Financial Inclusion / Financial Literacyin select districts of Jharkhand

A Project Report by

Prakash AgarwalRBI Young Scholar 2009

Reserve Bank of India, Ranchi

FOREWORDOver the last decade, there has been expansion, competition and diversification of ownership of banks leading to both enhanced efficiency and systemic resilience. However, there are legitimate concerns in regard to the banking practices that tend to exclude rather than attract vast sections of population, in particular, pensioners, self-employed and those employed in unorganized sector. This culminated into the Reserve Bank emphasizing in its Annual Policy Statement for 2005-06, that bankers should empower the depositors by providing wider access and better quality of banking services. With the objective of ensuring greater inclusive growth, Reserve Bank has undertaken a number of initiatives to continuously widen the scope and extent of financial Inclusion. In order to explore the potential for integrating financial education and literacy into the Reserve Banks overall endeavour for financial inclusion, the Bank launched the Reserve Bank of India Young Scholars Scheme for students between 18 and 23 years of age and studying in undergraduate classes at various institutions across the country. In this context, we consider ourselves fortunate enough to be allotted the project Financial Inclusion/Financial Literacy of which the Young Scholar Scheme is an inseparable part. This report is not just the work done by two of us, it is also the result of our interactions with the staff at RBI, Ranchi office, which moulded and shaped over views on financial inclusion, which can be seen, reflected in the report itself. The continued guidance from Shri R.N. Mishra, GM & O-In-C and mentor Shri Chandan Kumar, AGM helped us focus on financial inclusion and not get distracted away from our core topic. Our visit to the SHG meeting at Ramgarh with Smt Bimla Bhagat, Manager and Shri S.T. Punnoose, AGM was our first foray outside Ranchi, which helped us understand the working of SHGs and Farmer Clubs. The number of surveys and visits we undertook would not have been possible without them being facilitated beforehand by our mentor, who took every pain so as to smoothen our project work, which sometimes used to get off track too. We are also thankful to Shri S. Das who guided us in the early days of our project and gave a macro view on the topic of financial inclusion.[i]

The entire staff at office made it a point that we learn something each day we attended office. We are indebted to all of them, who helped us in one or the other manner.

[Prakash Agarwal]

July 15, 2009.

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CONTENTSList of Abbreviations Chapter No. 1 2 3 4 5 6 7 8 Introduction Initiatives for Promoting Financial Inclusion Pre 2005 International Experiences in Financial Inclusion Initiatives for Promoting Financial Inclusion 2005 Onwards Role of ICT in Enabling Financial Inclusion Survey on the Extent of Financial Inclusion Field Visits Recommendations Annexures References Title [v] Page No. 1 7 14 19 26 32 47 58 70 85 86 87

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List of AnnexuresAnnexure I Annexure II Annexure III Annexure IV Annexure V Annexure VI Annexure VII Annexure VIII Annexure IX RBI Young Scholar Survey on Financial Inclusion (Questionnaire) Performance Report of Abhay Credit Counselling Centre Working Hours of Abhay FLCC (as displayed on the centres website) Leaflet of Programmes Offered by BMIED, Hazaribag Annual Training Calendar of BMIED for the year 2009-10 Helpline for Farmers A Self-Sustaining Model Disha Financial Counselling Centre (Website Homepage) Detailed Working of The Kiva Model Homepages of Various Financial Education Websites A Comaprision

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List of AbbreviationsADWRS AML ATM BC BF BMIED BPL CCC CDFI CDMA CFT CGM CRA CRC CSOS CSP CTF DCC DRDA DRI FIF FITF FLCC Agriculture Debt Waiver and Debt Relief Scheme Anti Money Laundering Automated Teller Machine Business Correspondent Business Facilitator Birsa Munda Institute for Entrepreneurship Development Below Poverty Level Credit Counselling Centre Community Development Financial Institution Code Division Multiple Access Centralised Funds Transfer Chief General Manager Community Reinvestment Act Commission for Rural Communities Civil Society Organisations Customer Service Point Child Trust Fund District Consultative Committee District Rural Development Authority Differential Rate of Interest Financial Inclusion Fund Financial Inclusion Technology Fund Financial Literacy and Credit Counselling Centre[v]

GCC GDP GIPSA GoI GPRS GSM GUI ICT IDRBT IVRS KCC KVIC KYC LBS LDM LDO MFIS MSMED MoRD NABARD NBFC NCC NFC NGO NPA

General Credit Card Gross Domestic Product General Insurers Public Sector Association Government of India General Packet Radio Service Global System for Mobile Communications Graphical User Interface Information and Communication Technologies Institute for Development and Research in Banking Technology Interactive Voice Response Service Kisan Credit Card Khadi Village Industry Corporation Know Your Customer Lead Bank Scheme Lead District Manager Lead District Officer Micro Finance Institutions Micro Small and Medium Enterprises Development Ministry of Rural Development National Bank for Agriculture and Rural Development Non Banking Financial Company National Credit Council Near Field Communication Non Government Organisation Non Performing Asset[vi]

NREGES PACS PAIS PIN PMEGP PMRY POCA PoS PPP RCB RFID RPCD RRB RUDSETI SAA SGSY SHG SHPI SIDBI SIM SJSRY SLBC SLRS SME SMS

National Rural Employment Guarantee Scheme Primary Agriculture Credit Society Personal Accident Insurance scheme Personal Identification Number Prime Ministers Employment Generation Programme Prime Ministers Rozgar Yojana Post Office Card Account Point of Sale Purchasing Power Parity Rural Credit Bureau Radio Frequency Identification Device Rural Planning and Credit Development Regional Rural Bank Rural Development and Self Employment Training Institute Service Area Approach Swarnajayanti Gram Swarozgar Yojana Self-Help Group Self-Help Promoting Institution Small Industries Development Bank of India Subscriber Identity Module Swarna Jayanti Shahari Rozgar Yojana State Level Bankers Committee Scheme of Liberation and Rehabilitation of Scavengers Small and Medium Enterprise Short Message Service[vii]

SSI SSP UCBS UI UIN UTLBC

Small Scale Industries Society Security Pension Urban Co-operative Banks User Interface Unique Identification Number Union Territory Level Bankers Committee

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1. IntroductionIndia is the fourth largest economy in the world on a purchasing power parity (PPP) basis and twelfth on a nominal basis. With the real GDP forecasted to grow by 5.7% in the year 2009-10, the Indian economy is marching ahead. This rapid expansion is expected to continue as growth in the services and high technology manufacturing sector accelerates. Agriculture, which continues to support around 60% of the population, has grown by a mere 2.7% in the second quarter of 2008-09. In addition, the organized sector employment presently comprises less than 10% of the workforce, leaving the vast majority of the working population with irregular income streams. Notwithstanding the rapid increase in overall GDP and per capita income in recent years, a significant proportion of the population in both rural and urban areas still experiences difficulties in accessing the formal financial system. There is currently a perception that there are a large number of people, potential entrepreneurs, small enterprises and others, who may not have adequate access to the financial sector, which could lead to their marginalization and denial of opportunity to grow and prosper.

1.1 Financial ExclusionBroadly defined, financial exclusion signifies the lack of access by certain segments of the society to appropriate, low-cost, fair and safe financial products and services from mainstream providers. Financial exclusion is thus a key policy concern, because the options for operating a household budget, or a micro/small enterprise, without mainstream financial services can often be expensive. This process becomes self-reinforcing and can often be an important factor in social exclusion. Reserve Bank of India data shows that as many as 139 districts suffer from massive financial exclusion, with the adult population per branch in these districts being above 20,000 and only 3% with borrowings from banks. On the assumption that each adult has only one bank account (which does not hold good in practice, so that actual coverage is likely to be worse) on an all India basis, 59 percent of the adult population in the country has bank accounts. 41 percent of the population is, therefore, unbanked. In rural areas the coverage is 39 percent against 60 percent in urban areas. The unbanked

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population is higher in the poorer regions of the country, and is the worst in the North-Eastern and Eastern regions.

Causes of Financial ExclusionDemand-side Barriers: On demand constraints and opportunities, thefollowing issues have a significant bearing on the extent of financial exclusion/inclusion: 1. Cultural factors - Women are often disadvantaged by credit requirements such as collateral since in most of the cases property is registered under their husbands name and they are to seek male guarantees to borrow. 2. Mistrust of financial institutions - The feeling that there is no point in applying for financial products because he/she expects to be refused as banks are not interested to look into their cause has led to self-exclusion for many of the low income groups. 3. Level of income - A higher share of population below the poverty line results in lower demand for financial services as the poor may not have savings to place as deposit in savings banks. 4. Financial literacy and skills capacity High information barriers, low awareness and limited literacy, particularly financial literacy, i.e., basic mathematics, business finance skills as well as lack of understanding often constrain demand for financial services.

