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Financial inclusion to achieve the

Sustainable Development Goals (SDGs) in India

Shiladitya Chatterjee

International Seminar on Financial Inclusiveness

Department of Commerce, Calcutta University18 March 2016

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Financial inclusion – definitions and purpose

• Rangarajan Committee on Financial Inclusion (2008) ―Process of ensuring access to financial services; and ―Providing adequate credit where needed to vulnerable groups such

as weaker sections and low income groups at affordable cost

• Raghuram Rajan Committee on Financial Sector Reforms (2014) —Broadening of financial services to those who do not have access; —Deepening of financial services for people who have minimal

financial services; and —Promoting financial literacy and consumer protection for clients to

enable them make appropriate choices

• Latter definition has no special focus on poor and vulnerable• Also, these definitions tend to view financial services as goal by

themselves and not as instruments to achieve higher order goals such as the Sustainable Development Goals

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Financial inclusion - India compared to other countries

UK

South Korea

US

China

Thailand

Brazil

Russian Fed.

India

Indonesia

Bangladesh

0 20 40 60 80 100 120

98.9

94.4

93.6

78.9

78.1

68.1

67.4

53.1

36.1

31

21.1

18.2

23.3

9.6

15.4

11.9

10.3

6.4

13.1

9.9

Proportion of adults (15+) with accounts, and borrowings (%)

Proportion of adults borrowed Proportion of adults with accounts

Source: World Development Indicators

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The SDGs - growth, inclusion and sustainability

GOAL 1. End poverty in all its forms everywhere

GOAL 2. End hunger, achieve food security and improved nutrition and promote sustainable agriculture

GOAL 3. Ensure healthy lives and promote well-being for all at all ages

GOAL 4. Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all

GOAL 5. Achieve gender equality and empower all women and girls

GOAL 6. Ensure availability and sustainable management of water and sanitation for all

GOAL 7. Ensure access to affordable, reliable, sustainable and modern energy for all

GOAL 8. Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all

GOAL 9. Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation

GOAL 10. Reduce inequality within and among countries

GOAL 11. Make cities and human settlements inclusive, safe, resilient and sustainable

GOAL 12. Ensure sustainable consumption and production patterns

GOAL 13. Take urgent action to combat climate change and its impacts

GOAL 14. Conserve and sustainably use the oceans, seas and marine resources for sustainable development

GOAL 15. Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably manage forests, combat desertification, and halt and reverse land degradation and halt biodiversity loss

GOAL 16. Promote peaceful and inclusive societies for sustainable development, provide access to justice for all and build effective, accountable and inclusive institutions at all levels

GOAL 17. Strengthen the means of implementation and revitalize the global partnership for sustainable development

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SDG 1: Poverty reduction through financial inclusion: access to banking

• In recent years phenomenal bank branch expansion has occurred• Mainly through Business

Correspondents (BCs)• But 43% of accounts lie dormant

according to World Bank• Deposits expanded, but remain low

by developing country standards; and credit availed even smaller

• Attempts to improve previous approach being made through Jan Dhan Yojana

―By combining account opening with other services such as Direct Benefit Transfer (DBT), credit, pensions, insurance

―Through focus on financial literacy―Better remuneration for BCs

1-Jan-10 1-Jan-11 1-Jan-12 1-Jan-13 1-Jan-140

50000100000150000200000250000300000350000400000450000

Expansion in number of bank branches, total and through BCs 2010-2014

BankingOutletsinVillages—Total BankingOutletsinVillages—BranchlessMode

1-Jan-10 1-Jan-11 1-Jan-12 1-Jan-13 1-Jan-140

50

100

150

200

250

300

350

Deposit and credit expansion 2010-2014

Deposits (Rs. billion) OD facility availed in BSBDAs (Rs. billion)

Rs. b

illio

ns

Source: RBI quoted in Nair and Tanka, Inclusive Finance Report, Oxford University Press, 2014

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SDG 1: Poverty reduction through financial inclusion (cont.): microfinance as test of quality of inclusion• Self help groups (SHGs) serve 63% of microfinance

clients ― But SHGs account for only 3.4% of total agricultural

credit ― Causes are

― High risk (and NPAs) despite group lending― High transactions costs― Poor capacities

