DT Pai Contents

OVERVIEW OF FINANCIAL INCLUSION ANd MICRO CREdIT
By
d. T. Pai
2010
Copyright 2010, D. T. Pai
Published by
D. T. Pai 16-108, Saraswathi Sadan, Ananth Nagar Manipal 576 104 Tel.: 0820-2570656 E-mail : dayanand.t.pai@gmail.com
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Cover Design
Liyakath Ali, Artist Winner of National Award for the most efficient Physically Handicapped Employee.
All rights reserved. No part of this book may be reproduced or utilized in any form or by any means without permission in writing from the publisher.
dEdICATEd TO
(Late) Shri T. A. PAI

Great Visionary and Innovative Banker
Shri Tonse Anant Pai was a multi faceted personality. Under his leadership Syndicate Bank credited with a number of pioneering schemes for mobilisation of small savings and agricultural financing with focus on the common man an early initiative for inclusive growth in the nineteen sixties. He held several important positions in the Government of India - that of CMD of Syndicate Bank after nationalisation of the Bank, first Chairman of Food Corporation of India in 1965, Life Insurance Corporation of India in 1970, Union Cabinet Minister in 1972-76. The Government of India conferred upon him the Padmabhushan in 1972 in recognition of his contribution to various fields.
CONTENTS
Particulars Acknowledgements Preface Foreword Page Nos. vii viii ix 3 - 16
PART 1 CHAPTER I 1. Introduction 2. Definition of Financial Inclusion 3. Financial Exclusion 4. Factors affecting Financial Inclusion 5. Indicators of Banking Sector Outreach 6. Types of Govt. interventions for financial inclusion 7. Usage of Financial Services in Developed Countries 8. Policy responses in Developed Countries 9. Salient features of basic/no frill accounts of select countries CHAPTER II 1. Financial Inclusion Initiatives in India 2. Policy initiatives by RBI 3. Initiatives of Government of India 4. Steps taken by Banks for Financial Inclusion 5. Challenges 6. Issues of concern for 100 per cent Financial Inclusion 7. Micro Insurance CHAPTER III 1. Financial Literacy / Education 2. RBI Project for Financial Literacy CHAPTER IV 1. Technology & Financial Inclusion 2. Benefits of Branchless Banking to customers 3. Mobile Banking 4. Salient Features of various technologies 5. Branchless Banking through Business correspondents 6. Initiatives of IBA and IDRBT CHAPTER V 1. Payment system in India 2. Electronic payment system 3. Types of Electronic payment system 4. Card based payment system 5. Challenges 6. Payment system & remittance facilities PART 2 CHAPTER VI 1. Micro Credit : A Historical Perspective 2. Overview of Banking development & Micro credit in India (1947-1991)
17 - 40
41 - 46
47 - 52
53 - 60
61 - 68
Particulars CHAPTER VII 1. Micro Credit in India 2. Types of credit groups 3. Self Help Groups : Bank linkage programme 4. Micro Finance : Challenges 5. Rural Development & Self Employment Training Institutes CHAPTER VIII A. Micro Finance Institutions initiatives of NABARD/SIDBI Rating of Micro Finance Institutions B. CHAPTER IX 1. Global scale of Micro Finance 2. CGAP Principles Initiatives & innovations in micro finance of some 3. countries CHAPTER X Importance of A. Co-operatives B. Regional Rural Banks CHAPTER XI Pilot Projects/case studies on Financial inclusion India 1. 100 per cent financial inclusion in the state of Karnataka 2. Pondicherry Indian Bank 3. Andhra Pradesh Consortium of Banks 4. Branchless Banking through Business correspondents Corporation Bank 5. Urban Financial Inclusion Dharavi (Mumbai) Model by Indian Bank Hawkers in Mumbai Union Bank of India 6. Micro Finance Model Prathama Bank
Page Nos. 69 - 88
89 - 100
101 - 110 111 - 116
117 - 126
Table 1 Table 2 Table 3 Table 4 Table 5 Table 6 Table 7 Table 8 Table 9 Table 10 Table 11 Table 12 Table 13 Table 14 Table 15
: : : : : : : : : : :
Indicators of barrier in accessing banking services (select countries) Geographic and Demographic penetration of bank services Financial Inclusion and Development Indicators Position of Deposits with various categories of institutions Savings Accounts with Scheduled Commercial Banks Borrowal Accounts with Scheduled Commercial Banks Coverage of Banking Services Trends of Sources of Credit Distribution of Debt by sources across major States : 2003 Position of SHG-Bank Linkage Scheme Model-wise Linkage Position
TABLES
: Comparison of Rating Models : Position of Primary Agriculture Credit Societies
ACkNOWLEdGEMENTS
I am grateful to Shri V. Leeladhar, a professional Commercial and Central Banker who has served as Dy. Governor, RBI, Chairman of IBA, CMD, Union Bank of India and Vijaya Bank for writing Foreword to this book. His views on Financial Inclusion will be very valuable to readers. I am thankful to Shri T. J. A. Ganiga, former Chairman & Managing Director of Andhra Bank for sharing his knowledge with me. I thank Shri Srihari Bhat, General Manager, Syndicate Bank and Shri V. T. Pai, Director, Maharashtra Economic Development Council for review of the text. I acknowledge secretarial service rendered by Sarvashri J. F. Noronha, B. Vijayanand, B. R. Hiremath, Sudheendra Bhandary, Yashwant Nayak, Vadiraja Acharya and Liyakath Ali. My sincere thanks to my wife Sandhya for her gentle support.
1-1-2010
d. T. PAI
vii
PREFACE
Financial Inclusion is delivery of banking services at an affordable cost to the vast sections of disadvantaged and low income groups. A sizable population of the world particularly poor is excluded from the most basic financial services provided by financial sector. It has been universally accepted that Financial Inclusion can act as an effective instrument to accelerate economic growth and alleviate poverty in the world. All the countries are making all out efforts to bring vast segment of population especially under privileged section of the society in rural and urban areas in to banking fold. In India despite existence of co-operative banks for over a century and special efforts of commercial banks over four decades since nationalization of major banks, 41 per cent of the adult population do not have even bank accounts. In April 2005 Reserve Bank of India explicitly made Financial Inclusion as its major policy objective to make available banking and payment services to the entire population without discrimination as banking services are in the nature of public good. Government of India and RBI have taken series of measures in this regard. Banking system has also taken a number of steps for Financial Inclusion leveraging technology. National Rural Financial Inclusion Plan has been drawn and is in operation since 2008-09. It is a stupendous task before banks to bring willing population into banking fold. I have made an attempt to bring out this book giving an Overview of Financial Inclusion and Micro credit and challenges ahead for the benefit of student community and young bankers. The contents have been divided into two parts. Part I deals with global concerns of financial inclusion and policy initiatives taken in developed and under developed countries and their experiences. Special coverage is given for the policy initiatives in India. Part II deals with Micro credit and certain pilot projects / studies. I hope the readers will find it useful to have insight of Financial Inclusion. 1-1-2010
d. T. PAI
viii
FOREWORd
Financial inclusion is delivery of banking services, at an affordable cost, to the vast sections of disadvantaged and low income groups. Unrestrained access to public goods and services is the sine qua non of an open and efficient society. As banking services are in the nature of public good, it is essential that availability of banking and payment services to the entire population without discrimination is the prime objective of the public policy. As a proactive step, the Reserve Bank of India (RBI) in its Annual Policy Statement for the year 2005-06, while recognizing concerns in regard to the banking practices that tend to exclude vast sections of population, urged banks to review their policies to align them with the objective of financial inclusion. In the Mid Term Review of the Policy (2005-06) RBI exhorted the banks, with a view to achieving greater financial inclusion to make available a basic "no frills" account either with nil balance or very minimal balances as well as charges that would make such accounts accessible to vast sections of population. The banks in India, with the cooperation of state governments have achieved progress in this direction. But the task is stupendous and the pace of work will have to be accelerated and sustained. Further opening an account is only a baby step, the biggest challenge being making available to the masses affordable financial services. This comprehensive work on a contemporary subject is unique as it is written in simple language, shorn of technical jargon. The subject is very lucidly defined, explained in first chapter. The enactments on this subject in various countries makes interesting reading. It will be observed that the most advanced the country is the more detailed and strict are the laws on financial inclusion. The various technological innovations which ensure that the benefits reach the targeted beneficiaries, are also detailed. What finally makes the book invaluable are the case studies given at the end of the book. A student, new to the subject, as well as a practicing banker is likely to find this book of immense utility.
ix
I had the fortune of working with Sri D. T. Pai in two banks Syndicate Bank and Union Bank of India. Even when we were not working in the same bank Sri Pai used to be in constant touch with me exchanging ideas and experiences. Sri Pai has a formidable reputation in banking industry for his passion for spreading banking habits to masses. I am glad he has started documenting his rich knowledge for the use of the posterity. I hope Sri Pai keeps the flow of knowledge uninterrupted. My joy was doubled when I heard that the book is going to be dedicated to Late Sri T. A. Pai. Sri T. A. Pai was the person who picked up ordinary persons like me from small towns and moulded us, with care, into professional bankers. Financial inclusion was close to his heart even then, nearly four decades back. I wish Sri D. T. Pai all success in this endeavour.
Mumbai 25-10-2009
(V. Leeladhar)
Part 1 Financial Inclusion
Statistics Relating to Scheduled Commercial Banks at a Glance

Indicators Number of Commercial Banks (a) Scheduled Commercial Banks of which: Regional Rural Banks (b) Non-Scheduled Commercial Banks Number of Bank Offices in India (a) Rural (b) Semi-Urban (c) Urban (d) Metropolitan Population per Office (in thousands) Aggregate deposits of Scheduled Commercial Banks in India (Rs. crore) (a) Demand deposits (b) Time deposits Credit of Scheduled Commercial Banks in India (Rs. crore) Investments of Scheduled Commercial Banks in India (Rs. crore) Deposits of Scheduled Commercial Banks per office (Rs. lakh) Credit of Scheduled Commercial Banks per office (Rs. lakh) Per capita Deposit of Scheduled Commercial Banks (Rs.) Per capita Credit of Scheduled Commercial Banks (Rs.) Deposits of Scheduled Commercial Banks as percentage to Gross National Product at factor cost (at current prices) Scheduled Commercial Banks Advances to Priority Sectors (Rs. crore) Share of Priority Sector Advances in total credit of Scheduled Commercial Banks (per cent) Credit-Deposit Ratio (per cent) Investment-Deposit Ratio (per cent) Cash-Deposit Ratio (per cent) March 2001 300 296 196 5 67937 32585 14843 11193 9316 15 2002 297 293 196 4 68195 32503 14962 11328 9402 15 2003 292 288 196 4 68500 32283 15135 11566 9516 16 2004 290 286 196 5 69170 32227 15288 11806 9750 16 2005 289 285 196 4 70373 30790 15325 12419 11839 16 2006 222 218 133 4 71685 30436 15811 13034 14204 16 2007 183 179 96 4 74346 30575 16620 14049 13102 15 2008 174 170 91 4 78666 31105 17897 15530 14134 15 2009 170 166 86 4 82408 31699 19082 16614 15013 14
989141 1131188 1311761 1504416 1700198 2109049 2611934 3196940 3834110 159407 829734 529271 367184 1456 779 9770 5228 169103 187837 225022 248028 364640 429731 524310 523085
962085 1123924 1279394 1452171 1744409 2182203 2672630 3311025 609053 437482 1659 893 11008 5927 746432 547546 1925 1143 12253 7275 840785 1100428 1507077 1931190 2361913 2775549 677588 2265 1330 14089 8273 739154 2574 1700 16281 10752 717454 3047 2209 19130 13869 791516 3675 2757 23382 17541 971714 1166410 4344 3222 28610 21218 4980 3615 34372 24945
56.0
54.4
58.8
59.4
60.0
65.4
70.1
74.4
78.1
182255
205606
254648
263834
381476
510175
632647
738686
932459
31.0 53.5 37.1 8.4
34.8 53.8 38.7 7.1
35.1 56.9 41.3 6.3
34.5 55.9 45.0 7.2
36.7 62.6 47.3 6.4
35.3 70.1 40.0 6.7
34.3 73.5 35.3 7.2
32.9 74.6 35.5 9.7
35.2 73.9 35.7 7.3
Chapter I Financial Inclusion Global Concern

IntRoduCtIon: A sizable population of the world particularly poor, low income and vulnerable group remain excluded from most basic financial services provided by financial sector. It has been universally accepted that developing financial sector and improving access to financial services accelerate economic growth and helps to achieve inclusive growth. Inclusive growth is a little more than just the benefits growth distributed equitably and evenly. It is participation of all sections and regions of society in the history of growth and reaping fruits of growth. The financial sector provides critical financial services to household and business enterprise which include i) Safe savings and range of risk/return trade off services. It mobilizes savings into formal financial system. It helps accumulation of financial assets which can provide a cushion against unforeseen events. ii) Additional means beyond privately accumulated savings the help by way of credit and insurance to absorb shocks of unforeseen circumstances. iii) It reduces dependence on informal financial sources such as pawn shops, money lenders or informal groups relating to savings and credit associations by poor low income vulnerable group of society. iv) Facilitate payment between different parties and make them safer to a cash transaction. A small loan, a savings bank account and an insurance policy can make a great difference to poor and low income family.These financial services enable the poor to have better nutrition, housing, education for children
Overview of Financial Inclusion and Micro Credit
and better health-care and improve standard of living. Thus financial Inclusion can act as an effective instrument to alleviate poverty in the world particularly in developing and underdeveloped countries. The financial inclusion therefore has become issue of world wide concern as large section of the population has no access to financial services and depends on own resources or informal sources of financial services. All the countries are making conscious efforts to bring vast segment of population especially under privileged section of the society in rural and urban areas into the banking fold. 2. deFInItIon oF FInanCIal InCluSIon: There is no universally accepted definition of financial inclusion. The emphasis of financial inclusion varies across the countries and geographies depending upon level of social, economic & financial development, the structure & stake holding in financial institutions, socio-economic characteristics of the financially excluded segments and also the context of recognition of the problem by the authorities and governments. Similarly the measures applied to access to financial services vary. The access to financial services can be measured in the form of access to certain institutions such as banks, cooperatives, non-banking finance companies, credit unions, micro finance institutions, insurance companies or in terms of functions that institutions perform or services they provide such as payment services, saving or loans and credit. Yet another approach is to look to details in use of specific financial products viz. debit cards, credit cards, smart cards, life insurance etc. One of the popular benchmarks employed to assess the degree of financials services to the population of the country is the quantum of deposit accounts held as ratio to the adult population. Financial inclusion has been defined by United Nations and Asian Development Bank as under. United Nations A financial sector that provides access for credit for all bankable people and firms and saving and payment services to every one. Inclusive finance does not require that every one is eligible to use each of services but they should be able to choose them if desired. Asian Development Bank provision of broad range of financial services such as deposits, loans, payment services, money transfer and insurance to poor and low income house-holds and their micro enterprises.
The broadly covered products / services under financial inclusion and institutional structure in the world are given in the chart below: Chart 1
Indian Definition: The Committee on Financial Inclusion (Chairman: Dr. C. Rangarajan) has provided a working definition for Financial Inclusion as the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost. It is also termed as delivery of banking services at an affordable cost to the vast sections of disadvantaged and low income groups. 3. FInanCIal exCluSIon: As measuring financial inclusion is perceived to be difficult it is defined in terms of exclusion from formal financial system. The working or operational purposes financial exclusion focus on ownership or access to particular product or service.
Chart 2: Financial exclusion
Source: Finance for All? Policies and Pitfalls in Expanding Access, World Bank Report 2008
In any society you have a proportion of population which (i) uses services from non banking or other financial institutions but does not use services of banks (ii) uses services from informal sources of financial services (in view of convenience, easy approach less formalities) (iii) transacts through formal institutions/banks and financial instruments and also uses financial services. However higher share of the population particularly of below poverty line or low income hardly avails financial services from formal financial system. It exposes individual to inherent risk in holding and storing hard earned money operating solely on cash basis and increasing vulnerability. The financial exclusion is not restricted to rural or far flung areas but it is also taking place in urban areas as a result of increasing migration of rural poor to urban centers. 3.1 Causes for Financial exclusion: Although level of banking exclusion vary across the world it is the same group of people who are affected, people having low income or who have history of bad debt. Markets exclude them because they do not have sufficient income which can be translated into purchasing power or have assets or capabilities which are translatable in to labour and capable yielding income through wages.
The primary barriers in expansion of financial services are identified as i) ii) iii) iv) v) Non-availability of a bank branch with in near distance for physical access High charges and penalties attached to banking products and services which make them unaffordable. Perception of financial services as complicated Banks do not prefer low income people Other factors include gender, age, legal entity, illiteracy, place of living, physical and cultural barriers, type of occupation etc.
Indicators of barrier in accessing banking services of select countries are given in the following table table 1: Indicators of barrier in accessing banking services (select countries) (as % to GDP per capita)
Savings Account (deposit services) Country Private credit to GDP (%) (2004)
100.9 27.4 33.9 154.0 32.8 21 25.8 33.5 28.5 ----
Loans Services (SME)
GDP per capita (US$)

