Taking Banking Services to the Common Man Financial Inclusion * Ladies and Gentlemen, I am truly honoured to deliver the

e Fedbank Hormis Memorial Foundation commemorative lecture. The illustrious list of the previous years speakers indicates the kind of si nificance this commemorative lecture has ac!uired over the years. The late "hri #.$.Hormis, founder of Federal %ank, &as a visionary and left behind an institutional set up in the form of Federal %ank &hich has been doin yeoman service for &ell over seventy five years. The Fedbank Hormis Memorial Foundation, a public charitable trust, has been furtherin the cause of bankin and finance by providin kno&led e and trainin in the areas of bankin , finance, economics and mana ement to bankin students &ho are speciali'in professionals as &ell as deservin

in these areas. (s the life and times of late "hri

#.$.Hormis &ere spent lar ely in takin bankin to the masses, &hich is indicated by Federal %anks mi) of urban and rural covera e, I thou ht it &ould be appropriate for me to speak on takin bankin services to the common man * financial inclusion, a topic of contemporary si nificance and relevance. The bankin areas relatin industry has sho&n tremendous ro&th in volume and comple)ity si nificant improvements in all the

durin the last fe& decades. +espite makin

to financial viability, profitability and competitiveness, there are

concerns that banks have not been able to include vast se ment of the population, especially the underprivile ed sections of the society, into the fold of basic bankin services. Internationally also efforts are bein financial e)clusion and desi nin made to study the causes of strate ies to ensure financial inclusion of the

poor and disadvanta ed. The reasons may vary from country to country and hence the strate y could also vary but all out efforts are bein made as financial inclusion can truly lift the financial condition and standards of life of the poor and the disadvanta ed. ______________________________ * Commemorative Lecture by Shri V.Leeladhar, Deputy Governor Reserve bank o !ndia at the "edbank #ormis $emorial "oundation at %rnakulam on December &, &''(

3. What is Financial Inclusion? Financial inclusion is delivery of bankin ,nrestrained access to public services at an affordable

cost to the vast sections of disadvanta ed and lo& income roups. oods and services is the sine qua non of an open and efficient society. (s bankin services are in the nature of public ood, it is essential that availability of bankin and payment services to the entire population &ithout discrimination is the prime ob-ective of the public policy. 4. The sco e o! !inancial inclusion The scope of financial inclusion can be e)panded in t&o &ays. .a/ throu h state0driven intervention by &ay of statutory enactments . for instance the ," e)ample, the 1ommunity 2einvestment (ct and makin it a statutory ri ht to have bank account in France/. .b/ throu h voluntary effort by the bankin various strate ies to brin lar e strata of society. 3hen bankers do not ive the desired attention to certain areas, the re ulators have to step in to remedy the situation. This is the reason &hy the 2eserve %ank of India is placin a lot of emphasis on financial inclusion. In India the focus of the financial inclusion at present is confined to ensurin a bare minimum access to a savin s bank account &ithout frills, to all. Internationally, the financial e)clusion has been vie&ed in a much &ider perspective. Havin a current account 4 savin s account on its o&n, is not re arded as an accurate indicator of financial inclusion. There could be multiple levels of financial inclusion and e)clusion. (t one e)treme, it is possible to identify the 5super0included, i.e., those customers &ho are actively and persistently courted by the financial services industry, and &ho have at their disposal a &ide ran e of financial services and products. (t the other e)treme, &e may have the financially e)cluded, &ho are denied access to even the most basic of financial products. In bet&een are those community itself for evolvin sector the &ithin the ambit of the bankin

