Financial Inclusion in India

Presented By Gagan Varshney (12MBA-08)

And Others

Department of Business Administration Faculty of Management Studies and Research

Aligarh Muslim University

Under the supervision of Dr. Saboohi Nasim (Asst Professor)

Contents

• Introduction to Financial Inclusion • Meaning • FI in India : History • Need of FI in India

• RBI’s Approach toward Financial Inclusion

• Financial Inclusion Vs Financial Literacy • Set up of Institutional Mechanism by RBI in India • RBI’s Policy Initiatives toward FI

• Recommendations of Nachiket Mor Committee

• Critical Review of the Recommendations

Meaning

Financial inclusion refers to a process that ensures the ease of access, availability and usage of the formal financial system for all members of an economy.

In Indian Context:

“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.”

Important Milestones

• 1904 Setting up of Rural Cooperatives

• 1960 Social control of Banks

• 1969 Nationalization of 14 major Commercial Banks

• 1975 Setting up of Regional Rural Banks

• 1990s Self Help Group

• 2005 RBI advised banks to open no frill accounts

• 2006 RBI allowed BC/BF to act as agents of banks

• Sept. 2010 RBI allowed for - profit companies (excluding NBFC) to act as Business Correspondent

• 2011 National Payment Corporation of India (NPCI) launched Interbank Mobile Payment System IMPS)

History

• The Reserve Bank of India setup a commission (Khan Commission) in 2004 to look into Financial Inclusion and the recommendations of the commission were incorporated into the Mid-term review of the policy (2005-06).

• In the report RBI exhorted the banks with a view of achieving greater Financial Inclusion to make available a basic "no-frills" banking account.

• In India, Financial Inclusion was first introduced in 2005.

• In January 2006, the Reserve Bank permitted commercial banks to make use of the services of non-governmental organizations, micro-finance institutions and other civil society organizations as intermediaries for providing financial and banking services.

• emphasizes on the access to basic formal financial services at an affordable cost in a sustainable manner for the vulnerable people (NABARD, 2008).

• The bank asked the commercial banks in different regions to start a 100% Financial Inclusion campaign on a pilot basis

Need of Financial Inclusion

An inclusive financial system has several merits • It facilitates efficient allocation of productive resources, and

thus can potentially reduce the cost of capital.

• Easy access to appropriate financial services, which can significantly improve the day-to-day management of finances.

• help in reducing the growth of informal sources of credit

• an all-inclusive financial system enhances efficiency and welfare by providing avenues for secure and safe saving practices and by facilitating a whole range of efficient financial services.

Need of Financial Inclusion Some Facts about FI in India,

• 90% of small businesses have no links with formal financial institutions.

• About 60% of the rural and urban population does not even have a functional bank account.

• Bank-credit to GDP ratio in the country, as a whole, is a modest 70%.

• In Bihar, Bank-credit to GDP ratio is even lower, at 16%.

• Saving as a proportion to GDP has fallen from 36.8% in 2007-08 to 30.8% in 2011-12

-source: Nachiket Mor Committee’s report on FI

Measures for Financial Inclusion

• Providing basic banking services to population without discrimination

• Making the banking system self sustaining

• leads to increase in savings, investment and thereby, spurs the processes of economic growth

• Increasing the habit of saving in lower income group • creates avenues of formal credit to the unbanked population

• Increasing entrepreneurial spirit • Making available the formal remittance facilities to lower income

group

RBI APPROACH Toward Financial Inclusion

RBI’s Approaches to Fi. Inc.

• Approach towards FI by focusing on both the demand and supply side constraints.

• To Increase Demand = Financial Literacy – i.e. creating a demand for the financial products and

services by making people aware about their easeness to use & its advantage.

• To Increase Supply = Financial Inclusion – i.e. for creating access to the financial services

RBI’s Approaches to Fi. Inc.

• Adopted a bank-led model with non-bank entities

• Encouraged banks to pursue FI as a commercial activity

• Encouraged banks to leverage technology while keeping the cost of providing financial services to the minimum.

• Banks should adopt innovative business models and delivery channels to expand their FI efforts.