22083 402 3564 30735 638 906 566 1085 962 ----
Min. amt. to open (% of GDP per capita)

00 0.89 0.10 00 5.02 3.03 1.59 11.88 3.54 00 8.14 68.26
Min. amt. to Annual be maintaifee [% of ned [% of GDP per GDP per capita] capita]
00 0.79 00 00 5.02 0.65 0.71 11.88 0.84 00 6.15 64.75 0.10 00 0.03 00 0.17 0.66 00 00 00 00 0.38 3.63
DocuPhysi- Fee (% Days to ments cal of min. procerequired access # loan) ss (Nos) (Nos)
3.00 4.57 2.16 1.32 2.55 2.66 2.43 2.20 1.00 00 2.09 4.57 5.00 2.12 4.85 5.00 2.44 3.10 3.09 2.36 2.90 1.77 3.26 5.00 17.7 0.15 2.94 1.73 0.93 n.a. n.a. n.a. n.a. 00 2.55 29.32 7.2 43.3 3.63 1.00 10.8 9.7 33.6 33.3 10.4 1.0 10.5 43.3
Cost of transfer funds internationally ($250)

8.05 1.93 14.85 4.09 6.49 2.83 n.a. n.a. n.a. 0.12 6.64 20.0
Amt. of fee for using ATM cards (% of $ 100)

00 n.a. 0.11 00 00 00 0.6 00 n.a. 00 0.14 0.6
Australia Bangladesh Brazil Denmark India Indonesia Pakistan Philippines Sri Lanka Minimum* Average* Maximum*
of 8 countries covered under the study
# Out of and in terms of number of location to submit loan application [like Bank headquarter, branches, other offices, phone, internet, etc.] Source: Beck, Thorsten, Asly Demirgu c Kunt, and Maria Soledad Martinez Peria, 2007a. Banking Services for Everyone? Barriers to Bank Access and Use around the World. Policy Research Working Paper 4079, World Bank, Washington, DC.
Chart 3 : dimensions of access Problems

Low income house holds and their micro and small enterprises Majority with no access to finance at all A small majority with access to finance Very small proportion with full access
Very large proportion is underserved
Significant member depends on services of unsustainable institutions
Many have access to deposit services of state owned financial institutions and co-operatives
A significant proportion has access only to credit from micro credit institutions
Proportion with access to banking services is very limited
Access to insurance services is extremely limited
Clients have
to pay high transaction costs
Withdrawing
funds is not always easy Transaction costs are high
Poor credit
quality
Client transaction
costs are high Long processing time High minimum loan requirements Banks geared to serve high income groups
High product Low
incompatibility transparency
Source: Asian Development Bank 2007.
4. FaCtoRS aFFeCtInG aCCeSS to FInanCIal SeRvICeS: A number of factors affecting access to financial services have been identified in many countries. These are: Gender issue: Access to credit is often limited for women who do not have or cannot hold title to assets such as land and property and must seek male guarantees to borrow. age Factor: Financial service providers usually target the middle of the economically active population, often overlooking the design of appropriate products for older or younger potential customers. legal Identity: Lack of legal identities like identity cards, birth certificates or written records often exclude women, ethnic minorities, economical and political refugees and migrant workers from accessing financial services. limited literacy: Limited literacy, particularly financial literacy, i.e. basic
mathematics, business finance skills as well as lacks of understanding often constrain demand for financial services. Place of living: Although effective distance is as much about transportation infrastructure as physical distance, factors like density of population, rural and remote areas, mobility of the population (i.e. highly mobile people with no fixed or formal address), insurgency in a location, etc. also affect access to financial services. Psychological and cultural barriers: The feeling that banks are not interested to look into their cause has led to self-exclusion for many of the low income groups. However, cultural and religious barriers to banking have also been observed in some of the countries. Social Security payments: In those countries where the social security payment system is not linked to the banking system, banking exclusion has been higher. Bank charges: In most of the countries, transaction is free as long as the account has sufficient funds to cover the cost of transactions made. However, there are a range of other charges that have a disproportionate effect on people with low income. terms and conditions: Terms and conditions attached to products such as minimum balance requirements, and conditions relating to the uses of accounts often dissuade people from using such products / services. level of income: Financial status of people is always important in gaining access to financial services. Extremely poor people find it difficult to access financial services even when the services are tailored for them. Perception barriers and income discrimination among potential members in grouplending programmes may exclude the poorer members of the community. type of occupation: Many banks have not developed the capacity to evaluate loan applications of small borrowers and unorganized enterprises and hence tend to deny such loan requests. attractiveness of the product: Both the financial services/products (savings accounts, credit products, payment services and insurance) and how their availability is marketed are crucial in financial inclusion. *References: World Bank 2008; Asian Development Bank 2007: and Kempson et al., 2004
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5. IndICatoRS oF BankInG SeCtoR outReaCh: The Policy Research Working Paper of October 2005 of the World Bank presents some indicators of banking sector penetration across countries based on a survey of bank regulatory authorities. The sample of countries is comprised of financially and economically developed economies as well as emerging markets and transition economies. The indicators of banking sector out reach include; i) Geographic branch penetration number of bank branches per 1000 km. ii) Demographic branch penetration number of branches per 100,000 people. iii) Geographic ATMs per 1000 km. iv) Demographic ATM penetration number of ATMs per 100,000 people. v) Loan accounts per capita number of loans per 1000 people. A larger number of branches and ATMs per square kilometer indicate small distances to the nearest physical bank outlets and easier geographical access. Similarly larger number of deposit / loan account per capita per thousand people indicates greater reach of financial services. Geographic and Demographic penetration of bank services of some countries is given in the following table: table 2 : Geographic and demographic penetration of bank services Geographic Penetration Country No. of bank branches per 1000 sq. km. 65.02 45.16 22.57 10.00 9.81 4.09 3.05 1.83 0.19 No. of ATMs per 1000 sq. km. 436.88 104.46 # 5.73 38.43 8.91 3.72 5.25 0.53 Demographic Penetration No. of branches per 100,000 people 13.40 18.35 6.30 8.44 30.86 7.63 14.59 1.33 2.24 No. of ATMs per 100,000 people 90.03 42.45 -4.84 120.94 16.63 17.82 3.80 6.28
Korea U.K. India Indonesia USA Mexico Brazil China Russia
Source: Reaching Out: Access to and use of banking services across countries, Thorsten Beck, Asli Demirguc-Kunt and Maria Soledad Martinez Peria, World Bank Policy Research, WPS 3754, World Bank, 2005
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6. tyPe oF GoveRnment InteRventIonS FoR FInanCIal InCluSIon: Governments in many countries intervene on the supply side to address the financial services in various ways. Religious and other civil society organizations have also sought to broaden access to financial services for the poor and low income groups. These measures include, i) Nationalizing private banks ii) Regulating opening of branches by banks iii) Promoting specialized banks including national saving banks iv) Directives on portfolio of composition of loan assets v) Interest rate ceiling on credit to low income households and provision of credit at subsidized rates to priority sectors. vi) Voluntary charter or codes developed by banks themselves. vii) Enactment of regulations defining the right of access to formal banking services viii) Setting up empowered and dedicated agencies by governments ix) Running specialized and sponsored schemes including those sponsored by governments and banks themselves using a blend of innovations, reforms in the credit delivery mechanism and the existing infrastructure, post offices, passport accounts x) Countering the operations of moneylenders and xi) Community based savings and credit societies and mutual saving banks. 7. uSaGe oF FInanCIal SeRvICeS In develoPed CountRIeS: While in developed countries the formal financial sector comprising mainly the banking system serves most of the population in developing countries the financial sector serve small segment of low-income group has little access to financial services either from formal or semi-formal. As a result, many people necessarily depend on their own resources or informal sources of finance which are at high cost. In most developing countries formal sectors serve more often no more than 20 to 30 per cent of the total population, the vast majority of whom are low income households in rural areas (ADB 2007).
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The Financial Inclusion and Development indicators of some of the countries are given below. table 3 : Financial Inclusion and development Indicators Country India Bangladesh Brazil China Indonesia Korean Republic Malaysia Philippines Sri Lanka Thailand Composite Index* of Financial Inclusion 48 32 43 42 40 63 60 20 26 50 Poverty (% BPL Population) 28.6 (1999) 49.8 (2000) 22.0 (1998) 4.6 (1998) 27.1 (1999) 15.5 (1989) 36.8 (1997) 25.0 (1995) 13.1 (1992) Unemployment 4.3 3.3 9.7 4.0 9.9 3.5 3.5 9.8 9.0 1.5
(Source: World Bank 2006 and 2008 * per cent of population with access to Financial Inclusion)
In developed countries it ranges from 70 to 90 per cent (99% Denmark, 96% France, 91% USA, 96% Germany.) The central question therefore is how to bring financial services to all people and accelerate economic development by making available safe savings, suitably designed loans for poor and low income house holds and appropriate insurance and payment services which can help themselves to increase income and improve their standard of living. Some of the important legislative and voluntary measures taken by developed countries which enabled them to bring majority of the population into banking fold were as under. 8. PolICy ReSPonSeS In develoPed CountRIeS: There are limited data across countries on degree of usage of and access to financial services. Mostly data comes from surveys from World Bank or National agencies such as the US Federal Reserve Boards, UK Bank of England, EU etc. Department for International Department UK had
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commissioned a study in 2004 to provide a brief overview of policy level response to financial exclusion in a number of developed countries. The study indicated active programmes undertaken to bring disadvantaged groups into banking by USA, UK, Canada, Belgium, France, Germany, Sweden, and South Africa. Policy initiatives for financial inclusion of these countries are given here under in brief. united kingdom: i) Government identified three priority areas for the purpose of financial inclusion viz. access to banking services, access to affordable credit and an access to free face to face money advice. ii) Established Financial Inclusion Fund to promote financial inclusion and assigned responsibilities to banks and credit unions removing financial exclusion. iii) Enacted legislation for credit unions. iv) Introduction of No Frill Account. v) Introduction of Savings Gate Way for those on low income employment. Under the arrangement for every British Pound (BP) 1 saved by those low income employment the state will contribute up to BP 25. vi) A post office cared account was created for those who are unable or unwilling to access to bank account. vii) The Banking Code Standard Board, the body responsible to monitoring compliance. viii) Setup a Financial Inclusion Task Force to monitor the extent to which goal of financial inclusion has been achieved. ix) Community learning invitations were introduced with a view to promoting Financial Literacy among housing associations and tenants. united States: i) A civil rights legislation known as Community Reinvestment Act (CRA) enacted in 1997. The CRA prohibits discrimination against law and moderate neighborhoods and obliges banks to serve the credit and banking service needs of all communities in which they are chartered. ii) Federal Bank Regulatory Agencies rate banks on their effectiveness at serving low income communities. Rating is also taken into account for regulatory ruling such as permission for merger with another bank.
1
Canada: i) Bill C 8 was enacted in June 2001 and includes new rules designed to tackle banking exclusion which requires all banks to provide accounts without minimum balance for opening account to all Canadians regardless of employment, credit history with minimum identification requirements. ii) The Financial Consumer Agency of Canada monitors whether the financial institutions adhere to their public commitment. iii) Canada has a well established structure for promoting financial education among its citizens. The onus of spreading financial education lies with the Canada Bankers Association (CBA) which is the representative body of all charted banks in Canada. Belgium: i) In Belgium Code of Practice was introduced in July 1997 by Belgium Bankers Association which provide for basic banking services for people on moderate income who lack bank accounts which include call deposit accounts and offers three basic type of transactions, money transfer, deposit and withdrawals and bank statement. ii) Belgium Banks Act was enacted on 24th March, 2001, setting out minimum standard basic bank account including ceiling on charges, minimum number of free face-to-face transaction. iii) The Banks Act requires banks to contribute a compensation fund which is managed by the National Bank of Belgium to compensate the financial institution that operate more than their share of basic accounts. Sweden: In Sweden banks are not allowed to refuse to open saving or deposit account under Banking Business Act, 1987 Section 2. France: i) In France Articles of Banking Act, 1984 has recognized principle of right to bank account. ii) Voluntary charter were introduced in 1992 developed by French Bankers Association to make banks committed to opening affordable account with facilities such as card, free access to cash machines network, bank statements and negotiable number of cheques. australia: Australian Bankers Association in 2002 made to provide a generic account with no minimum balance to open account, unlimited deposits, free of charges and six free non-deposit transactions (three counter cash withdrawals).
1
Germany: Voluntary Code was introduced by German Bankers Association in 1996. 9. SalIent FeatuReS oF BaSIC/no-FRIllS aCCountS oF SeleCt CountRIeS aRe aS undeR:
name of the account and year of Introduction No-frills Account, 2005 Basic Bank Account Passport Account (PA)
Country
main Features
India
1. Very low or no minimum balance. 2. 5-10 free transactions per month. 3. ATM facility. 1. Affordable. 2. Free face-to-face money advice. 1. International debit-cum-ATM cards. 2. Shopping online, over the phone in UK and abroad. 3. Instrument of flexible savings account. 4. Low costs international money transfer. 5. Multi-lingual relocation advice. 6. SIM (Subscriber Identity Module) card. 1. Very low or minimum balance. 2. Low fees. 3. For people without deposit accounts. 1. Universal savings account. 2. Savings by the poor, matched by the Government. 3. Use of savings is restricted for investments in homes, education, business capitalization or other development purposes. 1. No minimum balance requirement. 2. ATM facility provided. 3. Government pays the obliging bank a onetime subsidy of $12.60 for every account it opens. 4. No cheque book or direct debit payments.
United Kingdom
United States of America
First Account, 2002 Individual Development Account (IDA), 11
Electronic Transfer Account,1
1
Belgium
Basic Bank Account
1. Euro 12 a year ceiling on charges. 2. 36 free face-to-face transactions with a debit card. 3. Compensation for banks that open more account. 4. Independent dedicated extra-judiciary litigation service in case of dispute. 5. Banks to give reasons for refusal in writing. No management fees. One free cash deposit per month. Only valid ID as identity proof. Limited to deposits, withdrawals, transfers (anywhere in the country). 5. Debit card payments. 1 . No keeping fees. 2 . No minimum balance. 3 . Unlimited deposits free of charge. 4 . Six non-deposit transactions (including three over-the-counter cash withdrawals) free of charge each month. 1. Savings Bank accounts and banking services. 2. Used extensively by people with low income. 3. proposal to create full-fledged postal A bank/credit institution was with the Parliament. 1. limit on over-the-counter withdrawals. No 2. Tax free. 1. Card based. 2. Simplified application procedures. 3. Accessible through point-of-sale terminals at correspondents. 4. Accepts regular payments of social benefits and cash deposits. 5. Electronic version e-Account Calxa for Brazilians abroad for remittances at just 2.5 per cent as compared with 8-15 per cent by traditional channels. 1. 2. 3. 4.
South Africa
Mzansi Account 2004
Australia
Generic Account 2002
France
La Poste Account
Brazil
Livret A Account
Caixa Aqui Account
Chapter II Financial Inclusion Initiatives in India

