Financial Inclusion - Yet Another Ritual or Tool for Integrated Development?

8/14/2019 Financial Inclusion - Yet Another Ritual or Tool for Integrated Development?

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Financial Inclusion in India Yet Another

Ritual or An Integrated Tool for Poverty

Alleviation?Prof Chowdari Prasad

Alliance Business School, Bangalore

December 30, 2008

atInternational Conference on

Better Business Practices for Sustainable SocialChange Organised by JKSHIM, Nitte, India and

School of Social Policy and Practice,University of Pennsylvania, USA


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03/30/09 JKSHIM, Nitte, India 2

Millennium Development Goals

More than one billion people struggle tosurvive on less than one dollar a day. Anothe2.7 billion live on less than two dollars a day

In 2000, 147 nations (UN) agreed that, together,the citizens of the world must work to put an endto severe poverty by 2015. They drafted eight

important goals which, when achieved, willimprove the lives of the three billion people livingin dire poverty


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The Eight Goals

Eradicate Extreme Poverty and Hunger Achieve Universal Primary Education Promote Gender Equality and Empower

Women Reduce Child Mortality Improve Maternal Health Combat HIV/AIDS, Malaria and Other

Diseases Ensure Environmental Sustainability and Develop a Global Partnership for Development


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World Savings Bank Institute

Only global representative of savings and retailbanks

Founded in 1924, represents savings and retail

banks and associations in thereof in 86 countriesof the world (Asia-Pacific, the Americas, Africaand Europe via the European Savings BanksGroup)

At the start of 2005, assets of member banksamounted to more than 7,506 bn Euros


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UNO : International Year ofMicro Credit - 2005
http://www.uncdf.org/english/microfinance/yom.php


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http://www.uncdf.org/english/index.phphttp://www.undp.org/


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Financial Inclusion & Development indicator

Recent data shows that countries with large proportion of population

excluded from the formal financial system also show higher povertyratios and high inequality.

Country Composite index of financial inclusion(percent of population with access tofinancial services)

Poverty (percent of populationbelow poverty line)

India 48 28.6 (1999-00)

Bangladesh 32 49.8(2000)Brazil 43 22.0(1998)

China 42 4.6(1998)

Indonesia 40 27.1(1999)

Korean Republic 63

Malaysia 60 15.5(1989)

Philippines 26 36.8(1997)

Sri Lanka 59 25.0(1995-96)

Thailand 59 13.1(1992)

Source : World Bank (2006) and (2008)


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The Dimensions of theChallenge in India

1. Area - 3.3 million squarekilometers

2. Population - 1 billion +3. GDP ~ US$3.9 trillion4. Annual Growth rate 8.5 to 9%

last 5 Years5. Total number of banks in

operation in country - 300+6. Total number of bank branches

in country 76,000 +

7. Unbanked Population: 400Million !


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37.7% of Indian households do not haveaccess to a nearby water source

49% do not have a proper shelter

69.5% do not have access to suitable toilets

85.2% of Indian villages do not have asecondary school and

43% of Indian villages do not have an all-weather road connecting them

The bare truth


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WHAT IS FINANCIAL EXCLUSION?

Financial

Exclusion

No

SavingsNo

InsuranceNo

assets

No bank

accountNo access to

money advice

No affordable

credit


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Financial Exclusion and AlliedPhenomena

Financial

Exclusion

Financial

Exploitation

Financial

Discrimination

Financial

Illiteracy


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Who are Financially Excluded

1. Poor

2. Socially under-privileged

3. Disabled

4. Old as well as children

5. Women

6. Uneducated

7. Ethnic Minorities8. Un-employed


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Financial Inclusion - Definition

The process of ensuring access toThe process of ensuring access tofinancial services and timely andfinancial services and timely andadequate credit where needed byadequate credit where needed byvulnerable groups such as weakervulnerable groups such as weakersections and low income groups at ansections and low income groups at anaffordable cost. - NABARDaffordable cost. - NABARD


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Financial Inclusion

Credit Cards

Bank A/Cs -Savings

Empowerment

of SHGs

Insurance

Lack of

Assets (for

Collateral)

