Professional Documents
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On Financial Inclusion: Acknowledgement
On Financial Inclusion: Acknowledgement
On Financial Inclusion: Acknowledgement
On
Financial inclusion
Bangalore
ACKNOWLEDGEMENT
I am indeed thankful to Reserve Bank of India for selecting
me as a Young Scholar and providing me this excellent
opportunity. It was a great learning experience to do a
project on “Financial inclusion” with special reference to
Bangalore.
Last but not least, I would like to thank all who helped me
Directly and indirectly to complete this project
ANWER ALI
RBI YOUNG SCHOLAR
INTRODUCTION
The World is moving at an amazing pace. Globalization has enabled the rise of
global trade leading to wealth generation in developed as well as developing
countries. Wealth can be created in any part of the world with a single click of the
mouse. Developing nations, like India have immensely benefited from the globalizing
economy. Wealth has been pouring into the country as investments (both direct and
institutional). Wealth has been also generated by Indian companies from global
trade. This has directly affected the lives of many citizens in our country. For many,
there has been a dramatic increase in the disposable income. The savings,
consumption and investment patterns have changed in the past few years. This has
meant that there has been an increase in demand for many financial services from
different financial firms.
The market has responded to the soaring demand with making attractive offers and
services for the customers at affordable rates. The liberalization of the economy in
the 1990s has brought in new players into the field. This has not only brought in
some much needed fresh air to the stagnant financial sector but also competition for
the same market space which was relatively unknown in the financial sector till then.
Since then, there have been progressive reforms in the financial sector allowing for
better and easier facilities and options to the consumer. An increasing financially
aware middle class have realized the importance of financial services. Banks have
streamlined and rationalized themselves to meet up with the changing demands of
the people. Banks have become partners in growth for many offering them a safer
and secure future.
However, not all the reforms in the financial services sector have still been able to
bring in the other half of India’s population who are un-banked. There are many
reasons that percolated into the lower strata of the society. It is easy to blame the
capitalist are obvious for this kind of financial exclusion. The new surge in the
economy has not yet growth for this sort of income disparities; however, the
inefficiencies and the inadequacies of the government and its policies are equally at
fault for lack of reduction in poverty. Even after 60 years of Indian independence, 1/3
of our population is still illiterate (let alone financially literate) and at least 26% of the
population still lives under the poverty line. There are many statistics, which goes on
to prove that for even a developing nation India has a long way to go.
Most of the un-banked or financially excluded population of India live in rural areas;
nevertheless there is also a significant amount of the urban population of India who
face the same situation even with easy access to banks. Many of the financially
excluded in these areas are illiterates earning a meagre income just enough to
sustain their daily needs. For such people, banking still remains an unknown
phenomena or an elitist affair. It is easier for them to keep their money at their house
or with some money lenders and easily make immediate purchases (which make up
most of their expenditure) rather than to follow the cumbersome process at banks. A
lot of the financially excluded populations are at the mercy of money lenders or pawn
shop owners. They should be made a part of the formal banking structure so that
they could also have the benefits that the others enjoy. By making them financially
inclusive we are making their financial position less volatile. At the same time, we are
treating them on an equal par with other members of the population so that they
wouldn’t be denied of access to a basic service such as banking.
Background:
Nationalisation of banks in India in 1969 and 1980 marked a paradigm shift in the
focus of banking from class banking to mass banking. The multi-agency approach
consisting of cooperatives, regional rural banks (RRBs), commercial banks, non-
banking financial a key institutions, etc has played a key role in catering to the credit
needs of rural population. Most of these agencies have been acting not merely as
financial intermediaries but also playing a key developmental role. In the post
nationalisation era, launching of SHG-Bank linkage programme in 1992 and its
success as one of the largest micro credit programmes in the world could be
considered as a landmark programme can be regarded as the most potent initiative
since independence for delivering financial services to the poor in a sustainable
manner.
Despite large scale deepening and widening of formal as also informal credit delivery
system, it is estimated that 45.9 million farmer households in the country (51.4%),
out of a total of 89.3 million households do not access credit, either from institutional
or non-institutional sources. Further, despite the vast network of bank branches, only
27% of total farm households are indebted to formal sources (or which one-third also
borrow from informal sources). One of the benchmarks employed to access the
degree of reach of financial services to the population of the country, is the quantum
of deposit accounts (current and savings) held as a ratio to the adult population. In
the Indian context, taking into the census of 2001 (ignoring
the incremental growth of the population thereafter), the ratio of deposit accounts
(data available as on March 31, 2004) to the total adult population was only 59%
though this ratio in case of Karnataka (65 %) is above the national average, the fact
remains that the formal financial institution in the state do not.