India is the second largest populated country after China in the world. More than 60 per cent population makes its living in villages. India has recognized since fifties that for long term sustainability of economic prosperity and social development and take benefit of growth to rural India is critical. At the commencement of the process of planned economic development in 1950-51 it defined the role of banks, financial institutions as they are vital link between various production elements of economic activity. It strengthened in sixties the foundations of Indian banking system by encouraging mergers among small banks and compulsory amalgamation to take banking to rural India. Government of India and Reserve Bank of India have taken series of measures and experimented various alternatives to take financial services to masses although the term Financial Inclusion was not in vogue then. The initiatives taken in this regard include l Building institutional frame work of credit institutions with the focus on cooperative institutions. l Nationalization of major domestic commercial banks. l Introduction of Lead Bank scheme to expand the outreach of banking facilities in rural and semi-urban areas. l Creation of Regional Rural Banks. l Setting of targets for lending to agriculture, small scale industries and other weaker sections defining them as priority sector for the purpose of lending by banks. l Introduction of Service Area Approach and Village Adoption Scheme to cover nearly 6 lakh villages of the Country by banking system through rural and semi-urban branches of commercial banks.
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l
Sponsoring schemes targeted at the poor, linking them to lending schemes of banks in the villages.
In India financially excluded class comprises largely of small/ marginal farmers, landless labourers, oral lessees, self employed in unorganized sector enterprises, urban slum dwellers, migrants ethnic minorities, socially excluded groups, senior citizens and women. The outreach of banking sector has seen rapid growth since 1969. The population per office of the commercial banks has came down from 65000 in June 1969 to 14000 in 2009 with network of over 80369 (June 2009) branches of commercial banks of which 31,796 are in rural areas and 19119 are in semi-urban areas. According to basic statistical returns of Scheduled Commercial Banks (SCBs)-2008 including RRBs there were 581.6 million deposit accounts (rural 168 million, semi-urban 148.4 million, urban 128 million, metropolitan 137.2 million) and 106.99 million borrowal accounts. The following table gives the position of deposit accounts with various categories of institutions in 1993, 2002 and 2007: table 4 : Position of deposits with various categories of institutions
(Numbers in Millions) Institution Deposit Accounts 1993 2002 2007 Credit Accounts 2002 2007
1. SCBs 2. RRBs (1+2) Urban Co-op Banks Pry Agri Credit Societies Post Offices TOTAL Self Help Groups
246.0 30.5 276.5 41.6 89.0 47.5 454.6
246.5 36.7 283.2 41.6 102.1 60.2 487.1
320.9 52.7 373.6 50.0 125.8 60.8 610.2
43.3 12.6 55.9 4.4 55.5
76.6 15.0 91.6 7.1 47.9
7.4
4.00
1
The coverage of rural and urban population by savings bank accounts is given in the following table: table 5: Savings accounts with Scheduled Commercial Banks
Population Group Particulars 1971* 1981 1991 2001 2006 2007
No. of Accounts (Million) Rural Accounts per 100 persons Accounts per 100 adults No. of Accounts (Million) Urban Accounts per 100 persons Accounts per 100 adults No. of Accounts (Million) Total Accounts per 100 persons Accounts per 100 adults
* As at end-June
------23.6 4.3 7.1
56.9 153.8 169.8 194.4 213.8 10.9 17.9 40.9 25.7 42.3 14.3 22.9 24.5 39.2 45.6 73.1 29.9 46.8 22.9 35.0 38.5 58.9 27.2 41.5 24.2 35.8 48.1 71.4 30.8 45.9 26.2 38.8 50.7 75.2 33.0 48.9
99.2 110.2 149.1 159.7
97.8 253.0 280.0 343.4 373.5
Source: Basic Statistical Returns of SCBs in India
The banking system has covered 26.2 per cent of rural population through savings deposit accounts. The un-banked segment is much higher at 61 per cent in rural areas. Coverage of rural and urban borrowers per 100 persons is given in the following tables from 1971 to 2007. It is 9.6 in rural and 19.5 in urban per 100 adult population. table 6: Borrowal accounts with Scheduled Commercial Banks
Population Group Rural Particulars No. of Accounts (Million) Accounts per 100 persons Accounts per 100 adults No. of Accounts (Million) Accounts per 100 persons Accounts per 100 adults No. of Accounts (Million) Accounts per 100 persons Accounts per 100 adults 1971* 4.3 0.8 1.3 1981 16.4 3.1 5.2 4.4 2.7 4.5 20.7 3.0 5.0 1991 49.9 7.9 12.7 12.1 5.5 8.9 61.9 7.3 11.7 2001 36.6 4.9 7.5 15.8 5.5 8.4 52.4 5.1 7.9 2006 50.5 6.3 9.3 34.9 11.3 16.7 85.4 7.7 11.6 2007 53.1 6.5 9.6 41.3 13.1 19.5 94.4 8.3 12.4
Urban
Total
* As at end-June Source: Basic Statistical Returns of SCBs in India
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The census population groups are rural and urban, whereas the population groups used in BSR data are rural, semi-urban, urban and metropolitan. There is no unique relationship between the two. For comparison purpose and simplicity, therefore, rural and semi-urban are taken as rural, and urban and metropolitan are combined as urban. Adult population in this section refers to the population in the age group of 15 years and above. Rural/Urban population for 2007 is estimated on the basis of rural/urban share in 2001 population. SCBs include RRBs unless stated otherwise/ given separately. Out of 203 million households in the country 147 million are in rural area. As per NSSO data out of 89.3 million farmer households 45.9 million (51.4 per cent) do not access credit either from credit institutions or from noninstitutional sources. (as per the NSSO survey of farmer households for 2003). One of the bench marks 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 of the adult population. Available data (March 2004) shows that 59 per cent of adult population in the country has bank accounts. Thus 41 per cent of the adult population is financially excluded. The un-banked segment is much higher at 61 per cent in rural areas. The exclusion is as high as above 75 % in the states of Meghalaya, Arunachal Pradesh, Uttarakhand, Assam, Mizoram, Manipur, and Jharkhand. It ranges from 25% to 50% in the states of Bihar, Chathisgarh, Himachal Pradesh, Jammu & Kashmir, Nagaland, Orissa, Sikkim, Tripura and Uttar Pradesh. It is relatively low in southern states and other states like Madhya Pradesh, Rajasthan, Punjab, Maharashtra, Haryana and West Bengal (see Table 7 on Page 40 for state wise position of financial inclusion on the basis of deposit accounts for adult population). Financial exclusion of large section of population particularly in rural areas and slums in urban areas are attributed both from supply side and demand side factors. The reasons from supply side are (a) Persons are unbankable in the perception of banker. (b) The deposit/loan account is too small. (c) The person is bankable but distances are too long for servicing and supporting the account and expanding branch network is not feasible and viable. (d) High transaction cost particularly with large number of small accounts.
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(e)
(f) (g)
Inability to evaluate and maintain cash flow cycles and repayment capacities due to lack of basic data base and absence of credit history of people with small means and collateral security for loan accounts. Lack of banking habit and culture. Inadequacy of extension services, poor infrastructure viz; roads, communication facilities, adverse security situation in certain parts of rural India.
From the demand side there are reasons for rural/urban poor remaining excluded from banking sector such as (a) (b) (c) (d) (e) High cost of transactions at clientele due to expenses such as travel cost, wage loss, incidental expenses. Lack of awareness. Very small volume/size of transactions which are not encouraged by formal banking institutions. Hassles related to documentation and procedure and Easy availability of timely doorstep service from money lenders/ internal sources.
Having identified the reasons for financial exclusion and the wide gap in availability of banking services the Government of India, Reserve Bank of India and NABARD initiated further steps for taking banking services to masses. Apart from the existing banking system network with a view to developing a supplementary credit delivery system that is cost effective and user friendly for both banks and the poor, micro credit initiatives such as Self Help Group and Micro Finance Institutions were encouraged. Promotion of Self help Group: Self Help Group (SHG) is a group about 10 to 20 people from homogeneous class who join together to address issues. They involve voluntarily thrift activities on regular basis and use the pooled resources to make interest bearing loans to members of the group. The SHG Banks Linkages programme is a major plan of the strategy adopted for delivery of financial services to the poor in a sustainable manner. The programme was started as an Action Research Project in 1989 which was off shoot of a NABARD initiative in 1987 through sanctioning Rs.10 lakh to MYRADA NGO as seed money assistance experimenting Credit Management Group. In the same year, Ministry of Rural Development, Government of India provided PRADAN NGO with support to establish Self Help Group in Rajasthan. The experiences of these early efforts led to the approval of pilot project by NABARD in 1992. The project although
22
was initially made slow progress till 1999, subsequently the programme has been growing rapidly and members of SHGs increased from 81780 in 1999-2000 to more than 61.21 lakhs (including SGSY Self Help Groups) in March 2009. 2. PolICy InItIatIveS By RBI: In March 2005 Financial Inclusion was explicitly made as major policy objective by RBI as banking services are in the nature of public good and it is essential to make available banking and payment services to the entire population without discrimination. As financial inclusion signified lack of access by certain segment of the society it was felt appropriate that low cost fair and safe financial products and services made available to these segments by main stream providers. i) no Frill account: In November 2005 Reserve Bank of India advised banks to make available a basic banking No Frill Account with low or no minimum balance as well as charges to expand the outreach of such accounts to vast sections of the population. Simplification of KYC Norms: In order to ensure that persons belonging to the low income group both rural and urban areas do not encounter difficulties in opening bank accounts, the Know Your Customer (KYC) procedure for opening bank account was simplified asking banks to seek only a photograph of the account holder and self certification of addresses (the amount of outstanding balance in these accounts would be limited to Rs.50,000 and total transactions would be limited to Rs.2 lakh in one year).
ii)
iii) use of Intermediaries: In January 2006 Reserve Bank of India permitted banks to utilize the services of Non-Government Organizations (NGO), Self Help Groups, Micro Financial Institutions (MFI) and other civil societies organization as intermediaries in providing finance and banking services through Business Facilitator and Business Correspondents (This allows banks to do cash in cash out transactions at a location closer to rural population and facilitate greater financial inclusion and income) which is known as Agency Model. a) adoption of agency model: With an effort to focus commercial banks, Regional Rural Banks and Cooperative banks to reach rural household and farm household banks were permitted to use infrastructure of civil society organizations, rural kiosks, and adopt Business Facilitator (BF) and Business Correspondent (BC) models for providing financial services.
23
RBI has also permitted the participation of Individual kirana/medical/ fair price shop owners, PCO operators and agents of small savings schemes of Government of India / Insurance companies, retired and authorized functionaries of well run SHGs linked to banks as Business correspondents. The type of services of BF and BC Models are given below. Types of services of Business Facilitator: i) ii) iii) iv) v) vi) vii) Identification of borrowers and fitment activities. Creation of awareness of savings and other products. Collection and preliminary process of loan application. Processing and submission of application to banks. Educating, Counseling, advice on managing money and debt. Promotion and nurturing of Self Help Group and Joint Liability Group. Post sanction monitoring.
B) Business Correspondents (BCs): In addition to the activities listed under Business Facilitator Model, the scope of activities listed to be undertaken by BCs will include: i) Disbursement of small value credit. ii) Recovery of principal / collection of interest. iii) Collection of small value deposits. iv) Sale of micro insurance/mutual fund products, pension products and other third party products. v) Receipt and delivery of small value remittances, other payments of instruments. iv) Use of Post Offices: Banks were permitted to use enormous network of Post Offices (with over 1.55 lakh which is largest in the world, 1.39 lakh rural and 15562 in urban) as Business Correspondents for increasing their outreach and leveraging Postmans intimacy, knowledge of the local population and trust reposed in him. v) Introduction of General Credit Card: Banks were asked to introduce a General Credit Card (GCC) scheme for issuing GCC to their constituents in rural and semi-urban areas based on the assessment of income and cash flow of the household similar to that prevailing under normal credit card without insisting on security and the purpose or end use of credit (as Point of Sale (POS) and ATM facilities) with similar products are not feasible or available in rural areas. The limit under GCC is up to Rs.25,000.
24
Banks were advised to utilize the services of schools, primary health centre, local government functionaries, Farmers Association/Clubs, well established community based agencies etc. for the purpose. vi) Weightage for Financial Inclusion in Branch licensing: In terms of the existing provisions of Banking Regulations Act, 1 banks are not allowed to open new place of business or change the locations of the place or villages in India without prior approval of Reserve Bank. While considering the application of Banks for opening branches, Reserve Bank gives due weightage to the nature and scope of banking facilities provided to common person, particularly in unbanked areas, actual flow of credit to the priority sector pricing of its products and overall efforts for promoting financial inclusion including introduction of appropriate new products and enhanced use of technology for delivering of banking services. vii) Identification of under-banked Districts: Reserve Bank of India has identified districts whereby the population per bank office is higher than national average in rural and semi-urban areas. Banks have been asked to identify unbanked/under-banked centres to open new branches. The District Consultative Committees have been given the task of identifying centres for opening branches of Commercial Banks and Regional Rural Banks. viii) Responsibility to Sponsor Banks: Regional Rural Banks 83 (after amalgamation of 196 RRBs) have covered 525 districts out of 605 districts as on March 2008 with their dominant presences in rural and semi-urban areas (net work-11,637 rural branches and 2,750 semiurban branches (June 2009)) can become powerful instruments for financial inclusion. The sponsor banks (i.e. lead banks) have been made responsible for their performance. ix) Preferences to RRBs in Branch licensing: Liberalized branch licensing policy in their areas of operations and recapitalization of RRBs having negative net worth and providing them with facilities to upgrade skills of their staff are being attempted. x) All State and District Central Co-operative Banks have also been advised to make available a basic No Frill Account with nil or very low minimum balance and give wide publicity of such No Frill Account and reporting of progress made in opening such accounts. xi) Co-operative banks and RRBs have been allowed to sell insurance and financial products.
25
xii) Financial literacy: Reserve Bank has formulated a model scheme for all scheduled commercial banks (including RRBs) in 2009 with the broad objective to provide free financial literacy education and credit counseling. xiii) mobile banking: As the penetration of mobile phones particularly among low income people and enormous opportunities they afford in extending the banking outreach, RBI has formulated guidelines on mobile banking. It has encouraged introducing technology based products and services such as prepaid cards/debit cards, mobile banking. (The total tele-density in the country is 35.65 per cent in February 2009 Rural 11.81%, Urban 83.66%). India is experiencing an explosion in the use of mobile communication technology and this is a development that banking sector can exploit. Mobile phone services belong to all strata of society, spread across metropolitan centres, towns and villages. Banks can take advantage of this expanded reach of Tele communication if they provide services through this mode. These hold substantial promises as delivery vehicle of the future. There is huge potential and opportunities.) xiv) RBI has liberalized policy for ATMs. The National Electronic Fund Transfer (NEFT) facility is able to offer nationwide ATMs linked to NEFT w.e.f. 1-4-2009 and can facilitate banking transactions including remittance through ATMs. xv) RBI has also rationalized service charges for use of electronic products which would facilitate movement of funds at low cost. xvi) Government of India and Reserve Bank of India are trying payment of pension for below poverty line families and unorganized sectors targeted nearly 300 million workers through bank accounts thereby not only saving the cost of payment but also minimum leakage and payment in the name of pension which do not actually exist. Banks have leveraged the technology for opening large number of No Frill Accounts. xvii) To encourage banks to adopt ICT solutions for enhancing their outreach, the Reserve Bank formulated a scheme to quicken the pace of adoption of the smart card-based electronic benefit transfer (EBT) mechanism by banks and rolled out the EBT system in the States that are ready to adopt the scheme. As per the scheme, the Reserve Bank would reimburse the banks a part of the cost of opening accounts with bio-metric access/smart cards at the rate of Rs.50 per account through which payment of social security benefits,
26
National Rural Employment Guarantee Act (NREGA) payments and payments under other Government benefit programmes would be routed to persons belonging to below poverty line (BPL) families. The scheme is currently being implemented in Andhra Pradesh. So far, seven banks have been paid Rs.1.8 crore for smart cards issued by banks in Andhra Pradesh during July-December 2008. The process is at different stages of implementation in other States such as Karnataka and Uttarakhand and the scheme of partial reimbursement by the Reserve Bank has been extended by one year up to June 30, 2010. Banks are advised to work in co-ordination with the respective government departments at the Central and State levels to ensure that all State benefits are delivered to individuals only through bank accounts within a specific timeframe. xviii) A definite strategy has been adopted for ensuring financial inclusion. 431 districts have been identified by State Level Bankers Committee consisting of banks for 100 percent financial inclusion (progress made in this regards is monitored by RBI and internal evaluation is also made). RBI has advised the lead banks to constitute a SubCommittee of the District Consultative Committees (DCCs) to draw up a roadmap by March 2010 to provide banking services through a banking outlet in every village having a population of over 2000, by March 2011. Such banking services may not necessarily be extended through a brick and mortar branch but can be provided through any of the various forms of ICT-based models, including through BCs. (policy decision announced by RBI in October 2009) (Studies were undertaken jointly by the Reserve Bank, concerned State Governments, NABARD, banks and financial institutions, which have imparted a renewed impetus for concerted action to bring about improvements in the economies of the respective States. The working groups constituted for Bihar, Uttaranchal, Chhattisgarh, Lakshadweep, Himachal Pradesh and Jharkhand during July and October 2006 made wide ranging recommendation. The following recommendations were accepted and their implementation is monitored by RBI and State Level Bankers Committee: 1. Opening of new branches. 2. All branches to be made RTGs and NEFT enabled to reap the benefits of electronic payment and settlement system. 3. Agencies to take initiatives to promote more SHGs by making use of the services of NGOs. 4. Setting up of rural development and self-employment training institutes for promoting self-employment opportunities.
27
5. Banks to aggressively use the BF model for increasing banking outreach. 6. Use of Post Offices for augmenting credit flow in rural areas. 7. Village panchayats can also act as BFs/BCs for banks. 8. Banks and other agencies to carry out awareness campaign for opening of no frills accounts. 9. Inclusion of underdeveloped districts for 100 per cent financial inclusion. 10. Opening of credit counselling centers in the districts of the States by major banks. xix) Despite the host of measures taken by the Reserve Bank since 2005, moneylenders remain dominant source of credit, especially in the rural areas and hinterland. With a view to addressing the needs of the people who rely on informal sources of credit, the Reserve Bank has constituted a Group to review the legislation on money lending. 3. InItIatIveS oF GoveRnment oF IndIa: The Government of India in June 2006 constituted a Committee on Financial Inclusion under the chairmanship of Dr. C. Rangarajan, former Governor of RBI to look into the problem of exclusion of rural poor from access to financial services. 3.1 Based on recommendations of the Committee: a) A National Rural Financial Inclusion Plan has been drawn with target to provide access to comprehensive financial services to at least 50 per cent of 55.7 million financially excluded rural cultivator and noncultivator households across different states by 2012 through rural / semi-urban branches of Commercial Banks and RRBs. The remaining population have to be covered by 2015. Accordingly Banks have been advised to set target of additional minimum new 250 rural households for each rural and semi-urban branch per annum commencing from the year 2008-09. b) As per announcement made in the Union Budget 2007-08, two funds (the Financial Inclusion (Promotion and Development) Fund (FIF) and the Financial Inclusion Technology Fund (FITF)) were set up with NABARD. The Funds are meant for meeting the cost of developmental and promotional interventions, and costs of technology adoption, respectively, for facilitating the mandated levels of inclusion. The Funds will have an initial corpus of Rs.500 crore with initial funding of Rs.250 crore each, to be contributed equally by GOI/RBI/NABARD, with annual accretions thereto. Banks will be eligible for support from the Funds on
28
a matching contribution of 50% from the Fund for non-tribal districts and 75% for tribal districts identified under the Tribal Sub-Plan. l Funding from FIF would be available for various promotional and developmental initiatives to facilitate better credit absorption capacity among the poor and vulnerable sections, viz., i) Creation of and support to Farmers Service Centres (FSCs) to provide advisory services to the new/hitherto excluded segments. ii) Promoting entrepreneurship/skill development among farmers/ rural entrepreneurs for effectively managing the assets financed. iii) Promotion, nurturing and credit linking of SHGs especially in the central, eastern and north-eastern regions. iv) Training of personnel of Commercial Banks/RRBs to positively orient them towards lending to the poor and hitherto excluded. v) Support for setting-up Resource Centres to enable mature SHGs to micro enterprises and voluntary establishment of federations together/or from MFDEF. vi) Prioritized support for capacity building of BFs/BCs. Support from the FITF would be extended to enable application of low-cost technology solutions and for rolling out IT-based inclusive financial sector plan on the scale as envisaged in the National Rural Financial Inclusion Plan. (NRFIP)
3.2. Indian Computer emergency Response team (CeRt-In) The Department of Information Technology has established the Indian Computer Emergency Response Team with a specific mandate to respond to computer security incidents. The CERT In is assisting the Department of Information Technology to put in place a national cyber security strategy and a national information security governance policy. Its elements are as follows: l Security legal framework and law enforcement; l Security early warning and response; l Security compliance and assurance; l Security education awareness and training; l Security technology R&D; and l Security information sharing and co-operation. In pursuit of the cyber security strategy, CERT In is working towards preventing cyber attacks, reducing vulnerability of cyber attacks and minimizing damage and recovery time from cyber attacks.
29
3.3. uId authority of India Government of India has set up UID Authority of India which has taken up the project of providing Unique Identification (UID) Numbers to all the citizens in the country. The authentication of the UID is made by using mobile phones. The UID project will not only help to solve the logistical and know-your-customer (KYC) issues but also enable financial institutions to reach out to unbanked areas, facilitating financial inclusion. It will also reduce the overall transaction cost for all intermediaries. highlights of dr. Rangarajan Committee Recommendations
l
The National Rural Financial Inclusion Plan (NRFIP) aims to provide comprehensive financial services to 50% (55.77 million) of the excluded rural cultivator/non-cultivator households by 2012 through rural/semi-urban branches of commercial banks and RRBs. The remaining households are to be covered by 2015. Rural/semi-urban branches of commercial banks and RRBs to set themselves a target of covering 250 new cultivator/non-cultivator households per branch p.a., emphasising on MF/tenant cultivators/poor non-cultivators. The national targets would be disaggregated state-wise/district-wise at the SLBC and DLCC levels. GOI would constitute a National Mission on Financial Inclusion (NMFI) comprising representatives of all stakeholders and responsible for deciding on policy issues, supporting stakeholders in the public/private/NGO sectors and monitoring the implementation of NRFIP. applications Financial Inclusion (Promotion and development) Fund (FIF) and the Financial Inclusion technology Fund (FItF) be set up with NABARD, for meeting the cost of developmental and promotional interventions and costs of technology adoption, respectively. The Funds will have an initial corpus of Rs.500 crore with initial funding of Rs.250 crore each, to be contributed equally by GOI/RBI/NABARD. excluded districts. The banks to bring out innovative products, viz., i) ii) Utilising SHGs for tapping small savings by providing them incentives and suitable back-end technology support, Developing a savings-linked financing model based on repayment behaviour and
l To provide for the cost of offering credit plus services and technology
l Commercial banks may undertake targeted branch expansion in the
30
iii) Undertaking distribution of suitable micro-insurance products. Existing staff in rural branches to be incentivise based on an index of measurable performance parameters. Commercial banks may actively promote JLGs for purveying credit and other facilities to SF/MF/tenant, farmers/share, croppers/oral lessees.
l
To broad base the BF/BC model, locally settled retired post masters, school teachers, head masters, ex-servicemen, ex-bankers etc., would function as Business Facilitators/Business Correspondents (BFs /BCs). Banks to be given the discretion to choose their BCs after exercising due diligence and endeavour towards having a BC touch-point in each of the six lakh villages. Incentives for BCs may be linked to the number of accounts/volume of transactions handled. Commensurate financial responsibilities to be placed on BCs over a period of time with increasing turnover. SLBCs may discuss with State Governments for routing government payments through BCs. RRBs to extend branch outreach to unbanked areas and set exclusive targets for MF & financial inclusion. While no further amalgamation of RRBs may be committed upon, recapitalization of RRBs with negative net worth, widening of network/coverage, preparation and implementation of NRFIP, up-scaling of MF programme, pilot testing and grounding of BF/BC model will necessitate funding and technological support. RBI may allow new local area Banks (laBs) to operate in districts/ regions with high levels of exclusion without compromising on regulatory prescriptions. Strengthen the co-operative banks by ensuring early implementation of the revival package for STCCS. Facilitate enabling legislation to admit SHGs as members of PACS, use of PACS and other primary cooperatives as BF/BC of commercial banks/RRBs etc. To strengthen the ShG-bank linkage programme, SHGs to be encouraged in excluded areas, support capacity building of government functionaries, opening of dedicated project offices by NABARD in priority states, incentivising NGOs to diversify into backward areas. FIPB guidelines stipulating minimum foreign equity investment of US $100,000; SEBI Venture Capital guidelines to permit venture capital funds to invest in MF-NBFCs. NABARD may extend equity support to MF-NBFCs operating in regions with high exclusion levels.
31
Tax concession up to 40% of their profits by including them under Section 36(1)(viii)of the IT Act. IRDA Micro-insurance Guidelines, 2005, permitting MF-NBFCs to act as agents of regulated life and non-life insurance companies. A mutual code of conduct covering aspects of governance, transparency, interest rates, handling of customer grievances, staff conduct, recovery practices, etc., may be made mandatory. Appropriate accounting and disclosure norms would be enforced as also exercise lenders discipline regarding reasonable rates of interest and acceptable modes of recovery. While Section 25 of Companies Act could be covered by the Micro Financial Sector (Development and Regulation) Bill, 2007, co-operatives can be excluded from it. Further, supervision of MF-NBFCs could be delegated to NABARD. micro-Insurance: To economise on costs, increase outreach to the poor and leverage on the existing network, the partner-agent model for delivery where the insurer underwrites the risk and an existing intermediary handles the distribution, may be adopted. To bring down the inherent risk cost of lending, micro-insurance be linked to microcredit and NABARDs active involvement to leverage on its experience in this field. Need to create a cadre of full-time/part-time staff for insurance marketing and servicing; develop appropriate systems for tracking client information, collecting market intelligence, building database, consumer education/marketing/grievance handling, product innovation; setting-up of a technology platform in the long run and stimulating demand etc.
Remittance needs of Poor: A low value card linked to a bank account, encashable at 3 lakh POS and 1.5 lakh post offices and allows transfer of small amounts from one card to another, designing an electronic product, offering such services through the BCs of banks would help in alleviating remittance problems of the poor. demandside Perspectives: Demandside issues like access to land and tilling, access to employment, productivity enhancement, value addition & market linkages, risk mitigation and aggregating mechanics at production/marketing levels could be allowed.
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4. StePS taken By BankS: a. no Frill accounts: Banks have introduced No Frill /Zero Balance Savings Bank Account for covering all the eligible and willing persons. Photograph of the person who proposes to open account with self-certification of his address to be made available. Banks conduct household survey in villages selected for the purpose of financial inclusion. The objectives of the survey are to: i) Identify every eligible person not having bank account, invite and assist them in opening the bank account. To begin with effort is to ensure that each family has an account in the name of one of their eligible members. Extend credit based on the need and potentiality for the purpose of encouraging economic activity and income generation. Aim at preparing family business plan and village business plan for implementation of programmes. Cross sell various deposit/credit and insurance products based on potentiality. General Credit Card (GCC) scheme has been introduced to provide hassle free credit to persons of small means in rural and semiurban areas. Under the scheme, the facility is extended in the form of overdraft or cash credit for meeting general needs of customers without insisting on purpose, security and end use, up to a credit limit of Rs.25,000/-. 100% of GCC loans are treated as indirect agriculture advance under priority sector lending. Banks have introduced a number of alternative income generation activities for small / marginal farmers and agricultural labourers in farm sector and rural artisans, traditional craftsmen, small traders, etc. under non-farm sector. The SHG-Bank Linkage scheme has been introduced for providing credit assistance to members of Self Help Groups (detailed in Part II). Scheme for financing tenant farmers cultivating land either as share croppers or oral lessees through joint liability group (detailed in Part II). Banks have initiated steps to set up one Financial Literacy and Credit counselling centre on Pilot basis.
ii) iii) iv) B.
C.
d. e.
F.
33
G.
Branchless Banking The banks are attempting to deliver financial services outside conventional bank branches using Information and Communication Technologies adopting non-bank model known as Branchless Banking as it can extend distribution of financial services to poor people through Non-Bank Models which include:

Automated Teller Machines (ATMs). Point of Sale Machines Transaction Machines to do purchases in identified retail outlets with arrangements with banks mostly on credit basis. Biometric Cards / Smart Cards IT enabled cards which facilitate transaction of accounts with biometric enablement. Mobile Banking Transactions carried through mobile phones. Internet Banking. Palm Tops/ Hand Held Machines A hand held device given to field officers to record the day to day transactions and give appropriate receipts to the clients which get uploaded with day end transactions (e.g. Pigmy daily collection of small savings scheme of Syndicate Bank). E- Banking transaction is linked to Kiosks. Business Correspondents using the services of NGOs/SHGs, MFIs and other civil society organizations as intermediaries in providing financial and banking services. Business Facilitators using intermediaries such as NGOs, farmers clubs, co-operatives, community based organisations, IT enabled rural outlets of corporate entities, post offices, insurance agents, well functioning panchayats, village knowledge centres, agri-clinics/agro based centres, Krishi Vigyan Kendras and KVIC/ KVIB units for providing facilitation services.
h. I.
Banks have launched Pilot Projects to expand their outreach through Smart Cards. As part of the initiative to identify at least one suitable district in each State/Union Territory for achieving 100 per cent financial inclusion, which started in April 2006, 431 districts had been identified as on March 31, 2009. The target has reportedly been achieved in 204 districts in 18 States and six Union Territories. All districts of Haryana, Himachal Pradesh, Karnataka, Kerala, Uttarakhand, Goa, Chandigarh, Puducherry, Daman and Diu, Dadra and Nagar Haveli, and Lakshadweep have reported achieving 100 per cent financial inclusion.
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5. ChallenGeS: The stupendous task before the banks is to bring entire willing population into banking fold with special attention to rural areas where major segment of financially excluded population live. i) how to increase outreach? The Indian Financial sector has built up vast banking infrastructure and extending banking services through over 80,000 branches, 44000 ATMs of commercial banks (including RRBs) and over 1.22 lakhs service outlets of co-operative sector. The population per office of commercial banks has been brought down from 65000 in June 1969 to 15000 in March 2009. 59 per cent of adult population has bank account in the country. The major challenge before the banking system is to bring remaining willing adult population into banking fold. While the first stage of financial inclusion opening of No Frill accounts has been impressive and over 33 million No Frill accounts have been opened March 2009, due to inadequate follow up, cost of transaction and access constraints in many cases the accounts have not been operated. In order to improve access and use of account banks will have to offer services much closer to customers either through mobile branches, satellite offices, extension counters or using intermediaries like Self Help Groups, Micro Finance Institutions or Business Correspondent/ Business Facilitators. The banks will have to provide customer education and counselling using multimedia, multilanguage for dissemination of information and advice. ii) Build up Saving history Instead of seeing Financial Inclusion primarily for extending credit it has to be seen as expanding access to payment services, savings and insurance products. The number of credit assistance to the poor through various Government programmes can be channeled into savings accounts. This will not only reduce leakages, but the poor will be able to build saving history with their bank which can open door to credit.
iii) leveraging technology The global banking and financial system has undergone fundamental changes because of revolution in Information and Communication Technology (ICT). Information Technology and Electronic Fund Transfer have emerged as pillars of modern banking. Banking related services are made available to its customers without direct recourse to branch, through electronic modes such as ATMs, EFT at
35
a point of sale, Smart Card, Mobile Banking, Internet Banking, etc. The new electronic channels are cost effective and have high level of efficiency, speed and response to customer requirement. The banks have a challenge to use technology to devise an appropriate business model that would address the issues pertaining to product pricing, segmentation and distribution. Clear strategies will have to be designed keeping in mind the different client groups rural, urban, Below Poverty Line (BPL), Above Poverty Line (APL), etc. With suitable business models formed, banking system can realize the huge business potential coming from unmet demand for financial services from financially excluded people. iv) multiple Channels of delivery/Customer Protection ICT solutions are required to capture customer details to facilitate unique identification, to ensure reliable and uninterrupted connectivity to remote areas and to access the multiple channels of delivery which offer multiple financial products (banking, insurance, capital market, etc.). The banks have to ensure consumer protection and develop comprehensive and reliable credit information system for efficient credit delivery and credit pricing. Risk assessment and management The banks have to gear up their risk assessment and management practices. They have to finance first time entrepreneurs notwithstanding the risk of financial inclusion in reality. The inevitability of some degree of failed ventures should not lead to laxity in risk assessment. Selection of low Cost technology Solution The challenge for banks in extending services to the excluded are large cost of covering the huge number (cost of enrolment), relatively high maintenance cost of such accounts, small ticket size for each transaction, need for communication modes suited to illiterates in local language, affordability of products or services, need for local acceptance and involvement of personnel, need for large scale coverage including the difficult geographical terrain and areas where there are no normal communication facilities. The banks will have the challenging task to look for technology based solution and low cost delivery mechanism that will reduce transaction cost of such services. developing synergies with mFIs/ ShGs ICt The challenges are going to be banks using multiple channels for delivery of variety of financial services, developing synergies with MFIs and SHGs by introducing seamless ICT based models linked
v)
vi)
vii)
36
to such intermediaries, availability of skilled manpower to facilitate adoption of IT in a large scale, use of IT for credit information, efficient credit delivery and risk management in much bigger way moving away from use of cash. viii) Financial Protection to Senior Citizen The aged people in India (i.e. over 60 years) that stood at 84.7 million (7.5%) in 2005 is expected to rise 10.2 % by 2020. The aged people require addition attention both from society and from government. Senior citizen can be forgetful. They need to be politely handled and are treated with respect and sensitively. ix) Pension payment of BPL families and unorganized sector targeted are nearly 300 million workers who can be paid through bank accounts. As RBI is trying to see that the un-banked people get access to bank accounts it is critical that subbank accounts to ensure a safe and reliable payment system to old age pension. As literacy as well as knowledge management levels among poor are very low in our country and large parts of the hinterland have inadequate communication penetration, the importance of physical rural branch should not be discounted. Existing Post Offices and Banks should formally explore ways and means to extend financial services/ literacy to the excluded population of low income groups. To meet the challenge of financial literacy, State Level Bankers Committees should impress upon State Governments to include Financial Inclusion as subject for study in the school from X standard onwords and also to use their school teachers for the purpose at village level. Banks may assist such efforts as it will help them in their endeavors for financial inclusion.Indian Banks Association may bring out simple literature in regional languages with the help of convener of SLBC for the benefit of public.SLBCs be given responsibility to plan regular campaigns associating banks which have been allotted the villages, NGOs of the area, School teachers/ students, giving them one day training. Lead banks be given the task of co-ordinating at district level, and review the impact and progress. ISSueS oF ConCeRn oF 100 PeR Cent FInanCIal InCluSIon:
x)
xi)
6.
The path towards 100 per cent financial inclusion faces several issues. Some of the concerns in this Endeavour are: Coverage: Indias large size and population makes it difficult for any programme at a national level to reach out to everyone. The inclusion efforts
37
in the urban centers and metros are difficult, especially in case of migrant labourers who do not have identity particulars at their place of work. The remittance of money by these migrant workers to their home town is often dependent on informal channels. Infrastructure: Poor infrastructure in many parts of the country inhibits the development process. It is important, there are adequate road, rail, digital connectivity and adequate power and infrastructure facilities which are important prerequisites for operation of a banking outlet. Financial products: It is imperative that products that cater to the needs of the masses are available. Simple products rather than sophisticated instruments are required at affordable cost for the people. Flexibility is an important criterion and the products and services available should be flexible. delivery models: Efforts need to be taken to identify best delivery models/ business models for financial inclusion. The typical brick and mortar bank branches may not be feasible in all villages because of viability and other reasons. Banks have to adopt/experiment with all delivery models like satellite branches, mobile branches, business correspondents/POS, and mobile telephone services. The BC model, though a facilitating concept, is yet to scale up. technology: Despite significant technological advancements there are issues of standardization, inter-operability and costs that inhibit smooth technology solutions. The financial services offered with the help of ICT should ideally be standardised, inter-operable and cost effective. One of the major reasons for the slow progress in providing banking services in the hinterland is the high transaction costs associated with the low value large volume transactions. Technology can to a great extent reduce the cost of transactions. Role of financial intermediaries: The banks are not uniformly geared up for financial inclusion. While the commercial banks have taken significant steps to facilitate inclusion, the RRBs and the co-operative banks need to gear up their efforts in this area. Participative efforts: It is important that all the participative stakeholders work together to achieve the goal of financial inclusion. Banks, State Governments, technology providers, regulators and other developmental agencies need to work together in tandem to drive the efforts towards achieving total financial inclusion.
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7. 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 welloff, but more importantly they are more vulnerable to the same risk. Usually, the poor face risks such as death, illness, accident, injuries. They also face other two types of risks idiosyncratic (specific to the household) and covariate (common, e.g., drought, epidemic, etc.). To combat these risks, the poor do pro-active risk management grain storage, savings, asset accumulation (specially bullocks), loans from friends and relatives, etc. Micro-insurance is the term used to insurance cover to the low-income people, different from insurance in general as it is a low value product (involving modest premium and benefit package instruments). Helping the rural poor systematically to manage financial risks to their livelihoods and lives through micro-insurance offers are innovative ways to combat poverty in India. Government of India and Reserve Bank of India have taken following initiatives for promoting Micro Insurance: A. All insurers entering the business after start of IRDA Act, 1999 are required to comply with the obligation towards the rural and social sectors. B. The Insurance Regulatory and Development Authority (IRDA) defines rural sector as consisting of (i) a population of less than five thousand, (ii) a density of population of less than four hundred per square kilometer, and (iii) more than twentyfive per cent of the male working population is engaged in agricultural pursuits. The categories of workers falling under agricultural pursuits are: cultivators, agricultural labourers, and workers in livestock, forestry, fishing, hunting and plantations, orchards and allied activities. The social sector as defined by the insurance regulator consists of (i) unorganized sector (ii) informal sector (iii) economically vulnerable or backward classes, and (iv) persons, both in rural and urban areas. C. RBI permitted RRBs to undertake insurance business as a corporate agent without risk participation as RRBs have a network of branches in rural areas.
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D. IRDA has permitted NGOs, MFIs and SHGs as micro-insurance agents. This has the potential of significantly increasing rural insurance penetration. Many commercial banks have partnered foreign insurance companies for providing life insurance policies. Thus, banking outlets (which number) close to 80000 and more than 1 lakh co-operative societies could provide the needed outreach to purvey micro-insurance facilities, without any further addition. Historically in India, a few micro-insurance schemes were initiated, either by Non-Governmental Organizations (NGOs) due to the felt need in the communities in which these organizations were involved or by the trust hospitals. These schemes have now gathered momentum partly due to the development of micro-finance activity, and partly due to the regulation that makes it mandatory for all formal insurance companies to extend their activities to rural and well-identified social sector in the country (IRDA 2000). As a result, increasingly, Micro-Finance Institutions (MFIs) and NGOs are negotiating with the for-profit insurers for the purchase of customized group or standardized individual insurance schemes for the low-income people. Although the reach of such schemes is still very limited anywhere between 5 and 10 million individuals. In the past insurance as a prepaid risk managing instrument was never considered as an option for the poor. The poor were considered too poor to be able to afford insurance premia. Often they were considered uninsurable, given the wide variety of risks they face. However, recent developments in India, as elsewhere, have shown that not only can the poor make small periodic contributions that can go towards insuring them against risks but also that the risks they face (such as those of illness, accident and injury, loss of life, loss of property etc.) are eminently insurable as these risks are mostly independent or idiosyncratic. Moreover, there are cost-effective ways of extending insurance to them and of combining micro-insurance with micro-finance.
table 7: Coverage of Banking Services (Ratio of demand deposit accounts to the adult Population)
Region/State/Union Terriroty NORTHERN REGION Haryana Himachal Pradesh Jammu & Kashmir Punjab Rajasthan Chandigarh Delhi NORTH-EASTERN REGION Arunachal Pradesh Assam Manipur Meghalaya Mizoram Nagaland Tripura EASTERN REGION Bihar Jharkhand Orissa Sikkim West Bengal Andaman & Nicobar Islands CENTRAL REGION Chhattisgarh Madhya Pradesh Uttar Pradesh Uttaranchal WESTERN REGION Goa Gujarat Maharashtra Dadra & Nagar Haveli Daman & Diu SOUTHERN REGION Andhra Pradesh Karnataka Kerala Tamil Nadu Lakshadweep Pondicherry ALL-INDIA Current Accounts 4215701 572660 134285 277529 1156137 689657 80607 1304826 476603 10538 378729 12514 24305 3441 13819 33257 1814219 464511 166007 228160 4097 942733 8711 2202217 192067 553381 1324509 132260 3178102 81551 955964 2127240 6076 7271 4666014 1156405 1086662 600065 1786514 491 35877 Savings Accounts 52416125 8031472 2433595 3094790 13742201 12139302 1126696 11848069 6891081 209073 5071058 200593 458779 117885 195452 638241 47876140 13225242 5834341 7030004 125365 21544753 116435 64254189 3346898 11731918 45804350 3371023 49525101 1584177 16220262 31568184 69308 83170 83386898 23974580 19147819 17669723 22052812 22997 518967 Total Population 132676462 21082989 6077248 10069917 24289296 56473122 900914 13782976 38495089 Adult No. of Acc. No. of Acc. Population Total No. of Per 100 Per 100 of (Above 19 Accounts of Adult Population Years) Population 67822312 11308025 3566886 5379594 14185190 28473743 546171 7929589 19708982 56631826 8604132 2567880 3372319 14898338 12828959 1207303 13152895 7367684 219611 5449787 213107 483084 121326 209271 671498 49690359 13689753 6000348 7258164 129462 22487486 125146 66456406 3538965 12285299 47128859 3503283 52703203 1665728 17176226 33695424 75384 90441 88052912 25130985 20234481 18269788 23839326 23488 554844 43 41 42 33 61 23 134 95 19 20 20 9 21 14 11 21 22 17 22 20 24 28 35 26 17 20 28 41 35 124 34 35 34 57 39 33 38 57 38 39 57 31 84 76 72 63 105 45 221 166 37 40 39 17 44 25 21 38 41 33 44 34 45 49 59 51 32 39 57 78 61 187 60 60 61 93 65 57 66 89 60 70 90 59
1091117 544582 26638407 14074393 2388634 1222107 2306069 1088165 891058 476205 1988636 995523 3191168 1784212 227613073 122136133 82878796 40934170 26909428 13737485 36706920 21065404 540493 288500 80221171 45896914 356265 213660 255713495 129316677 20795956 11209425 60385118 31404990 166052859 82229748 8479562 4472514 149071747 86182206 1343998 891411 50596992 28863095 96752247 56207604 220451 122765 158059 97331 223445381 135574225 75727541 44231918 52733958 30623289 31838619 20560323 62110839 39511038 60595 33686 973829 613971
16552856 304349534 1027015247 541031553 320902390
Chapter III Financial literacy / education