&ho use the bankin

services only for deposits and &ithdra&als of money. %ut

these persons may have only restricted access to the financial system, and may not en-oy the fle)ibility of access offered to more affluent customers. ". Conse#uences o! Financial $%clusion 1onse!uences of financial e)clusion &ill vary dependin on the nature and e)tent of services denied. It may lead to increased travel re!uirements, hi her incidence of crime, eneral decline in investment, difficulties in ainin access to credit or ettin credit from informal sources at e)orbitant rates, and increased costs, delays in unemployment, etc. The small business may suffer due to loss of access to middle class and hi her0income consumers, hi her cash handlin remittances of money. (ccordin lead to social e)clusion. &. International e% erience in romoting !inancial inclusion (n interestin feature &hich emer es from the international practice is that the reater the thrust on empo&erment of the to certain researches, financial e)clusion can

more developed the society is, the

common person and lo& income roups. It may be &orth&hile to have a look at the international e)perience in tacklin the problem of financial e)clusion so that &e can learn from the international e)perience. The Financial Inclusion Task Force in ,# has identified three priority areas for the purpose of financial inclusion, vi'., access to bankin , access to affordable credit and access to free face0to0face money advice. ,# has established a Financial Inclusion Fund to promote financial inclusion and assi ned responsibility to banks and credit unions in removin financial e)clusion. %asic bank no frills accounts have been introduced. (n enhanced le islative environment for cre'it unions has been established, accompanied by ti hter re ulations to ensure reater protection for investors. ( (ost )!!ice Car' *ccount +()C*, has been created for those &ho are unable or un&illin to access a basic bank account. The concept of a Savings -ate.a/ has been piloted. This offers those on lo&0income employment 67 from the state for every 67 they invest, up to a ma)imum of 689 per month. In addition the Communit/ Finance 0earning Initiatives +CF0Is, &ere also

introduced &ith a vie& to promotin association tenants.

basic financial literacy amon

housin

( civil ri hts la&, namely 1ommunity 2einvestment (ct .12(/ in the ,nited "tates prohibits discrimination by banks a ainst lo& and moderate income nei hborhoods. The 12( imposes an affirmative and continuin &hich they are chartered. obli ations on

banks to serve the needs for credit and bankin services of all the communities in In fact, numerous studies conducted by Federal is a &in0&in 2eserve and Harvard ,niversity demonstrated that 12( lendin

proposition and profitable to banks. In this conte)t, it is also interestin to kno& the other initiative taken by a state in the ,nited "tates. (part from the 12( e)periment, armed &ith the sanction of %ankin La&, the "tate of :e& ;ork %ankin +epartment, &ith the ob-ective of makin available the lo& cost bankin services to consumers, made mandatory that each bankin institution shall offer basic banking account and in case of credit unions the basic share draft account, &hich is in the nature of lo& cost account &ith minimum facilities. "ome key features of the basic bankin account are &orth0mentionin here. the initial deposit amount re!uired to open the account shall not e)ceed ," < 89 the minimum balance, includin any avera e balance, maintain such account shall not e)ceed ," < =.7= the char e for periodic cycle for the maintenance of such declared up front the minimum number of &ithdra&al transactions &hich may be be ei ht a &ithdra&al shall be deemed to be made &hen recorded on books of the account holders bankin institution e)cept, as provided belo&, an account holder shall not be any additional char e restricted as to the number of deposits &hich may be made to the account &ithout incurrin the made durin any periodic cycle at no char e to the account holder must at least accounts to be re!uired to

the bankin institution may char e account holders for electronic facilities &hich are not operated by institution as &ell as other fees

transactions at

the account holders bankin

and char es for specific bankin services should ma)imum cycle &ithout

&hich are not covered under the basic bankin account scheme every periodic statement issued for the basic bankin account invariably cover on it or by &ay of separate number of &ithdra&als permitted durin communi!u> each periodic

additional char e and the conse!uences of e)ceedin such ma)imum and the fee if any, for the use of electronic facilities &hich are not operated by the account holders bankin institution. (n interestin feature of basic bankin account scheme is the element of the account,

transparency i.e. the bankin

institution should, prior to openin

furnish a &ritten disclosure to the account holder describin the main features of the scheme i.e. the initial deposit amount re!uired to open the account, minimum balance to be maintained, char e per periodic cycle for use of such account, ma)imum number of &ithdra&al transactions &ithout any additional char e and other char es imposed on transactions for availin electronic facility not operated by the account holders bankin institution, etc. 1. In'ian Scenario %ank nationali'ation in India marked a paradi m shift in the focus of bankin as it &as intended to shift the focus from class bankin to mass bankin . The rationale for creatin 2e ional 2ural %anks &as also to take the bankin services to poor people. The branches of commercial banks and the 22%s have increased from ?@87 in the year 7ABA to B?,8?8 branches as at the end of March 8==9. The avera e population per branch office has decreased from BC,=== to 7B,=== durin the same period. Ho&ever, there are certain under0banked states such as %ihar, Drissa, 2a-asthan, ,ttar $radesh, 1hattis arh, Eharkhand, 3est %en al and a lar e number of :orth0Fastern states, &here the avera e population per branch office continues to be !uite hi h compared to the national avera e. (s you &ould be a&are, the ne& branch authori'ation policy of 2eserve %ank encoura es banks