Supply-side Barriers: The following issues on the supply side are majorobstacles in providing an adequate supply of financial services to the currently unbanked: 1. Locational constraints Absence of physical infrastructure in interior-most parts of the country leads to difficulties in accessing financial institutions (like banks, etc) resulting in a substantial proportion of households in rural and remote areas being kept outside the ambit of the formal financial system. 2. Real and perceived risk in lending - The perceived risk of lending to the poor is higher than the real risk, creating a supply barrier by triggering higher than necessary transactions costs due to stricter than needed prudential requirements.

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3. Approaches and products - Generally, financial services tend to be concentrated in urban areas, allowing rural clients little access to services and information for making well grounded decisions. 4. Financial viability of MFIs - MFI practitioners encounter difficulties in having a double bottom line: at the same time aiming to be profitable and stimulating local economic development.

Costs and Consequences of Financial ExclusionBroadly, the issue of cost of financial exclusion may be conceived from two angles, which are intertwined. First, the exclusion may have cost for individuals/entities in terms of loss of opportunities to grow in the absence of access to finance or credit. Second, from the societal or the national perspective, exclusion may lead to aggregate loss of output or welfare and the country may not realize its growth potential. In terms of cost to the individuals, financial exclusion leads to higher charges for basic financial transactions like money transfer and expensive credit, besides all round impediments in basic/minimum transactions involved in earning livelihood and day to day living. Individuals/families could get sucked into a cycle of poverty and exclusion and turn to high cost credit from moneylenders, resulting in greater financial strain and unmanageable debt. At the wider level of the society and the nation, financial exclusion leads to social exclusion, poverty as well as all the other associated economic and social problems. Another cost of financial exclusion is the loss of business opportunity for banks, particularly in the medium-term. Banks often avoid extending their services to lower income groups because of initial cost of expanding the coverage which may sometimes exceed the revenue generated from such operations.

1.2 Financial InclusionThe definitional emphasis of financial inclusion varies across countries and geographies, depending on the level of social, economic and financial development; the structure of stake holding in the financial sector; socioeconomic characteristics of the financially excluded segments; and also the extent of the recognition of the problem by authorities or governments.

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The Report of the Committee on Financial Inclusion in India (Chairman: C Rangarajan) (2008) defines 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.

Measurement of Financial Inclusion/ExclusionWhile the importance of financial inclusion has been widely accepted, much less is known about how inclusive the financial systems are and who has access to which financial services. Individual indicators, viz. number of bank accounts and number of bank branches that are generally used as measures of financial inclusion, can provide only partial information on the level of financial inclusion in an economy. Financial services or products rendered by banks, postal savings banks, credit unions, finance companies, micro-finance institutions (MFIs), and other formal and quasi-formal non-bank institutions generally form the basis for measuring the financial inclusion. Core and headline indicators place a given population along a continuum of access, depending on its usage of formal, semi-formal, and informal financial services, and those excluded from the use of financial services. The access to finance could be divided into five segments: (i) The proportion of the population that uses a bank or bank like institution; (ii) The population which uses service from non-bank other formal financial institutions, but does not use bank services; (iii) The population which only uses services from informal financial service providers; (iv) The proportion of the population transacting regularly through formal financial instruments; and (v) The population which uses no financial services. There exists no single comprehensive measure that can be used to indicate the extent of financial inclusion across economies. Specific indicators such as number of bank accounts, number of bank branches, that are generally used as measures of financial inclusion, can provide only partial information on the level of financial inclusion in an economy.

Scope of Financial InclusionThe scope of financial inclusion can be expanded in two ways: (i) Through state-driven intervention by way of statutory enactments ( for instance the US example, the Community Reinvestment Act and making it a statutory right to have bank account in France).

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(ii) Through voluntary effort by the banking community itself for evolving various strategies to bring within the ambit of the banking sector the large strata of society. Internationally, financial exclusion has been viewed in a much wider perspective. Merely having a bank account is not regarded as an accurate indicator of financial inclusion. Rather, its scope is considered to be quite large and ranges from empowerment of people through schemes of financial literacy/education to ensuring their participation in institutional credit, insurance cover and remittance services. The scope of financial inclusion is much broader and hence, it is considered to be critical for achieving inclusive and sustainable growth in the country.

Benefits of Financial InclusionImprovements in access to financial institutions accrue several benefits to the consumer, regulator and the economy alike. Establishment of an account relationship can pave the way for the customer to avail the benefits of a variety of financial products. The bank accounts can also be used for multiple purposes, such as, making small value remittances at low cost and making purchases on credit. Furthermore, the regulator benefits, as the audit trail is available and transactions are conducted transparently in a medium that can be monitored. The economy benefits, as greater financial resources become transparently available for efficient intermediation and allocation, for uses that have the highest returns. Promoting financial inclusion can also help in the regeneration of local areas if money saved by increased access to financial services can be re-invested in the community. Inclusive finance - safe savings, appropriately designed loans for poor and low income households and for micro, small and medium sized enterprises, and appropriate insurance and payments services - can help people help themselves to increase incomes, acquire capital, manage risk, and work their way out of poverty. Increasing the inclusiveness of financial sectors, fuelled by domestic savings to the greatest extent possible, will, over time, bolster the poorer segments of the population as well as those segments of the economy that most affect the lives of poor people. Holding a bank account itself confers a sense of identity, status and empowerment and provides access to the national payment system. Therefore, having a bank account becomes a very important aspect of

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financial inclusion. While financial inclusion, in the narrow sense, may be achieved to some extent by offering a single financial service/product, the objective of comprehensive financial inclusion would be to provide a holistic set of services encompassing all of the above.

1.3 Financial Education/Financial LiteracyFinancial literacy allows people to increase and better manage their earnings - and therefore better manage their life events like education, illness, job loss or retirement. It also promotes understanding and acceptance of important political reforms, such as health care or pension reforms. While the significance of financial literacy has not yet been fully articulated and recognized by the international development community - or by policy makers and practitioners in developing countries - measures to promote and improve financial education are becoming more frequent. It has been noted that low financial literacy significantly contributes to financial exclusion in general and self-exclusion in particular. It accounts for many low-income households not using insurance and deposit services, for instance, or keeping their savings under the mattress. It prevents people from understanding how inflation affects the real value of money and what options they have to protect against erosion. Many poor people opt out of formal financial systems due to misconceptions about price of credit. Many are unaware of the best utilization of credit facilities and become over-indebted, including micro credit facilities where markets have become more competitive in recent years. Improved financial education can bridge these gaps. It can also strengthen accountability and competitiveness across financial sectors, and reduce the elite capture of community level institutions, such as cooperatives, that provide financial services to low-income people. And it can also contribute towards efficient use of public resources that are targeted to assist the poor in various ways. Thus, benefits of financial education can be enormous not only to individuals, but to society as a whole. With increased financial literacy, there will also be an increased demand for financial services from the poor, which will further assist in percolating the benefits of inclusive finance throughout every strata of the society.

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2. Initiatives for Promoting Financial Inclusion Pre 2005India has a long history of banking development. After Independence, the major focus of the Government and the Reserve Bank was to develop a sound banking system which could support planned economic development through mobilization of resources/deposits and channel them into productive sectors. Accordingly, the Governments desire to use the banking system as an important agent of change was at the core of most policies that were formulated after Independence. In order to expand the credit and financial services to the wider sections of the population, a wide network of financial institutions has been established over the years. The organized financial system comprising commercial banks, regional rural banks (RRBs), urban co-operative banks (UCBs), primary agricultural credit societies (PACS) and post offices caters to the needs of financial services of the people. Besides, MFIs, self-help groups (SHGs) also meet the financial service requirements of the poorer segments. Furthermore, development of the institutional framework in recent years has focused on new models of expanding financial services involving credit dispensation using multiple channels such as Civil Society Organizations (CSOs), non government organizations (NGOs), post offices, farmers clubs, and panchayats. Specific financial instruments/products were also developed in order to promote financial inclusion.