CRedIt CounSellInG: The need for financial education is felt both in the developed and the developing countries. In the developed countries, the increasing number and complexity of financial products, the continuing shift in responsibility for providing social security from the Governments and financial institutions to individuals, and the growing importance of retirement planning by the individuals, make it imperative that financial education be provided to all. Similarly, in emerging economies, the increasing participation of a growing number of consumers in developing financial markets necessitates the promotion of financial education. With changing growth dynamics, certain segments of the population could become susceptible to excessive borrower optimism or even to vicissitudes in the economic environment. In such a scenario, it is necessary to establish credit counselling institutions for educating individuals to assess their credit demand and debt management in order to mitigate bankruptcy risk. Furthermore, credit counselling institutions can also remove asymmetric information in rural credit and can help individuals by guiding them to access credit from various available sources. From the perspective of a regulator, financial education delivered through credit counselling can empower the common person and, thus, reduce market failure attributable to information asymmetries. The first well known credit counselling agency was created in 1951 in the United States when credit agencies created the National Foundation for Credit Counselling (NFCC). Their stated objective was to promote financial literacy and help consumers to avoid bankruptcy. In 1993, the Association of Independent Consumer Credit Counselling Agencies (AICCCA) was founded in the United States, considering the need for industry-wide standards of
42
excellence and ethical conduct. The concept caught the attention of other countries and over the last several years, a number of countries have undertaken significant initiatives towards credit counselling. The Consumer Credit Counselling Service (CCCS) in the UK, established in 1993, helps consumers with budgeting and better money management as also their debt repayment plans. In fact, the Banking Code in the UK provides that member banks shall discuss financial problems with customers and together evolve a plan for resolving these problems. Canada established a non-profit counselling organisation in 2000 called Credit Counselling Canada (CCC), which seeks to enhance the quality and availability of not-for-profit credit counselling for all its citizens. The Bank Negara Malaysia has established a Credit Counselling and Debt Management (CCDM) agency to provide advice to individuals on credit counselling and loan restructuring. The arrangement is expected to be a prompt and cost-effective means of debt settlement based on the repayment plan between creditors and the debtor without intervention of courts. In view of rising personal bankruptcies, primarily on unsecured debt, Credit Counselling of Singapore (CCS), established in 2003, is meant to assist financially distressed consumers. In India a framework, for small and medium enterprises has also been evolved recently. In the case of agriculture loans and small borrowers, however, only broad guidelines have been issued to banks from time to time on parameters for restructuring. 2. RBI Project Financial literacy In India, the need for financial education is greater considering the low levels of literacy and the large section of population which is still out of the formal financial set-up. Project Financial literacy: The RBI has undertaken a project titled Project financial literacy. The objective of the project is to disseminate information regarding central bank and general banking concepts to various target groups including school and college going children, women rural and urban poor, defense personnel and senior citizens. The project envisages a multi pronged approach. The project has been designed to be implemented in two modules, one module focusing on the economy, Reserve Bank and its activities and the other module on general banking. The material is created in English, Hindi and other regional languages and is disseminated to the target audience with the help, among others, of banks, local government machinery, schools and colleges through presentations, pamphlets, brochure, films, as also, through the Banks website.
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The Reserve Bank has also created a link on its website for the common person to give him the ease of access to information in 13 regional languages which he can use in his dealings with banks. RBI Financial Literacy Scheme for Banks is 1) To provide financial counselling services through face to face interaction as well as through other available media like e-mail, fax, mobile etc. as per convenience of interested parsons including education on responsible borrowing, proactive and early saving and offering debt counseling to individuals who are indebted to formal or informal financial sectors. 2) To educate the people in rural/urban areas with regard to various financial products and services available from financial sector. 3) To make the people aware of the advantages of banking with the formal financial sector. ) To formulate debt restructuring plans for borrowers (other than willful defaulters) in distress and recommend the same to formal financial institution/banks including cooperatives for consideration. 5) To take up any such activity that promotes financial literacy, awareness of the banking services and financial planning. For increasing financial literacy and credit counselling RBI has also launched in June 2007 a multilingual website in 13 Indian languages on all matters connecting banking and the common person. Financial education : Initiatives In Scotland Scotland follows a three pronged strategy with regard to financial education: education, information and advice. Financial education in Scotland is based on the premise that making sound financial decisions is an essential life skill. Therefore, financial education in Scotland is aimed at school going children as well as the adult population. Merely targeting school children may not be enough as the country will have to wait for an entire generation to grow up before the objective of financial literacy is achieved. The Scottish Centre for Financial Education, part of the Learning Teaching Scotland is at the forefront of financial education in the country. They are supported by number of other organizations: the Financial Education partnership (FEP) with the Chartered Institute of Bankers in Scotland, The Royal Bank of Scotlands Face to Face with Finance (F2F) and the Stewart Ivory Foundation. Efforts in financial education also receive active support from banks in Scotland. For instance, Lloyds TSB Scotland has taken financial education into the workplace through its Financial Capability in Work initiative. In collaboration with a college, it also extends support to New Deal graduates in setting up their own business by opening bank accounts for them.