to open branches in these under banked states and the under banked areas in other states. The ne& policy also places a lot of emphasis on the efforts made by the %ank to achieve, inter alia, financial inclusion and other policy ob-ectives. Dne of the benchmarks employed to assess the de ree of reach of financial services to the population of the country, is the !uantum of deposit accounts .current and savin s/ held as a ratio to the adult population. In the Indian conte)t, takin into account the 1ensus of 8==7 .i norin the incremental ro&th of population thereafter/, the ratio of deposit accounts .data available as on March @7, 8==C/ to the total adult population &as only 9AG .details furnished in the table/. 3ithin the country, there is a &ide variation across states. For instance, the ratio for the state of #erala is as hi h as ?AG &hile %ihar is marked by a lo& covera e of @@G. In the :orth Fastern "tates like :a aland and Manipur, the covera e &as a mea er 87G and 8HG, respectively. The :orthern 2e ion, comprisin the states of Haryana, 1handi arh and +elhi, has a hi h covera e ratio of ?CG. 1ompared to the developed &orld, the covera e of our financial services is !uite lo&. For instance, as per a recent survey commissioned by %ritish %ankersI (ssociation, A8 to ACG of the population of ,# has either current or savin s bank account. 2. Ste s to.ar's !inancial inclusion In the conte)t of initiatives taken for e)tendin bankin services to the small man, the mode of financial sector development until 7A?=s &as characteri'ed by a hu ely e)panded bank branch and cooperative net&ork and ne& or ani'ational forms like 22%sJ a reater focus on credit rather than other financial services like savin s and insurance, althou h the banks and cooperatives did provide deposit facilitiesJ lendin tar ets directed at a ran e of 5priority sectors such as a riculture, &eaker sections of the population, etcJ interest rate ceilin sJ

si nificant overnment subsidies channeled throu h the banks and cooperatives, as &ell as throu h related overnment pro rammesJ a dominant perspective that finance for rural and poor people &as a social obli ation and not a potential business opportunity.

It is absolutely beyond any doubt that the financial access to masses has si nificantly improved in the last three and a half decades. %ut the basic !uestion is, has that been ood enou h. (s I mentioned earlier, the !uantum of deposit accounts .current and savin s/ held as a ratio to the adult population has not been uniformly encoura in . There is a tremendous scope for financial covera e if &e have to improve the standards of life of those deprived people. 3ith a vie& to enhancin the financial inclusion, as a proactive measure, the 2%I in its (nnual $olicy "tatement for the year 8==90=B, &hile reco ni'in the concerns in re ard to the bankin practices that tend to e)clude rather than attract vast sections of population, ur ed banks to revie& their e)istin practices to ali n them &ith the ob-ective of financial inclusion. In the Mid Term 2evie& of the $olicy .8==90=B/, 2%I e)horted the banks, &ith a vie& to achievin reater financial inclusion, to make available a basic banking 5no frills account either &ith nil or very minimum balances as &ell as char es that &ould make such accounts accessible to vast sections of the population. The nature and number of transactions in such accounts &ould be restricted and made kno&n to customers in advance in a transparent manner. (ll banks are ur ed to ive &ide publicity to the facility of such no frills account so as to ensure reater financial inclusion. Further, in order to ensure that persons belon in to lo& income roup both in

urban and rural areas do not face difficulty in openin the bank accounts due to the procedural hassles, the #;1 procedure for openin accounts has been simplified for those persons &ho intend to keep balances not e)ceedin rupees fifty thousand .2s. 9=,===40/ in all their accounts taken to ether and the total credit in all the accounts taken to ether is not e)pected to e)ceed rupees one lakh .2s.7,==,===40/ in a year.

