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CHAPTER – 3
FINANCIAL INCLUSION A RETROSPECTIVE APPRAISAL
3.1 Introduction
This chapter gives an overview of the ‘financial inclusive growth policies
and schemes implemented by the Government of India (GOI) and the Preserver Bank
of India. There are three sections in this chapter. Section-1 provides an overview of
current status of financial inclusion analysed in the Demand side requirement.
Section-II set out the outlook the supply side requirement and with achievement in the
present context. Section-III Credit Delivery and Financial Inclusion. Section-IV
Challenges of the current operational strategies and Obligation to Opportunity.
Over the years scheduled commercial banks in India have played a pivotal role
in the development. But simultaneously they have also thrown up some challenges. It
is observed that clouds of anxiety and drops of growth are two important fact of
market, which often change in different sets of conditions. The pre and post
liberalization period has witnessed a mixture of environmental changes which directly
affect the aforesaid phenomena. But their presences in the rural areas reproduce
results in the reduction in the number of rural branches of SCBs. Since the last
decade, the Government of India set out the objective for more inclusive growth in the
Eleventh Plan Period. Specifically, the decrease in the share of smaller credit in total
credit distributed by the SCBs may constrain the objective of financial inclusion,
which is to provide financial services and timely and sufficient credit needed by
vulnerable groups such as weaker sections and low income groups at an affordable
cost. These trends designate that the banking system is still uncertain on various
grounds to provide credit to the poor and low income groups especially in the rural
areas.
85
SECTION-I
3.2 Demand Side Analysis
3.2.1 Importance of financial inclusion in the Demand Side
According to UNCDF (2006)131
report the majority of the developing
countries felt that access to finance is now in more demand for the bottom up the
pyramid communities and they perceived it as a public good, because it is as basic as
access for the socio-economic development. Therefore, the important effects of
financial inclusion are that the entire national financial system benefits by greater
inclusion, especially when promoted in the wider context of economic inclusion. That
India had the high demand for financial inclusion has a special significance for a
growing economy and it is bringing the large segment of the productive sectors. The
formal financial network could unleash their creative capacities besides augmenting
domestic demand on a sustainable basis driven by income and consumption growth
from such sectors. Financial inclusion efforts do have multiplier demand on various
financial products as a higher savings, insurance, credit from the vast segment of the
bottom of the pyramid (BOP) population. However, the formal financial system could
lead to improvement of their financial conditions and living standards, enabling them
to create financial assets, generate income and build resilience to meet macro-
economic and livelihood. It immensely benefits by way of efficient and leakage-proof
transfer of vast amounts of welfare benefits to the targeted, disadvantaged groups of
population (Harun R Khan., 2012)132
.
3.3 Financial Inclusion: India’s position compared with other countries
The progress of financial exclusion in India is found to be higher as
compared with many developed and some of the major emerging economies in the
progress report (RBI Report, 2012)133
. The wide extent of financial exclusion in India
is visible in the form of high population per bank branch and low proportion of the
population have access to basic financial services like savings accounts, credit
131
UNCDF Building Inclusive Financial Sectors for Development, published by United
Nations Capital Development Fund, New York, 2006 132
Shri Harun R Khan Issues and Challenges in Financial Inclusion: Policies, Partnerships,
Processes & Products at the symposium on “Financial inclusion in Indian Economy”
organized by the Indian Institute of Public Administration, Bhubaneswar on June 30, 2012 133
abid…
86
facilities, and credit and debit cards. Here, it can see the India’s performance in the
area of financial inclusion as compared with other developing as well as developed
countries. See the table: 3.1 Cross Country Analysis
Table: 3.1 Cross Country Analysis
Select indicators of Financial Inclusion - Cross
Country Analysis
Country Number
of
Branches
Number
of
ATMs
Bank
Credit
Bank
Deposits
India 10.91 5.33 33.62* 60.11*
Austria* 11.81 38.14 35.26 32.57
Brazil 13.73 120.62 19.04 47.51
France 43.11 110.07 56.03 39.15
Mexico 15.22 47.28 16.19 20.91
UK* 25.51 65.58 467.97 427.49
US 35.74 173.75* 46.04 53.14
Korea 18.63 250.29 84.17 74.51
Afghanistan 2.25 0.5 11.95 21.4
Philippines 7.69 14.88 27.57 53.02
Source: World Bank, Financial Access Survey
Note: Data pertains to 2010. For rows/cells indicated as ‘*’ data
pertains to 2009.
As at end of 2010-11,the number of ATMs per 0.1 million stood at
6.3, bank credit and bank deposit as a percentage of GDP stood
at 50.10% and 66.10% respectively
87
3.4 The Existed Financial Inclusion Architecture
The banking system in India is an important segment of the financial system
and it has made available a variety of savings, credit and other financial products and
services to the people. They allocate resources to different sectors of the economy for
asset creation capital formation, income, and purchasing power distribution, and so
on. They are intended to provide a safety net for parking the hard-earned savings of
the people. Banking industry has shown tremendous growth with the volume and
complexity during the last few decades and made major improvements in all the areas
relating to financial viability, profitability, and competitiveness.
Over a period of time various methods have been adopted to address issues
relating to enhanced financial inclusion of the weaker sections and more vulnerable
groups of people. There is directed credit, regulated interest rates, financing though
group model and introduction of credit products like KCCs and SCCs are all steps
towards greater financial inclusion of the masses. The formal sector, perhaps, finally
understood the reasons why borrowers prefer to take loans from friends and relatives
or moneylenders and other informal lenders- realization that was lacking in the past.
The success of the micro-credit movement lies primarily in the successful attempt to
understand the besides group lending, has salient features success use of mobile staff,
simplified loaning procedures, rescheduling and early repayment procedures,
incentives for repeat borrowing and compulsory savings. In other words the entire
process is based on learning to avoid the pitfalls/shortcomings that make the
borrowers approach the informal sector for loans (K.G. Karmakar, G.D. Banerjee, and
N.P. Mohan, 2011)134
Financial inclusion, therefore, has to go beyond creating new institutions or
framing new rules that call for a renewed thrust of the formal sector in rural areas.
The emphasis should be on innovations and creating financial products which capture
the advantage that a borrower received when he/she decides to take a loan from the
informal sector. It is well known that since 1992, NABARD has played a crucial and
pivotal role in linking SHGs with various banks, which basically made available
hassle-free and timely credit for the very poor. Also KCCs and GCCs were other
effective products which caught the imagination of farmers and rural clients,
134
K.G.Karmakar, G.D.Banerjee, N.P.Mohapatra, Towards Financial Inclusion in India,
Publisher : SAGE Publications India, 2011
88
However, the overwhelming need for rural clients of financial or microfinance
institutions is safe deposits of very small and infrequent sums and the need for loans
when essential. The desire to have friendly relations with the bankers also exists and
is rarely reciprocated by bankers.
The Reserve Bank of India had the build-up of financial architecture as the
nationalisation of major commercial banks. The RBI’s objective is essentially
reflected in the national aspiration for rapid equitable economic and social
development. The result of nationalisation witnessed a remarkable spread of the
banking system to the hither to neglected sectors and regions. We saw that significant
progress was made in terms of coverage of the rural population by formal credit
institutions, the majority 70 per cent of all commercial bank branches and
approximately 1, and 00,000 cooperative credit outlets at present operating in the rural
areas. These networks apart from working as financial institutions also play a pivotal
role in the development and transformation of the rural and agrarian economy.
Notwithstanding concerted and multi-pronged efforts to extend institutional
credit to all sections of society, the dependence on informal sources of credit has not
decreased in rural areas and has, in fact, increased in several regions. The banking
outreach continues to be unevenly spread with poorer regions at a particularly
disadvantaged position. According to an estimate by the World Bank, the credit
requirement of the poorer sections in India was placed at around Rs.50, 000 crore per
annum in 2002. Against this requirement, the credit outstanding of the poorer sections
with the formal banking sector is stated to be Rs.5, 000 crore or 10 per cent of the
total demand (Planning Commission, 2007)135
. Furthermore, the physical outreach of
the rural credit has not been effective in achieving income expansion and poverty
reduction, and access to needed financial services is still an issue in the rural areas.
See the table: 3.2
135
Planning commission, Towards Financial Inclusive Growth: Gender Dimension, Published
by Planning commission, New Delhi
89
Table: 3.2 the financial products for the rural vulnerable clients should have the
following features:
Deposit Products Credit Products Insurance Products
Liquidity
Safety
Return
Easy accessibility
Procedural simplicity
Timely
Adequate
Assurance of repeat loans
Reasonable interests rates
Collateral free
Flexible
Repayment as per the cash
flow
Responsive
Free from Procedural
hassles
Simple documentations
Life(Group)
Health(Group)
Non-life
Integrated cover
combining life and non-life
insurance.
Source: K.G. Karmakear, G.D. Banerjee and N.P. Mohapatra (2011)
3.4.1 Current Status of Banking at All-India Level
Current status of Banking in India spread the majority of commercial banking
network at India level. It can see table has skewed in favour of metropolitan centres.
The table presents population group-wise number of offices of Scheduled Commercial
Banks (SCBs) since 1982 March and March 2010. There are about 70,776 branches of
SCBs in India. The decade since 1982 saw an addition of 6,320 offices of SCBs at the
all-India level, 4,052 (64.1 per cent) of which was into the metropolitan category. On
the contrary, rural category witnessed decline offices and increased towards
metropolitan branches. The present and past trend become diminishing presence of
SCBs in the rural areas is the main constrains. However, the Government of India for
the Eleventh Plan Period (2007-08 to 2011-12) has taken the objective of faster and
more inclusive growth set out. The table no.3.3 gives the details of SCBs .