The Royal Bank of Scotland is one of the largest corporate sponsors of the money advice sector and focuses its support on providing face-to-face help. For this it has entered into a six year agreement with the Money Advice Trust, which in turn aims to improve the quality face-to-face money advice delivered through orgnisations such as the Citizens Advice Bureaux. Through the support of the RBS several money advisers have received access to training and it has improved the quality of money advice for more than 8,00,000 people who need financial advising. There is also an example of a peer education project in Edinburgh where adults become learning buddies, encouraging the financially illiterate to get financial education and develop enough basic financial skills to at least manage their personal finance. uSas efforts In Financial education In the United States, the Treasury in 2002 established an Office of Financial Education. This office works to coordinate the financial education efforts of other federal bodies and more generally identified and promotes access to financial education tools and effective education practices by a wide variety of institutions, including state, private sector, and non-profit bodies. The financial education programme of the Federal Deposit Insurance Corporation (FDIC) is noteworthy. The Federal Deposit Insurance Corporation (FDIC) is an independent agency of the federal government in the USA. FDIC is an institute set up to preserve and promote public confidence in the countrys financial system. It insures deposits, identifies and addresses risks to the deposit insurance funds and even bails out banks and thrift institutions when they face financial failures. The financial education programme of the FDIC is rooted in its belief that financial education brings financial stability to individuals and communities. Collaboration is at the heart of the Money Smart Alliance. To make financial education a reality FDIC forms alliances with entities such as financial institutions, bank trade associations, national non-profit organizations and community and consumer based groups. Banks have a commitment to the Community Reinvestment Act. Such alliances are a part of what it calls Money Smart Alliance, which among other things, is determined to enlist at least 1000 members as a part of this Alliance and deliver copies of the Money Smart curricula to reach 1 million adults all across the USA. The Money Smart Curriculum is designed to help adults build financial knowledge, develop financial confidence and use banking services efficiently. The community Rein vestment Act of 1977 (CRA) is a mandate for all federally insured banks and thrifts in the USA. It is a part of the financial inclusion strategy of the country. When banks are reviewed for

CRA, their efforts in financial education are reckoned positively. Therefore, banks are encouraged to be members of the Smart Money Alliance. The Smart Money Programme has several training modules designed to cover all aspects of financial education from introduction to bank accounts to advice on savings, credit, credit cards and mortgage. It is designed to ensure that those who are not financially included feel confident enough to enter the mainstream financial system and use it confidently and to their advantage. The FDIC has also within its programme designed a programme for the vulnerable groups such as the Hispanics. Thus it has designed the Hispanic Outreach Financial Education programme aimed at Hispanics in the age group of 18-49; its objective is to raise awareness about FDICs Money Smart Programme, its classes and products throughout the Hispanic population in the country. Extensive use of the various media such as radio and television was made to create such awareness among the people. In the print-media colour advertisements were placed especially in the local newspapers. (Source: Readings on Financial Inclusion by Indian Institute of Banking & Finance)
State and PoPulatIon GRouP-WISe dIStRIButIon oF oFFICeS CommeRCIal BankS - 2009 State / union territory Number of Offices As on March 31, 2009 Rural Semiurban metrototal urban politan (1) (2) (3) () () 1 20 37 2388 1537 1 10 8 0 27 88 334 307 1429 2356 8 433 281 3916 24 1 287 312 254 346 1254 1 24 1 18 1 729 2166 332 8 1 2143 35 124 35 1 28 1123 1 10 80 0 2319 31699 18 36 265 8 8 10 192 366 1208 2712 3 11 21 30 1 1 1 33 993 25 1839 110 1 290 626 19082 924 72 268 10 1343 1142 8 111 25 1 26 88 743 81 1 8 1731 246 16614 2219 1357 118 1274 3147 526 431 110 1 18 1306 15013 18 2311 424 81 2201 1 100 10 1 18 11 08 8 81 205 8 2756 128 3357 01 1 6133 881 110 1 82408
Andaman & Nicobar Andhra Pradesh Arunachal Pradesh Assam Bihar Chandigarh Chhattisgarh Dadra & Nagar Haveli Daman & Diu Delhi Goa Gujarat Haryana Himachal Pradesh Jammu & Kashmir Jharkhand Karnataka Kerala Lakshadweep Madhya Pradesh Maharashtra Manipur Meghalaya Mizoram Nagaland Orissa Punducherry Punjab Rajasthan Sikkim Tamil Nadu Tripura Uttar Pradesh Uttarakhand West Bengal total
Chapter Iv technology & Financial Inclusion

The revolutionary development in information and communication technology and electronic payment system has provided a new launch pad for extending banking outpost to remote location without having to open bank branches. The banking technology is acting as an effective instrument to take banking services to reach the rural and low income group at reduced operating cost. This has enabled the banks where the customer is present. There are three broad types of technologies that have been identified to drive growth of financial services. These are a) Pro-poor new information and communication technology. b) Primarily low cost cell phones. c) ATMs and other point of sales devices and Smart plastic cards. The centralized data processing system and non-conventional methods based on computer system which does not require uninterrupted electric supply and radiation frequency network. It reduces significantly the cost of extending financial services. The technology has potential to lead new delivery mechanism and business model. The new technology will allow branchless banking and establishment of new partnership between financial services that were not feasible hence before to provide services to clients in remote areas and low population density areas. The Technology for financial inclusion is secured amenable to audit and follow widely open standards. The IT business model has important features, such as low operation cost, scalable, user friendly, secured, inter-operable, and compliant to legal system, standardized, viable, profitable and sustainable.
8
The projects have promised technology which uses hand held devices and connectivity with host computer through general packet radio service (GPRS)/ Global system for mobile communication (GSM)/ code division multiple access (CDMA)/ Landline network. These devices come in several forms like Simple inexpensive multilingual computers (Simpton)/ personal digital assistant/ programmed mobiles etc. There are also rural biometric ATMs which have been introduced by banks on pilot basis. 2. BeneFItS oF BRanChleSS BankInG: (a) CUSTOMERS: l Customers need not come to branch for carrying out basic transactions such as cash deposits, withdrawal (Mini statement) and saves time and cost of travel which can be used for his/ her occupation or income generation activity. l Access to banking facility in unconnected areas. Availability of multitude of banking products and services at their location. l Enable microfinance disbursement/ micro insurance facilities. l Self Help Groups can be serviced at their doorsteps. l Collection of fees in colleges and schools. l Payment of pension at the residence of the pensioner-payment of salary at their company to their employees at their office, factory etc. l Setting stalls, exhibitions, fares, outside locations etc. for catering to the customers. l Government payment on account of NREGP/ Subsidy. l Utility payment. (b) BANKS: l Expand reach of banks financial inclusion services for people in remote / un-banked location and inculcate the habit of thrift among rural folks. l Enhance social responsibility of banks by taking technology to common man. l Economic of operation-low transaction cost vis--vis branch based. l Competitive edge in tapping untapped business potential. l Building Long-term relationship with customer announcing trust and loyalty towards bank. l Transaction being handled by devices has greater accuracy and increased security.

3. moBIle BankInG: As a strategy in India banks have selected Mobile Banking and Smart Card technology to accelerate pace of financial inclusion to masses. Mobile Banking is a term used for performing account transactions, balance checks, payments via mobile device such as mobile phone. Most of the mobile payments fall in to four categories. Mobile banking enables i) Users to perform banking transaction using mobile phone like balance checks, fund Transfers, bill payment etc. ii) Purchase goods over internet or phone delivery. iii) Person to person fund transfers and iv) To pay for goods at merchant location-point of sale. 3.1. Services offered through mobile Banking l Account Information: i) Balance Checks ii) Mini statement and checking of account history iii) Alerts on account activity or passing of set thresholds iv) Monitoring of term deposits v) Access to loan statements vi) Access to credit card statements vii) Mutual funds/ equity statements viii) Insurance Policy management ix) Pension plan management x) Status on cheques, stop payment on cheques etc. l Payment & Transfers: i) Domestic and international fund transfer ii) Micro payment handling iii) Commercial payment processing iv) Bill payment processing etc. l Investments: i) Portfolio management services ii) Real time stock quotes iii) Personalized alerts and notifications on security prices iv) Status of request for credit v) Cheque book and card requests vi) Exchange of data messages and email including complaint submission and vii) Tracking ATM location l Content services: General information such as weather updates, news etc.
0
4. SalIent FeatuReS oF vaRIouS teChnoloGIeS oF ConneCtIvIty: SmS: ( Short Message System ) l Most of the popular services are currently based on SMS (Short Message Service). i) Easier to build applications ii) a popular medium to communicate iii) Billing activities can be automated by right integration with operators system. GPRS/ Cdma: l
l l l l
Provides ability to build advanced features Users interact with a well designed UI and do not require training Can integrate seamlessly with e-commerce scenarios Development skill-set for GPRS are widely available (CDMA requires specialized skill-set which is not widely available )
hand Set technologies SIm toolkit: Ensure availability of application as and when customer buys a new SIM card. Operator is closely associated with the mobile banking project and hence task of delivery is easy. mobile application development l Operator independent l Development skill-set is widely present for GPRS l Ability to design and deliver better features and User Interface
emerging technologies Near Field Communication (NFC) is a technology which is in its early stages. NFC describes a short range wireless technology which enables communication between devices over short range. Mobile Phone as device; Availability with customer 24 x 7 Always on and always connected Telecom operators already have sophisticated billing system and can deliver banking services independent of banks.
SmaRt CaRd Smart Card differs from Debit or Credit Card in the sense that Smart Card has built in electronic chip in place of magnetic strip in ATM card. The personal details along with biometric features and account details are incorporated in the electronic chip. As a result the transaction by card holder are electronically reconciled on the card itself. The Smart Card is genetic term carrying both credit and debit transactions. Use of Smart Card is considered as most suited and helpful device for Financial Inclusion, recognizing its several advantages.
1
5.
BRanChleSS BankInG thRouGh BuSIneSS CoRReSPondentS (BC):
Banks have started taking technology to the remote rural areas as a part of their Financial Inclusion initiative by introducing Card based authentication devices and by appointing Business Correspondents at identified villages. These BCs would serve as an extension of branch at villages by providing basic banking services to the rural folk. The following challenges are encountered while extending the basic banking facilities at rural locations and the use of technology help to overcome them. l Establishing the Identity of the Customer l Predominantly Illiterate Populace l Lack of reliable infrastructure l Problem of accessibility. The Bank Provides hand held device to the Business Correspondent. The individual customer is provided with Smart Card / Radio Frequency Identification Card (RFID) for identification of the customer. The device chosen has alternate back up for the power source and for communication links to tide over power outages and link failures. The Business Correspondent card stores the photograph and the characteristics or transaction parameters of the BC. And the Customer Cards contains the photograph and the basic KYC (Know Your Customer) carries details of the customer on the face of the card and the chip inside contains the account details of the customer with fingerprints of different fingers of the customer. In both the devices there is a day begin to synchronize and download the modified/changed balances on the card and a day end to enable settlement and creation of data files which would be used for updating the balances in the account at the back end. The transactions done by the customers are captured by the device in an off line mode and then uploaded to the central server during day end settlement for updating the various customer accounts. 6. InItIatIveS oF IndIan BankS aSSoCIatIon (IBa) & IdBRt: IBA has recognized that there are a wide variety of technologies and solutions that can be utilized to provide inclusive banking to rural and remote regions of India. This diversity offers possibilities for immediate adoption of newer and more efficient technologies as they emerge in the market (making existing solutions costlier and obsolescent). This also entails a cost in that it is difficult to offer a Pan-Indian Standard Interoperable solution that
52
will benefit the customers to be able to operate on an Anywhere, Anytime basis. This standard can only come about with patient efforts and some sacrifice in absorbing novel technologies instantly. The benefits offered by standardization to customer far outweigh the costs of adhering to a particular standard. Banks have started to implement financial inclusion schemes with the help of information and communication solutions. Broadly, two technologies have been explored-one is based on Smart Card Technology and the other is based on Mobile Telephony. Smart Card solutions have been relatively easily implemented compared to the mobile based solution, as the technology is still in nascent stages. Many implementations of the Smart Card based solutions have been initiated pilots and have not been scaled up and are quite limited in their scope. One of the main reasons behind this is that for pilot schemes, CVC guidelines are quite difficult, in the absence of standards. Secondly, the presence of various vendors offering their own proprietary solutions makes it difficult for customers as the various technology components are not interoperable. Moreover, vendor independence has so far not been possible due to lack of standards in the financial inclusion arena. A bank gets tied-up to a particular vendor for a lifetime in the present scenario. To address these issues IBA and IDRBT came together to organize a workshop on Open Standards for Financial Inclusion. After deliberations of the various issues, a Technical Committee on Open Standards for Financial Inclusion has been constituted comprising of banking personnel, technical experts from academia and the Government. This Committee has been working for the past few months The committee has since finalized Phase I of the Open Common Standards specifications and has designed a public domain for review by all stakeholders public, banks and technology solution providers. IBA hope to arrive at solid inferences and consensus after receiving constructive feedback from such important quarters. The Smart Card based standards are related to Financial Inclusion Customer Card Architecture. Financial Inclusion Technical Operator Card Architecture. Specifications for Bank Terminals. Key Management Architecture. Subsequent to receiving responses from stakeholders, the Final Standard Specifications for Financial Inclusion will be made available to the banking industry which will be Inter-operable and vendor independence for banks.
Chapter v Payment System in India

A Payment System means a system that enables payment to be effected between a payer and beneficiary. It holds the key for efficient economic activity. It provides highways for conducting trade, commerce and forms of economic activities in any country. It enables the creation and transfer of liquidity among different economic sections and ensures efficient utilization of scarce resources and eliminate systemic risks. 2. eleCtRonIC Payment SyStem: The payment and settlement system assumed greater importance in the context of domestic financial sector reforms and global financial integration as efficient low cost cross border payment help to promote international trade in goods and services and encourage foreign investment (direct portfolio). The technological revolutions in the field of electronic and telecommunication made it possible to bring sea changes in the payment and settlement system and introduction of sophisticated financial services. Reserve Bank of India has played a catalytic role over the years in creating an institutional framework for development of safe, secure and sound and efficient payment system. It has taken steps to develop and promote electronic payment infrastructure. This includes Electronic Clearing Service (ECS) and Electronic Fund Transfer (EFT) System in 1995, Real Time Gross Settlement System (RTGS) in March 2004, National Electronic Fund Transfer (NEFT) system in 2005 and Cheque Truncation System (CTS) in 2008 (on pilot basis) and setting up of Clearing Corporation of India. This has brought a revolution in retail payment system. Retail Payment System comprise of paper based and electronic clearing systems viz: ECS, EFT, Card payments, e-payments, internet and mobile payments.