FINANCIAL EXCLUSION
Research carried out and discussions held among experts within the the present
research project leads us to propose the following definitions:
1. LOW INCOME: Most of the poor are low wage earners, for them opening an
account and withdrawing money is seemingly unviable. Most of the poor do
not have high spending that would require borrowing of credit from a formal
agency like banks. They would rather keep their daily income at their homes
rather than in a bank.
The word Financial Inclusion could be described as being the opposite of financial
exclusion. However financial inclusion is more of a process rather than a
phenomenon. It is a process by which mainstream financial services are made
accessible to all sections of the population. It is a conscious attempt at trying to bring
the un-banked people into banking. Financial Inclusion does not merely mean
access to credit for the poor, but also other financial services such as Insurance.
Financial Inclusion allows the state to have an easier access to its citizens. With an
inclusive population, for e.g.: the government could reduce the transaction cost of
payments like pensions, or unemployment benefits. It could prove to be a boon in a
situation like a natural disaster, a financially included population means the
government will have much less headaches in ensuring that all the people get the
benefits. It allows for more transparency leading to curtailing corruption and
bureaucratic barriers in reaching out to the poor and weaker sections. An intelligent
banking population could go a long way by effectively securing themselves a safer
future. More importantly Financial Inclusion is imperative for creating an inclusive
economy at all fronts. This attains special importance at this stage of rising food and
oil prices, without an inclusive economy the country’s development will suffer. In the
recently concluded G8 meeting in Hokkaido, Japan, the World Bank chief Robert
Zoellick reiterated the importance of creating an inclusive economy in an increasingly
globalized World.
FINANCIAL INCLUSION
There are, however, concerns that banks have still not been able to reach a vast
segment of the population and provide them with basic banking services. Growth has
also not been uniform across all the regions/ States of the country and there still
continue to be wide gaps in the availability of banking services in the rural areas.
While from the policy angle none of the earlier measures aimed at broad basing their
clientele has been withdrawn, the banks might be laying somewhat less emphasis on
inclusive practices in view of the thrust on profitability.
b. through voluntary effort by the banking community itself for evolving various
strategies to bring within the ambit of the banking sector the large strata of society.
When bankers do not give the desired attention to certain areas, the regulators have
to step in to remedy the situation. This is the reason why Reserve Bank of India is
placing a lot of emphasis on financial inclusion.
In India the focus of the financial inclusion at present is confined to ensuring a bare
minimum access to a savings bank account without frills, to all. Internationally, the
financial exclusion has been viewed in a much wider perspective. Having a current
account / saving account on its own, is not regarded as an accurate indicator of
financial inclusion. There could be multiple levels of financial inclusion and exclusion.
At one extreme, it is possible to identify the ‘super-included’, i.e., those customers
who are actively and persistently courted by the financial services industry, and who
have at their disposal a wide range of financial services and products. At the other
extreme, we may have the financially excluded, who are denied access to even the
most basic of financial products. In between are those who use the banking services
only for deposits and withdrawals of money. But these persons may have only
restricted access to the financial system, and may not enjoy the flexibility of access
offered to more affluent customers.
There are several micro finance institutions (MFIs) which normally have the
organizational form of societies, trusts, cooperatives, non-banking financial
companies (NBFCs) and not-for-profit companies set up under Section 25 of
the Companies Act, 1956, which supplement the efforts of banks in providing
financial services to the poor. The experience of the formal banking system
partnering with such MFIs has been quite encouraging in several places.
Illustratively, the convenor of the SLBC has to undertake the following steps
for ensuring financial inclusion in the pilot areas in the state:
3. BASIC "NO FRILLS" BANK ACCOUNTS: At the first stage, there is a need
for lowering the entry barriers to the banking system and simplifying
procedures. Thanks to developments in micro finance, one of the myths held
earlier by the banking system that the poor cannot save, has been
demolished. Experience has shown that the poor can and do save, may be by
way of thrift, and all they need is an appropriate product and access to the
banking system. Holding a savings product to a substantial extent reduces
financial exclusion. Moreover, the act of saving, however little it may be,
reinforces longer-term thinking and a sense of responsibility for one’s future.