90
Table.3.3: Deposits and Credit of Scheduled Commercial Banks According to
Population Group
(Amount in Rs crore)
(No. of Accounts in Thousands)
Deposits
Year Rural Semi urban
Urban Metropolitan
Number of
Accounts
Amount
Outstanding
Number of
Accounts
Amount
Outstanding
Number
of
Accounts
Amount
Outstanding
Number of
Accounts
Amount
Outstanding
1983 47322 7671.98 53612 12813.96 40536 13546.25 36076 20415.31
1984 52497 9243.16 51438 13342.18 45749 16692.85 40487 25037.86
1985 57514 10411.47 62028 16758.30 53057 20416.10 43835 30181.61
1986 65873 12808.81 66625 19511.80 57176 23693.31 47534 36219.40
1986 65873 12808.81 66625 19511.80 57176 23693.31 47534 36219.40
1987 73664 15521.63 72068 23031.88 60759 28207.96 49689 41582.00
1988 84749 19215.26 82489 27631.53 66784 32683.76 53261 48062.12
1989 89235 22046.49 86269 31430.68 70646 36841.12 55853 56712.99
1990 102113 26233.64 92314 36369.64 75747 42416.11 63140 66892.00
1991 108876 31009.80 98084 41439.17 80889 49140.02 67342 78979.37
1992 114808 35749.70 101949 46591.38 83449 55289.40 69553 99476.73
1993 117814 41409.73 104023 53584.61 87256 63934.92 70618 116921.21
1994 121299 49331.14 108502 63035.46 93032 74248.54 74046 37361.38
1995 109944 51819.62 108129 71464.36 88828 84128.74 83134 71761.42
1996 112904 61313.17 109416 83187.34 88452 95565.57 81238 86053.47
1997 116693 73769.70 110129 98045.13 88645 112577. 81112 216163.87
1998 120060 86706.41 110705 115644. 6 88536 134897. 80731 59220.60
1999 122660 102697. 7 112376 136052. 9 89533 160181. 581339 99238.47
91
2000 125852 120539. 9114109 161972. 289831 188963.4 4 83023 349944.64
2001 131723 139431.3 6116400 186188.0 092769 217832.7 5 87137 405981.19
2002 133000 159423.4 6 117394 2149903 9 94622 255478.1 0 94975 493501.37
2003 136733 176502.3 176502.3 9117537 2417566 896099 290503.3 567433.27
2004 138760 195081.7 1120651 268216.9 299571 330295.7 498176 717679.01
2005 141908 213104.1 1 125198 295685.4 101376 374891.0 3 98310 863133.51
2006. 139570 226061.1 8121664 302212.8 1106172 430813.2 3117692 1132087.02
2007 149663 253013.6 9132808 357395.1 4113422 532592.2 532592.2 1454043.47
2008 168034 303423.0 4148361 430279.7 1128021 657699.0 2137241 1858544.40
2009 199695 363910.1 9169725 529758.3 9142272 822913.6 6150611 2205398.63
2010 224155 420337.7 2189457 614047.1 8152323 944992.2 4168934 2581651.91
Source: RBI macro-economic time series, 2011
While the comparing from 1996 to 2006 as a decade, it cab see the pattern of
population group-wise share in total credit outstanding of SCBs. See the chart:
Figure 3.1: Population Group-wise Share in SCBs Credit Outstanding
Source: Pankaj Kumar and Ramesh Golait , RBI,2011
The figure 3.1 indicates the share of rural regions in credit outstanding of SCBs
declined to 8.3 per cent in 2006 from over 11.4 per cent in 1996. Therefore, the share
of semi-urban and urban centres also declined in credit outstanding during the decade
92
leaving only the metropolitan centres to gain in share by about 7.6 percentage points.
It is the evidence that neglected the rural branch penetration was at ‘0’ level even in
the present context at all India level.
When looking into all-India Credit-Deposit Ratio (CDR) that stood at 72.4 per
cent in 2006, that was about 12.6 percentage points higher than in 1996 somewhat
reflecting floating credit growth in the recent years. Then the CDR has increased for
all population-groups during the last decade ending 2006. However, it remains in the
range of 50-55 per cent in the rural, semi-urban and urban centres and substantially
higher at over 85 per cent in the metropolitan centres. See the Column chart-2:
Figure 3.2: Credit –Deposit Ratio (per cent)
Source: Pankaj Kumar and Ramesh Golait , RBI,2011
3.4.2 Regional Spread of Banking
In general to measure, the household socio-economic indicators are not
uniform across their profiles and in that same way in banking also indicators are not
uniform across regions in India. According to RBI (2011)136
it is said that lower value
of population per office indicates higher banking density. It is observed that the
banking density is significantly higher in the Southern, Northern and Western Region
as compared with North-Eastern, Central and Eastern Region (see the table no 3.4). In
136
Pankaj Kumar and Ramesh Golait current issues in Agriculture Credit in India: An
Assessment, Reserve Bank of India, New Delhi
93
additional, the banking density has got worse more in the North-Eastern, Central and
Eastern Region, where it was already low, in the decade since 1996.
Table: 3.4 Region wise Banking Density
Regional per office(‘000)
Region 1996 2006 Change
Northern Region 11.9 12.6 0.7
North-Eastern 18.4 21.7 3.3
Eastern Region 17.8 19.9 2.1
Central Region 17.4 20.2 2.8
Western Region 13.7 14.9 1.2
Southern Region 12.2 12.2 0.0
All India 14.7 15.9 1.2
Source: Pankaj Kumar and Ramesh Golait, RBI, 2011
In the circumstance of regional extend of SCBs since 1996, only 4,925
branches, it is observed that of the 6,320 offices, while compared to southern regions
more than three quarters, Northern and Western Region while the other three regions,
According to RBI (2011) report that North-Eastern, Central and Eastern Region taken
together, have accounted for less than a quarter (Table 3.5). The result indicated that
individually and collectively in the present situation accountability is for a lower share
of SCB offices as compared with that a decade ago.
94
Table: 3.5 Region wise spreading Banking
Region 1996 2006 Change
Northern Region 10,021
(15.5)
11,821
(16.7)
1,800
(28.5)
North-Eastern 1,936
(3.0)
1,949
(2.8)
13
(0.2)
Eastern Region 11,686
(18.1)
12,308
(17.4)
622
(9.8)
Central Region 13,344
(20.7)
14,104
(19.9)
760
(12.0)
Western Region 9,938
(15.4)
10,996
(15.5)
1,058
(16.7)
Southern Region 17,531
(27.2)
19,598
(27.7)
2,067
(32.7)
All India 64,456
(100.0)
70.776
(100.0)
6,320
(100.0)
Source: Pankaj Kumar and Ramesh Golait, RBI, 2011
However, based on the RBI report(2011) it is emphasized that the rate of
increase in the penetration of banking services in the rural and semi-urban areas has
been much lower than that in the urban areas. In additional, penetration of banking
services has been lower in the central, eastern, and northeastern regions of the country
compared to the more developed northern, southern, and western regions. In order to
overcome of this problem the branch authorisation policy was liberalised in December
2009 giving freedom to domestic scheduled commercial banks to open branches at
Tier 3 to 6 centres (with population of up to 49,999 as per the Population Census of
2001) without have the need to take permission from RBI in each case, subject to
reporting (Dr Debesh Roy, 2011)137
.
3.5 Vulnerable Group Demands for Financial Services in India
NABARD (2009) reported that indebtedness of household in India has been
reviewed periodically by government of India. The demand side of financial
services of Indian households has been analysed from National sample Survey
Organization (NSSO) reports. Debt and investment survey of NSSO, 59th
round has
estimated incidence of indebtedness (IOI) that is defined as percentage of indebted
households. It can be observed in the results of financial inclusion from the various
studies and report; there is an urgent need to fast-track financial inclusion, adding
that the various technological and financial products need to be taken. According to
2011 census the rural population is 72.2 per cent of even today, but only 30% of the
137
abid…
95
bank branches operate in the rural areas (Nirupam Mehrotra,Dr. V. Puhazhendhi,
Gopakumaran Nair G, Dr. B. B. Sahoo, 2009)138
. According RBI (2012) report
indicated that the rural India accounts for just 9% of total deposits, 7% of total
credit, 10% of life insurance, and 0.6% of non-life business, all the financial
inclusion not reaching to the poor. Thus, financial inclusion need to redefine the
delivery of financial services at affordable costs to sections of disadvantaged and
low income segments of society. Unreserved access to public goods and services is
a feature of an open and efficient society. Therefore, there is urgent need to
understand the Demand and supply of financial services in Rural India (RBI,
2012)139
.
3.5.1 Demand Side Factors
While financial inclusion can be substantially enhanced by improving the supply
side or the delivery systems, it is also important to note that many regions, segments
of the population and sub-sectors of the economy have a limited or weak demand for
financial services. In order to improve their level of inclusion, demand side efforts
need to be undertaken including improving human and physical resource
endowments, enhancing productivity, mitigating risk and strengthening market
linkages. However, the primary focus of the Committee has been on improving the
delivery systems, both conventional and innovative.
3.5.2 Demand Potential
The potential market for microfinance in India appears to be in the range of
57.9–77.3 million clients, which translates into an annual credit demand of $5.7
billion–$19.1 billion (INR 230–773 billion). Considering economically active low-
income occupational segments, such as small and marginal farmers, landless
agricultural laborers, and microentrepreneurs, together with microfinance clients, the
potential market could reach an estimated 245.7 million customers and an annual loan
demand of $51.4 billion (INR 2.1 trillion). Significant market demand also exists
among the low-income population for insurance, pension, savings, and remittance
138
Nirupam Mehrotra, Dr. V. Puhazhendhi, Gopakumaran Nair G, Dr. B. B. Sahoo, Financial
Inclusion: An over view, Published by NABARD, Mumbai, 2009. 139
RBI, Report on Trend and Progress of Banking in India 2009-10, Published by Reserve
Bank of India, 2012
96
products. Existing regulatory restrictions, however, constrain for-profit MFIs from
tapping into these markets (IFC,KfW, 2009)140
.
3.5.3 Demand for Credit
In terms of demand for microcredit, there are three segments. At the very
bottom, in terms of income and assets and most numerous, are those who are landless
and engaged in agricultural work on a seasonal basis and manual labourers in forestry,
mining, household industries, construction and the transportation industry. They also
need credit for acquiring small productive assets such as livestock, from which they
can generate additional income.
The next market segment is of small and marginal farmers and rural artisan
weavers and the self-employed in the urban informal sector such as hawkers, vendors,
and workers in household micro enterprises. This segment mainly needs credit for
working capital, a small part of which also serves consumption needs. In rural areas,
one of the main uses of working capital is for crop production. This segment also
needs term credit for acquiring additional productive assets such as irrigation pump
sets, bore wells and livestock in case of farmers, and equipment (looms, machinery)
and work sheds, in case of non-farm workers. This market segment also largely
comprises the poor but not the poorest.
In the NSSO survey, it has also been estimated that a large percentage of rural
women in the age group of 15 years and above, who are usually engaged in household
work, are willing to accept work at their household premises (29.3 per cent), in
activities such as dairy (9.5 per cent), poultry (3 percent), cattle rearing, spinning and
weaving (3.4 percent). Tailoring (6.1 per cent) and manufacturing of wood and cane
products, etc.
3.5.4 Demand for Saving and Insurance Services:
Savings are fundamental to sustainable economic development. Access to
savings and deposits enables households to southern the consumption of uneven
income flows, accumulate assets for the future, invest in improved human capital, and
better prepare for unexpected emergencies. It can, therefore be said that demand for
140
IFC and KfW, India: Microfinance and Financial Sector Diagnostic Study published by
International Finance Corporation and KfW Bankengruppe , Washington D.C,2009 ,p.p.4-5
97
savings services is even higher than that of credit. Studies of rural households in
various states in India show that the poor, particularly women, look for ways to save
small amounts whenever they can. The irregularity of cash flows and the small
amounts available for saving at a time deter them from using formal channels such as
banks. This is true of urban areas also. Almost all women’s groups in their early years
begin with regular saving and their saving exceeds the loans they give from their
funds. Of course, part of this lower demand for credit is the inadequate absorption
capacity of women, which comes from long years of exclusion from the economic
sphere outside their homes (Michael S. Barr, 2011)141
.
The poor often do not have the time, money, or ability to visit banks. The
banks place minimum deposit requirements, which are often too high for the village
poor. Micro finance institutions (MFIs), which promote saving groups, provide the
poor with a safe place to save. When Non Governmental organizations(NGOs) are
involved in promoting SHG savings, the incremental savings per household goes up
further (UNCDF, 2006)142
.
3.5.5 Demand for Micro Insurance
Micro-insurance is a key element in the financial services package for people
at the bottom of the pyramid. The poor face more risks than the well off. It is
becoming increasingly clear that micro-insurance needs a further push and guidance
from the Regulator as well as the Government. The Committee concurs with the view
that offering micro credit without micro-insurance is self-defeating. There is,
therefore, a need to emphasise linking of micro credit with micro-insurance.
The country has moved on to a higher growth trajectory. To sustain and
accelerate the growth momentum, we have to ensure increased participation of the
economically weak segments of population in the process of economic
growth. Financial inclusion of hitherto excluded segments of population is a critical
part of this process of inclusion (UNCDF, 2006)143
.