Cheque V/s electronic Payment The key difference between a cheque and an electronic payment lies in the process. A cheque is a pulling device which can draw funds from the payers account whereas an electronic payment is pushing device which carries the funds to the receivers account. While it is possible to the payer to issue cheque without sufficient balance in his account which can be funded later exploiting inherent delay in clearing process. Making payment electronically would require having funds to effect the payments. Electronic payment is as good as cash. 3. tyPeS oF eleCtRonIC Payment SyStem: The various types of electronic clearing and payment systems and their purpose of introduction with the help of electronic payment infrastructure are given below:
l
electronic Clearing Service (eCS) (Credit): The objective of Electronic Clearing Service is to provide alternative method of effecting bulk payment. Transactions of low value and recurring nature which would absolve the need for handling paper instruments and improve payment efficiency to facilitate better customer service. Electronic clearing Service was introduced on 1st September 18 at Offices of Reserve Bank of India. In ECS credit services the electronic payment instructions are generated to replace paper instruments. The system works on the basis of one single debit transaction triggering large number of credit entries. These credits are electronic payments instructions (which possess liabilities, beneficiaries account number, amount and the branch) are then communicated to the bank branches through their respective service branches for crediting the accounts of beneficiaries either by magnetic media duly encrypted or through hard copy.
electronic Clearing Service (debit): It is a scheme which facilitates payment of charges of utility services such as electricity, telephones, payment of Insurance premiums, loan installments etc. by customers. The scheme facilitates faster collection of bills by companies, better cash flow management and eliminates need to go to collection centres/ designated banks by customers. national electronic Fund transfer (neFt): National Electronic Fund Transfer scheme enables the account holder of a bank to transfer funds to another person having account with any participating commercial banks without any physical movement of instruments from one centre to another centre. The scheme is meant for small value fund transfer

and it uses the RBI NET as its courier. The scheme is in operation in the four metropolitan centres (Mumbai, Kolkata, Chennai and Delhi) in 4500 branches at 27 public sector banks. The scheme is retail in nature, and the maximum amount permitted for transfer is Rs.1 lakh. EFT process cycle is spread over 3 days. Funds are made available to the beneficiary on a T + 1 basis.
l
Internet Banking: RBI has permitted to offer internet banking facilities based on the broad internet banking policy following detailed guidelines on internet banking issued by RBI. The product portfolio to be offered through internet banking is no longer confined to only local currency products but even foreign exchange services for permitted underlying transactions, Operations on the Vostro Accounts of overseas banks and exchange houses maintained with bank in India are also permitted through the internet banking operations. Real time Gross Settlement (RtGS): Real Time Gross Settlement acts as the backbone of payment system. It enables real time on line fund transfer and adjustment for the financial system as a whole. It significantly reduces the risk as transactions are settled bilaterally on real time basis. In fact the demand for liquidity at short end of the market depends upon the type of settlement system in operation and has an implication for conducting monetary policy as it enables real time on line funds management for financial system. The pricing of resources at short-end also depends upon the payment and settlement system in place. In the day liquidity requirements would be minimal if the Real Time Gross Settlement is in operation. The RTGS was operationalised in March 2004 which enables settlement of transactions on real time on gross basis. Almost all the inter bank transactions in the country and many time critical customer transactions are settled through this system. Out of over 80,000 bank branches in the country more than 58720 (August 2009) bank branches accept request for remittance through RTGS system for customer as well as inter bank transactions. A minimum threshold of rupees one lakh has been prescribed for customer transactions to ensure that RTGS is used only for large value transactions and retail transactions taken an alternative channel of electronic fund transfer.
Cheque truncation System: The Cheque Truncation System (CTS) is image based clearing process. Its objective is to improve the efficiency and substantially reduces the cheque processing time in the system. Under CTS physical movements of cheques from the branch to clearing house and vice versa obviated. Instead the electronic image of the

cheque would be sent to the clearing house. It enables the realization of cheques on the same day and provide a more cost effective mode of settlement than manual and MICR clearing. The CTS has been launched in February 2008 on pilot basis in the National Capital Region of New Delhi. CTS enables banks to handle payment against instrument easier way apart from eliminating infrastructure requirement and inefficiencies in terms of clearing time. Customers enjoy the benefit of encashing cheques faster apart from reduction in transaction cost for bank customers. Under the Negotiable Instrument Act, cheque truncation has been recognized under law and the cheque has been redefined to enable payment based on electronic image of cheque. In order to promote use of electronic mode for payments the service charge levied on banks by RBI for ECS, EFT and RTGS transactions has been waived and limits set for ECS and EFT transactions have been dispensed with to increase user base. 4. CaRd BaSed Payment SyStem:
Plastic Money or Plastic Cards made their appearance in India in 1987 in the form of credit card. Internationally the plastic cards fall under three broad groups, viz; Credit Card, Debit Card and Smart-Card.
l
Credit Card: As the name indicates it enables the cardholders to enjoy credit from issuing bank for specific period after the payment. During the intervening period the cardholder is allowed to use the card for incurring further expenses. debit Card: Pay Now (i.e. instant debit). automated teller machine (ATM) Card: Makes instant debit to the account of card holders. The other forms of debit card are Electronic Fund Transfer at a Point of Sale (EFTPOS) which is payment mechanism. ATM card is primarily used for performing banking functions of withdrawal of cash, deposit of cash, cheques. Each customer is permitted with an ATM card with a unique Personal Identification Number (PIN). Whenever a customer performs transactions the person has to key in the PIN which is validated by the ATM before the machine permit any transactions.
l l

l

Smart Card: It differs from debit or credit card in the sense that smart card has built in electronic chip in place of magnetic tripe in ATM card. As a result the transactions are offered by card holders are electronically reconciled on the card itself. The Smart Card is genetic term carrying both credit and debit transactions.
5. Satellite Banking: The availability of communication network is an important prerequisite for facilitating electronic mode of payment. However non-availability of the terrestrial communication link in many parts of the country-particularly hinter land and hilly areas poses a major constraint in securing greater penetration of electronic payment services. An alternative communication net work is use of satellite communications technology to facilitate penetration of payment services in rural areas/hilly areas which are denied of these facilities due to non-availability of communication network. 6. umbrella organisation for Retail Payment: In India the paper based and electronic clearing is carried out in 1089 bankers clearing houses all over the country. The multiplicity of local operators and diverse local practices which determine the conduct of clearing often compromises safety and efficiency of clearing operations, besides not giving due importance to customer service. This situation limits the scope for product innovation and expanding the reach of payment system. It was therefore felt the need for setting up of Umbrella Organisation of Retail Payments to bring greater efficiency by way of uniformity and standardization in retail payments and facilitate expansion of its reach and innovative payments products to augment customer convenience. 7. national Payment Corporation of India: It is proposed to set up an organization known as National Payment Corporation of India (NPCI). It will be an entity, registered under Section 25 of Companies Act owned by banks and financial institutions. The ownership of the company will be suitably diverse with no bank or group of banks having shareholding exceeding 10 per cent of total capital. It will not distribute profits as dividend but will plough back for improvements and expanding reach of payment system. The Payment and Settlement Act has laid down that not less than 51 per cent equity of the company will be held by public sector banks.
8
8. Advantages/Benefits of Payment System: For Economy: a) An effective payment and settlement system promotes trade and commerce in domestic and international market. It provides financial stability. It enables the creation and transfer of liquidity among different economic sectors and assumed efficient utilization of scarce resources and growth in the economy. b) It improves efficiency of functioning of money market, capital market and foreign exchange markets and encourage inflow of foreign funds. c) The demand for liquidity at short end in the market depends upon the type of settlement system in operation and has impact on conducting monetary policy. In the Real Time Gross Settlement system environment the requirement of liquidity will be minimum as funds are realized on time. For Customers: a) Safe and secure payment system enhances public confidence and use of payment instruments/electronic payment channels in place of cash. Customers have been able to get multiple choices for payments which are more convenient and fraud free and time saving. Borrowers can manage funds as funds are realized on line under electronic fund transfer and require lesser amount of working capital facilities such as discount of cheque, drafts etc. Banks have been able to manage their cash flows better and improve profitability as minimum funds are blocked in payment and settlement system. Banks have been able to provide innovative products such as ATM Card, Debit Card, Credit Card, Smart Card and money payments etc. which provide banking services to customers without their visiting branches and improve customer service and satisfaction.
b) c)
For Banks: a)
b)

9. ChallenGeS ahead: l The main challenge in the payment system areas is to promote large scale use of electronic modes of payment access in the country. The reason for slow pace of adoption of electronic modes of funds transfer particularly retail segment is lack of education on the part of bank staff at branch level and inter face with the customers. This will call for massive campaign to bring awareness of electronic banking services to public.
l
There is need to focus on expanding geographical reach of the electronic payment services to that segment of people which is not touched by it. Payment instruments are constantly changing and new products and services are being innovated. At the retail level a wide range of payment instruments like EFT, ECS & money, Smart Cards and Credit Cards will cater to the needs of different types of economic transactions. At the level of inter bank payment and settlement, real time on line funds are likely to play major role both local as well as intercity dealings. The spread and the reach of modern system should facilitate equal and convenient access to small and big centres alike. It should also provide wide choices of payment instruments at the retail levels and end to end connectivity over all parts of the country to enable of these instruments through fast reliable and secure communication and to reach un-reached sections of people in far flung areas. The technology with regard to MICR processing would need upgradation to image capture solution. Similarly for expansion of automated and electronic clearing services, the cheque processing centres and computerization of clearing will be another challenge.
10. Payment SyStem & RemIttanCe FaCIlItIeS: Remittance facility is one of the important financial services needed by all sections of the society. Traditionally the remittance needs have been met by money orders from Post Office, sale of traveller's cheques, demand drafts by banks and through informal sources, including physical carrying of cash by the poor themselves and their relatives and friends. The poor need the facility of remittances to send money to their families when they migrate out of their villages or towns. Situations often arise when migrant workers in a city remit money to their families in the village or when parents in the village need to remit money to their children in the city. Other cases of remittance could arise on account of transfer payments by Government or remittances of miscellaneous nature. Moreover the remittance needs of this nature are mostly repetitive and small in value.
0
The present system of remitting through post office and other modes is also costly. There is need to make available remittance facility which has accessibility timeliness, certainty of delivery, affordability and value for money service and cost effectiveness. With new technology and computerization of banking operations, new remittance products have been introduced in the market, which have increased the speed, cost effectiveness and efficiency of the payments and settlement system. While these systems meet the needs of a modern economy, they leave the financially excluded sections of the population untouched. The basic requirement of ECS and cheque transactions are a checkable account with a bank which offers these products. The RTGS is also a bulk payment facility and would be addressing the needs of high value settlements. As such these systems pose a high entry barrier for the financially excluded sections. This calls for a conscious attempt to build a payment and settlement system that caters to the needs of the poor and excluded sections of society. International experiences Wizzit, a South African company enables customers to use their phones to send funds to one another buy airtime and pay their bills. The funds come from customer accounts at Wizzit, which operates as a bank in South Africa under license from the Johannesburg-based South African Bank of Athens (SABA). SABA is a subsidiary of the Athens-based National Bank of Greece. Globe Telecom, a mobile service provider in Philippines provides an e-wallet facility to its customers. The product turns cell phone into an e-wallet, and the customers can use their phones to transact business. Non-subscribers can send money electronically to Globe mobile subscribers.
Part 2 micro Credit
Population Group-Wise Distribution of Deposits and Credit of Scheduled Commercial Banks - 2005 to 2009
( Amount in Rs. crore ) Population Group March 2005 March 2006 March 2007 March 2008 March 2009
Deposits
Credit
Deposits
Credit
Deposits
Credit
Deposits
Credit
Deposits
Credit
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
Rural
213536
106497
226534
127445
258128
154785
303025
183097
365491
208694
(12.2)
(9.2)
(10.8)
(8.4)
(9.9)
(7.9)
(9.4)
(7.6)
(9.3)
(7.3)
Semi-Urban
296303
130596
302245
151076
356827
189783
429377
230629
531944
266736
(16.9)
(11.3)
(14.4)
(10.0)
(13.7)
(9.7)
(13.3)
(9.6)
(13.5)
(9.3)
Urban
376133
189593
431564
248141
531269
316166
657624
383576
824463
461870
Metropolitan
867201
731121 1132698
990835 1452599 1288833 1838792 1597263 2215437 1920225
(49.5)
(63.1)
(54.1)
(65.3)
(55.9)
(66.1)
(56.9)
(66.7)
(56.3)
(67.2)
All India
1753173 1157807 2093041 1517497 2598823 1949567 3228818 2394565 3937335 2857525
(100.0)
(100.0)
(100.0)
(100.0)
(100.0)
(100.0)
(100.0)
(100.0)
(100.0)
(100.0)
Note : Figures in bracket indicate percent share in All-India total.
Chapter vI micro Credit

mICRo CRedIt: a hIStoRICal PeRSPeCtIve: Earliest form of micro-lending can be tracked back to1700s, when writer Jonathan Swift started micro-credit organizations for lending to the poor rural people in Ireland. More formal savings & credit institutions in the form of peoples Banks, Credit Unions etc. also began to emerge in Europe in the 1800s. Savings and credit groups have since operated in various forms Susus in Ghana, Chit funds in India, Tandas in Mexico, Arisan in Indonesia, Cheetu in Srilanka, Totines in West Africa and Pasanaku in Bolivia. The current form of microfinance however finds its roots in 1900s, when credit began to be directed to farmers through state owned rural development banks, co-operative banks with the primary objective of increasing agricultural productivity. Over time, this model experienced problems such as capital erosion due to subsidized lending rates and poor repayment rates with funds getting concentrated with a few well-off farmers. 1970s then saw some experimental programmes take root in countries like Brazil and Bangladesh, involving solidarity lending to groups of women to invest in micro-enterprises. It was in the 1990s though, with high repayment rates and cost recovery interest rates, which permitted MFIs to achieve longterm sustainability and reach a large number of clients, when microfinance began to be seen as a commercially viable opportunity as well as an efficient strategic tool for poverty alleviation. Mid1990s also saw the term micro-credit being replaced by microfinance to include a larger bouquet of financial services (savings, insurances and remittances). Micro Credit Programme was launched in 1992 by NABARD, a model pilot project of linking around 500 Self Help Groups .This was considered as new credit delivery system alternative to the conventional banking in reaching the hitherto unreached poor.