Overall ApproachFinancial inclusion in the Indian context implies the provision of affordable financial services, viz., access to payments and remittance facilities, savings, loans and insurance services by the formal financial system to those who tend to be excluded. Besides access, emphasis is also placed on affordability (low cost) of financial services such as savings, loan, and remittance to the underprivileged segments of the population. Although the term financial inclusion was not in vogue in India then, since the late 1960s both the Government and the Reserve Bank have been concerned about the non availability of banking facilities to the under-privileged and weaker sections of the society. Accordingly, several initiatives have been taken over time.

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The initiatives undertaken for the purpose of promoting financial inclusion in India can be broadly categorized into the following four phases. In the first phase during the early years of independent India from 1947 - 1967, the focus was on channeling of credit to the neglected sectors of the economy, especially agriculture and the spread of banking in the unbanked and rural areas. Special emphasis was also laid on weaker sections of the society. In the second phase beginning 1967 till the early 1990s, the focus was mainly on nationalization of private sector banks, the spread of banking, institution of directed credit through introduction of priority sector lending norms and setting up of Regional Rural Banks. The third phase from 1991-92 onwards till 2005 focused on improving the credit delivery system to the rural sector and SMEs.

2.1 Developments during 1947-1967The banking scenario that prevailed in the early independence phase had two distinct disquieting features. Firstly, there was large concentration of resources from deposits mobilization in a few hands of business families or groups. Banks raised funds and on-lent them largely to their controlling entities. Secondly, agriculture was neglected insofar as bank credit was concerned. However, with the advent of planning for economic development and the growing social awareness of the role of bank credit in the economy, it was felt that the then commercial bank lending system had little social content and that it aided concentration of economic power. It was felt that the system was unresponsive to the needs of the weaker sections of the economy, small industry and agriculture, as it concentrated on lending to large customers. This period also witnessed several controls such as the credit authorization scheme and selective credit controls to ensure that credit was not concentrated in the hands of a few and that it was well disbursed.

Lending to Agriculture and Spread of Banking to Rural AreasWith independence, not only did the operating environment change but policies were also geared towards planned objectives. Regulation was aligned to the attainment of these objectives. Banks were considered unique among financial institutions and were assigned a developmental role from the beginning of the planned era. The Reserve Bank assumed a unique role in this context that was occasioned by the predominantly agricultural base of the Indian economy and the urgent need to expand and co-ordinate the institutional credit structure for agriculture and rural development.

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Emergence of Administered Structure of Interest RatesThis period was difficult for monetary policy as it had to accommodate fiscal policy that was under pressure on account of two wars and a drought. The rising deficit and the accompanying inflation led to an administered structure of interest rates and several other micro controls. In early years, the Reserve Bank relied on direct control over the lending rates of banks, rather than indirect instruments such as the Bank Rate for influencing the cost of bank credit. This was generally done by stipulating minimum rates of interest. The period during 1961 to 1967 was particularly difficult for the nation. Inflation was high and at times, shortages also developed.

2.2 Developments during 1967-1991During this period, several initiatives were undertaken for enhancing the use of the banking system for sustainable and equitable growth. These included nationalization of private sector banks, introduction of priority sector lending norms, the Lead Bank Scheme, branch licensing norms with focus on rural/semi-urban branches, interest rate ceilings for credit to the weaker sections and creation of specialized financial institutions to cater to the requirement of the agriculture and the rural sectors having bulk of the poor population. The National Credit Council was set up in February 1968 mainly to assess periodically the demand for bank credit from various sectors of the economy and to determine the priorities for grant of loans and advances. The administrative framework for rural lending in India was provided by the Lead Bank Scheme introduced in 1969, which was an important step towards implementation of the two-fold objectives of deposit mobilization on an extensive scale and stepping up of lending to weaker sections of the economy. Realizing that the flow of credit to employment oriented sectors was inadequate, the priority sector guidelines were issued to the banks by the Reserve Bank to step up the flow of bank credit to agriculture, small-scale industry, self-employed, small business and the weaker sections within these sectors. The target for priority sector lending was gradually increased to 40 per cent of advances for specified priority sectors. The National Bank for Agriculture and Rural Development (NABARD) was set up in 1982 mainly to provide refinance to the banks extending credit to agriculture. RRBs, which were set up in 1975 to cater, to the credit requirements of the rural poor, were put on restructuring.

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Nationalization of Banks and Spread of BankingThe Indian banking system underwent major structural transformation after the nationalization in 1969. To address the issue of urban orientation, specific emphasis was laid on making banking facilities available in the then unbanked areas. This was executed through two definite steps, viz., by designing a specific branch license policy and by initiating specific schemes like the Lead Bank Scheme (LBS). The LBS, launched by the Reserve Bank with a view to mobilizing deposits on a massive scale throughout the country and also for stepping up lending to weaker sections of the economy, became the principal instrument for branch expansion.

Institution of Directed Credit ProgrammeDirected credit programme involving loans on preferential terms and conditions to priority sectors was a major tool of development policy in both developed and developing countries in the 1960s. An enunciation of the need to channel the flow of credit to certain sectors of the economy, known as the priority sectors with the social objectives in mind, was first discussed in India in July 1961. Banks were expected to play a more active and positive role in aiding sectors such as agriculture and small scale industries. The National Credit Council (NCC) was set up in February 1968 to assist the Reserve Bank and the Government to allocate credit according to plan priorities. The Differential Rate of Interest (DRI) Scheme was also instituted in 1972 to cater to the needs of the weaker sections of the society and for their upliftment. On the whole, scheduled commercial banks advances to agriculture, exports and small scale industries showed a significant rise, while those to industry declined. The distribution of bank credit to the agricultural sector increased from 2.2 % (end March 1968) to 15.8 % (end June 1989) whereas that for the industrial sector declined from 67.5 % to 37.5 % during the same period.

2.3 Developments during 1991-2005With the onset of economic reforms in the beginning of the 1990s, a strong and resilient financial sector was considered necessary for accelerating the growth momentum in the country and also for expanding the coverage of financial services in a sustainable manner. Accordingly, the financial sector reform process placed more emphasis on creating a strong, vibrant and

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competitive banking system. A high-powered Committee on the Financial System (CFS) was constituted by the Government of India in August 1991 to examine all aspects relating to the structure, organization, functions and procedures of the financial system (Chairman: Shri M. Narasimham). The main issues faced in this phase were (i) increase the flow of credit to agriculture and SMEs; (ii) strengthen the urban cooperative banks and resolve the issue of dual control; and (iii) bring a large segment of excluded population within the fold of the banking sector. Credit to the SME and agriculture sectors decelerated in the 1990s and early years of the current decade. Given the significance of both the sectors, concerted efforts were made by the Government and the Reserve Bank to increase the flow of credit to these sectors. The restructuring of RRBs by merging them sponsor bank wise at the state level was done to make them larger and stronger to serve as a better instrument of rural credit delivery. An important step to bring financially excluded people within the fold of formal financial sector was the promotion of microfinance in India. The SHGbank linkage programme was launched by NABARD in 1992, with policy support from the Reserve Bank, to facilitate collective decision making by the poor and provide door step banking. Banks, as wholesalers of credit, were to provide the resources, while the NGOs were to act as agencies to organize the poor, build their capacities and facilitate the process of empowering them.

Improving Credit Delivery Rural SectorNotwithstanding the impressive geographical spread, functional reach, improved credit flow to agriculture and consequent decline in the influence of informal sources of credit, rural financial institutions were characterized by several weaknesses, viz., decline in productivity and efficiency, erosion of repayment ethics and profitability. On the eve of the 1991 reforms, the rural credit delivery system was again found to be in a poor shape. In this context, it was felt that there was a need for better alignment of interest rates and mix of target and non target lending. The Reserve Bank initiated several measures to increase the flow of credit to the agriculture sector. These included (i) treating loans to storage units designed to store agricultural products, irrespective of location, as indirect credit to agriculture; (ii) treating investment by banks in securitized assets representing direct (indirect) lending to agriculture as direct (indirect) lending to agriculture; and (iii) waiver of margin/security requirement for agricultural loans up to Rs.50000 and in case of agri-business and agri-clinics

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for loans up to Rs.5 lakh. In addition, the Reserve Bank also aligned repayment dates with harvesting of crops by treating loans granted for short duration crops as an NPA, if the installment of the principal or interest thereon remained unpaid for two crop seasons beyond the due date.