Affordable CreditFinancial

Advice

Payments +

Remittances

Financial Inclusion : The Indian Perspective


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1904 - Cooperative Societies Act

1954 - Rural Credit Survey Committee

1955 - State Bank fo India created for rural penetration

1969 - 19 Commercial Bank Nationalised, All India Rural

Credit Review Committee

1970 - Lead Bank Scheme - States/Districts

1975 - Regional Rural Bank - Hybrid banks

1981 - 6 more Commercial Banks nationalised

1992 - SHG - Bank Linkage Programme

2001 - Kisan Credit Card / Swarojgar Credit Card / Gramin

Tatkal Card

- Committee on Financial Inclusion Set up

Financial Inclusion Institutionalisationmilestones since early 1900s


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State Bank of India

Imperial Bank of India nationalised in 1955 Opened 400 rural branches immediately

SBG with seven other associates - 1959

Rural, Village, Satellite, ADBs, ABD Branches Employed Graduates in Agri and Veterinary

Sciences

Adopted Villages, Slums and Schools Group Guarantee Scheme for liberal lending

Technology, Biometric ATMs, hill-tops, waterways


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SBIs Mobile ATM in Kerala

Hi t f t t i f I l i


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History of strategies for InclusiveGrowth/Financial Inclusion

in India

Phase I (1960 1980) Social control of Banks (1960)

Nationalisation of Banks (1969)

Setting up of Regional Rural Banks (1975)

Priority Sector lending stipulation by RBI -(1972)

Lead Bank scheme (1969)

Histor of Incl si e Gro th/


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History of Inclusive Growth/Financial Inclusion

in India

l Phase II (1980 2005) Integrated Rural Development programme/

SGSY promoted by Govt. Of India

Microfinance programme SHG Bank linkagefacilitated by NABARD

Phase III (2005 onwards) Development of MFIs

Financial Inclusion in a MISSION mode


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Analysis of Financial Inclusion

Andhra Pradesh,< 25%

Karnataka, Kerla, MP, Maharashtra,Punjab, Tamilnadu, West Bengal,

25 to 50%

Bihar, Chattisgarh, Orissa

Himachal Pradesh, J & K, UP, Nagaland, Tripura,Sikkim

50 to 75%

Meghalaya, Arunachal Pradesh, Mizoram,Manipur, Assam, Uttaranchal, Jharkhand

> 75%

StatesExtent ofFinancialExclusion

State wise Exclusion


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Analysis of Financial Inclusion

State wise Exclusion

51.3648.6489248.1Total

50.5849.4224688.4Others

48.5851.4237043OBC

63.6836.3211924.1S.T

49.7750.2315592.6S.C

%Excluded

% IncludedPopulationSocialGroup

(Figures in 000)


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Model for Financial InclusionLess constrained spending

Low cost services

Free Use of Money

Easy pathway out of poverty

Good Social,economic & Health outcomes

High standard of living

Financial literacy Good financial habits

Good education

Macro -environment Personal characteristics Commercial & regulatory environment

Social/wider inclusion

Financial

inclusion

Low or controlled debtAsset ownership

Employment

High Income

Mainstream product

Attributes: fees;

Penalties,bundling,marketing

Which suit those with higher

income/assets


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Eleventh Plan (2007-2012)

Is divided into three volumes (I) Inclusive Growth (II) Social Sector and(III) Agri-culture, Rural Development, Industry, Services andPhysical Infrastructure

Objectives:-

1. Income and Poverty: Accelerate GDP growth from 8% to 10% and maintain at 10% inthe next Plan to double the per capita income by 2016-17

Increase agricultural GDP growth rate to 4% per year to ensure abroader spread of benefits

Create 70 million new work opportunities Reduce educated unemployment to below 5% Raise real wage rate of unskilled workers by 20 per cent Reduce the headcount ratio of consumption poverty by 10

percentage points


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Eleventh Plan (2007-2012) contd...