141
Michael S. Barr Demand for Micro Insurance, published Google Scholars, 2011
142 Building Inclusive Financial Sectors for Development United Nations Capital
Development Fund, New York, 2006
143 abid….
98
3.5.6 Micro Finance Institutions – NBFCs
Micro Finance Institutions (MFIs) could play a significant role in facilitating
inclusion, as they are uniquely positioned in reaching out to the rural poor. Many of
them operate in a limited geographical area, have a greater understanding of the issues
specific to the rural poor, enjoy greater acceptability amongst the rural poor and have
flexibility in operations providing a level of comfort to their clientele. The Committee
has, therefore, recommended that greater legitimacy, accountability and transparency
will not only enable MFIs to source adequate debt and equity funds, but also
eventually enable them to take and use savings as a low cost source for on-lending.
There is a need to recognize a separate category of Micro finance – Non
Banking Finance Companies (MF–NBFCs), without any relaxation on start-up capital
and subject to the regulatory prescriptions applicable for NBFCs. Such MF-NBFCs
could provide thrift, credit, micro-insurance, remittances and other financial services
up to a specified amount to the poor in rural, semi-urban and urban areas. Such MF-
NBFCs may also be recognized as Business Correspondents of banks for providing
only savings and remittance services and also act as micro insurance agents.
The Micro Financial Sector (Development and Regulation) Bill, 2007 has been
introduced in Parliament in March 2007. The Committee feels that the Bill, when
enacted, would help in promoting orderly growth of microfinance sector in India. The
Committee feels that MFIs registered under Section 25 of Companies Act, 1956 can
be brought under the purview of this Bill while cooperative societies can be taken out
of the purview of the proposed Bill.
3.5.7 Revitalising the Cooperative System
Though the network of commercial banks and RRBs has spread rapidly and
they now have nearly 50,000 rural/semi-urban branches, their reach in the countryside
both in terms of the number of clients and accessibility to the small and marginal
farmers and other poorer segments is far less than that of cooperatives. In terms of
number of agricultural credit accounts, the Short Term Cooperative Credit System
(STCCS) has 50% more accounts than the commercial banks and RRBs put together.
On an average, there is one PACS for every 6 villages; these societies have a total
membership of more than 120 million rural people making it one of the largest rural
financial systems in the world. However, the health of a very large proportion of
99
these rural credit cooperatives has deteriorated significantly (Government of India,
2008)144
.
The Vaidyanathan Committee Report has suggested an implementable Action
Plan with substantial financial assistance. The implementation of the Revival Package
would result in the emergence of strong and robust cooperatives with conductive legal
and institutional environment for prosper. A financially sound cooperative structure
can do wonders for financial inclusion given its extensive outreach.
3.6 Expectations of Poor People from Financial System
Inclusion report (2012) gave the insights that the bankers can only provide
the financial services for their customers such as finances, products, money transition,
and other business services. Therefore, to recognise that efforts can never be one
sided, but also need to converge of these items which can ultimately result in a real
increase in production and that bank has not only given credit but whether banks are
going to have any increase in agriculture productivity?” ( Inclusion, 2012)145
While questions previously have focused on the broad spectrum of
operations ranging from issues regarding banks to those regarding productivity, it is
important to look back at the question focused an essential element of the system,
“How many families or how many people are we able to connect with the bank on the
one hand and what banking solutions are we able to extend to people?” Other than
this, there is also the issue of safety and security. People carrying large amounts of
cash in states such as UP, Bihar and Jharkhand face such breaches of security.
However, based on the discussion and then results given evidences that taking into
account their seasonal Inflow of Income from agricultural operations, migration from
one place to another, seasonal and irregular work availability and income; the existing
financial system needs to be designed.
3.7 Challenges in current inclusive growth strategies
The main principal ideas of inclusive growth have sated behind much the same
since the pre-reform period; there seem to be a few distinct differences in the 144
GOI, Report of the Committee on Financial Inclusion, Published by Government of India,
New dalhi,2008 145
Inclusion, Financial Inclusion 2012 Insights and Expectation
http://www.inclusion.in/index.php?option=com_content&view=article&id=513&Itemid=77
100
circumstances surrounding the pursuit of inclusive growth in the post-reform period.
On the one hand, the economic and political climate in the post-reform period seems
to have been endowed with the potential to reduce disparities. Recent higher
economic growth enables the government to raise revenue so that it can finance the
bigger budgets which the inclusive growth strategy requires, mainly through higher
tax revenues and a larger borrowing capacity, both of which, in fact, as a share of
GDP have, on aggregate, risen for state governments in the 2000s. Politically, quite a
few caste/religion-based or -supported parties have increasingly voiced their own
demands, interests and rights, and even come into power, especially at the state level
(DEBASIS PATNAIK, 2012)146
. In the villages, economic, social, and political
mobility has undergone changes in the local power structure over the years,
particularly through the emergence of some intermediate and backward castes, even in
underdeveloped states, although the extent to which this has happened varies from
village to village (Shigemochi Hirashima, Hisaya Oda and Yuko Tsujita, 2011)147
Datta (2009) debated that on the other hand, overall economic policy in the
post-reform period is for market forces to drive economic growth. Inclusive growth in
the post-reform period has been tenaciously adopted with this form of growth strategy
in mind. In the 11th Five-Year Plan document, it is clear that the provision of
economic and social infrastructure and services tends to be reliant on the private
sector or on public–private partnerships (PPP) (Datta, 2009)148
. The rational of public
sector participation, or PPP, is mainly the public sector’s inefficiency and the lack of
resources. Critics argue that the current model of PPP is inclined to privatization or
that it contains a built-in mechanism to move towards privatization, even in essential
service delivery to the poor at the grassroots level.
In fact, despite the government’s emphasis on care for the vulnerable and
the poor who are more likely to depend on public services and infrastructure,
146
DEBASIS PATNAIK, M Umakanth and Haripriya V, Preference formation for Effective
Economic Decision Making at Grassroots , by International Conference on Interplay of,
Bhutan Conference on Politics, Economics and Society on14th-15th September2012 at
Royal Thimpu College, Department. 147
Shigemochi Hirashima, Hisaya Oda and Yuko Tsujita, Introduction: Inclusiveness in
India: A Challenging Strategy for Growth and Equality, published by palgrave, 2011
http://www.palgrave.com/PDFs/9780230290235.pdf 148
Datta, Amrita (2009) ‘Public–Private Partnerships in India: A Case for Reform?’
Economic and Political Weekly, 45 (33), pp. 73–8.
101
development expenditure on aggregate by state governments, both as a share of GDP
and of total expenditure, has not significantly increased, and social expenditure at the
aggregated states level, both as a share of GDP and total expenditure, has declined
since the late 1990s and risen since 2005/6 only to the level of the late 1990s. Worse
still, underdeveloped states tend to be in a weaker fiscal position. This contradictory
trend of stagnating expenditure at the level of the state while revenues have increased
can be attributed not only to the Fiscal Responsibility and Budget Management Act,
2003, under which the government sought to take measures to reduce both the
revenue and the fiscal deficits, but also, implicitly, to the recognition that the role of
the government had changed from that of a major player to that of being just one
player or facilitator among many in social and economic development through the
PPP(Hirashima, Hisaya Oda and Yuko Tsujita, 2009) 149
.
The inclusive growth strategy is predicated on market-led growth.
Nevertheless, the government has emphasized the political consideration that the
interplay of market forces alone is unlikely to remedy disparities stemming from
social and economic divisions. Quality infrastructure and services affordable to
anyone and maximizing everyone’s quality of life with limited public finances remain
major challenges.
3.8 Issues of the weaker Sections and Inclusive Growth
The mains issues of inclusive growth that the system of quotas for public
sector jobs and for higher education for SC/STs has in implementing at the target
level including allocated funds were diverted to other projects than the targeted for
SC, St, and OBC. Therefore, to include the disadvantaged communities in the main
stream of development is evolved to expand education and employment quotas for
SC, ST, and OBCs to maintain equity across caste, religion, and gender. The
implementation of Reservations has been further extended to SC/STs in the Indian
parliament, and to SCs, STs, OBCs, and women in Panchayat (local democratic
institutions) to ensure that deprived groups are represented in government. In general,
however, these underprivileged groups have continued to be relatively deprived even
149
Hirashima, Hisaya Oda and Yuko Tsujita, Introduction: Inclusiveness in India – A
Challenging Strategy for Growth and Equality, published by palgrave, 2011
http://www.palgrave.com/PDFs/9780230290235.pdf
102
long after the implementation of the reservation policy (Deshpande, 2001; Kijima,
2006)150
.
In India Muslims are underprivileged groups, while generally categorized
as OBCs, do not seem to benefit from the reservation system when compared to
Hindu OBCs, who far outnumber Muslims. Muslims, comprising about 13 per cent of
the population, are subject to occasional violence along religious lines, which has
been instigated by the rise of Hindu nationalism in response to changing secular
values. According to the Sachar Committee established in 2005 and tasked with
reporting on the socio-economic state-of-affairs of Muslims (N. Chandrasekhara Rao,
2009)151
,
150
Deshpande, Ashwini (2001) ‘Caste at Birth? Redefining Disparity in India’, Review of
Development Economics, 5 (1), pp. 130–44. 151
N. Chandrasekhar Rao, India: Perspectives on Equitable Development, New Delhi:
Academic Foundation,2009
103
SECTION-II
3.9 The Supply Side Ecosystem
The supply side ecosystem is very important to achieve full financial inclusion.
Therefore, there is a need to motivate the demand for formal financial sector products
among the financially excluded consumers, suitable, affordable, and effective supply
side interventions hold the key to increasing financial inclusion, specifically in the
short term.
3.9.1 Supply Side Constraints
The main constraints are as follows:
A. Products: the products and services offered by the formal banking sector are
not suitable for the financially excluded consumers resulting in slow uptake.
This is because most of the currently available products and services have
been designed for a certain customer segment and either the same products or
their stripped down versions are being offered to the financially excluded
segment. But if you look into with business aspects continuing to see financial
inclusion as a social obligation rather than a viable business opportunity. The
financial institutions need to concentration developing suitable products
specifically for the financially excluded consumers and business my increase
(Rajdeep Sahrawat, 2012)152
.
B. Processes: The inflexibly obligatory processes of the formal financial
institutions are complicated, due their documentation demanding from the
financially excluded consumers, many of them assets less labourers whom
are illiterate or semi-literate, from approaching the formal financial sector
need documentary evidence of identity verification requirement through
credit history, fixed loan repayment schedules, operating timings are some
examples of processes acting as access barriers.
C. Technology: In the present existing system many public sector banks have
adopted major technology initiatives such as core banking system
implementation, Regional Rural Banks (RRB), Primary Agricultural Co-
152
Rajdeep Sahrawat, Financial Inclusion – From Obligation to Opportunity, published by
Tata Consultancy Service, Mumbai, 2012
104
operative Society (PACS) and the other supply side stakeholders of the formal
financial ecosystem including post offices, Micro Finance Institutions (MFI),
continuously improving information technology. Therefore, the majority of
these institutions have the primary responsibility to provide financial services
to rural India and due their low IT capabilities often slow down their ability to
provide services efficiently and scale up their operations. Finally, lack of IT
strategies are also makes them difficult their upstream and downstream
operations with the other integrating the financial ecosystem.