3. The Wa/ For.ar' The banks should come out of inhibited feelin that very a ressive competition policy and social inclusion are mutually e)clusive. (s demonstrated else&here, the mass bankin &ith no0frills etc. can become a &in0&in situation for both. %asically bankin services need to be KmarketedL to connect &ith lar e population se ments and these may be -ustifiable promotional costs. The opportunities are plenty. In the conte)t of India becomin one of the lar est micro finance markets in the &orld especially in the ."HGs/ and the sustainin ro&th of &omens savin s and credit roups success of such institutions &hich has been

demonstrated by the success of "F3( bank in Gu-arat, lo& cost bankin is not necessarily an unviable venture4proposition. The I%( may e)plore the possibility of a survey about the covera e in respect of financial inclusion keepin in vie& the eo raphical spread of the banks and e)tent of financial services available to the population so as to assess the constraints in e)tension of financial services to hitherto unbanked sections and for initiatin appropriate policy measures. It may be useful for banks to consider franchisin &ith other se ments of financial sector such as cooperatives, 22%s etc. so as to e)tend the scope of financial inclusion &ith minimal intermediation cost. "ince lar e sections of lo& income roups transactions are related to transaction costs,

deposits and &ithdra&als, &ith a vie& to containin

Isimple to useI cash dispensin and collectin machines akin to (TMs, &ith operatin instructions and commands in vernacular &ould reatly facilitate financial inclusion of the semi urban and rural populace. In this re ard, it is &orth&hile to emulate the e)ample of 5e01houpal pro-ect brou ht forth throu h private sector initiative.

Conclusion It is becomin increasin ly apparent that addressin financial e)clusion &ill re!uire a holistic approach on the part of the banks in creatin a&areness about financial products, education, and advice on money mana ement, debt counselin , savin s and affordable credit. The banks &ould have to evolve specific strate ies to e)pand the outreach of their services in order to promote financial inclusion. Dne of the &ays in &hich this can be achieved in a cost0effective manner is throu h for in linka es &ith microfinance institutions and local communities. %anks should ive &ide publicity to the facility of no frills account. Technolo y can be a very valuable tool in providin access to bankin products in remote areas. (TMs cash dispensin machines can be modified suitably to make them user friendly for people &ho are illiterate, less educated or do not kno& Fn lish. To sum up, banks need to redesi n their business strate ies to incorporate specific plans to promote financial inclusion of lo& income roup treatin it both a business opportunity as &ell as a corporate social responsibility. They have to make use of all available resources includin technolo y and e)pertise available &ith them as &ell as the MFIs and :GDs. It may appear in the first instance that takin bankin to the sections constitutin Kthe bottom of the pyramidL, may not be profitable but it should al&ays be remembered that even the relatively lo& mar ins on hi h volumes can be a very profitable proposition. Financial inclusion can emer e as commercial profitable business. Dnly the banks should be prepared to think outside the bo)M

Coverage o! Banking Services +4atio o! 5eman' 5e osit *ccounts to the a'ult o ulation/
:o. o! acc. (er 9;; o! o ula tion 43 C7 C8 @@ B7 8@ 7@C A9 93 8= 8= A 87 7C 77 87 == 7H 88 8= 8C 8? @9 =& 7H 8= 8? C7 3" 78C @C @9 @C 9H 33 @@ @? 9H @? @A :o. o! acc. (er 9;; o! a'ult o . 24 HB H8 B@ 7=9 C9 887 7BB 31 C= @A 7H CC 89 87 @? 49 @@ CC @C C9 CA 9A "9 @8 @A 9H H? &9 7?H B= B= B7 A@ &" 9H BB ?A B= H=

4egion6State67nion Territor/ :)4T<$4: 4$-I): Haryana Himachal $radesh Eammu N #ashmir $un-ab 2a-asthan 1handi arh +elhi :)4T<>$*ST$4: 4$-I): (runachal $radesh (ssam Manipur Me halaya Mi'oram :a aland Tripura $*ST$4: 4$-I): %ihar Eharkhand Drissa "ikkim 3est %en al (ndaman N :icobar Islands C$:T4*0 4$-I): 1hhattis arh Madhya $radesh ,ttar $radesh ,ttaranchal W$ST$4: 4$-I): Goa Gu-arat Maharashtra +adra N :a ar Haveli +aman N +iu S)7T<$4: 4$-I): (ndhra $radesh #arnataka #erala Tamil :adu Lakshad&eep