Improving Credit Delivery SMEsConsequent upon the deregulation of interest rates, there was an expectation that credit flow to the needy will increase. However, credit to the SME sector decelerated in the 1990s and the first four years of the current decade. Realizing the critical role of small industries in the economy, the Reserve Bank initiated several measures with a view to increasing the flow of credit to Small Scale Industry (SSI) units. Several other measures were also initiated to increase the flow of credit to the SSI sector. These included identification of new clusters and adopting cluster-based approach for financing the small and medium enterprises (SME) sector; sponsoring specific projects as well as widely publicizing the successful working models of NGOs; sanctioning higher working capital limits to SSIs in the North Eastern region for maintaining higher levels of inventory; and exploring new instruments for promoting rural industry. Interest rates on deposits placed by foreign banks with SIDBI in lieu of shortfall in their priority sector lending obligations were restructured and the tenor of deposits was increased from one year to three years with effect from financial year 2005-06.

SHG Bank Linkage ProgrammeThe problems in the beginning of 1990s were two fold i.e. institutional structure was neither profitable in rural lending nor serving the needs of the poorest. Reaching the poorest, whose credit requirements were very small, frequent and unpredictable, was found to be difficult. Further, the emphasis was on providing credit rather than financial products and services including savings, insurance, etc. to the poor to meet their simple requirements. Therefore, need was felt for alternative policies, systems and procedures, savings and loans products, other complementary services and new delivery mechanisms, which would fulfill the requirements of the poorest. As a result National Bank for Agriculture and Rural Development (NABARD), in India, launched its pilot phase of the Self Help Group (SHG) Bank Linkage programme in February 1992.

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Since 1992, SHG-bank linkage programme has been promoting micro finance facilities to the poor. A growing component of inclusive banking is the lending by MFIs that are societies, trusts, cooperatives or not for profit companies or non banking financial companies registered with the Reserve Bank. The MFIs cover millions of borrowers and the NBFC segment within this sector is the fastest growing segment. Interest rates on lending to MFIs/NBFCs have been completely deregulated. Bank lending to such entities for microfinance is treated as priority sector lending. In India, there have been several innovative experiments with various variants of micro-finance taking into account the highly localized needs. To further promote the SHG-bank linkage programme in the country, banks were advised in 1998 that SHGs that were engaged in promoting the saving habits among their members would be eligible to open savings bank accounts and that such SHGs need not necessarily have availed of credit facilities from banks before opening savings bank accounts. Subsequent to the Monetary and Credit Policy announcement for the year 1999-2000, banks were advised that interest rates applicable to loans given by them to micro credit organizations or by the micro credit organizations to SHGs/member beneficiaries would be left to their discretion. Subsequently, banks were advised that they should provide adequate incentives to their branches for financing the SHGs and that the group dynamics of working of the SHGs may be left to themselves. The main advantage to the banks of their links with the SHGs is the externalization of a part of the work items of the credit cycle, viz, assessment of credit needs, appraisal, disbursal supervision and repayment, reduction in the formal paper work involved and a consequent reduction in the transaction costs. Though a variety of micro-finance models are followed in India, SHG-bank linkage programme is the predominant one. Along with the SHG-Bank Linkage Programme, a multi-pronged strategy was followed to promote financial inclusion which not only served better the diverse demand for financial services, but also reduced the systemic risks, increased competition, and improved efficiency. On the larger scale, a wide paraphernalia of institutional framework was established by the Reserve Bank and the Government to ensure better banking penetration and outreach so that the credit needs of agriculture and small enterprises were met while allowing sufficient flexibility to banks to evolve their own policies and strategies for the purpose.

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3. International Experiences in Financial InclusionWhile India has followed a multi-pronged strategy to promote financial inclusion, the global experience also suggests that countries that allow diversity in approaches are more likely to achieve better results. Diversity in approaches not only serves better the diverse demand for financial services, but also reduces systemic risks, increases competition, and improves efficiency. Many other countries have also followed more or less a similar approach. An interesting feature which emerges from the international practice is that the more developed a society is, the greater is the thrust on empowerment of the common person and low-income groups. The problem of financial exclusion is found even in several advanced countries. These countries have also initiated specific measures to bring financially excluded people within the fold of the banking system. The measures initiated by governments of developed as well as developing/less developed countries have been discussed below.

3.1 United KingdomThe Government of UK has been tackling financial exclusion since 1997. For example, in 1999, the Social Exclusion Units Policy Action Team 14 (PAT 14) recommended the creation of basic bank accounts. The Government worked successfully with the banks to bring these products to the market, and there are now basic bank accounts available from 17 providers. Since 2006, the Financial Inclusion Fund (FIF) has provided Growth Funding of 42 million for third sector lenders. The Fund provides capital for lending to financially excluded customers, with revenue support to meet costs. A Post Office Card Account (POCA) has been created for those who are unable or unwilling to access a basic bank account. This enables cash withdrawals at post offices but does not offer an overdraft facility. The Government is also piloting Savings Gateways schemes in which those on low-income employment will receive 1 from the state for every 1 they

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invested, up to a maximum of 25 per annum. The forthcoming Child Trust Fund (CTF), which will offer all households a fixed sum for long-term investment at the birth of their children, is hoped to be most beneficial in lower income households. Initiatives to promote financial inclusion have not been restricted to just the urban centres. As part of the Commission for Rural Communities (CRC) work to tackle disadvantage in rural areas, some good and enterprising practices in rural financial inclusion includes the NatWests mobile bank, Cumbrian Debt Rescue and Financial Advice, Ely Citizens Advice Bureau, Farm Crisis Network and many others.

3.2 United States of AmericaA civil rights law, namely Community Reinvestment Act (CRA) in the United States prohibits discrimination by banks against low and moderate income neighbourhoods. The CRA imposes an affirmative and continuing obligation on banks to serve the needs for credit and banking services of all the communities in which they are chartered. The US Community Development Financial Institution (CDFI) Fund uses Federal resources to invest in and build the capacity of CDFIs to provide capital and financial services to under-served people and communities. The Federal Reserve Systems recently redesigned financial education website, FederalReserveEducation.org, is dovetailed to increase the use of Federal Reserve educational materials and promote financial education in the classroom. It provides easy access to free educational materials, a resource search engine for teachers, and games for various ages and knowledge levels.

3.3 BrazilIn 1997, banks and regulators in Brazil created a network of "correspondents bancarios" or "banking correspondents", small outlets with extended working hours that offered basic banking services. At that time, 40 out of the 68 million economically active Brazilians had no access to formal financial services. Today, an additional 4 million have begun using banks for the first time through 27,000 banking correspondents. Under this arrangement, banks are permitted to appoint a wide variety of institutions/entities as correspondents/ agents, which are easily accessible to people, e.g., drug stores, petrol pumps, super markets, small stores in neighbourhood, post

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offices and even lottery shops. The Brazilian model is largely technology driven. The agents use kiosks or automated teller machines to accept payment, open accounts, without a cheque book facility, take small deposits, provide micro credits, and sell savings bonds and insurance.

3.4 South AfricaThe Financial Sector Charter in South Africa led to the establishment of the Mzansi account; a National no frills Bank Account (NBA). In its first year of operation itself, it garnered nearly 2 million accounts. Access to the affordable card based product is provided through a combination of existing service point outlets and physical branch outlets including own and shared ATMs, Post Offices, and merchant PoS devices. There is a money transfer service associated with the Mzansi account which makes it possible to transfer money between un-banked/banked customers from any participating bank or South Africa Post Office. All banks in South Africa are participants in this unique venture. As it is a technology intensive product, the transaction costs are very low and thus, what was thought to be as too costly to serve areas and people has become an attractive proposition.

3.5 SingaporeA sophisticated example of global payments network operating via postal banks is the Singapore Post which regards payments and remittance services, an important catalyst for enhancing financial inclusion. Singapore Posts remittance services, in partnership with banks and other financial entities in a number of countries, provides consumer loan services, insurance and investment products on behalf of banks and finance companies, offices and investment managers to Singapore residents including workers from overseas.

3.6 PhilippinesIn 2004, BSP, the central bank of Philippines sanctioned two e-money products. The first was Smart Money, product of a major commercial bank and the second was G-cash, a non-bank product whose provider was ultimately licensed as a remittance agent. The impact of these e-money products has been substantial. Some 8 million people use one or other of the two products, while the numbers of banks involved has grown rapidly. Apart from the larger commercial banks, increasing numbers of small rural banks

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has also participated in these products. Some banks have lowered interest rates, by up to 50bps/month, on microfinance loans administered via the phone repayment platform. Lower cost remittance channels have seen remittance costs fall markedly. These advances have increased financial inclusion in the country with the convergence of e-money, mobile technology and the traditional brick-and-mortar networks of financial institutions.