• Microfinance institutions (MFIs) serve 37% of microfinance clients

— MFIs account for only a third as much of micro-credit as SHGs

— MFI model not sustainable as— Their borrowing rates leave little margins requiring high

volumes and higher on-lending rates

• There is a tendency to reduce role of microfinance after Andhra crisis

— But only 11% of Andhra household debt was from MFIs

— Over-regulation may hurt industry even more— Deposits can solve problem – Bandhan example— Greater role for SHGs also needed with scaling up of

successful models as there is wide variation in microfinance penetration in the country

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

0500

100015002000250030003500400045005000

Credit to SHGs by SCBs, RRBs and Cooperatives compared to total agriculture credit 2011-12

SHG Lending Total credit to agriculture

Lend

ing

₹ bi

llion

s

Andhra Prad

eshKera

laGoa

Tripura

Uttarakhan

d

Mahara

shtra

Haryana

PunjabBihar

Meghalay

a

Gujarat

Madhya

Pradesh

Uttar Prad

esh

Arunach

al

Mizoram

0

1

2

3

4

5

6

7

8

Microfinance Poverty Penetration Index (2014)(MPPI=share of state in SHG clients/share in poor)

Source: RBI, Nair and Tankha (2014)

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SDG2: Eliminating hunger and achieving food security through financial inclusion• Share of agriculture in SCB lending

low (13%) and stagnating• Lending by specialized institutions

(RRBs and cooperatives) to agriculture still minor (33%)• Rural cooperatives must perform well• Vaidyanathan Committee

recommendations not fully implemented

• Loan waiver affected health

• Share of marginal farmers in SCB lending is low (30%) compared to share in holdings (67%)

• Problem of risk and high transactions costs• Risks be tackled by specialized

institutions (such as cooperatives) functioning properly

• Costs can be lowered by mobile banking – currently only 1% by volume and mainly urban.

2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-150

10000

20000

30000

40000

50000

60000

70000

Non-food credit outstanding by scheduled commercial banks total, and to agriculture

Total non-food credit outstandingTotal credit outstanding to agriculture

₹ Bi

llion

)

Source: RBI, Agricultural Census 2010-11

SDG3: Universal access to health care – the role of health insurance for poor

• In India 6.2% of people are impoverished by catastrophic health events

• Universal access to health care difficult through direct public provision alone

• Publicly supported health insurance can fill an important gap

• But India’s initiatives on health insurance leaves most uncovered

• The Central Government’s flagship Rashtriya Swastha Bima Yojana (RSBY) is still quite ineffective

― Of total intended coverage (70 million poor households by 2017); so far 40 million covered

― Extreme poor left out and many non-BPL families may have captured benefits

― RSBY caps benefits at ₹ 30,000 per family per year – results in increasing health costs according to an EPW study

― Helping mainly urban poor and middle income rural population

• Realistic solution is to focus on health insurance for organized sector; and strengthening direct public health provision for unorganized sector 8

Source: S.K. Hooda, Health Insurance, Health Access andFinancial Risk Protection, EPW Dec 2015

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SDG 4: Education loans for vocational and higher education• Tertiary and vocational

enrolment in India low compared to comparators in Asia• Skills development needs

are large• Not all can pay for their

education and more education loans are needed

• But education loans (now priority sector) account for just 1% of non-food loans outstanding of scheduled commercial banks in March 2015

• Delhi Government model could be scaled up• State guarantees provided

0

10

20

30

40

50

60Enrolment in vocational education as proportion of

total enrolment 2006 (%)

South Korea Thailand Indonesia East Asia & Pacific

India0

20

40

60

80

100

120

Enrolment in tertiary education latest year (%)

Source: UNESCO Institute for Statistics 2006, World Development Indicators

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SDG 5: Promoting gender equality through financial inclusion

• Access to finance by women in agriculture is limited

— In rural India, 83% of women depend on agriculture but only 10% have land ownership, preventing access to finance

— SHGs have helped, with women’s groups predominating but lending meagre, stagnating and working only in a few states

— Another reason why SHG based lending needs promotion – for women’s empowerment

• Outside agriculture, women’s participation in wage employment is low.

― Women’s entrepreneurship needs promotion with focused lending towards them

Russian Fed.