Keeping in view the need for the banking system to take urgent steps to bring
about financial inclusion in the country, the Reserve Bank of India, in the Mid-
Term Review of the Annual Policy for the year 2005-06, exhorted banks to
make available a basic banking ‘no frills’ account either with nil or very low
balances as well as charges that would make such accounts accessible to
vast sections of the population. The nature and number of transactions in
such accounts would be restricted and would be made known to customers in
advance in a transparent manner. Several banks, both in the public and
private sectors, have responded positively to this measure and devised no-
frills accounts for the lower income groups.
5. MICROINSURANCE: More than credit, the poor need access to some form
of insurance, as they are the most vulnerable to various types of risk to both
life and property. They need suitably designed schemes offering health, life or
property insurance: limited protection at a somewhat low contribution. It is
heartening to know that insurance companies are coming up with schemes
aimed at poorer sections of the population and designed to help them cover
themselves collectively against risks, the delivery channels being banks,
NGOs and SHGs working in rural areas. There is also a possibility of
providing some kind of microinsurance to holders of the General Credit Cards,
on the lines of the personal accident insurance cover available to Kisan Credit
Card holders.
People have been responsible for managing their own finance on a day to day
basis spend on a holiday or save for new furniture; how much to put aside for
a child’s education or to set them in life- but recent development have made
financial education awareness increasingly important for financial well being.
For one thing, the growing sophistication of financial markets means
consumers are not just choosing between interest rates on two different bank
loans or savings plans, but are rather being offered a variety of complex
financial instrument for borrowing and saving with a large range of options. At
the same instrument for borrowing and saving with the large range of options.
At the same time, the responsibility and risk for financial decisions that will
have a major impact on an individual’s future life, notably pensions are shifted
increasingly to workers and away from government and employers. As life
expectancy is increasing, the pension question is particularly important as
individuals will be enjoying longest period of retirement.
Definitions
One of the major hindrances in the way of delivery of financial services to the
poor is the lack of basic knowledge and lack of awareness of the products and
services available. In fact, education is a great facilitator. The delivery of
financial education would include :
One of the pioneers in promoting the concept of financial inclusion, the United
Kingdom, has established a Financial Inclusion Task Force, which has
emphasized 'access to free face-to-face money advice' as an important
component of financial inclusion, apart from access to banking and access to
affordable credit. A Financial Inclusion Fund has also been established there
to promote financial inclusion.
Some banks have on their own take steps to provide such education, as in the
case of the Debt Counselling Cells recently set up by some banks. However,
any large scale delivery of financial education has to leverage on the
presence of other agencies, such as private entities, non-governmental
organizations, civil society organizations, outlets of the corporate sector etc.,
apart from Government initiatives. The use of information technology (IT)
offers a lot of promise in providing financial literacy and education and
experience in several parts of the country through the use of kiosks, mobile
vans, etc. has shown to what extent IT can be leveraged to provide
information on various products and services, production processes and
markets for the products. While provision of connectivity for facilitating
communication services in rural areas is still an issue, recent developments in
wireless technology holds out a lot of promise for evolving an IT-based
information dissemination system.
As the central bank of the country, the Reserve bank of India has taken steps to
ensure financial inclusion in the country. It has tried to make banking more attractive
to citizens by allowing for easier transactions with banks. In 2004 RBI appointed an
internal group to look into ways to improve Financial Inclusion in the country. It came
out with a report in 2005 (Khan Committee) and subsequently RBI issued a circular
in 2006 allowing the use of intermediaries for providing banking and financial
services. Through such policies the RBI has tried to improve Financial Inclusion.
Financial Inclusion offers immense potential not only for banks but for other
businesses. Through an integrated approach the businesses, the NGOs, the
government agencies as well as the banks can be partners in growth. RBI has
realized that a push is needed to kick start the financial inclusion process. Some of
the steps taken by RBI include the directive to banks to offer No-frills account, easier
KYC norms, offering GCC cards to the poor, better customer services, promoting the
use of IT and intermediaries, and asking SLBCs and UTLBCs to start a campaign to
promote financial inclusion on a pilot basis. So far the campaign for 100% financial
inclusion has been said to be a success with many states now reaching near-total
financial inclusion.