3.7 BangladeshThe Grameen Bank (GB) in Bangladesh has reversed conventional banking practice by obviating the need for collateral. It has created a banking system based on mutual trust, accountability, participation and creativity. GB provides credit to the poorest of the poor in rural Bangladesh, without any collateral. It offers credit for creating self-employment, income-generating activities and housing for the poor, as opposed to consumption, and provides service at the doorsteps of the poor. In order to obtain loans, a borrower must join a group of borrowers. The repayment responsibility solely rests on the individual borrower and there is no form of joint liability. Loans can be received in a continuous sequence. New loan becomes available to a borrower if his/her previous loan is repaid. All loans are to be paid back in instalments (weekly or bi-weekly). GBs success can also be gauged from the fact that it has 7.46 million borrowers in Bangladesh alone and has grown into over 2 dozen enterprises represented by the Grameen Family of Enterprises. Grameen Foundation not only provides microloans in the USA itself but also supports microfinance institutions in Asia-Pacific, America and Africa.

3.8 KenyaRecent international experience indicates that micro savings are as important as micro credit. Moving in this direction, Equity Building Society in Kenya has developed the Jijenge Savings Account, a contractual savings product with an emergency loan facility. The client defines the length of the contract and the periodicity of the deposits, which could be weekly or monthly. A premium interest rate is offered to those who take out longer term contracts and there are significant penalties for premature withdrawals. All Jijenge savings account holders have guaranteed immediate access to an emergency loan of 90 percent of the amount in their Jijenge savings account. As well as providing a disciplined way to save, this product allows clients to meet their "illiquidity" preference and protects their savings against the demands of petty spending

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or "marauding relatives". The account is already proving extremely popular with existing as well as new clients. Commercial Bank of Africa in conjunction with local mobile operator Safaricom has enabled mobile subscribers to make micro payments from mobile phones. The majority of the people in Kenya do not hold bank accounts but purchase prepaid mobile refill cards. The technology allows settlement of bills by building up credit balance on the mobile phone and sending text message to make payments. The above discussed cross country experiences show that there has been several innovative experiments worldwide to promote financial inclusion with special emphasis on creating demand through diversified credit instruments, outreach considerations, sustainability aspects, delivery mechanisms among others. Although these international experiences come with their own merits and demerits, the initiatives undertaken in India (to be discussed in subsequent chapters) are unique in nature, formulated with due consideration to the diverse socio-economic conditions prevailing in the country.

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4. Initiatives for Promoting Financial Inclusion 2005 OnwardsThe objective of bringing financially excluded people within the fold of the banking sector received renewed emphasis in 2005-06 as the term financial inclusion was explicitly used for the first time in the Annual Policy Statement for 2005-06. It observed that there were legitimate concerns in regard to the banking practices that tended to exclude rather than attract vast sections of population, in particular pensioners, self-employed and those employed in the unorganised sector. It also indicated that the Reserve Bank would (i) implement policies to encourage banks which provide extensive services, while disincentivising those which were not responsive to the banking needs of the community, including the underprivileged; (ii) the nature, scope and cost of services would be monitored to assess whether there was any denial, implicit or explicit, of basic banking services to the common person; and (iii) banks urged to review their existing practices to align them with the objective of financial inclusion. The recent approach focuses on financial inclusion on the individual and household level. The important difference in the recent focus on financial inclusion is the adoption of market oriented approach that recognises the importance of business consideration of banks and other financial institutions for the long-term sustainability of the process.

4.1 MicrofinanceOf the different models for delivery of microfinance, the SHG-Bank Linkage Programme has emerged as the major micro-finance programme in the country. It is being implemented by commercial banks, RRBs and cooperative banks. As on March 31, 2008 3.6 million SHGs had outstanding bank loans of Rs.17000 crore, an increase of 25 per cent over March 31, 2007 in respect of number of SHGs credit linked. As at end-March 2008, SHGs had 5 million savings accounts with banks for Rs.3785 crore. Based on the findings of a joint study conducted by the Reserve Bank along with a few major banks, the banks were advised in November 2006 to encourage microfinance institutions (MFIs) assisted by them to (i) focus on

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unbanked and underbanked areas; (ii) desist from multiple lending; (iii) engage in capacity building and empowerment of the groups; and (iv) follow practices that maintain the cohesiveness of the groups. This led to banks financing NGOs/MFIs for on-lending under micro-finance. As on March 31, 2007, the number of MFIs that had outstanding bank loans was 550 amounting to Rs.1585 crore. Recognising the potential of microfinance to positively influence the development of the poor, the Reserve Bank has advised commercial banks that micro credit should cover not only consumption and production loans for various farm and non-farm activities of the poor, but also include their other credit needs such as housing and shelter improvements. A Micro Financial Sector (Development and Regulation) Bill, 2007, which envisages the regulation of the sector, is currently under consideration of the Parliament.

4.2 No-Frills AccountsThe Reserve Bank reiterated the concerns of financial inclusion in its Midterm Review of Annual Policy Statement for 2005-06. All banks were advised in November 2005 to make available a basic banking no-frills account either with nil or very low minimum balances as well as charges that would make such accounts accessible to vast sections of population. The nature and number of transactions in such accounts could be restricted, but made known to the customer in advance in a transparent manner. All banks were also advised to give wide publicity to the facility of such a no-frills account including on their web sites indicating the facilities and charges in a transparent manner. Significant progress has been made in this regard, and till now, banks have opened more than 15 million no-frills accounts in the country. As announced in the Annual Policy Statement for the year 2008-09, and in order to give further impetus to financial inclusion, banks were advised in May 2008 to classify overdrafts up to Rs.25000 (per account) granted against no-frills accounts in rural and semi-urban areas as indirect finance to the agriculture sector under priority sector with immediate effect.

4.3 Relaxation of KYC NormsThe Reserve Bank in its Annual Policy Statement for 2005-06, emphasised that banks should empower depositors by providing wider access and better quality of banking services. Furthermore, banks were advised in August 2005

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to ensure that customers belonging to poor sections of the society are not kept away from banking system, on account of difficulties in meeting the KYC requirements for opening bank account. The KYC procedure for opening accounts was simplified further for persons who intend to keep balances not exceeding Rs.50000 in all their accounts taken together and the total credit in all the accounts taken together is not expected to exceed Rs.1 lakh in a year. The customer is allowed to exceed the threshold limit only after the full compliance with the KYC norms. Based on feedback received on the extant KYC/AML/CFT regime, relevant guidelines were revised on February 18, 2008. These guidelines include among others (i) in case of close relatives who find it difficult to furnish documents relating to place of residence while opening accounts, banks can obtain an identity document and a utility bill of the relative with whom the prospective customer is living, along with a declaration from the relative that the said person (prospective customer) wanting to open an account is a relative and is staying with him/her. Banks can also use any supplementary evidence such as a letter received through post for further verification of the address; (ii) banks have been advised to keep in mind the spirit of the instructions and avoid undue hardships to individuals who are otherwise classified as low risk customers; (iii) banks should review the risk categorization of customers at a periodicity of not less than once in six months.

4.4 Kisan Credit CardsThe KCC scheme enabling farmers to purchase agricultural inputs and draw cash for their production needs was further extended by providing personal accident insurance coverage on an ongoing basis at competitive rates/terms, thus safeguarding the interest of the KCC holders. Banks have been given the discretion to approach either any general insurance company which is a member of GIPSA (General Insurers [Public sector] Association of India) or any private sector general insurance company, to take advantage of the competitive offers. However, the banks have been advised that they may, while negotiating with the insurers, keep in mind the guiding principles of Personal Accident Insurance Scheme (PAIS), especially the aspects such as premium sharing formula and coverage. This add on benefit is expected to bring in an increasing number of farmers under the KCC fold, thereby leading to complete coverage. The cumulative number of KCCs issued by public sector banks aggregated 31.22 million (provisional) up to March 31, 2008 involving an amount of Rs.1.54 crore.

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4.5 General Purpose Credit CardsWith a view to providing credit card like facilities in the rural areas, with limited point-of-sale (POS) and limited ATM facilities, the Reserve Bank advised all scheduled commercial banks, including RRBs, in December 2005 to introduce a General Credit Card (GCC) facility without insistence on collateral or purpose, with a revolving credit limit up to Rs.25000 based on the assessment of income and cash flow of the household to enable hassle free access to credit to rural and semi-urban households. The Reserve Bank also advised banks to classify fifty per cent of the credit outstanding under loans for general purposes under General Credit Cards (GCC), as indirect finance to agriculture under priority sector. The Reserve Bank further advised banks in May 2008 to classify 100 per cent of the credit outstanding under GCCs as indirect finance to agriculture sector under the priority sector with immediate effect.