2. Education

3. Health

4. Women & Children5. Infrastructure and

6. Environment

ki


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Banking system- 1969

141015% share of Priority Sector in totalcredit

36630Total Credit (Rs. bil)

1,833

(22.2)

329

(19.7)

1,504

(22.8)

Rural Branches

(% to total branches)

2.2negligible

2.2% share of agriculture in totalcredit

8,2621,6666,596Total Branches

8981*8Number of banks

TotalPrivatePublicCommercial banks

+ about 340 cooperative banks with 100,000 primary societiesfor giving crop loans thru refinance from the Central Bank


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Rural Banking / Finance Schemes Bank Credit in Rural & Urban Areas

Institutional & Non-Institutional Channels

Institutional Channels Banks, Cooperatives, Micro Finance Institutions

Non-Institutional Channels Landlords, Shop-keepers, traders/suppliers and Money

Lenders

Share down from 91% (1951) to 45% (1991) 87% SF/MF do not access formal system

Intt rates range from 24 - 60 & even 120% pa


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Rural Banking - Committees Rural Banking Enquiry Com 1950 All India Rural Credit Survey 1954 State Bank of India 1955; Associates - 1957 National Credit Council 1967 Gadgil Study Group : LBS : 1969 14 Banks Nationalisation : 1969 Differential Interest Scheme : 1972 Dantwala Committee : RRBs : 1975 6 Banks Nationalisation : 1980 Service Area Approach : 1989 : Loan Melas, Debt Waivers Financial / Banking Sector Reforms : 1991 / 1997 IRDP, DWCRA, TRYSEM, NREGP, Kisan Credit Cards... Dr Raghuram Rajan Committee on FSR...2007


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Bank network for rural creditank network for rural credit

Reserve Bank of India Government of India

NABARDNABARD

Public SectorBanks (27) RRBs (196)

June 2002

PrivateBanks (31)

Ruralemi-urban

UrbanMetroTotal

19,27510,9038,7377,203

46,118

12,0602,037

35917

14,473

1,1381,7611,3221,1555,376

ForeignBanks (41)

02

20180202

TOTAL32,47314,70310,4388,555

66,169

+ the cooperative banks


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Coml Banks & branch expansion

71,17770,37369,18068,47868,115TOTAL2825272420NSBs

6,7466,4485,9495,5925,600OSBs

14,74714,74614,71614,71714,689RRBs261245224212252Foreign

35,35634,98834,46534,18233,832PSBs

14,03913,92113,79913,75113,722SBG

20062005200420032002Banks

FormalFormal Bank Network In IndiaBank Network In India


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Government of India

NABARDNABARD

Public SectorBanks (28)

RRBs (96)LABs (4)

PrivateBanks (24)

RuralSemi-urban

UrbanMetroTotal

18,19711,73610,2479,726

49,906

11,444 / 52,481 / 14

522 / 1159 / 0

14,506 / 30

9872,0772,1021,9017,067

CreditCooperatives

SCB 31DCCB 367

PACS 108779SCARDB 20PCARDB - 727

13,104 NBFCs registered with RBI.1853 Urban Co-operative banks with 7217 branches. Foreign Banks Urban 43, Semi Urban 2, Metro 227. (Total 272)

FormalFormal Bank Network In IndiaBank Network In IndiaReserve Bank of

India


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Coml Banks and Branches

76,00374,32673,01372,11771,497TOTAL12,86512,43812,21411,98911,789Metro14,41213,94413,51013,20912,967Urban17,77117,21216,74316,48116,332SUrban30,95530,73230,54630,43830,409Rural Brs.

8890929596-RRBs

166169172175177ASCBs

171173176179181No.

Jun08Mar08Dec07Sep07Jun07Banks


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Priority Sector Lending andPoverty Alleviation Programs

NCC recommendations in 1968 Priority Sector defined Agl, SSI & Others

Target 33-1/3 % (1979) revised 40% (1985)

Foreign Banks too to lend 32% of NBC

CS Murthy (RBI) Working Group revision

and new guidelines in April 2007 To include Small and Micro Enterprises asper MSMED Act, 2006


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Outstanding Credit to Priority Sectorfrom Banking Sector

(Rs in Crore)

2,71,079(- 5.07)

2,85,559(16.4)

2,45,280(39.0)

1,76,495(64.3)

1,07,438(38.3)

c. Other PrioritySectors

1.94,720

(66.6)

1,16,908

(28.4)

91,020

(22.7)

74,189

(12.7)

65,855

(9.0)

b. Small ScaleIndustries

3,06,387(33.1)2,30,180(32.4)1,73,875(39.9)1,24,269(37.3)90,541(23.2)a. Agriculture

7,72,186

(22.0)

6,32,647

(24.0)

5,10,975

(36.1)

3,74,953

(42.1)

2,63,834

(24.7)

Priority Sector

(a+b+c)

20082007200620052004Category

Population Group wise o/s credit


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Population Group-wise o/s credit(% to Total)

19,14615,17511,5785,564All India

(Rs Bn.)