1. No-frills Accounts: The RBI in its annual policy statement for the year
2005-06 and also in the mid term review of the policy (2005-06), exhorted the
banks, with a view to achieving greater financial inclusion , to make available
a basic banking “No-Frills” account either with nil or very minimum balances
as well as charges that would make such accounts accessible to vast sections
of the population. The nature and number of transactions in such accounts
would be restricted and made known of transaction in such accounts would
be restricted and made known to customers in advance in a transparent
manner. All banks have been urged to give wide publicity to the facility of such
“No-Frills” account. Banks are required to make available all printed used by
retail customers in the concerned regional language.
5. General purpose Credit Card: Banks have been advised by RBI to provide a
General purpose Credit Card (GCC) facility at their rural and semi urban
branches. The credit facility extended under the scheme will be in the nature
of revolving credit. The GCC-holder will be entitled to draw cash from the
specified branch of bank up to the limit sanctioned. Banks would have
flexibility in fixing the limit based on the assessment of income and cash flow
of the entire houdehold, without insistence on security or purpose.however,
the total credit facility under GCC for an individual should not exceed RS.
25,000/- . it is expected that banks will come out with their own schemes to
popularise this product amongst the rural client.
6. Business Facilitators and correspondents: with the objective of ensuring
greater financial inclusion and increasing the outreach of the banking sector,
banks were permitted to use the services of NGOS/ SHGs, MFIs and other
civil society Organisations as intermediaries in providing financial and banking
services through the use of business facilitator and correspondent models.
7. Broader definition of financial inclusion: RBI subsequently observed that a
family satisfying the following conditions also would be treated as financially
included:
A. Member of SHG
B. Member of a PACS
C. If have a post office savings account
D. Member covered under govt schemes
4. International experience in promoting financial inclusion
An interesting feature which emerges from the international practice is that the more
developed the society is, the greater the thrust on empowerment of common person
and low income groups. It may be worthwhile to have a look at international
experience in tackling the problem of financial exclusion so that we can learn from
the international experience.
The Financial Inclusion Task Force in UK has identified three priority areas for the
purpose of financial inclusion, viz., access to banking, access to affordable credit and
access to free face-to-face money advice. UK has established a Financial Inclusion
Fund to promote financial inclusion and assigned responsibility to banks and credit
unions in removing financial exclusion. Basic bank no frills accounts have been
introduced. An enhanced legislative environment for credit unions has been
established, accompanied by tighter regulations to ensure greater protection for
investors. A Post Office Card Account (POCA) has been created for those who are
unable or unwilling to access a basic bank account. The concept of a Savings
Gateway has been piloted. This offers those on low-income employment £1 from the
state for every £1 they invest, up to a maximum of £25 per month. In addition the
Community Finance Learning Initiatives (CFLIs) were also introduced with a view
to promoting basic financial literacy among housing association tenants.
A civil rights law, namely Community Reinvestment Act (CRA) in United States
prohibits discrimination by banks against low and moderate income neighborhoods.
The CRA imposes an affirmative and continuing obligations on banks to serve the
needs for credit and banking services of all the communities in which they are
chartered. In fact, numerous studies conducted by Federal Reserve and Harvard
University demonstrated that CRA lending is a win-win proposition and profitable to
banks. In this context, it is also interesting to know the other initiative taken by a state
in United States. Apart from the CRA experiment, armed with the sanction of Banking
Law, the State of New York Banking Department, with the objective of making
available the low cost banking services to consumers, made mandatory that each
banking institution shall offer basic banking account and in case of credit unions the
basic share draft account, which is in the nature of low cost account with minimum
facilities. Some key features of the basic banking account are worth-mentioning here.