4.6 Use of Intermediaries as AgentsWith the objective of ensuring greater financial inclusion and increasing the outreach of the banking sector, banks have been allowed to use the services of NGOs/SHGs, MFIs and other civil society organisations as intermediaries in providing financial and banking services through the use of business facilitator and correspondent models. The BC model allows banks to do cashin/cash-out transactions at a location much closer to the rural habitation, thus addressing the last mile problem. Banks are also entering into agreements with India Post for using the vast network of post offices as business correspondents, thereby increasing their outreach and leveraging on the postmans intimate knowledge of the local population. Banks have also been permitted to engage retired bank employees, exservicemen and retired government employees as BCs with effect from April 24, 2008, in addition to the entities already permitted, subject to appropriate due diligence. While appointing such individuals as BCs, the Reserve Bank advised banks to ensure that these individuals are permanent residents of the area in which they propose to operate as BCs and also institute additional safeguards as may be considered appropriate to minimise agency risk. With a view to ensuring adequate supervision over the operations and activities of the BCs, the Reserve Bank advised banks that every BC should be attached to and be under the oversight of a specific bank branch to be designated as the base branch. The distance between the place of business of a BC and the base

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branch, ordinarily, should not exceed 15 kms. (further extended to 30 kms. from April 2009) in rural, semi-urban and urban areas. In metropolitan centres, the distance could be up to 5 kms. However, in case a need is felt to relax the distance criterion, the matter can be referred to the District Consultative Committee (DCC) of the district concerned for approval.

4.7 Financial Literacy and Credit CounsellingRecognising that lack of awareness is a major factor for financial exclusion, the Reserve Bank has taken a number of measures towards imparting financial literacy and promotion of credit counselling services. The Reserve Bank has undertaken a project titled Project Financial Literacy to disseminate information regarding the central bank and general banking concepts to various target groups, including, school and college going children, women, rural and urban poor, defence personnel and senior citizens. It would be disseminated to the target audience with the help of, among others, banks, local government machinery, schools/colleges using pamphlets, brochures, films, as also, the Reserve Banks website. The Reserve Bank has also created a link on its web site For the Common Person to give him the ease of access to information, in Hindi, English and 11 regional languages (Assamese, Bengali, Gujarati, Kannada, Malayalam, Marathi, Oriya, Punjabi, Tamil, Telugu and Urdu). A Financial Education site link on the Reserve Banks website was launched on November 14, 2007, mainly aimed at teaching basics of banking, finance and central banking to children in different age groups. The comic books format has been used to explain the complexities of banking, finance and central banking in a simple and interesting way for children. In May 2007, convenor banks of the SLBCs/UTLBCs were advised to set up, on a pilot basis, a Financial Literacy and Credit Counselling Centre (FLCC) in any one district in the State/Union Territory coming under their jurisdiction. The objectives of the FLCCs are to provide free financial literacy/education and credit counselling - educating people in rural and urban areas with regard to various financial products and services available, providing face-toface financial counselling services, and formulating debt restructuring plans for borrowers in distress and recommending the same to formal financial institutions for consideration. FLCCs should not, however, act as investment advice centres. In rural areas, the centres could concentrate on financial literacy and counselling for farming communities and those engaged in allied activities while the centres in metro/urban areas could focus on individuals

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with overdues in credit cards, personal loans, housing loans, etc. among others. So far, banks have reported setting up or proposing to set up 123 credit counselling centres in various states of the country.

4.8 Setting up of RUDSETIsThe Reserve Bank has issued guidelines, framed by the Government of India, to the SLBC convenor banks to set up at least one Rural Development and Self Employment Training Institute (RUDSETI) in each district by 2010. These institutions will train at least one youth in a family below poverty line (BPL) in various fields and enhance capacity building. In all, 134 RUDSETIs have been set up as on December 31, 2008. A target for opening of 100 RUDSETIs by banks was set for the year 2008-09 and a grant of Rs.1 crore per RUDSETI has been earmarked by the Planning Commission for setting up the institutes. The Regional Offices of the Reserve Bank have been advised to monitor the progress of setting up of RSETIs under their jurisdiction on a quarterly basis.

4.9 Establishment of FIF and FITFIn order to meet the costs of technology adoptions, developmental and promotional interventions for ensuring financial inclusion, the Union Finance Minister, in his Budget Speech for 2007-08 announced the constitution of the Financial Inclusion Fund (FIF) and the Financial Inclusion Technology Fund (FITF), with an overall corpus of Rs.500 crore each at NABARD. The FIF/ FITF would be in operation until financial inclusion to the extent of 100 per cent of rural families in all districts is achieved, over a period of five years from the date of commencement of the Fund or for such enhanced period as may be decided by the Government. The FIF would be used for activities such as funding support for capacity building inputs to BCs/BFs; providing promotional support to institutions such as resource centres, farmers service centres and RUDSETIs; providing funding support for promotion, nurturing and credit linking of SHGs; funding support for setting up of Rural Credit Bureaus and credit rating of rural customers; and supporting pilot projects for development of innovative products, processes and prototypes for financial inclusion. The FITF would be used for purposes such as providing financial support to technological solutions aimed at providing affordable financial services to the disadvantaged sections of the society; creating a common technology infrastructure with comprehensive credit information; providing viability

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gap/pilot project funding for unproven but potential technological interventions; and conduct of studies, consultancies, research, evaluation studies relating to technological interventions for financial inclusion.

4.10 Other measuresThe Reserve Bank has continued with its endeavour to improve credit delivery through its various measures. The revised guidelines on priority sector lending which became effective from April 30, 2007 have given special emphasis on agriculture, small enterprises, micro credit, retail trade, education loans and housing loans up to Rs.20 lakh. There has been significant improvement in the credit flow to the agriculture with the implementation of the Advisory Committee on Flow of Credit to Agriculture and Related Activities from the Banking Systems recommendations; provision of assistance packages to the distressed farmers of Maharashtra and Andhra Pradesh; and the more recently developed Agricultural Debt Waiver and Debt Relief Scheme (ADWRS), 2008. Sections of population employed in the MSME sector have also benefited with the formulation of the debt restructuring mechanism for small and medium enterprises and enactment of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. Under the government sponsored schemes such as the SGSY, SJSRY and SLRS, a total number of 1,505,944 beneficiaries received bank credit during the year 2007-08 amounting to Rs.1523.64 crore. The beneficiaries of the above schemes included women, physically challenged persons, SC/STs and OBCs. Assistance under the PMRY scheme as on March 2008 amounted to Rs.1746 crore for 234,165 beneficiaries. The Government of India has decided to merge PMRY with REGP to form a new scheme viz. Prime Ministers Employment Generation Programme (PMEGP). Efforts to promote financial inclusion have so far yielded good results with a large number of people having been brought within the banking fold. The momentum gained in respect of micro-finance through SHG-bank linkage programme, the largest of its kind in the world, would also be maintained. In future, greater emphasis would be placed on leveraging technology through a multiagency approach, which would not only expand banking outreach but also reduce the transaction costs and make the process of financial inclusion sustainable.

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5. Role of ICT in Enabling Financial InclusionThe use of Information and Communication Technologies (ICT) solutions for providing banking facilities at the doorstep holds the potential for scalability of financial inclusion initiatives. To be able to ensure that the challenges of banking the unbanked are met effectively and converted into growing and sustainable business for banks, there is no alternative to adoption of ICT solutions on a very large scale and range. ICT solutions capture customer details, facilitate unique identification, ensure reliable and uninterrupted connectivity to remote areas, offer multiple financial products through the same delivery channel, develop comprehensive and reliable credit information system, develop appropriate products tailored to local needs and segments, provide customer education and counseling, enable use of multimedia and multiple languages for dissemination of information and advice. Technology can play an important role in reducing operating cost of providing banking services, particularly in the rural and low income groups segments. There are three broad types of technologies that have been identified to drive the growth of financial services. These are (i) pro-poor new information and communication technology, primarily low-cost cell phones; (ii) ATMs and other point of sales devices; and (iii) smart plastic card.