66.165.363.161.6Metro

16.216.416.416.8Urban9.710.011.311.5S Urban

7.98.49.210.1Rural

Mar2007Mar2006Mar2005Mar2001Popn Gr.


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FGD


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Business Facilitators andBusiness Consultants

MFIs operating in 19 countries in differentcontinents (including India)

Outsourcing of Financial Inclusion

permitted by RBI NGOs, SHGs, MFIs,Civil Society Organisations, etc Pilot Project by Indian Post 5 Districts of

Tamil Nadu NABARD experiment tobe extended to Maharashtra, MadhyaPradesh, Meghalaya, etc..

(


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Post Offices (for savings, the

figure is small)

Source: www.indiastat.com

4485964843.27Rajasthan

49451127055.73Maharashtra

3884823431.98Gujarat

34171020534.87Tamil Nadu

5626419523.60Kerala4062856934.81Karnataka

37171485755.22

AndhraPradesh

Populationserved by a

PO

No ofPost

OfficesPopulationIn VillagesState
http://www.indiastat.com/http://www.indiastat.com/http://www.indiastat.com/


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Index of Financial Inclusion (IFI) Proposed by Ms Mandira Sharma, ICRIER Measured in 100 countries A multi-dimensional index, captures information on various

dimensions Easy to compute and is comparable across countries Three basic dimensions Banking Penetration, Availability

of Banking Services and Usage of Banking System India ranked poorly, below African countries like Kenya and

Morocco ranked 50th much below China but above

Russia considering number of bank branches, ATMs,people served, amounts of bank deposits and credit

Micro Credit Rating


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Micro Credit RatingInternational Ltd. (M-CRIL)


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NABARDs Largest Financial


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NABARD s Largest FinancialInclusion Programme in the World

58 million poor households provided access58 million poor households provided accessto banks through 3.48 million SHGs.to banks through 3.48 million SHGs.

Savings of SHGs with banks $ 703 million.Savings of SHGs with banks $ 703 million.

Bank loans availed by SHGs $ 2473 millionBank loans availed by SHGs $ 2473 million NABARD Refinance support $1412NABARD Refinance support $1412millionmillionNABARD Promotional support $5.5NABARD Promotional support $5.5millionmillion

SHG- Bank Linkage programme in India facilitatedby NABARD, implemented by Banks, NGOs andGovernment agencies


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Mi Fi h i I di


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Micro-Finance reach in India Microfinance in India through its two major channels

SHG Linkage and MFIs served over 33 million Indians,up by 9 million over FY 2006-07

4 out of 5 microfinance clients in India are women. Micro-credit portfolio of India Microfinance was

Rs. 22,000 crore

75% are accounted for by SHG Linkage, 20% by largeMFIs and 5% by medium and small MFIs SHG Linkage reports over Rs. 3,500 crore savings, only

MFI Bank, KBS Bank reports about Rs. 40 crore savingsportfolio

MFIs operate in 209 out of 331 districts of the country,28% of the new clients are from Urban areas. Source : Sa-dhan, Bharat Micro-finance Report, 2008


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Micro Finance Bill 2007

Bill introduced in Parliament in March 2007 To regulate MFIs in India

Proposed NABARD as regulator

Conflicting with promotional and participatoryrole in SHG-Bank Linkage Program

Bill referred to experts for opinion and kept inabeyance

To re-examine and finalise the provisions

Financial Education


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Financial Education RBIs Financial Education Initiative

Project Financial Literacy, games, films... In 13 Indian Languages including English To disseminate information regarding

Central (Money Kumar) and GeneralBanking (Raju) concepts to various targetgroups including school and college goingchildren, women, rural and urban poor,defence personnel and senior citizen

www.rbi.org/financialeducation

TECHNOLOGY
http://www.rbi.org/financialeducationhttp://www.rbi.org/financialeducation