• the initial deposit amount required to open the account shall not exceed US $ 25
• the minimum balance, including any average balance, required to maintain such
account shall not exceed US $ 0.10
• the charge for periodic cycle for the maintenance of such accounts to be declared
up front
• the minimum number of withdrawal transactions which may be made during any
periodic cycle at no charge to the account holder must at least be eight
• a withdrawal shall be deemed to be made when recorded on the books of the
account holder’s banking institution
• except, as provided below, an account holder shall not be restricted as to the
number of deposits which may be made to the account without incurring any
additional charge
• the banking institution may charge account holders for transactions at electronic
facilities which are not operated by the account holder’s banking institution as
well as other fees and charges for specific banking services which are not
covered under the basic banking account scheme
• every periodic statement issued for the basic banking account should invariably
cover on it or by way of separate communiqué maximum number of withdrawals
permitted during each periodic cycle without additional charge and the
consequences of exceeding such maximum and the fee if any, for the use of
electronic facilities which are not operated by the account holder’s banking
institution.
5. Indian Scenario
The bank nationalization in India marked a paradigm shift in the focus of banking as
it was intended to shift the focus from class banking to mass banking. The rationale
for creating Regional Rural Banks was also to take the banking services to poor
people. The branches of commercial banks and the RRBs have increased from 8321
in the year 1969 to 68,282 branches as at the end of March 2005. The average
population per branch office has decreased from 64,000 to 16,000 during the same
period. However, there are certain under banked states such as Bihar, Orissa,
Rajasthan Uttar Pradesh, Chattisgarh, Jharkhand, West Bengal and a large number
of North-Eastern states, where the average population per branch office continues to
be quite high compared to the national average. As you would be aware, the new
branch authorization policy of Reserve Bank encourages banks to open branches in
these under banked states and the under banked areas in other states. The new
policy also places a lot of emphasis on the efforts made by the bank to achieve, inter
alia, financial inclusion and other policy objectives.
One of the benchmarks employed to assess the degree of reach of financial services
to the population of the country, is the quantum of deposit accounts (current and
savings) held as a ratio to the adult population. In the Indian context, taking into
account the Census of 2001 (ignoring the incremental growth of population
thereafter), the ratio of deposit accounts (data available as on March 31, 2004) to the
total adult population was only 59% (details furnished in the table). Within the
country, there is a wide variation across states. For instance, the ratio for the state of
Kerala is as high as 89% while Bihar is marked by a low coverage of 33%. In the
North Eastern States like Nagaland and Manipur, the coverage was a meager 21%
and 27%, respectively. Northern Region, comprising the states of Haryana,
Chandigarh and Delhi, has a high coverage ratio of 84%. Compared to the
developed world, the coverage of our financial services is quite low. For instance, as
per a recent survey commissioned by British Bankers' Association, 92 to 94% of the
population of UK has either current or savings bank account.
With the first phase of Financial Inclusion having been achieved in all the 29 districts of the
State in October 2007, it was realized that the process of implementation of FI in the State
would not be complete without covering BBMP (Bruhat Bangalore Mahanagar Palike) area
which is not covered under Lead Bank Scheme. Accordingly, in a meeting of local banks
convened by RBI, Bangalore, it was decided that Financial Inclusion should be implemented in
BBMP area comprising 100 wards, 8 City Municipal Councils and 110 erstwhile Service
Area villages. Monitoring the implementation of the programme was entrusted to SLBC.
Methodology adopted
• 100 Wards of BBMP area was allocated amongst 27 banks. The banks worked as
coordinating bank for the wards allocated to them.
• Areas falling under 8 CMCs (City Municipal Council) of the BBMP area were
allocated to 8 banks. The banks worked as coordinating banks for the CMCs allocated
to them.
• Coordinating banks obtained base level authentic data of households in the BBMP
area from multiple sources such as voters list, household data of villages from
erstwhile Panchayat Offices, list of ward-wise households from BBMP for the purpose
of conducting the survey
• The survey was conducted utilizing the services of NGOs, SHGs, Stree Shakthi
Groups, Anganwadi workers, retired employees of the bank etc.
• Wide publicity has been given by SLBC by inserting advertisements in leading
vernacular/ English dailies appealing the citizens to co-operate with banks / NGOs in
the household survey
• A Nodal Officer from the Coordinating bank monitored implementation of the
programme in the wards
• SLBC reviewed the progress on a regular basis and reported to RBI
In order to assess the extent of coverage by the banks, Regional Office engaged the services
of Ujjivan Financial Services Pvt. Ltd., an NGO working in the urban areas to evaluate the
implementation of the programme. The Evaluation Study was conducted in three slums of
BBMP area viz., Madiwala, Byatrayanapura and K.R. Puram. The Study revealed that around
60% of the slum households were yet to be covered under the programme. As such, it was
decided to revisit implementation of the programme in the BBMP area. Accordingly,
At the time of completion of the programme in BBMP area in October 2008, the banks
had opened 41,854 ‘no frills’ accounts.