D. People: In the existing banking system that the majority of rural branches
staff of formal financial institutions are on temporary deputations from urban
branches, so those manager or staff may not concentration that much to
increase the their market in that particular area where they located. Hence, the
temporary managers do not understand the unique requirements of the
financially excluded consumer often leading to an unfavorable interaction
between the bank staff and the consumers. Due to that may have negative
impact on financially exclude consumers?
E. Outreach: The density of bank branches in rural areas reducing and
increasing the urban areas banks and the urban branches are profitable, then
the rural branches. Therefore, the per capita density of the bank branches in
the rural locations continues to be decreasing. However, currently the average
population density per bank branch is 16,000 in India. The total numbers of
branches for rural and urban locations are 17,000 and 13,000 respectively.
3.10 Initiatives for Financial Inclusion in India
According to RBI (2008) report India has a long history of banking development
with the major focus of the Government. The Reserve Bank of India has developed a
sound banking system which could support planned economic development through
mobilization of resources/deposits and channel them into productive sectors. The
Government of India has made the strategies to use the banking system as an
important agent of change for the economic development of the country. However,
the most policies were formulated after Independence. The Reserve Bank of India
recognized the critical role of the availability of credit and financial services to the
public at large in the holistic development of the country with the benefits of
economic growth being distributed in a democratic manner. Finally RBI with
cooperation of government played a critical role to recognise and modify applicable
105
the policy framework from time to time to and ensure that the financial services
needs of various segments of the society were met satisfactorily (RBI, 2008)153
.
3.10.1 Progress till 1990
The government of India had taken several initiatives even before 1990. The
main initiatives were 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. There were special 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 have bulk of the poor population.
In 1967 the Government of India had been announced that the policy of social control
over banks with a view to securing a better alignment of the banking system with the
needs of economic policy. Then 1968 the National Credit Council was set up in
February with main objective of assess periodically the demand for bank credit from
various sectors of the economy and to determine the priorities for grant of loans and
advances. However, the social control of banking policy was soon implemented by
the nationalization of major Indian banks. After successful implementation of social
control policy, the immediate tasks set for the nationalized banks were mobilization of
deposits on a massive scale and lending of funds for all productive activities. Finally
government and RBI had emphasized on providing credit facilities to the weaker
sections of the economy.
In the year of 1982 the National Bank for Agriculture and Rural Development
(NABARD) was set up with the goal to provide refinance to the banks extending
credit to agriculture including for RRBs, to provide the credit requirements of the
rural poor, shave recently been restructured(RBI, 2008)154
.
3.10.2 Initiatives taken by Government of India and RBI in the recent years
Dr. C. Rangarajan committee on Financial Inclusion has given road map to achieve
financial inclusion in India. There are few initiatives to be implemented by GoI, RBI,
and NABARD. Following are the major initiatives suggested:
1. Semi Urban and Rural Bank Branches
153
RBI, Financial Inclusion, Published by Reserve Bank of India, 2008
http://rbi.org.in/scripts/publicationsview.aspx?id=10494 154
abid….
106
2. No frills Bank Accounts
3. Financial literacy and credit counseling centers
4. Business correspondents (BC)/Business facilitator (BF) model
5. Lead Bank scheme
6. Financial inclusion funds
7. Regional rural banks (RRBs)
8. Self Help Group – Bank Linkage Model
9. Micro finance Institutions
10. Micro Insurance
All the institutions like Banks, MFIs, RRBs, Insurance Companies, have started
implementation of these initiatives. Review of these initiatives is important to ensure
100% financial inclusion in India; as per goals set by GoI.
I. Semi- Urban and Rural Bank Branches
As per RBI data there are 171 different banks that operate in India, as on March 2011.
The details of Scheduled Commercial Bank branches, as on 31st March, 2011, are as
under
Table: 3.6 Semi Urban and Rural Bank Branches
Category Rural
Branches
Semi-urban
Branches
Urban
Branches
Metropolitan
Braches
Total
No of
Branches
33,495 22.631 17,712 15,784 89,622
Percentage
of Branch
37.4% 24.3% 19.8% 178.6%
Source: RBI report, 2012
The table 3.6 clearly indicates that the majority 38% (33,495) out of the
89,622 bank branches of Scheduled Commercial Banks in rural areas. While there are
about 600,000 villages in India, as per the 2001 Census, there are only 33,495 rural
bank branches. Average Population per Bank Branch Office (APBBO) in India, as on
31.3.2011, is 13,503. But, demand side as per Reserve Bank of India, there were 296
under banked districts in the under banked States in the country as on July, 2010.
107
In the year of 2010-11 the government of Indian Finance Minister had
announced in his budget that “All villages with population over 2000 will have
access to financial services through a banking outlet by March2012 - Harness Low
Cost technology and innovate Low Cost business model” (D.M.Gujarathi, 2012)155
.
RBI has also simplified authorization process to open new bank branches in semi-
urban and rural areas. Hence, the Reserve Bank of India has permitted domestic
Scheduled Commercial Banks to freely open branches in Tier 3 to Tier 6 centers with
population of less than 50,000 under general permission, subject to reporting. The
majority of the in states of North Eastern States and Sikkim, domestic Scheduled
Commercial Banks are willing to open branches in rural, semi urban and urban
centers with approval of from Reserve Bank in each case, subject to reporting. In
the present category of branches in rural area spread as follows:
Table:3.7 Category of Branches in Rural Areas
Bank No of Branches in
Rural Areas
State Bank of India 500
Bank of Baroda 80
Indian Overseas Bank 100
Canara Bank 100
IDBI Bank 50
PSU Bank 1500
Private Banks 800
Source: RBI report, 2012
The RBI has announced the Monetary Policy Statement of April 2010, with
clear guidelines and the roadmap to provide banking services in every village with a
population above 2,000 was finalized by state level bankers’ committees (SLBCs).
The Reserve Bank of India has identified that under the roadmap, 74,414 villages with
population above 2,000 as unbanked, which were allocated to various banks,
including regional rural banks (RRBs) for providing banking services by March 2012.
Banks have covered 74,199 (99.7 per cent) of these unbanked villages. But for
bankers side it is challenging task to cover all the unbanked villages of the country.
II. No frills Bank Accounts
155
Dinesh Borse and Dr. D.M. Gujarathi, Analysis Of Various Initiatives on Financial
Inclusion, National Monthly Refereed Journal ff Research In Commerce & Management,
Volume No.1, ISSUE NO.7, ISSN 2277-1166, 2012, PP:82-95.
108
The Reserve Bank of India made a policy and advised all Scheduled
Commercial Banks to make available a basic 'no frills' account with 'nil' or very low
minimum balances that would make such accounts accessible to vast sections of the
population. In 2011, RBI saw a progress report that banks have opened 74.3 million
such accounts as on March 31, 2011. The report indicated that in the majority of the
accounts, only ‘No frills’ savings accounts appear capable, at least on paper, to cater
to the small and also irregular income flows of the poor and Banks have also been
advised to provide small overdrafts in such accounts (RBI, 2012)156
. However, in the
year of 2012, RBI made a policy that all scheduled commercial banks offer ‘No
frills’ account as mandated by RBI for financial inclusion and has given target for the
year of 2012-2013 as follows:
Table:3.8 No-Frill Accounts
Parameter Mar 2012
Target
March 2013
Targets
Number of No-Frills Accounts(NFAs) opened (in
million)
109.6 153.3
Amount in NFAs(Rs. in million) 93.110 113,233
Number of NFAs with Overdraft(OD) facility in (in
million)
36.3 53.3
NFAs with OD-Amount outstanding(Rs. million) 14,458 22,282
Source: RBI report, 2012
II. Financial Literacy and Financial Counseling Centers
The Reserve Bank of India set up the High Level Committee for Financial
Literacy to cover initiatives under financial literacy and credit counseling while broad
basing the Lead Bank
The committee has given their recommendation to RBI for formulating model
scheme for Financial Literacy and Credit Counseling Centres (FLCCCs) and advised
Lead Banks to open a Financial Literacy and Credit Counseling Centre (FLCCC) in
conformity with the Model Scheme in every district where they have lead
responsibility. The main objectives of FLCCCs are:
To educate the people in rural & urban areas with regard to various financial
products / services available from formal financial sector.
156
RBI, Annual Report of the Reserve Bank of India for Year of 2011-12, Published by the
Reserve Bank of India, Mumbai, 2012
109
To provide face-to-face financial counseling services and offer debt
counseling to individuals who are indebted to formal / informal financial
sectors.
To formulate debt restructuring plans for borrowers who are in distress.
To take up any such activity that promotes financial literacy, awareness of
banking products.
To make the people aware of the advantages of being connected with the
formal financial sector
As on March 2010 banks had reported that setting up 135 Financial Literacy and
Credit Counseling (FLCC) centers in various states of the country. State Lead Bank
Committee implemented agencies under the RBI and covered the under credit
counseling centers in districts level to implement the programmes (Harun R Khan.,
2012)157
.
III. Business correspondents (BC)/Business facilitator (BF) Model
Business Correspondents model was formulated by RBI and it has initiated a major
policy measures to make sure financial inclusion to increase the outreach of the
banking sector. RBI have been directed to all the banks given to use this BC model as
intermediaries services such as Business Facilitators and correspondences to provide
banking services for ensuring grater financial inclusion and increasing the outreach of
the banking sector (Harun R Khan., 2012)158
.
However, with direction of RBI guidelines, all the scheduled commercial
banks including Regional Rural Banks (RRBs), Local Area Banks (LABs) banks use
the services of NGOs / SHGs, MFIs and other civil society organizations as
intermediaries in providing financial and banking services through the use of BF and
BC Strategies.
Following the RBI guidelines this model will help to provide - Banking
services through banking outlet in every village have population above 2000. As of
now banks are using this model for deposits, withdrawals, and remittance services.
ICICI Bank has appointed BCs for 393 villages in India and opened more than 40 Lac
157
Harun R Khan, Issues and Challenges in Financial Inclusion: Policies, Partnerships,
Processes & Products, Published by the Reserve Bank of India, Mumbai, 2012 158
abid…
110
accounts till date in FY 2011-12. BCs model very important and cost effective model
to provide financial services.
Table: 3.9 RBI has mandated following targets
Total Number of Villages covered March 12 Targets March
Targets
Total covered through covered 1,23,473 3,48,283
Villages covered through Branches 24,618 25,694
Villages covered through Business
Correspondents(BCs)
1,97,523 3,20,441
Other modes like Rural ATMs, Mobile Van
etc
1361 2177
Number of villages > 2000 population
covered
89,657 93,630
Number of Villages < 2000 1,33,816 2,54,653
No. of BCs employed by banks 1,25,988 1,87,972
Source: RBI report, 2012
3.10.3 Financial inclusion funds
The Rangarajan, committee recommended the Financial Inclusion Fund (FIF)
for meeting the cost of developmental and promotional interventions of financial
inclusion and Financial Inclusion Technology Fund (FITF) to meet the cost of
technology adoption. The FIF will have the corpus of 500 crore, contributed by the
GOI, RBI, and NABARD in the ratio of 40:40:20 in a phased manner over five years,
these funds will be release depending upon utilisation of funds. Banks will be eligible
for support from the Funds on a matching contribution of 50% from the Fund in
regard to districts other than tribal districts and 75% in case of branches located in
tribal districts identified under the Tribal Sub Plan (RBI, 2010)159
.