5.1 ICT Solutions and Technology EnablersThe centralised data processing system and the non-conventional methods based on computer systems, which do not require uninterrupted electric supply and radio frequency network, can significantly reduce the cost of extending financial services. Mobile phone-based services can be provided using various available connectivity technologies, each one of which has its own pros and cons (Table 5.1). However, the extent to which technology will be integrated into the financial service industry at the low end will depend on supportive government policies and the quality of the infrastructure, particularly in rural areas. While self-service solutions like ATMs, PoS and mobile phone applications are

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readily available and have been deployed widely in the country, financial Table 5.1 Pros and Cons of Various TechnologiesConnectivity Short Message Service (SMS) Pros Easier to build applications Already a popular medium to communicate Billing activities can be automated by tight integration with operators systems Provides ability to build advanced features User interacts with a well designed user interface (UI) and does not require training Can integrate seamlessly with e-commerce scenarios Cons Still unreliable delivery of message is not guaranteed Requires user to remember codes/ keywords Data size per message is restricted to 160 characters Multiple SMS based transactions can cause user resistance GPRS in particular requires separate hardware and is not present wherever GSM connectivity is available Both in turn do not have a pan India presence CDMA requires specialised skillset which is not widely available

General Packet Radio Service (GPRS) / Code Division Multiple Access (CDMA)

Handset Technologies Subscriber Identity Module (SIM) Toolkit Ensure availability of application as and when customer buys a new SIM Operator is closely associated with the mobile banking project, hence the delivery of service is easy Operator independent Development skillset is widely present for GPRS Ability to deliver better features and UI Requires operators assistance in replacing existing SIM cards Operator lock-in for banks Technology may not be interoperable in multiple operator scenarios

Mobile Application Development

Development skillset is rare for CDMA Data security is a concern

Emerging Technologies Near Field Communication (NFC) Mobile Phone as a device Ease of use Experience similar to credit card usage Round the clock availability with customer More handsets, than bank accounts Still in nascent stages. Mobile phones still costly Not built for mobile transactions Compared to PoS/ATM devices which are built and certified for banking activities

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inclusion presents some unique challenges. Low levels of literacy, the high number of languages spoken and poor infrastructure, for example, require enabling technologies to bring self-service closer to the unbanked population. Biometric Recognition eliminates the need for a personal identification number (PIN). It authenticates the user by scanning a thumb impression or retina of the account holder. Biometrics is an important enabler when reaching out to the illiterate and semi-literate population that avoids banking due to fear of technology and security concerns. Interactive Voice Response Services (IVRS) are software-based solutions that relate the transaction process in a synthesized voice format and guide a customer through the entire transaction flow. In India, this has obvious and immediate benefits as a large section of the population cannot read or write. Multilingual Software: There are about 1600 languages spoken in India and, according to the countrys constitution there are 22 official languages of communication. This creates a complex environment for the consistent delivery of any service. As an extension of IVRS, multilingual software provides a navigation solution in multiple languages, overcoming regional barriers, communication issues and illiteracy. Graphical User Interfaces (GUIs) as part of the navigation process helps to guide a user through a transaction by providing an intuitive set of graphical images or pictorial references instead of words. For Indias poor and illiterate, GUIs increase confidence in performing a transaction and thereby encouraging adoption of new technology. GUIs can also help to eliminate transactional errors through step-by-step guidance. Wireless Connectivity: Every month, nine million new Indians subscribe to a mobile service. The growing wireless networks provide an excellent platform to reach out to the financially excluded population in the diverse and remote regions of the country. Mobile banking applications can deliver banking facilities to the financially excluded population at low costs. For a geographically divided country like India with the growing rate of mobile connectivity, banking through mobile phone presents a strong future for technology enabled financial inclusion. Internet Connectivity: A persons usage of Internet banking basically depends on access to Internet through computer or mobile phone either at home or in the office. In most of Asia, where home computer penetration is much lower 15.3 percent, access to the internet, is

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increasing via the wireless mobile phone networks. Nevertheless, Indias internet penetration is barely more than five percent and it is difficult today to see the internet by itself being a key self-service enabler for eliminating exclusion and bridging the divide.

5.2 Initiative by the Govt. of Andhra PradeshThe Rural Development Department of Government of Andhra Pradesh launched a pilot project in Warangal District for payment of Social Security Pensions (SSP) and National Rural Employment Guarantee Scheme (NREGS) benefits to the beneficiaries. The project involves payment through BCs with the use of smart card and mobile technology. The BC uses a fingerprint scanner cum identifier, a mobile and a printer to process the payments. The beneficiaries hold smart cards with their photographs and images of their fingerprints pre-loaded at the time of their enrolment. The photograph and fingerprint are used for identification and authentication of the beneficiary. Once authenticated, the RFID chip embedded in the card gets charged. When the card with charged chip is brought close to the mobile phone, message templates for deposit, withdrawal and balance enquiry are generated in the mobile. The BC needs to select the relevant option and feed the amount of transaction through the mobile keypads and send the message to the back-end server. The server authenticates the message, processes the transaction and sends an update back to the mobile, which, in turn, writes back to the card. When the card is brought close to the printer, transaction report is printed in triplicate. The BC carries cash physically for making payments to the beneficiary. Thus, in effect, each BC carries a pocket ATM to the village in which it operates. The mobiles connect to a central data base server of the banks. The application has an off-line model also, which enables its operation in remote areas where there is no connectivity. Presently, the SSP and NREGS benefits are being paid through post offices which are given a commission of 2 per cent. The State Government, for the initial pilot agreed to pay Rs.90 per smart card, Rs.10000 per hand held device and 2 per cent commission on transactions, with the Government agreeing to meet a part of the infrastructure costs to kick start the project. The banks pay Rs.1000 to the village organisation member in the village who is the representative of the BC of the bank. The cost of cards is a one-time exercise and enrolment of beneficiaries also involves an expense of Rs.50 per person in addition to the card cost.

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The technology holds potential for a whole range of activities that banks can conduct through BCs and this includes other products like fixed deposits, various loans, and insurance, among others. Thus, this model is very likely to gain acceptance when more products of the banks are routed through them.

5.3 State Bank of India Tiny InitiativeSBI launched a project in Nov-Dec 2006 on making available banking facilities to the excluded people of Aizwal, Pithoragarh and Medak in the states of Mizoram, Uttarakhand and Andhra Pradesh respectively. SBI appointed a NGO named Zero Mass as its business correspondent (BC). Each village is served through a SBI-Tiny CSP, who is a BC. The CSP is the face of BC in the village, a banking outpost delivering banking services to the customers. The process of enrollment of beneficiaries for issue of smart cards begin with the distribution of enrolment forms by the CSPs. Prospective customers come to the CSP with filled forms, the CSP collects the forms, enters the data in a personal computer, captures one photo and two fingerprints of each customer. The collected forms are sent to nearest SBI branch for approval and enrolment data are sent to card production centre. The printed cards are dispatched to the CSP and the CSP hands over card to the customer after verifying the fingerprint and photo. The cards store extensive identity profile including bio-metric finger print data, multiple accounts, last known balance and history of recent transactions. The BC carries portable equipment - NFC mobile, fingerprint unit and transactions printer - which operate on portable battery with a stand-by time of up to 10 days. Customer identification takes place by matching of photo and fingerprint. The fingerprint unit matches the fingerprint on the card with client fingerprint. Once authenticated, the process followed is the same as in the case of Andhra Pradesh State Government (discussed in previous section 5.2). The BC keeps working capital in an aggregator account in a SBI core banking branch and carries cash physically for making payments to customers. The available services include savings product (SBI-Tiny no-frills pre-paid account), microcredit, micro-insurance, cash withdrawal and can be used for routing Government payments too.

5.4 Cost ConsiderationsIT-enabled financial inclusion models can be acquired at relatively low costs. A smart card is estimated to cost around Rs. 100 and a terminal with the BC

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between Rs.10000 to Rs. 20000 depending upon its features and accessories like printers. The cost of the central processor would depend upon the configuration which in turn is dependent upon the number of accounts, types of accounts, number of transactions, type of reports etc. As compared to the cost of establishing and operating a physical bank branch in a rural area, the system would be extremely cost effective. It will extend outreach at the doorstep of the farmers, handle even small size transactions, is capable of being operated by persons having local presence and feel, have necessary checks and balances to avoid frauds, protect the interest of depositors and help expand the volume of business for the bank. The experience of many banks in India suggests that the appropriate use of information technology can help in reducing the cost of providing financial services and make it operationally viable to expand the coverage of financial services. The appropriate technology combined with an effective use of banking correspondents has the potential of creating a banking outpost/ATM in every village, as has been observed in the case of Andhra Pradesh, which has successfully implemented mobile phone technology for providing banking services in remote areas in coordination with the Reserve Bank and IDRBT. There are several other instances where it has been observed that technology has the potential to overcome the problem of high operating cost. The need, therefore, is to increase the use of technology to expand the outreach in the hitherto untapped areas. A wide range of technologies is available. Financial inclusion offers a huge potential for business in terms of resources and assets. However, while selecting a technology, banks need to ensure that the solutions are highly secure and amenable to audit. It must have widely accepted open standards to ensure eventual inter-operability among the different systems as was highlighted in the Reserve Banks Annual Policy Statement for 2007-08.

