD-500014

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Financial Inclusion in India Sumit