Major initiatives under FITF
ICT Solution adopting BC / BF model by RRBs
Support for CBS (Core Banking System) for weak RRBs
Engaging Farmers Club as BF by RRBs
Training of BC / BF - Certification Course of IIBF
159
RBI, Policy Environment for Financial Inclusion, Published by Reserve Bank India,
Mumbai, 2010, http://rbi.org.in/scripts/PublicationsView.aspx?id=12975
111
Engaging SHGs as BC/BF by RRBs
Support to Financial Literacy and Credit Counseling Centres (FLCCs) from
FIF
Financial Literacy through Audio Visual medium – Doordarshan
Utilisation of FIF and FITF
Table: 3.10 The year-wise achievements are given below: (Rs. in crore)
Name
of the
Fund
2008-09
2009-10
2010-11 2011-12 Cumulative up
to Feb. 2012
S D S D S D S D S D
FIF 1.3 0.36 18.36 7.99 19 9.21 63.99 9.03 102.65 26.59
FITF 4.22 0.09 17.08 1.67 101.11 54.01 183.67 88.02 306.08 143.79
Total 5.52 0.45 35.44 9.66 120.11 63.22 247.66 97.05 408.73 170.38
S= Sanctions, D= Disbursement
Source: RBI report, 2012
3.10.4 Regional Rural Banks (RRBs)
The RRBs played a vital role to mobilize financial resources for rural (semi-
urban) areas and grant loans for social sector groups such small and marginal farmers,
agricultural laborers and rural artisans. The Reserve Bank of India has given the
operational area limitation area for RRBs to covering one or more districts in the
State. RRBs covered overall 618 districts as on 31 March 2010. The total number of
branches 15480 as on 31 March 2010 out of which more than 80% of the branches
are located in rural areas. In rural areas, RRBs account for a substantial 37% of total
offices of all scheduled commercial banks. In semi-urban areas, their share comes to
15%. It goes without saying that exclusion is more severe in rural areas.
RRBs progress at all India level, RRBs account for 12% of all deposit
accounts of scheduled commercial banks and a meager 3.5% of deposit amount.
However, in rural areas, RRBs market share in deposit accounts is a significant 31%
and that in deposit amount 19%. It shows that the average deposit amount is lower in
RRBs than other commercial banks, thereby implying RRBs’ better reach to small
depositors. RRBs account for 18% of loan accounts at all India level of all scheduled
commercial banks and 3% of loans outstanding. However, RRBs in rural areas the
share of loan accounts is an impressive 38% and more significantly, despite have
112
38% of all loan accounts, However, RRBs account for only 21% of total credit
outstanding in rural areas, implying thereby their better reach to small borrowers
(NABARD, 2012)160
.
3.11 Key Performance Indicators of RRBs as on 31 March 2010
No of RRBs 82
No of Branches 15480
Outstanding total borrowings(Rs.Lac) 1877006
No of accounts 100215962
Total Amount (Rs. lac) 14503494
Net NPA 1.80%
Source: NABARD report, 2012
3.11 Financial Inclusion further Progressed
In the present context the Reserve of Bank India is giving high level priority
for financial inclusion. The RBI has been encouraging the banking sector to expand
the banking network both through setting up of new branches and also through BC
model by leveraging upon the information and communication technology (ICT). As a
result of all these efforts the status of financial inclusion improved in 2010-11 over
the previous year
Table: 3.12 Financial Inclusion Progress as on March 2011
No. Indicator 2009-10 2010-11
1. Credit-GDP
2. Credit –Deposit
3. Population per Bank Branch
4. Population per ATM
5. Percentage of population have deposit accounts
6. Percentage of Population have Credit accounts
7. Percentage of Population have Debit cards
8. Percentage of Population have Credit cards
9. Branches opened on Tier 3-6 centers as a per cent total
new bank branches
10. Branches opened in hitherto unbanked centers as a per
cent of total new bank branches
53.4
73.6
14,000
19,700
55.8
9.3
15.2
1.53
40.3
5.6
54.6
76.5
13,466
16,243
61.2
9.9
18.8
1.49
55.4
9.7
*: Data relate to 2008-09 and 2009-10.
Note:1) Data on credit and deposits are taken from the consolidated balance sheet of SCBs.
2) Data on bank branches, new bank branches, branches opened in Tier 3 to Tier 6 centers, and
branches opened in unbanked centers are taken from Master Office File, DSIM. Data relate to April-
March.
3) Data on branches include branches of Regional Rural Banks in 2010-11.
4) Data on population for the year 2010-11 are taken from Census of India 2011.
160
NABARD, Regional Rural Banks, Published by National Bank for Agriculture and Rural
Development, Mumbai,2012, http://www.nabard.org/pdf/report_financial/Chap_V.pdf
113
5) Data on population per bank branch and population per ATM for the year 2009-10 are repeated from
the Report on Trend and Progress of Banking in India 2009-10.
6) Data on population for the year 2009-10 for calculating Indicators 5-8 are derived from the
population per bank branch as reported in the Report on Trend and Progress of Banking in India 2009-
10.
7) Data on number of deposits and credit accounts are taken from the Basic Statistical Returns 2009-10. 8) Data on number of ATMs, debit cards and credit cards are sourced from the Department of Payment
and Settlement System.
1. Number of bank branches increased by 4,826
The Government of India able to increase 4,826 branches for the year of
2010-2011 under the SCBs. In the expansion of those branches significantly 22 per
cent of the rural areas and 42 per cent of semi-urban areas branches were opened by
SCBs, According to NABARD report, the Southern region did not open new
branches, which is already well banked, had the highest share of new bank branches
in 2010-11. The table 3.13 indicating State-wise distribution of new bank branches
showed that Uttar Pradesh had the highest share of new bank branches at 11 per cent
followed by Maharashtra (10 per cent), Andhra Pradesh (9 per cent), and Tamil
Nadu (7 per cent) during the period April-March 2010-11. See the table as follow:
Table: 3.13 Distributions of New Bank Branches across Regions
Regions No. of new
branches
Population
groups
No.of
branches
Central Region 874.
(18.1)
Rural 1,077
(22.3)
Eastern Region 650
(13.5)
Semi Urban 2,011
(41.7)
North Eastern
Region
97.
(2.0)
Urban
865
(17.9)
Northern
Region
1,120
(23.2)
Metropolitan 873
(81.1)
Southern
Region
1,263
(26.2)
10.3
(.012
Western Region 822
(17.0)
6.3
(.004
Total 4,826(100.0)
Total 4,826(100.0)
Note: Figures in parentheses are percentages to total new bank branches.
Source: RBI Progress report, 2011
The Reserve Bank of India had taken an important policy initiative to increase
the number of bank branches in the Tier 3 to Tier 6 centers as part of the liberalisation
of the branch authorisation policy in December 2009. In the year of 2010-11 (April-
March), SCBs opened more number of branches in Tier 3 to 6 centers as compared
114
with the previous year. Hence, more than half of the new branches were opened in
Tier 3 to 6 centers during 2010-11 (Harun R Khan., 2012)161
. As following table:
Table: 3.14 Progress of banks in Financial Inclusion Plan in India
S.N Particulars
Yea
r en
ded
Ma
r 1
0
Yea
r en
ded
Ma
r 1
1
Yea
r en
ded
Ma
r 1
2
Qu
art
er
end
ed J
un
e
12
Pro
gre
ss
Ap
ril
11
-
Ma
rch
12
1 Total No. of Branches 85457 91145 99242 99771 8097
2 No. of Rural Branches 33433 34811 37471 37635 2660
3 No. of CSPs Deployed 34532 60993 116548 120098 55555
4 Banking outlets in Villages with
population >2000 37791 66447 112130 113173 45683
5 Banking outlets in Villages with
population <2000 29903 49761 69623 74855 19862
6 Banking Outlets through Brick & Mortar
Branches 33378 34811 37471 37635 2660
7 Banking Outlets through BCs 34174 80802 141136 147167 60334
8 Banking Outlets through Other Modes 142 595 3146 3226 2551
9 Total Banking Outlets 67694 116208 181753 188028 65545
10 Urban Locations covered through BCs 447 3771 5891 6968 2120
11 No Frill A/Cs (No. In millions) 73.45 104.76 138.50 147.94 33.74
12 Amount in No Frill A/Cs (Amt In
billions) 55.02 76.12 120.41 119.35 44.29
13 No Frill A/Cs with OD (No. in millions) 0.18 0.61 2.71 2.97 2.10
14 No Frill A/Cs with OD (Amt In billions) 0.10 0.26 1.08 1.21 0.82
15 KCCs-Total-No. In million 24.31 27.11 30.23 30.76 3.12
16 KCCs-Total-Amt In billion 1240.07 1600.05 2068.39 2094.00 468.34
17 GCC-Total-No. in million 1.39 1.70 2.11 2.29 0.41
18 GCC-Total-Amt In billion 35.11 35.07 41.84 43.21 6.77
19 ICT Based A/Cs-through BCs (No. in
millions) 13.26 31.65 57.08 62.77 25.44
20 ICT Based A/Cs-Transactions (No. In
millions) 26.52 84.16 141.09 45.96 141.09
Source: RBI Report, 2012
2. Bank branches opened in hitherto unbanked centers increased
161
Harun R Khan, Issues and Challenges in Financial Inclusion: Policies, Partnerships,
Processes & Products, Published by the Reserve Bank of India, Mumbai, 2012
115
In the year of 2011 the RBI advised all banks to allocate at least 25 per cent
of the total new bank branches in unbanked rural centers. Then the majority of the
bank branches opened in the hitherto unbanked centers increased from 281 in 2009-10
to 470 in 2010-11 (April-March). The overall total new bank branches opened in
2010-11, it is almost ten per cent were opened in hitherto unbanked centers as
compared with 6 per cent in the previous year (RBI, 2011)162
. Finally, in comparison
with the latest policy prescription, the share of new bank branches opened in
unbanked centers in 2010-11 was low (see chart-).