As opening of ‘no frills‘ accounts is not an end itself and it is only a beginning in the
process of Financial Inclusion, necessary thrust was given by the RO for operationalising
the ‘no frills’ accounts opened in the urban areas. Accordingly, in a Pilot project
conducted in Bellary and Raichur Districts in association with Pragathi Gramin Bank
(PGB), 560 Vegetable / Fruit / Petty Vendors were financed to the extent of Rs.49.00
lakhs under the Differential Rate of Interest scheme @ 4% interest thereby freeing these
vendors from the clutches of informal credit providers.
Based on the experience, we have advised the banks through SLBC to extend DRI loans
/ other products to the Vegetable / Fruit vendors in various markets located in Bangalore
City. We have also advised SLBC to develop suitable financial products for the purpose
and also form a Sub-Committee to monitor. The banks are in the process of finalising
suitable products to cater to these clientele. State Bank of India is also planning to cover
clusters of auto Drivers in Bangalore City for providing them Banking Facilities by
engaging Business Correspondents at strategic places through Smart Card technology.
THE STUDY
SCOPE OF STUDY
• The occupation of the respondent, the source of income for the family and
whether the respondent had an account, if so the type of account.
• About the awareness of new measures for financial inclusion like no-frills
account, GCCs, and relaxation of KYC norms for accounts
• The reason for not opening the account and if aware about measures for
Financial Inclusion, the reason for not opening an account.
• Whether they had availed any credit (long term and short-term) from the
banks, and the type of credit that was availed to them by the banks.
• Whether any family member was a part of an SHG or had access to micro-
credits from MFIs.
• The credit requirements and whether they were interested in availing credit
from banks and for what particular reason.
• About Money Lenders (MLs) and Micro Finance Institutions (MFIs) and
whether they were dealing with MLs and MFIs. If they had taken any credit
from these, then what rate of interest they enquired.
LIMITATIONS
The survey has been limited to area shivajinagar and therefore cannot give a
complete picture of the level of financial inclusion of the city. The study is
concentrated on the poor and the slum dwellers of the area, since the poor are the
majority who make up the financially excluded. The study is also limited by the
number of individuals, a 50 people of the slum dwellings of shivajinagar were
selected randomly for the study. The respondents selected were from the working
ages of 24-55 and concentrated on different occupational groups rather than
religious or other cultural distinctions to differentiate the individuals. The actual
number of financial inclusion in the city therefore should be the nature of a much
more detailed and extensive study.
FINDINGS
Sales
300%
300%
Self Employed
1900%
Laboures
unemployed
Private company employee
2500%
23 Account
27 Not Account
6. SELF-HELP GROUPS AND MFIS: In the survey no one found that had
members of SHG or access to credit from a MFI.
SUGGESTIONS
1. Bank should encourage households to open account by reaching the
doorstep of excluded households.
2. Financial literacy should be part of schooling for educating children the
importance of banking services in their daily life.
3. There should be a separate bank branches in urban slum areas.
4. Mass media should be effectively used for educating the poor
households for participating in the programmes.
5. Banks should adopt fast processing for better service.
6. More public awareness should be created.
7. RBI should organize camps in remote and urban slums for spreading
financial literacy to excluded households.
CONCLUSION
Financial Inclusion has been a catch phrase for the past few years. Delivering
financial services to all sections of the population will remain a challenge that central
banks around the world will face over the next few years. Increasing educational
level means more financial inclusion; therefore a literate population must be created
in order to create a meaningful financially included population. Innovation and out-of-
the-box thinking are what has made the World what it is today. We can never be
complacent with what we have or what we have achieved, the human life is an
endeavour for progress and a better life. This should be the case with Financial
Inclusion; we cannot become complacent and become victims of our own success.
Not only should people have access to basic financial services but should also
actively use them. A modern and a globalize economy cannot be successful unless it
is inclusive. With enthusiasm and foresight this challenge would be overcome rather
simply. We should not lose the enthusiasm with which we started and that mediocrity
or partial success cannot considered as same as success.