UK

USA

Brazil

South Africa

Thailand

Philippines

Cambodia

Vietnam

Malaysia

Indonesia

Sri Lanka

Bhutan

India

0 10 20 30 40 50 60

Share of women in wage employment in the non-agricultural sector (latest) (%)

Source: India (GOI- MOSPI); rest World Development Indicators

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SDG 6&7: Financing access to basic infrastructure

• Basic infrastructure integral to inclusion

• Financing basic infrastructure is a major problem

• Public sector alone cannot fund all India’s infrastructure needs

• Private financing of infrastructure essential• Private financing provided 37%

of funding in 2007-12• Expansion hampered by lack of

long-term bond market

Source: R. Sengupta and V. Anand, Corporate Debt Market in India: Lessons from the South African Experience. Indira Gandhi Institute of Development Research, Mumbai. July 2014

Source: Chatterjee (et al) (2015)

Access to roads and proportion of births attended by skilled health personnel

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SDG 9: Inclusive industrialization through financial inclusion • SME lending is small compared

to need―Getting just 8% of total lending

to industry —Although its share in industry

employments is about 75% —Challenges of lending to the

“Bottom of the pyramid”―Financiers not convinced of

viability―Need capacity support to

develop viable business models―Infrastructure, policy and

institutional support needed to expand SME sector

Source: RBI

Allocation of outstanding non-food credit (March 2015)

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SDG 10: Reducing inequality within countries

• In India, the top 20% income earners, earn 44% of total GDP• Access to credit is more

heavily skewed • Large borrowers

comprise about 20% of all borrowers but corner 90% of the total credit

• More equal access to credit will help reduce inequality in India

Source: RBI

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SDG 11: Promoting inclusive cities – funding shelter for the poor• Needs for housing for poor huge

• 100 million urban slum population• 20 million housing units needed of

which 75% (15 million) for bottom 40% of population

• Public housing schemes for poor yet to take off• 12th Plan Rajiv Awas Yojana (RAY)

contains a subsidized credit component (6.5% subsidy) for EWS/LIG category

• PM’s “Housing for All by 2022” programme subsumes RAY.

• Progress till Feb 2016 negligible• Availability of land key constraint

Non-food credit outstanding to housing sector (March 2015)

Source: RBI

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Inclusive equity finance for attaining the SDGs• The small investor in stock markets needs protection

—Retail investors have a significant share in capital market: 21% for NSE and 16% for BSE

—Mutual funds have only a small share: 5% of BSE - although these provide better protection to small investors and further development of mutual fund industry is essential

• Stock exchanges can also play a key role in promoting inclusive financing

―Equity finance for SMEs needs to grow― SME Exchanges (inaugurated in 2012) still insignificant by market capitalization

―The concept of “Social Stock Exchange” needs consideration— SSEs connect social minded investors to companies promoting social and

environmental objectives— CSR funds of companies can be used to support this— Under consideration at present.

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A few conclusions ………• Access to finance should be viewed not only as having intrinsic value but also as an instrument to achieving higher order goals such as the social and environmental objectives of the SDGs and specifically target financial indicators to be achieved in their support • Attention should be focused not merely on expanding access but also on the quality of access to finance• More focus is necessary on preparing the ground for making access to financial services productive

― Such as strengthening SHG models; the functioning of microfinance institutions, specialized rural credit institutions such as cooperatives; introducing institutional reforms to open up credit for women; supporting development of SME sector etc.

• The long-term bond market needs to be promoted for expanding inclusive infrastructure;• Stock markets must play a bigger social role including through the idea of ‘social stock exchanges.’

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Bibliography

Rajaram Dasgupta. Microfinance in India - Empirical Evidence, Alternative Models and Policy Imperatives. EPW March 19, 2005Shailender Kumar Hooda. Health Insurance, Health Access and Financial Risk Protection. EPW December 12, 2015. Tara S Nair. Microfinance: Lessons from a Crisis. EPW February 5, 2011. Mandira Sarma, Rajiv Kumar. Rural Short-term Cooperative Credit Structure. EPW March 1, 2008Pyaralal Raghavan. Delhi Government’s Educational Loans to Students Will Help Expand Facilities & Improve Quality of Institutions. September 9, 2015Tara S. Nair and Ajay Tankha. Inclusive Finance India Report 2014. Oxford University Press 2014.Abhijit Banerjee, Pranab Bardhan, Esther Duflo, Erica Field, Dean Karlan, Asim Khwaja, Dilip Mookherjee, Rohini Pande, Raghuram Rajan. Help Microfinance Don’t Kill It. The Indian Express Posted online: Fri Nov 26 2010Bandini Chhichhia. The Rise of Social Stock Exchanges. A new, innovative platform is helping more investors support social enterprises. Stanford Social Innovation Review. January 2015.

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Thank Youshilochatterjee@gmail.com