Figure: 3.3 Bank Branches opened hitherto unbanked Centres (April-March)
2011
Sources: RBI Progress Report, 2011
3.12 SHG-Bank Linkage Programme
Since last two decades, Indian bank sector has been expanding financial
system access and usage for the poor and marginalized sections of the population with
approach of the SHG-Bank Linkage Programme (SBLP). The progress of the SHG-
Bank linkage programme, over 103 million rural households have now access to
regular savings through 7.96 million SHGs linked to banks. About also 27% of these
SHGs are savings linked through the SGSY programme – the rural poverty alleviation
programme of the Government of India where predominantly households below the
poverty line are admitted as members (NABARD, 2012)163
. See the table 3.15
162
RBI, Operational and Performance of Commercial Banks, Published by the Reserve Bank
of India, Mumbai,2011 http://www.rbi.org.in/scripts/PublicationsView.aspx?id=13938 163
NABARD, Status of Microfinance in India 2012, Published by National Bank for
0
5
10
15
20
Central Region
Eastern Region
North Eastern Region
Northern Region
Southern Region
Western Region
6
10.1
16.2
3.9 4.6 3.2
11.6 12.6
7.2 8.9
10.3
6.3
Bank Branches Opened in Hitherto Unbanked Centres (April-March) 2011
2009-10 2010-11
116
Table: 3.15 Overall Progress under SHG-Bank Linkage for last 3 years
(Amount Rs in crore/ Numbers in lakh)
Particulars 2009-10 2010-11 2011-12
SHG
Savings
with bank
as on 31
March
Total SHGS
No.of
SHG
Amount No.of
SHG
Amount No.of
SHG
Amount
69.53
(13.6%)
6198.71
(11.8%)
74.62
(7.3%)
7016.30
(13.2%)
79.60
(6.7%)
6551.41
(-6.7%)
Of which SGSY
Groups
16.94
(12.5%)
1292.62
(-17.3%)
20.23
(19.4 %)
1871.12
(40.6%)
21.23
(5.0 %)
1329.25
(-23.2%)
% of SGSY
Groups to Total
24.4 20.9 27.1 25.9 26.7 21.3
All women
SHGs
53.10
(9.18 %)
4498.66
(1.46 %)
60.98
(14.8%)
5298.65
(17.8%)
62.99
(3.3 %)
5104.33
(-3.7 %)
% of women
Groups
76.4 72.6 81.7 75.5 79.1 77.9
Loans
Disbursed
to SHGs
during the
year
Total SHGS 15.87
(-14%)
14453.3
(17.9%)
11.96
(- 24.6%)
1457.73
(0.01%)
11.48
(-4%)
16534.77
(13.7%)
Of which SGSY
Groups
2.67
(1.0%)
2198
(9.1%)
2.41
(-9.9%)
2480.37
(12.8%)
2.10
(-12.9)
2643.56
(6.6%)
% of SGSY
Groups to Total
16.9 15.2 20.1 18.3 17.0 16.0
All women
SHGs
12.94
(5.8%)
12429.37
(18.1)
10.17
(-21.4%)
12622.33
(1.6%)
9.23
(-9.2%)
14132.02
(12.0%)
% of women
Groups
81.6 86 85 86.5 80.4 85.5
Loans
Outstanding
against
SHGs as
on 31st
March
Total SHGS 48.51
(14.8%)
28.38.28
(23.6%)
47.87
(-1.3)
31221.17
(11.4%)
43.54
(-9.0%)
36340.00
(16.4%)
Of which SGSY
Groups
12.45
(27.5%)
6251.08
(6.6%)
12.86
(3.4%
7829.39
(25.2%)
12.16
(-5.4%)
8054.83
(2.9%)
% of SGSY
Groups to Total
25.3 22.3 26.9 25.1 27.9 22.2
All women
SHGs
38.98
(9.18%)
23030.36
(23.9%)
39.84
(2.2%)
26123.75
(13.4%)
36.49
(-8.4%)
30465.28
(16.6%)
% of women
Groups
80.3 82.1 83.2 83.7 83.8 83.8
Source: NABARD SHG Progress Report, 2012
The number of saving linked SHGs now stands at 7.96 million with a
membership of over 103 million poor households. While bulk of these savings is used
for internal lending within the Group (over 70%), the balance is maintained in the
savings accounts with the financing banks. Over 79% of SHGs linked to banks are
exclusive women groups, which is one of the most distinguishing features of
microfinance sector in the country.
Agriculture and Rural Development, Mumbai, 2012
117
NABARD (2012) indicated in that report that the balance in the savings
accounts of the banks as at the end of March 2012 stood at `6551.41 crore. Among the
major States, Karnataka SHGs maintain the highest S.B. balance of over `16000 per
SHG followed by Punjab of nearly `12500 per SHG. Among the regions, southern
region is highest at `10080 per SHG and northeastern region recorded the lowest
balance of `4159 per SHG. On an average, the SHGs maintain a balance of `8230.
Commercial Banks account for 58% of the savings account maintained by SHGs and
RRBs 27% and Cooperative Banks the remaining 15% (NABARD, 2012)164
. Figure:
.3.4 shows a graphical presentation of the savings, fresh loans, and the loan
outstanding of SHGs with Banks for the last 4 years
Figure: 3.4 SHGs as on 31.3.2012 – Savings and Credit
Source: NABARD Status of Microfinance in India Report, 2012
164
abid….
0
5000
10000
15000
20000
25000
30000
35000
40000
2008-09 2009-10 2010-11 2011-12
5546
12254
22680
7016 6199
14453
28038
1458
6551
16535
36340
31221
SHGs Bank-Linkage highlites
Savings Balance
Loan Disbursed
Loan Outstanding
118
Figure: 3.5 Saving Linked SHGs (Number): Agency wise
Source: NABARD Report 2012
According to NABARD report(20012) fact that Commercial Banks
(and financial institutions like SIDBI) are losing their confidence in lending to
MFIs is evident from the fact that the fresh lending to MFIs by banks during the
year declined by over 38% as compared to last year. There has also been a
marginal decline in the number of MFIs availing fresh loans from Banks loan
outstanding against MFIs has come down by almost 17% during the year. If the
trend continues, this sector is likely to face serious resource crunch and could
affect its outreach plans in the near future. The Regional Rural Banks on the other
hand have increased their landings to MFIs during the year, while, reducing the
outstanding loans although they still remain an insignificant player in this arena
The figure 3.5 clearly indicates that the performance of the commercial
banks for SHG Bank Linkage-Agency wise. The majority 58% of the commercial
banks were distributed SHG Linkages .The SHG bank linkages overall India level,
while only 15% of SHG Bank Linkage was able to distributed by cooperatives,
whereas 27% of the SHG Bank Linkage was distributed by Regional Rural bank
in year of 2011-12. MFIs act as an important conduit for extending financial
services to the micro finance sector in the country by raising resources from
Banks and other institutions
58%
15%
27%
SHG Bank Linkage-Agency wise
Commercial Banks
Coopeanks
Regional Rural Banks
119
Figure: 3.6 Average Savings Balance of SHGs with Banks- region wise
Source: NABARD Report 2012
The progress of the SHG Bank Linkage to over all country 4.36 million
SHGs have now access to direct credit facilities from the banks and the total bank
loans outstanding against these groups is over `36340 crore as on 31 March 2012. i.e.
an average of `83500 per group. Hence, 1.15 million SHGs were extended fresh loans
to the extent of `16535 crore during 2011-12 by all banks averaging `1.44 lakh per
group. Although there are fresh lending to SHGs during the year showed an increase
of 13.7% over last year, the steady decline in the number of SHGs being extended
fresh loans by banks for the last 3 years is a matter of concern. The number of SHGs
have outstanding loans with banks is also showing a decline partly due to the
continued decline in the number of SHGs being extended fresh loans by banks for the
last 3 years. (NABARD, 2012)165
.
3.13 Micro- Insurance
Micro-insurance is a key element in the financial services package for
people at the bottom of the pyramid. The poor face more risks than the well-off, but
more importantly they are more vulnerable to the same risk. Poverty is not just a state
of deprivation but has latent vulnerability. Micro insurance should, therefore, provide
greater economic and psychological security to the poor as it reduces exposure to
multiple risks and cushions the impact of a disaster.
165
abid….
0
2000
4000
6000
8000
10000
12000
Central Region
Eastern Region
North Eastern Region
Northern Region
Southern Region
Western Region
7549
5827
4159
6175
10080
8210
Savings Balance for SHG with Banks- Region wise(in Rupees)
120
Micro-insurance is defined as “the protection of low income households
against specific perils in exchange for premium payments proportionate to the
likelihood and cost of the risk involved.” Micro-insurance is not viable as a
standalone insurance product. At present, the Personal Accident Insurance Scheme
(PAIS) which is being provided as a bundled offering along with the Kisan Credit
Card (KCC) Scheme and the Rashtriya Krishi Bima Yojana (RKBY) for insuring
crops are, probably, the only borrowable-linked risk mitigation mechanisms available
to rural households. Further, many State Governments are offering health insurance
facilities to the rural poor (eg. Yeshaswini Scheme of the Government of Karnataka).
A Non-Government Organization (NGO); or a Self Help Group (SHG); or Micro-
Finance Institution (MFI), who is appointed by an insurer to act as a micro-insurance
agent for distribution of micro-insurance products (NABARD, 2011)166
.
From a modest beginning, micro insurance has been able to grow to a
respectable size in the five-year period after issue of the Regulations. In the year
2010-11, the total premium collected under life and non-life micro insurance
portfolios put together was of the order of 1,543 crore, out of which life insurance
premium was `1,149 crore. There is good growth in number of agents as well which
will result in further growth.
Table: 3.21 New Business under Micro Insurance Portfolio for
2010-11(Premium in ` lakh)
Insurer Individual Group
Policies Premium Lives Covered Premium
Private 699733 735.09 1983537 9.14171
LIC 2951235 12305.76 13275464 13803.67
Total 36509668 13040.85 15259001 15522.81
Source: NABARD Report, 2011.
SECTION – III
3.14 Credit Delivery and Financial Inclusion
Access to finance is important for all segments of poor people by improving
credit delivery and financial inclusion has remained as a key challenge of the Reserve
166
NABARD, Chapter-11: Micro Insurance, Published by National Bank for Agriculture and
Rural Development, Mumbai, 2011
http://www.nabard.org/pdf/report_financial/Chap_XI.pdf
121
Bank and government of India. Even though there are many programs which were
introduced in this direction, still they are not able to achieve 100% of financial
inclusion in India. The main programs are biometric smart card system for the Kisan
Credit Card (KCC), to be used in ATMs and hand held devices and Financial
Inclusion Plan (FIP). The commercial banks set their targets for financial inclusion
activities, to achieve 100% financial inclusion has been making substantial progress.
The Reserve of Bank recently released important guidelines on the implementation of
Electronic Benefit Transfer (EBT) and convenient model is expected to further boost
financial inclusion efforts. The outreach programmes have also been helpful in
spreading awareness and improving financial literacy. Moreover, in view of the
colossal task of financial inclusion, there is a need for the banks to upscale and
mainstream their financial inclusion efforts (RBI, 2011)167
.
Financial inclusion has been accorded high importance by the Reserve Bank
to aid the inclusive growth process for the economy. There have been formidable
challenges in this area such as bringing sections of society that are financially
excluded within the ambit of the formal financial system, providing financial literacy
and strengthening credit delivery mechanisms. Apart from the priority sector lending
policy which has been in existence for a long time, a host of initiatives have been
taken in recent years which include the rollout of Financial Inclusion Plans and
expanding the scope of the Business Correspondent (BC) model, improving credit
delivery procedures for the micro and small enterprises (MSE) sectors and
encouraging the adoption of Information and Communication Technology (ICT)
solutions.
3.14.1 Priority Sector Lending
The Government of India emphasized the Priority sector lending to enhance
credit availability to all sectors of the economy. There are two categories to focus
agriculture and Micro and Small Enterprises (MSE) are major sectors that receive
priority sector lending apart from education, housing etc. The Government target for
aggregate advances to the priority sector is 40 per cent of the Adjusted Net Bank
167
RBI, Credit Delivery and Financial Inclusion, Published by Reserve Bank of India,
Mumbai, 2012 http://rbidocs.rbi.org.in/rdocs/AnnualReport/PDFs/IVCDFIN230812.pdf
122
Credit (ANBC) or the credit equivalent of Off Balance Sheet Exposure (OBE),
whichever is higher for domestic banks and 32 per cent for foreign banks
Table: 3.22 Priority Sector Lending by SCBs
(Amount in ` billion)
As on the
Last
Reporting
Friday of
March
Public
Sector
Banks
Private
Sector
Banks
Foreign
Banks
1 2 3 4
2011
10,215 2,491 667
(41.0) (46.7) (39.7)
2012
11,299 2,864 805
(37.4) (39.4) (40.8)
Notes: 1. Figures in parentheses are percentages
to ANBC or credit equivalent of off balance
sheet exposure (OBE), whichever is higher, in
the respective groups.