Current *ccounts 4=9"1;9 9H8BB= 7@C8?9 8HH98A 779B7@H B?AB9H ?=B=H 7@=C?8B 41&&;3 7=9@? @H?H8A 7897C 8C@=9 @CC7 7@?7A @@89H 9294=93 CBC977 7BB==H 88?7B= C=AH AC8H@@ ?H77 ==;==91 7A8=BH 99@@?7 7@8C9=A 7@88B= 39129;= ?7997 A99ABC 878H8C= B=HB H8H7 4&&&;94 779BC=9 7=?BBB8 B===B9 7H?B97C CA7

Savings *ccounts "=49&9=" ?=@7CH8 8C@@9A9 @=ACHA= 7@HC88=7 787@A@=8 778BBAB 77?C?=BA &239;29 8=A=H@ 9=H7=9? 8==9A@ C9?HHA 77H??9 7A9C98 B@?8C7 4121&94; 7@8898C8 9?@C@C7 H=@===C 789@B9 879CCH9@ 77BC@9 &4="4923 @@CB?A? 77H@7A7? C9?=C@9= @@H7=8@ 43"="9;9 79?C7HH 7B88=8B8 @79B?7?C BA@=? ?@7H= 2332&232 8@AHC9?= 7A7CH?7A 7HBBAH8@ 88=98?78 88AAH

Total (o ulation 93=&1&4&= 87=?8A?A B=HH8C? 7==BAA7H 8C8?A8AB 9BCH@788 A==A7C 7@H?8AHB 3243";23 7=A777H 8BB@?C=H 8@??B@C 8@=B=BA ?A7=9? 7A??B@B @7A77B? ==1&93;13 ?8?H?HAB 8BA=AC8? @BH=BA8= 9C=CA@ ?=8877H7 @9B8B9 =""19343" 8=HA9A9B B=@?977? 7BB=98?9A ?CHA9B8 943;19141 7@C@AA? 9=9ABAA8 ABH988CH 88=C97 79?=9A ==344"329 H9H8H9C7 98H@@A9? @7?@?B7A B877=?@A B=9A9

*'ult (o ulatio n +*8ove 93 /ears, &12==39= 77@=?=89 @9BB??B 9@HA9AC 7C7?97A= 8?CH@HC@ 9CB7H7 HA8A9?A 931;232= 9CC9?8 7C=HC@A@ 78887=H 7=??7B9 CHB8=9 AA998@ 7H?C878 9==93&933 C=A@C7H= 7@H@HC?9 87=B9C=C 8??9== C9?ABA7C 87@BB= 9=339&&11 778=AC89 @7C=CAA= ?888AHC? CCH897C 2&92==;& ?A7C77 8??B@=A9 9B8=HB=C 788HB9 AH@@7 93""14==" CC8@7A7? @=B8@8?A 8=9B=@8@ @A977=@? @@B?B

Total :o. )! accounts "&&392=& ?B=C7@8 89BH??= @@H8@7A 7C?A?@@? 78?8?A9A 78=H@=@ 7@798?A9 13&1&24 87AB77 9CCAH?H 87@7=H C?@=?C 787@8B 8=A8H7 BH7CA? 43&3;3"3 7@B?AH9@ B===@C? H89?7BC 78ACB8 88C?HC?B 7897CB &&4"&4;& @9@?AB9 788?98AA CH78??9A @9=@8?@ "=1;3=;3 7BB9H8? 7H7HB88B @@BA9C8C H9@?C A=CC7 22;"=39= 897@=A?9 8=8@CC?7 7?8BAH?? 8@?@A@8B 8@C??

$ondicherry *00>I:5I*

@9?HH 9&""=2"&

97?ABH 3;4343"34

AH@?8A 9;=1;9"=41

B7@AH7 "49;39""3

99C?CC 3=;3;=33;

9H 39

A= "3