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TECHNOLOGYDEVELOPMENTS IN BANKING

ALPMs CLEARING HOUSE CAR,CRR,SLR,PS,NPAs CREDIT/DEBIT CARDS

NICNET,I-NET, RABMN INFINET, RBINET BANKNET, NDS, SFMS MICR, ATMs, SWIFT

DEMAT, IT ACT-2000 INTERNET BANKING ECS, EFT, SEFT, RTGS CROSS SELLING

ALM & RM, MIS CRM, KYC, AML Core Banking Solutions KISAN /SME CARD

CREDIT INFO BUREAU DISASTER MANAGEMENT Cheque Truncation CYBER CRIMES

HACKING, PHISHING,PHARMING, TROJAN,SKIMMING, ETC

SMART CARDS

ACCION I t ti l


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ACCION InternationalACCIN International, a

private nonprofitorganization founded in1961,

works to reducepoverty

by providing financialservices

through its network ofpartner financial

institutions

to the millions ofworking poorthroughout the world

Mission:Give people the tools they need to worktheir way out of poverty

Pervasive, permanent impact

Means:

By building strong microfinanceinstitutions

Core Operating Principles:Social impact and scale

SustainabilityLink to commercial markets

Technology Solutions being


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Technology Solutions beingtried in India

Smart card, hand held terminal, centralCPU

Low cost ATMs

Mobile Phone Banking

SMS Banking

Public Call Office (PCO) Connectivity.


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Way Forward

Targets fixed for each Branch ofTargets fixed for each Branch ofCommercial Bank/Regional RuralCommercial Bank/Regional RuralBank to :Bank to :

Open 250 accounts every yearOpen 250 accounts every year

Issue 100 Farmers Credit CardIssue 100 Farmers Credit Card Issue 100 General Credit CardIssue 100 General Credit Card Distribute 100 micro insuranceDistribute 100 micro insurance

policiespolicies

W F d ( td )
http://images.google.co.in/imgres?imgurl=http://apfr.co.in/images/rangarajan.gif&imgrefurl=http://apfr.co.in/290103/rbibungling.htm&h=263&w=178&sz=24&hl=en&start=294&tbnid=0LLinECa0FSh4M:&tbnh=112&tbnw=76&prev=/images%3Fq%3DBank%2BComputerisation%2Bin%2BIndia%26start%3D280%26gbv%3D2%26ndsp%3D20%26svnum%3D10%26hl%3Den%26sa%3DNhttp://images.google.co.in/imgres?imgurl=http://apfr.co.in/images/rangarajan.gif&imgrefurl=http://apfr.co.in/290103/rbibungling.htm&h=263&w=178&sz=24&hl=en&start=294&tbnid=0LLinECa0FSh4M:&tbnh=112&tbnw=76&prev=/images%3Fq%3DBank%2BComputerisation%2Bin%2BIndia%26start%3D280%26gbv%3D2%26ndsp%3D20%26svnum%3D10%26hl%3Den%26sa%3DN


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Way Forward (contd...)

Micro Finance Sector (Development andRegulation) Bill, 2007 under consideration

Setting up of Rural Credit Information BureauSetting up of Rural Credit Information Bureau

Ensuring effectiveness of Business FacilitatorEnsuring effectiveness of Business Facilitator

(BF) / Business Correspondent (BC)(BF) / Business Correspondent (BC) Micro finance Development and Equity Fund

Micro finance Ombudsman

Regulatory and developmental power to NABARD

R d ti


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Recommendations Benefits of economic development to percolate

down to needy sections of population GOI to concentrate on (i) infrastructure

development (ii) basic amenities (iii) integration of

water source (iv) setting up of SEZs (v) openingof e-choupals (vi) strengthening of Postalservices (vii) enlisting of Farmers Clubs, NGOs,etc., (viii) Agricultural Research Stations (ix)

Opening of Vocational Training Centres,Industrial Training Institutes for rural youth ...

Employment / Income generation leads to FI...


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Financial Inclusion - Yet Another Ritual or Tool for Integrated Development?