2. Data for 2012 is provisional.
The Reserve Bank of India felt that it is necessary to revisit the guidelines
relating to priority sector lending in view of the recommendations of Malegam
Committee on Micro-Finance Institutions (MFIs) and similar requests from other
stakeholders. In this direction the Reserve Bank constituted a committee and
submitted its report in February 2012.
The major recommendations of the Committee were as follows:
a. Targets for Domestic Banks
The overall priority sector lending target may be retained at 40 per cent of
Adjusted Net Bank Credit (ANBC) for domestic banks. Agriculture, MSE,
123
micro credit, education, and housing, off-grid energy solutions for
households and export credit (for foreign banks only) may form part of the
priority sector.
Lending to the agriculture sector may cover the entire spectrum of
‘agriculture & allied activities’ without any distinction between direct and
indirect agriculture lending and 18 per cent of ANBC may be retained as
target for the agriculture sector.
A focused sub-target of 9 per cent of ANBC may be fixed for loans
extended by banks to small and marginal farmers, to be achieved in stages,
by 2015-16 at the latest.
A similar, focused sub-target of 7 per cent of ANBC may be fixed for loans
extended by banks to micro enterprises, to be achieved in stages by 2013-14
at the latest.
b. Targets for Foreign Banks
For foreign banks, the Committee recommended a target of 40 per cent for the
entire priority sector, and a 15 per cent target each for MSE and export credit.
Export credit up to a limit of ` 100 million may qualify for the purpose of
reckoning under priority sector.
In addition, a focused priority sector target, equivalent to 7 per cent of ANBC,
is recommended for micro enterprises.
c. Off-grid Energy Solutions for Households
Loans given to individuals to set up off-grid solar and other renewable energy
solutions for households may be classified as priority sector.
124
d. Weaker Sections
Priority sector loans to individual women and housing loans to economically
weaker sections and lower income group segments may be considered as loans
to weaker sections in addition to the existing categories of beneficiaries. The
existing target level of 10 per cent of ANBC may be retained for weaker
sections. Achievement of not more than 6 per cent of ANBC may be reckoned
under lending to (a) eligible small and marginal farmers and (b) eligible village
and cottage industries and artisans put together.
e. Differential Rate of Interest Scheme
The Differential Rate of Interest (DRI) scheme may be discontinued since
other government sponsored schemes with better features target similar
beneficiaries.
f. Loans to Non-Bank Financial Intermediaries
Bank loans sanctioned to non-bank financial intermediaries for on-lending to
specified segments may be reckoned for classification under the priority sector
up to a maximum of 5 per cent of ANBC.
g. Priority Sector Lending Certificates
Non-tradable Priority Sector Lending Certificates (PSLCs) may be allowed on
a pilot basis with domestic scheduled commercial banks (SCBs), regional rural
banks (RRBs) and foreign banks as market players.
h. Agriculture Credit Risk Guarantee Scheme
The establishment of an Agriculture Credit Risk Guarantee Fund for small and
marginal farmers, similar to Credit Guarantee Fund Trust for Micro and Small
Enterprises (CGTMSE), is recommended as an efficient mechanism to address the
risk in lending to agriculture sector.
3.14.2 Flow of Credit to Agriculture Sector
In the year of union budget that target of `4,750 billion for agricultural credit in
2011-12 was announced. This target includes banks including cooperative banks and
125
RRBs disbursed `5,110 billion forming 108 per cent of the target as at the end- March
2012. The Financial year of 2012-13, the government has fixed a target of `5,750
billion for disbursement to agriculture by all agencies. The RBI asked to step up direct
lending to agriculture and credit to small and marginal farmers. In this way credit
delivers to recovery of Direct Agriculture Advances. (RBI, 2012)168
. See the table the
progress of credit deliver as follows:
Table:3.23 Recovery of Direct Agriculture Advances ( in billions)
Year ended June Demand Recovery Over dues Per cent of recovery to
demand
2009 1,190 907 284 76.1
2010 1,244 922 322 74.1
2011 1,282 945 332 73.7
Sources: RBI Report, 2012
A. Kisan Credit Card Scheme
Under the Credit deliver the Kisan Credit Card (KCC) is an effective
instrument for making agricultural credit available to farmers. The Union Budget
2011-12 announced that the KCC scheme would be modified to introduce smart cards
that could be used at ATMs. To simplify and align the KCC scheme with current
requirements and to facilitate the issuing of electronic KCC, a working group was
constituted. The working group made recommendations about introducing
standardised KCCs and specified technical details to make the biometric smart card
compatible for use in ATMs and hand-held swipe machines and capable of storing
adequate information on farmers’ identity, assets, land holdings, and credit profile.
The recommendations of the working group were accepted by the government and
subsequently the KCC Scheme was revised by the Reserve Bank.
B. Interest Rate Subvention Scheme: The Union Budget 2011-12 increased the rate
of interest subvention for short-term production credit up to `0.3 million to 2 per
168
RBI, Credit Delivery and Financial Inclusion, Published by Reserve Bank of India,
Mumbai, 2012 http://rbidocs.rbi.org.in/rdocs/AnnualReport/PDFs/IVCDFIN230812.pdf
126
cent from 1.5 per cent while the additional interest subvention for farmers who paid
promptly was increased to 3 per cent from 2 per cent, reducing the effective interest
rate charged to such farmers to 4 per cent per annum.
C. Agricultural Debt Waiver and Debt Relief Scheme: Under the agricultural debt
waiver and debt relief scheme, 2008, the government has been reimbursing lending
institutions in a staggered manner.
Table:3.24 Amount Reimbursed by the Central Government to Lending Institutions
(in billions)
Lending Institutions
1st
installment
Sept 2008
2nd
installment
July 2009
3rd
installment
January
2011
4th
installment
November
2011
5th
installment
March
2012
RRBs and Co operatives 175.0 105.0 12.4 0.4 0.0
SCBs, UCBs and LABs 75.0 45.0 101.0 10.4 1.0
Total 250.0 150.0 113.4 10.8 1.0
Source: RBI Report, 2012
The government was able to deliver the credit and disbursed `525 billion in five
installments. Over the`293 billion was passed on to NABARD for reimbursement to
RRBs and co-operative credit institutions. The remaining amount of `232 billion was
reimbursed to SCBs, Local Area Banks (LABs) and Urban Co-Operative Banks
(UCBs).
3.14.3 Flow of credit to Micro, Small and Medium Enterprises
In the recent year the Public sector banks have been advised to open at least
one specialized branch in each district. Under the guidelines of RBI the banks have
been permitted to categorize their MSME general banking branches have 60% or
more of their advances to MSME sector, as specialized MSME branches for providing
better service to this sector as a whole. According to the policy package announced by
the Government of India for stepping up credit to MSME sector, the public sector
banks will ensure specialized MSME branches in identified clusters/centres with
preponderance of small enterprises to enable the entrepreneurs to have easy access to
127
the bank credit and to equip bank personnel to develop requisite expertise. With the
utilization of their core competence to extend finance and other services to MSME
sector, they will have operational flexibility to extend finance/render other services to
other sectors/borrowers (RBI, 2010)169
. Credit delivers to the MSE sector is as
follows:
Table:3.25 Credit to MSE sector by SCBs
As on last Friday of March Outstanding Credit to MSE
sector
MSE credit
as per cent
of ANBC
Number of
accounts
(in
millions)
Amount outstanding
(` billion)
2011 9.3 4785.3 15.0
(9.4) (32.1)
2012 9.9 5,286.2 13.4
(6.45) (10.47)
Note: 1. Data for 2012 are provisional.
2. Figure in parentheses indicates y-o-y change in per cent.
Source: RBI Report, 2010.
3.15 Rural Infrastructure Development Fund
Rural Infrastructure Development Fund (RIDF) was introduced by Central
Government with SCBs, both in the public and private sector for the development
rural infrastructure. But the implementation of RIDF failed to achieve the priority
sector targets/ sub-targets. Then the government is required to deposit the shortfall to
the extent of corpus funds announced by the central government into the Rural
Infrastructure Development Fund (RIDF) set up with the National Bank for
Agriculture and Rural Development (NABARD) and other funds set up with the
Small Industries Development Bank of India (SIDBI) and the National Housing Bank
(NHB). The majority of the Foreign banks operating in India, which fail to achieve
the priority sector targets/ sub-targets, are also required to deposit the shortfall to the
extent of corpus of funds announced by the central government into certain funds set
169
RBI, Guidelines for Micro, Small and Medium Enterprises, Published by the Reserve
Bank of India, Mumbai, 2010, http://www.rbi.org.in/scripts/FAQView.aspx?Id=84
128
up with SIDBI or other financial institutions, as decided by the Reserve Bank (RBI,
2011)170
.
However in the year of 2012 the Union Finance Minister announced that
RIDF XVIII, with a corpus of `200 billion for year of 2012-13, including a separate
window under RIDF for financing warehouse infrastructure with a corpus of `50
billion, with help to set up with NABARD. And also an MSME (Refinance) Fund
with a corpus of `50 billion, a Short-Term Co-operative Rural Credit (STCRC)
(Refinance) Fund with a corpus of `100 billion and a Rural Housing Fund with a
corpus of `40 billion, would be set up with SIDBI, NABARD, and NHB, respectively.
Accordingly to analysis of Union Budget, the Union Finance Minister has also
announced a plan for setting up two new funds viz., the Short Term RRB Credit Re-
Finance Fund and the India Opportunities Venture Fund in the year 2012-13 with a
corpus of `100 billion and `20 billion, respectively (CII, 2012)171
.
3.16 Lead Bank Scheme
Roadmap for Opening Banking Outlets in Unbanked Villages
The RBI has announced in the Monetary Policy Statement of April 2010, the
roadmap to provide banking services in every village with a population above 2,000
as it was finalized by state level bankers’ committees (SLBCs). Under the RBI
guidelines the roadmap covering 74,414 villages, with population above 2,000 which
were identified as unbanked, which were allocated to various banks, including RRBs
for providing banking services by March 2012. Therefore, Banks have covered 74,199
(99.7 per cent) of these unbanked villages. But the challenge is to cover all the
unbanked villages of the country is very difficult tasks with achievement of business
goal. Hence, SLBCs have been mandated to prepare a roadmap covering all unbanked
villages of population less than 2,000 and notionally allot these villages to banks for
providing banking services in a time-bound manner (Finance Ministery, 2012)172
170
RBI, Credit Delivery and Financial Inclusion, Published by Reserve Bank of India,
Mumbai, 2012 http://rbidocs.rbi.org.in/rdocs/AnnualReport/PDFs/IVCDFIN230812.pdf 171
CII report, Union Budget 2012-13: Analysis, Published by Confederation of Indian
Industry, New Delhi,2012 172
Finance Ministry, Annual Report for 2011-12 Published Ministry of Finance
Government of India, New Delhi, 2012
129
2. Lead Bank Responsibility for Districts
The progress of Lead Bank has covered the number of districts assigned by the
RBI for each bank and able to increased the lead banks from 625 in March 2011 to
630 in March 2012. Punjab National Bank has assigned lead bank responsibility in
two new districts in Punjab and one new district in Uttar Pradesh, while lead bank
responsibility for two new districts in Uttar Pradesh was assigned to Syndicate Bank.
3.17 North East Region- Special Dispensation Scheme
Special Dispensation Scheme (SDS) was introduced by the RBI during the
year 2008, and devised to encourage banks to open branches at commercially
unviable centres in the North-East Region. The Reserve Bank of India given
guidelines to implement the scheme, that RBI would bear a onetime capital cost and
the recurring expenses for a period of five years while the state government would
provide premises, security for the branch and rental accommodation for the bank staff.