• Considers financial Literacy is an important adjunct

• Create a conducive regulatory environment and providing institutional support to banks in their FI efforts

Institutional Mechanism by RBI • Separate Technical Group on Financial Inclusion and

Financial Literacy under the aegis of FSDC (Financial Stability and Development Council)

• RBI has constituted a Financial Inclusion Advisory Committee (FIAC) under the Chairmanship of a Deputy Governor from RBI.

• State Level Bankers Committees (SLBC) in all the states. • Lead District Managers in all the 659 districts

• About 700 financial literacy centres have been set up by

banks • Rural Self-Employment Training Institutes (R-SETI)

RBI Policy Initiatives • Branch expansion in rural areas

– Banks need not to require prior permission to open branches in centres with population less than 1 lakh

– Banks have been mandated to open at least 25 per cent of their new branches in unbanked rural centres

• Agent Banking - Business Correspondent/ Business Facilitator

Model – RBI permitted banks to utilise the services of intermediaries – This model allows banks to do ‘cash in - cash out’ transactions at a

location much closer to the rural population,

• Relaxed KYC norms

– Small accounts can be opened with self certification in the presence of bank officials

– RBI has allowed ‘Aadhaar’ card

RBI Policy Initiatives

• Roadmap for Banking Services in unbanked Villages – In 1st phase, banks were advised to draw up a roadmap for

villages having a population of over 2,000 – In 2nd phase, Roadmap has been prepared for covering

remaining unbanked villages i.e. with population less than 2000

• Bouquet of Financial services

– To meet all customer needs, banks have to offer a minimum of four basic products • A savings cum overdraft account • A pure savings account • A remittance product to facilitate EBT and other remittances, • Entrepreneurial credit products like GCC, KCC

Committee on FI

The RBI appointed a Committee on Comprehensive Financial services for Small

Businesses and Low-Income Households under the Chairmanship of Shri Nachiket Mor, member

on the Central Board of Directors, RBI in the month of Sep 2013.

Motive of the Panel

• To frame a clear and detailed vision for financial inclusion and financial deepening in India.

• Designing principles for achievement of financial inclusion and financial deepening across the country.

• Development of comprehensive framework to monitor the progress of financial inclusion.

RECOMMENDATIONS OF NACHIKET MOR COMMITEE

On Financial Inclusion in India

RECOMMENDATIONS OF NACHIKET MOR COMMITEE

• At its core the Committee’s recommendations argue that in order to achieve the vision of full financial inclusion and financial deepening in a manner that enhances systemic stability, there is a need to move away from a limited focus on any one model to an approach where multiple models and partnerships allowed to emerge, particularly between national full-service banks, regional banks of various types, non-bank finance companies, and financial markets.

• In the spirit of the RBI’s approach paper on differentiated Banks, the Committee recommends that the RBI may also seriously consider licensing, with lowered entry barriers but otherwise equivalent treatment, more functionally focussed banks like Payments Banks, Wholesale Consumer Banks, and Wholesale Investment Banks.

SOME IMPORTANT SUGGESTIONS

• By 1 January 2016 each resident of India, above the age of 18, would have an individual, full-service, safe, and secure electronic bank account

• Every Indian resident should be issued an account

at the time of receiving Aadhaar number by a bank.

• Aadhaar card should be used automatically to

open a bank account.

• Facility for withdrawal, payment and deposit should be set up within a 15-minutes walking distance anywhere in the country.

• ‘Payments Banks’ should be set up to “provide

payment services and deposit products to small businesses and low-income households” with a maximum balance of Rs 50,000 per customer. These banks can be set up with minimum capital requirement of Rs 50 crore, one-tenth of the Rs 500 crore required for full-service bank.

• Interest subsidies and loan waivers should be abolished. Instead govt. should transfer benefits directly to farmers.

• Statutory liquidity ratio has outlived its utility for both Banks and NBFCs and eventually needs to be removed.

• Banks should do away with the system of lending below their respective base rates to the farm sector.

• All type of Insurance products should be made available to the poor at reasonable prices.

• Bank interest rates should be over and above the prevailing rate of Wholesale Inflation

• NBFCs (non-banking financial companies) should

be appointed as agents of banks and their services should be taken in increasing financial inclusion

CRITICAL REVIEW Of the Recommendations made by Nachiket Mor Committee

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