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6. Survey on Extent of Financial InclusionSubstantial literature on financial inclusion in India with particular reference to groups with low incomes is very much available. Although various organisations especially NGOs, are working with people who are especially vulnerable to financial exclusion, significant changes on a much wider and larger scale can be brought about only by giving special emphasis to financial inclusion by Indian policy makers and practitioners. In order to address the needs of these underserved sections of the population, a number of financial inclusion initiatives have been launched by the Reserve Bank of India. Since these initiatives are relatively recent and remain at the early stages, our survey aims at evaluating the impact of these very initiatives in the sphere of financial inclusion.

6.1 ObjectivesThe broad objectives of conducting the survey are as follows: (i) To identify the extent and nature of financial inclusion in and around Ranchi; (ii) To understand the drivers of financial exclusion/inclusion; (iii) To determine the level of awareness of people in various financial products and interest in undergoing courses in financial inclusion; (iv) To assess further thrust needed to achieve 100 percent financial inclusion so as to enable appropriate policy modifications; and (v) Finally, to hear from the very people for whom various financial inclusion initiatives have been launched, what they think and what needs to be done by government agencies to make them financially included.

6.2 MethodologyPrimary data collected from 160 randomly selected households have been analysed and the results interpreted in this chapter. Households have been selected both in urban as well as rural areas, and a comparison has been drawn. Survey of urban areas have been conducted both inside and outside of bank premises which include ICICI Bank, Ranchi Main Road; PNB, Mahavir Chowk; SBI, Pandra; Pandra Krishi Market and Mesra all lying in rural and urban areas of Ranchi. We also visited the under-developed Gumla district for

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the purpose, for it being more prone to financial exclusion, as also has been brought out by our survey. We looked at various aspects of financial inclusion. One was the savings side where we tried to assess the number of households having/not having a bank account, the type of account, the reasons behind opening an account as well as reasons behind not having such an account, and the awareness among people on the recently launched initiative of no-frills accounts. On the borrowing side, we identified households which have ever availed of loans whether from institutional or non-institutional sources, their reasons of availing a one and whether they have ever been refused credit and on what grounds. We also looked at other financial products (mainly insurance) and services (mainly credit counselling) as well as financial education being provided by organisations and the financial services sector. The survey questionnaire employed is provided in Annexure I.

6.3 Major findings from the survey(i) Sample Data: Total number of households surveyed: 160 Urban households: 82 Rural households: 78 (ii) Households having at least one bank account: Out of the 82 urban households surveyed, 78 % of households were having a bank account whereas in case of rural households, it was a mere 41 %. More than half of the rural respondents, i.e. 59 % were not having any bank account. This reinforces the belief that financial exclusion is widespread in rural areas than it is in the urban ones.Fig 6.1 Urban HouseholdsHouseholds with a bank account 78% Households without a bank account 59%

Fig 6.2 Rural Households

22%

41%

Households with a bank account Households without a bank account

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(iii) Number of accounts in a household: The graph (Fig 6.3) below shows the % of households having one, two, three and more than three accounts in urban as well as rural areas. Out of the 78 % urban households and 41 % rural households who were having a bank account, 66 % urban households were having two or more than two accounts. On the other hand, 75 % rural households were having just one account. This observation should serve as a caution before we declare that 100 % financial inclusion has been achieved. It has to be ensured that there is no duplicity of accounts when we are taking into comparing the number of accounts and the number of households. It has to be ensured that each household has at least one bank account, rather than simply dividing the total number of bank accounts and the total number of households to obtain a somewhat misleading ratio. In the figure below, it may be seen that, whereas in urban areas, households with one, two or three accounts are relatively uniform, in case of rural households there exists a large variation. Moreover, in case of rural households, there exists not even a single household surveyed with more than three accounts. This clearly brings to light that there exists a section of people in urban areas who are super included having more than three accounts. In fact, we encountered a few households having double the number of accounts than the number of members in the family. Also there were households having one account each for the adult members as well as the children in the family. The accounts include savings, current, recurring as well as fixed deposit ones, but excludes accounts maintained in post offices. This highlights that, while financial deepening already exists in urban centres, financial widening is what needs to be achieved, especially in rural areas.Fig 6.3 Number of accounts in a household80 70 60 50 40 30 20 10 0 75

% of households

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33 19 19 6 1 2 3 Urban 14 0 More than 3 Rural

Number of accounts

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(iv) Households having a bank account with cheque book facility: In urban areas, out of total number of households having a bank account only 44 % were having a cheque book facility, whereas in rural areas, it comes out to be a mere 12 %. This disparity may be due to the fact that rural households generally deal in cash transactions and cheque books are not accorded much importance. High illiteracy rates among rural households can also be a contributing factor. (v) Reason behind households opening a bank account: The graph (Fig 6.4) below shows the various reasons behind opening of accounts in rural and urban areas. In rural households, while few have opened accounts for the sole purpose of receiving NREGS payments, there is hardly such a household to be found in urban areas, which is quite obvious when seen from the context of the place of implementation of such programs. When it comes to receiving remittances, rural households are ahead of their urban counterparts, since many men folk have migrated to the cities in search of work and continue remitting money from their work places. Moreover, urban households seem to be more aware of saving money than rural ones, which may also be because of their higher earning incomes. That urban households are more inclined in availing credit from institutional sources is reflected in their opening accounts just for requesting a loan. While it is 7 % in case of urban households, the same is just 3 % for rural ones.

Fig 6.4 Reasons behind households opening a bank accountTo receive Govt payments from NREGP To receive Govt payments from other schemes For receiving remittances For saving money To request a loan Others

0

7 5 3 12 30 49 3 7 6 8 20 30 40 50 60 70 80 70 Rural Urban

0

10

% of households

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(vi) Reasons for not having a bank account: For a vast majority of households not having bank accounts, for 63 % of urban respondents and 72 % of rural respondents, the sole reason was they had no or little money to put in. Since the areas we surveyed were having at least one bank branch in their vicinity, so there were no respondents complaining of not having an account because of absence of a bank branch in their area. Although no one said they were not having an account as they thought it not important to them, there were many instances (17 % in urban and 20 % in rural) where people were put off just because of anticipated rejection, lengthy processes and the pre condition of maintaining a minimum balance in the accounts. (vii) Reasons for being refused a bank account: As pointed out by the respondents, the primary reason for being refused of a bank account was their lack of identity proof. Lack of legal identities like identity cards, birth certificates, etc came out as the major reason resulting in exclusion of women and especially migrant workers who are most likely not to have an address proof. There were also people complaining that their application forms were outright rejected without bank authorities offering any explanation. This comes not as a surprise considering the indifferent attitude of officials towards the disadvantaged groups, whom they do not consider a viable business opportunity. (viii) Awareness regarding no-frills account: Awareness on no-frills account was limited to a handful of 4 to 5 people we surveyed. This finding is consistent with our observation of the different banks we visited, where we did not come across any notice or poster giving information on no-frills account. Even if it was present it was not an eye catching one, not to the eyes of a person seeking one, let alone to one who is unaware of any such scheme. In one of our visits, replying to our query on whether any notice on no-frills account was put up inside the bank premises, we were pointed to a more than 30 page thick booklet placed near the notice board. And the supposedly easy task of finding the word no-frill in the booklet was achieved not by us, but by the banks manager who consulted the contents table and finally brought out the page where a two line note on no frill account was mentioned. If this is the scenario prevailing in and around Ranchi, we can fairly estimate

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the situation in far flung areas of a State like Jharkhand with large tracts of areas populated with tribal sections. With bank employees adopting such an indifferent and insensitive attitude towards the needs of the disadvantaged groups, there is no doubt the scheme will take an indefinite period to take off in a full blown manner. (ix) Sources of availing loans for households: Of the 82 urban households surveyed, only 40 % had availed credit from institutional and non-institutional sources. In case of rural households, the percentage was 62 % but the majority was from non-institutional sources. The graph (Fig 6.5) below shows the different s