SLBCs in consultation with the state government identified 42 ‘agreed centers’ in five
North-East states. Up to June 2012, branches had been opened at 34 of these centres
(RBI, 2011)173
. However the SDS scheme cannot continue indefinitely, banks were
advised to open branches in the allotted agreed centres, latest by June 30, 2012 so as
to avail the benefits of reimbursement of the cost by Reserve Bank.
3.18 Revival of Rural Co-operative Credit Structure
The Reserve Bank of India has considered the Task Force on Revival of Rural
Co-operative Credit Institutions (Chairman: Prof. A. Vaidyanathan) based on the
recommendations and in consultation with state governments, the Government of
India had approved a package for revival of the Short-Term Rural Cooperative Credit
Structure (STCCS). The STCC package sought to provide financial assistance to
improve the system, introduce legal and institutional reforms necessary for its
democratic, self reliant and efficient functioning and take measures to improve the
quality of management. However, all the 25 states have executed MoUs with the
central government and the NABARD as envisaged under the package. This covered
173
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130
more than 96 per cent of the STCCS units in the country. Twenty one states have
amended their respective State Cooperative Societies Act through legislative process.
According to the evaluation report 2012, an aggregate amount of `90 billion
has been released by NABARD up to March 31, 2012 as central government’s share
for recapitalisation of PACS in seventeen states, while the state governments have
also released `9 billion as their share. The National Implementing and Monitoring
Committee, set up by the central government, is guiding, and monitoring the
implementation of the revival package on an all-India basis (RBI, 2011)174
.
3.19 Status of CBS Implementation
The RRBs adopted appropriate technology in order to prepare Core Banking
Solutions (CBS) for better customer services, under special working group which
was constituted by Reserve Bank (Chairman: Shri G. Srinivasan) for technology
upgradation of RRBs. The working group report inter alia, set September 2011 as the
target date for all RRBs to move towards CBS. Thus, RRBs have stipulated that all
branches for opened after September 2009 should be CBS compliant from day one.
As on March 31, 2012, 82 RRBs are operating in the country. CBS has been
implemented in 80 RRBs covering 16,741 branches.
3.20 Status of Financial Inclusion
According to World Bank financial inclusion survey says that India lags
behind developing countries in opening bank accounts, but is much closer to the
global average when it comes to borrowing from formal institutions. In India, 35 per
cent of people had formal accounts versus the global average of 50 per cent and the
average of 41 per cent in developing economies (Asli Demirguc-Kunt Leora Klapper,
2012)175
.The table as follows:
174
abid…. 175
Asli Demirguc - Kunt and Klapper, L. (2012): ‘Measuring Financial Inclusion’, Policy
Research Working Paper, 6025, World Bank,
131
Table3.26 Key Statistics on Financial Inclusion in India: A Survey
Key statistics on financial inclusion in India: A survey (Per cent)
Share with an
account at a
formal financial
institution
Adults saving in
the past year
Adults
originating a
new loan in the
past year
Ad
ult
s w
ith
a c
red
it c
ard
Ad
ult
s w
ith
an o
uts
tan
din
g
mo
rtg
age
Ad
ult
s p
ayin
g p
erso
nal
ly f
or
hea
lth
insu
ran
ce
Ad
ult
s usi
ng m
ob
ile
mo
ney
in t
he
pas
t y
ear
All
ad
ult
s
Po
ore
st i
nco
me
qu
inti
le
Wo
men
Usi
ng
a f
orm
al
acco
un
t
Usi
ng
a
com
mu
nit
y-b
ased
met
ho
d
Fro
m a
fo
rmal
fin
anci
al i
nst
itu
tio
n
Fro
m f
amil
y o
r
frie
nd
s
India 35 21 26 12 3 8 20 2 2 7 4
World 50 38 47 22 5 9 23 15 7 17 7
Source: Asli Demirguc - Kunt and Klapper, L. (2012): ‘Measuring Financial
Inclusion’, Policy Research Working Paper, 6025, World Bank, April.
The survey indicated the ‘slow growth of mobile money in India, where only
4 per cent of adults in the Global Findex sample report have used a mobile phone in
the past 12 months to pay bills or send or receive money’. However, the goal of
bringing banking services to identified 74,414 villages with population above 2,000
by March 2012, and thereafter progressively to all villages over a period of time, the
Reserve Bank advised commercial banks while preparing their Annual Branch
Expansion Plan (ABEP). All the commercial banks have to allocate at least 25 per
cent of the total number of branches proposed to be opened during the year in
unbanked rural centres. In order improve the implementation of financial inclusion
strategies that were permitted at the retail outlets or sub-agents of BC, subject to
certain conditions, provided the technology available with the bank, which has
appointed the BC, supported interoperability. However the BC or its retail outlet or
sub-agent at the point of customer interface would continue to represent the bank,
which has appointed the BC.
The Finance Minister announced the same for the year of 2012-13 budget as
well as the Annual Monetary Policy of the Reserve Bank for the year 2012-13. Under
the implementation plan banks have been advised that they may set up intermediate
132
brick and mortar structures (in rural centres) between the present base branch and BC
locations, so as to provide support to a cluster of BCs (about 8-10 BCs) units at a
reasonable distance of about 3-4 kilometers. So all the branches should have
minimum infrastructure, such as a Core Banking Solution (CBS) terminal linked to a
pass book printer and a safe for cash retention for operating large customer
transactions and would have to be managed full time by bank’s own officers/
employees. The government of India expected that such an arrangement would lead to
efficiency in cash management, documentation, Redressal of customer grievances and
close supervision of BC operations (CII, 2012)176
.
3.21 Financial Inclusion Plan of banks
The Reserve Bank formulated the Financial Inclusion Plan (FIP) and advised
all public and private sector banks to prepare and submit their board approved
Financial Inclusion Plans (FIPs) to be rolled out in 3 years from April 2010 to March
2013. Financial Inclusion Plans contained self-set targets in respect of opening of
rural brick and mortar branches, deployment of business correspondents (BCs),
coverage of unbanked villages through various modes, opening of no-frills accounts,
Kisan Credit Cards (KCCs) and General Credit Cards (GCCs) to be issued etc. The
progress of commercial banks (excluding RRBs) since the launch of FIPs clearly
indicates that banks are progressing in areas like deploying BCs, opening of banking
outlets opening of no-frills accounts, grant of credit through KCCs and GCCs (RBI,
2011)177
. See the table as follow:
176
CII report, Union Budget 2012-13: Analysis, Published by Confederation of Indian
Industry, New Delhi,2012 177
RBI, Credit Delivery and Financial Inclusion, Published by Reserve Bank of India,
Mumbai, 2012 http://rbidocs.rbi.org.in/rdocs/AnnualReport/PDFs/IVCDFIN230812.pdf
133
Table: 3.27 Progress of SCBs in Financial Inclusion Plan (excluding RRBs
Progress of SCBs in Financial Inclusion Plan (Amount in billion)
Particulars March
2010
March
2011
March
2012
Var
iati
on
Mar
ch
2012 o
ver
Mar
ch
2010
No. of BCs/BC Agents deployed 33,042 57,329 95,767 62,725
Number of banking outlets in villages with
population above 2,000 27,353 54,246 82,300 54,947
Number of banking outlets in villages with
population less than 2,000 26,905 45,937 65,234 38,329
Total number of banking outlets in villages 54,258 1,00,183 1,47,534 93,276
Of which
a) Through branches 21,475 22,662 24,701 3,226
b) Through BCs 32,684 77,138 1,20,355 87,671
c) Through Other Modes 99 383 2,478 2,379
Urban Locations covered through BCs 433 3,757 5,875 5,442
No-Frill accounts
Number (millions) 50.3 75.4 105.5 55.2
Amount (` billions) 42.6 57.0 93.3 50.7
Overdraft availed in No - Frill Accounts
Number (millions) 0.1 0.5 1.5 1.4
Amount (` billions) 0.1 0.2 0.6 0.5
Kisan Credit Card (KCC)
Number of Accounts ( millions) 15.9 18.2 20.3 4.4
Outstanding amount (` billions) 940.1 1237.4 1651.5 711.4
General Purpose Credit Card (GCC)
Number of Accounts (millions) 0.9 1.0 1.3 0.4
Outstanding amount (` billions) 25.8 21.9 27.3 1.6
ICT Based Accounts through BCs
Number of Accounts (millions) 12.6 29.6 52.1 39.5
Number of transactions during the year (millions) 18.7 64.6 119.3 183.9
Sources: RBI Report, 2012.
134
The penetration of banks in rural areas has increased sharply in two years of
the FIP implementation. With a view to encouraging transactions in no-frill accounts,
banks were advised to provide small overdrafts (ODs) in such accounts, which helped
in a strong growth of such accounts. The impact of Information and Communication
Technology (ICT) based BC model in facilitating door step delivery of services can
be seen from the ascending trends of transactions.
3.22 Chapter Conclusion:
Financial exclusion is often described as a scourge which perpetuates poverty
and leads to several social ills. With over 2 billion financially excluded people
globally, addressing the complex and deep-seated challenge of financial exclusion
does not lend itself to simple solutions. Achieving sustainable financial inclusion
will require a systemic effort which leverages technology, regulatory framework
and appropriate business strategies cohesively. It is not a preserve or responsibility of
one sector and will instead require game-changing innovations which more often than
not occur at the intersection of different sectors e.g. banking and telecom.
Reserve Bank has been emphasizing that the bankability of the poor holds a
major business opportunity for the banks in developing a stable, retail deposit base
and in curbing volatility in earnings with the help of a diversified asset portfolio. The
recent crisis has, in fact, underscored the need for reducing banks’ reliance on
wholesale deposits and borrowed funds and cultivating a retail portfolio of assets and
liabilities for financial stability. The current policy objective of inclusive growth with
financial stability cannot be achieved without ensuring universal financial inclusion.
Pursuit of financial inclusion by adoption of innovative products and processes does,
however, pose challenge for managing trade,-offs between the objective of financial
inclusion and financial stability. In the Indian context, Reserve Bank has always
sought to balance the risk of partnerships and product innovations with the ability to
achieve greater penetration in a safe, secured, and prudentially sound manner. The
underlying belief is that only sound and strong institutions can promote financial
inclusion in a sustainable manner and, towards this end, prudent regulations have to
be in place to achieve inclusion while protecting financial stability and consumer
interest. One such measure, for example, has been restricting deposit taking to banks
and encouraging the non-bank financial companies to focus on innovative approaches
135
to lending under a lighter regulatory framework, with additional regulations for
systemically important NBFCs. By adopting appropriate regulatory framework for
innovations in policies, partnerships, processes, and products meant for financial
inclusion, Reserve Bank has sought to further the cause of inclusion without falling
short of the policy goal of financial stability
However the financial sector will have to lead the way as many of the current
issues exist because of the reluctance of the financial sector to embrace change and
innovation. Financial sector institutions which address financial inclusion
As an opportunity instead of a social obligation and commit they to creating
innovative products and services will find themselves ahead of the curve
competitively. The growing ubiquity of IT and proliferation of wireless
communication coupled with falling hardware and mobile phone costs provides a
unique opportunity to deliver mainstream financial services to the poor at the required
scale and affordability by leveraging ICT. Appropriate and affordable technology
accompanied by the right business model can make financial inclusion
economically viable for the formal financial sector and transform it from an
obligation to an opportunity.
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