The problem of financial exclusion exists in developed and developing countries although the type, degree and magnitude differ. The UN General Assembly had designated 2005 the Year of Micro Credit as this will provide an important opportunity for giving impetus to Micro finance programmes throughout the world. Micro credit has been defined as the provision of thrift credit and other financial services and products of very small amount to the poor in rural semi-urban and urban areas for enabling them to raise their income level and improve their living standard. 2. oveRvIeW oF BankInG develoPment & mICRo CRedIt In IndIa: (1947-1991)
Our country had inherited an urban oriented and weak banking system at the time of Independence on 15th August 1947. As the banks were operating in port and urban towns except in southern states they were catering facilities primarily in urban areas of customers engaged in trade and commerce. The responsibility of extending banking facilities in rural and semi urban areas was left to co-operative banks as a matter of policy .The Government did not plan or aim use of banking system as an instrument to foster economic development of the country. Co operative banks although wide spread in villages could not play significant role because of their poor management and weak financial position. The indigenous bankers and money lenders were main sources of finance for farmers cottage industries, rural artisans and small business enterprises. The process of planned economic development in 10-1 recognized that banking constitutes a vital link between various elements of production and economic activity. It defined the role of banks, financial institutions and central banking stating Central banking in planned economy can hardly be confined to regulation of bank credit, it would have to take a direct and active role first in helping to create a machinery needed for financing development activities all over the country and ensuring that finance available flows to directions intended. Despite of efforts made bringing the structural changes in cooperative sector and extension of banking to rural and semi-urban centers in the first three five year plans advances continued to meet primary needs of industry and organized trade. Credit needs of agriculture, small scale industries, rural artisans and small business did not receive due attention it deserved. Social Control: It was therefore felt by the Government of India to bring

banking institutions under social control to serve the cause of economic growth and fulfill social purpose more effectively making available credit to all productive endeavors. Accordingly on 14th December 1967 Social Control was introduced which aimed at making credit as an instrument of economic development spreading banking a habit in the country duly aligning credit policy and practice with national development programs and priorities. Banking Policy: Banking policy was defined in 1968 bringing an amendment in Banking Regulation Act, 1949 as Banking policy means any policy which is specified from time to time by Reserve Bank of India in the interest of banking system or in the interest of monetary stability or sound economic growth having due regard to the interest of depositors, the volume of deposits and other resources of banks and the need for equitable allocation and efficient use of these deposits and resources. nationalization of major Banks With a view to ensure that banks were motivated towards specific achievements of objectives of social control measures 1 major scheduled commercial banks having deposits of Rs.50 crore and above were nationalized on 1th July, 1969. With this 83.3 per cent deposits of scheduled commercial banks (including State bank of India and its subsidiaries) came within the ambit of public sector banks. In on 15th April, 180 further six private sector banks having deposits of Rs.200 crore and above were nationalized. With this share of public sector banks in deposits increased to 90.7% and 90.6% in advance. lead Bank Scheme For taking banking to masses in the villages Lead Bank Scheme was introduced in the year 1 and all the districts of the country (except metropolitan cities and union territories) were allotted among commercial banks mainly depending upon their network of branches and given the task of (a) conducting impressionistic survey of district to get familiar with salient features of economy of the district (b) identify unbanked growth centers having potential for banking facilities and formulate area development plans and programmes in consultation with district development agencies. District Consultative Committees were formed for each district consisting of representatives of financial institutions, banks, district development agencies of state government to provide a forum to discuss problems and also to review progress made in implementation of banking plan and schemes. The Lead Bank Scheme enabled geographical spread of branches of commercial banks in unbanked centers in rural and semi-urban areas,

acceleration of mobilization of deposits and stepping up lending by banking system to agriculture, small scale industries, transport operators, retail traders, small business, professional self-employed, education, and exports which were then treated as priority sector advances. Banks also introduced deposit and credit schemes to suit the needs of various sections of the society to bring them into banking fold. village adoption Scheme The scheme was introduced in 1972 for adoption of villages for catering banking facilities to the villages and to meet the credit needs of neglected sectors for acquiring productive assets and working capital requirements to increase production, employment, and income particularly of small/ marginal farmers, agricultural labourers, and rural artisans engaged in cottage industries, and other allied activities. General lending to economic activities as in seventies out of 350 million people living below poverty line 300 million were in rural areas. differential Rate of Interest (dRI) DRI Scheme was introduced in March 1972 where loans at a concession rate of interest at 4% p.a. were made available to very poor who have potential to develop productive endeavors and who cannot offer guarantee or security, having annual income of Rs.2000 in rural and semi-urban areas and Rs.3000 in urban areas. Regional Rural Banks (RRBs) The entry of commercial banks in the field of agriculture finance and rural areas mainly focused big farmers and did not pay due attention to meet needs of small/marginal farmers (who constituted nearly 62 per cent of land holding)and other weaker section of the society. It was therefore felt by Govt. of India to create a separate institutional frame work to provide credit and other banking facilities to small/marginal farmers, agricultural labourers, rural artisans and small entrepreneurs in rural areas. Regional Rural Banks were therefore established in October 1 initially in those districts where co-operative banks were weak and operations of commercial banks were low to supplement efforts of exiting credit institutions. (See Chapter X, B for details) Integrated Rural development Programme (IRdP) The IRDP was launched in 1979 for raising family income of identified group of below poverty line and to create sustained employment in rural areas. The target group comprised small / marginal farmers, rural artisans, rural women and persons belonging to scheduled caste/tribe. Family of five members was taken as unit whose annual income is less than Rs.3500. (Swarna

Jayanti Gram Swarojgar Yojana SGSY Programme has come in to force from 1st April, 1999 replacing earlier programmes like IRDP, TRYSEM, DWCRA, SITRA, GKY, and MWS.) national Bank for agriculture and Rural development (naBaRd) NABARD was set up on 1-2-1982 to provide credit for promotion of agriculture, Small scale industries, cottage and village industries handicrafts and other rural crafts and allied economic activities. It prepares on annual basis rural credit plans for all districts of the country called as potential linked credit plans. These plans form the base for credit plans of rural financial institutions and banks operating in the districts. Service area approach: Although the banking system made significant progress in extending banking facilities and credit to rural areas it was felt that there was need to improve quality of credit planning to reach benefit of banks assistance to rural masses. In April 1989 Service Area Approach was launched to cover over lakhs villages in the country through 8 per cent of branch network of banks in rural and semi-urban areas. As per RBI guidelines 15 to 20 villages were allotted to each branch of the bank. The purpose of village level credit plan was to formulate realistic credit plan for villages based on genuine needs of households in villages for their productive endeavors. Uniform methodology was adopted for credit planning at block, district and state level to arrive at quantum of credit required to be lent in the areas. Annual Action Plans were prepared and progress was reviewed in relation to planned target under the scheme at district and state level by Bankers Committees. kisan Credit Card (kCC): This scheme was introduced in 188-8 for providing crop loans to farmers in flexible and cost effective manner. Beneficiaries covered under the scheme are issued credit card cum pass book incorporating name, address particulars of land and borrowing limit.(investment credit and consumption credit has been covered under the scheme subsequently.)
outstanding Credit of Scheduled Commercial Banks according to Size of Credit limit

(Amount in Rupees Lakh) no. of CRedIt lImIt RanGe Rs. 25,000 and Less Above Rs. 25,000 and upto Rs.2 Lakh Above Rs. 2 Lakh and upto Rs.5 Lakh Above Rs. 5 Lakh and upto Rs.10 Lakh Above Rs. 10 Lakh and upto Rs.25 Lakh Above Rs. 25 Lakh and upto Rs.50 Lakh Above Rs. 50 Lakh and upto Rs.1 Crore Above Rs. 1 Crore and upto Rs.4 Crore Above Rs. 4 Crore and upto Rs.6 Crore Above Rs. 6 Crore and upto Rs.10 Crore Above Rs. 10 Crore and upto Rs.25 Crore Above Rs. 25 Crore TOTAL accounts 1 382,98,075 (35.8) 562,56,311 (52.6) 81,, (7.6) 24,33,810 (2.3) 12,20,074 (1.1) 3,05,343 (0.3) 1,31,156 (0.1) 1,02,426 (0.1) 18,0 0.0 1,1 0.0 17,289 0.0 1,0 0.0 10,0,180 (100.0) 2 58536,49 (1.8) 404839,10 (12.3) 269540,21 (8.2) 1818,81 (5.4) 191070,37 (5.8) 110443,56 (3.4) 98352,23 (3.0) 209559,41 (6.4) 92687,66 (2.8) 141525,32 (4.3) 285447,98 (8.7) 1243670,19 (37.9) 3284091,33 Credit limit amount outstanding 3 46420,32 (1.9) 284601,53 (11.8) 213713,98 (8.8) 141326,23 (5.8) 155586,12 (6.4) 88926,48 (3.7) 0,0 (3.2) 166962,92 (6.9) 71061,83 (2.9) 102592,86 (4.2) 209332,46 (8.7) 80, (35.6) 2417006,52
Chapter vII micro Finance In India

India has witnessed unprecedented growth in mobilization of deposits, extension of credit and expansion of network of branches of commercial banks as a result of series of policy measures undertaken by Government of India and Reserve Bank of India since late sixties and achieved phenomenal outreach. However the access to credit for the poor from conventional banking is constrained by lack of collateral information asymmetry, high cost of transaction associated with small borrowal accounts. There continues to be wide gap in availability of banking services in rural areas as commercial banks covered 26.2 per cent of the rural population through savings and deposits accounts and even lower per centage 9.6 per cent households by loan accounts. The dependence of the rural poor on money lenders continues especially for meeting emergent requirements. Such dependence pronounced in the case of marginal farmers, agricultural labourers, petty traders and rural artisans belonging to socially and economically backward classes and tribes whose capacity to save is too small to be mopped up by banks. According to NSSO survey (2003) out of 203 millions of house holds in the country 147 million are in the rural areas. 45.9 million households out of total 89.3 million farm households, do not have access to credit either from institutional or non-institutional sources. Further only 27 per cent of total farm households are indebted to formal credit sources. In other words 73 per cent of farm households do not have access to formal credit sources. In the northern, eastern, and central regions only 19.6 per cent of the farm households are indebted to formal source. Indebtedness to formal banking sector is also one of the indicators of financial inclusion.
0
Of the marginal farmer households nearly per cent do not have access to either formal or non-formal sources of credit. In contrast, in case of large farmer house holds the incidence of exclusion is 33.6 per cent. Banking data reveal that credit exclusion is severe in 139 districts of the country. In these districts, only 10 per cent or less out of 100 persons have access to credit from the organized banking system. Thus apart from the fact that exclusion is large there is also a wide variation across regions, social groups and asset holding. However there has been decline on dependence of house hold cultivator on money lenders which has comedown from 69.7% in 1951 to 26.8% in 2002 as a source of credit. (The following table gives trends of sources of credit from 1951 to 2002). table 8: trends of Sources of Credit Sources of Credit Institutional Co-operative Societies/Banks, etc. Commercial Banks Non-Institutional Money Lenders Unspecified TOTAL
Source:
Per cent 1991 66.3 30.0 35.2 30.6 17.5 3.1 100.0 2002 61.1 30.2 26.3 38.9 26.8 100.0
1951 7.3 3.3 0.9 92.7 69.7 100.0
1961 18.7 2.6 0.6 81.3 49.2 100.0
1971 31.7 22.0 2.4 68.3 36.1 100.0
1981 63.2 29.8 28.8 36.8 16.1 100.0
RBI, All-India Rural Credit Survey, 1951-52; RBI All India Rural Debt and Investment Survey, 1961-62 and NSSO, All India Debt and Investment Surveys, 1971-72, 1981-82, 1991-92 and 2003.
The table 9 reflects sources of debt of cultivators in major states of the country.
1
table 9: distribution of debt by sources across major States: 2003
(%)
Institutional State Govt Co-op. Bank All
Non-Institutional Money Traders Lenders Others All Total
Maharashtra Kerala Uttaranchal Orissa Chhattisgarh Gujarat Karnataka Haryana Jammu & Kashmir Himachal Pradesh Jharkhand Uttar Pradesh West Bengal Madhya Pradesh Tamil Nadu Punjab Bihar Assam Rajasthan Andhra Pradesh All India
Source:
1.2 4.9 31.5 13.0 1.3 0.5 1.9 1.1 13.1 6.1 3.9 2.4 10.3 1.9 2.0 1.9 2.2 7.0 1.3 1.0 2.5
48.5 28.3 4.8 18.1 20.6 41.8 16.9 23.9 0.2 11.6 4.5 6.7 19.2 16.9 23.3 17.6 2.5 2.7 5.9 10.4 19.6
34.1 49.1 39.8 43.7 50.5 27.2 50.1 42.6 54.3 47.6 55.7 51.2 28.5 38.1 28.1 28.4 37.0 27.8 27.0 20.0 35.6
83.8 82.3 76.1 74.8 72.4 69.5 68.9 67.6 67.6 65.3 64.1 60.3 58.0 56.9 53.4 47.9 41.7 37.5 34.2 31.4 57.7
6.8 7.4 5.9 14.8 13.0 6.5 20.0 24.1 1.1 7.2 19.0 19.1 13.0 22.6 39.7 36.3 32.8 15.5 36.5 53.4 25.7
0.8 1.7 1.7 0.8 4.2 4.4 1.9 3.1 15.5 5.5 1.7 2.9 10.7 9.0 0.4 8.2 1.1 12.0 19.2 4.8 5.2
8.6 8.5 16.3 9.5 10.5 19.6 9.3 5.3 15.7 22.0 15.2 17.7 18.4 11.4 6.4 7.6 24.6 35.1 10.1 10.4 11.5
16.2 100.0 17.6 100.0 23.9 100.0 25.1 100.0 27.7 100.0 30.5 100.0 31.2 100.0 32.5 100.0 32.3 100.0 34.7 100.0 35.9 100.0 39.7 100.0 42.1 100.0 43.0 100.0 46.5 100.0 52.1 100.0 58.5 100.0 62.6 100.0 65.8 100.0 68.6 100.0 42.4 100.0
NSSO: Situation Assessment Survey of Farmers, 2003. Quoted in the Report of the Expert Group on Agricultural Indebtedness, 2007.
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The critical studies in 180s revealed that very large number of poorest of the poor continue to remain outside of the formal banking system. It was realized that the existing banking system and procedure, deposit and loan products were not well suited to meet the banking needs of the poor. Micro Credit emerged as viable alternative to reach hitherto unreached for their economic development and improvement through social and financial intermediation. Micro Credit involves provisioning for thrift, credit of very small amount to the poor for enabling them to raise their income level and thereby improve living standards. In operational terms micro credit is referred to small loan upto Rs.50000 extended to the poor without any collateral for undertaking self employment. Apart from the existing banking system network with a view to developing a supplementary credit delivery system that is cost effective and user friendly for both banks and the poor micro credit initiatives such as Self Help Group and Micro Finance Institutions were encouraged. The informality in credit delivery and easy access system demonstrated by the fact SHGs and MFIs has enabled them to become fastest growing segment in reaching out to small borrowers. 2. tyPeS oF CRedIt GRouPS: There are three types of credit groups as intermediaries for Micro Credit viz;
l l l
Self Help Groups, Joint Liability Group Partnership.
2.1. Self-help Groups: A SHG is a group of about 15 to 20 people from a homogenous class who join together to address common issues. They involve voluntary thrift activities on a regular basis, and use of the pooled resource to make interest bearing loans to the members of the group. In the course of this process, they imbibe the essentials of financial intermediation and also the basics of account keeping. The members also learn to handle resources of size, much beyond their individual capacities. They begin to appreciate the fact that the resources are limited and have a cost. Once the group is stabilized, and shows mature financial behavior, which generally takes up to six months, it is considered for linking to banks. Banks are encouraged to provide loans to SHGs in certain multiples of the
73
accumulated savings of the SHGs. Loans are given without any collateral and at interest rates as decided by banks. Banks find it comfortable to lend money to the groups as the members have already achieved some financial discipline through their thrift and internal lending activities. The groups decide the terms and conditions of loan to their own members. The peer pressure in the group ensures timely repayment and becomes social collateral for the bank loans. Generally, the SHGs need self-help promoting institutions (SHPIs) to promote and nurture them. These SHPIs include various Non Government Organisations, banks, farmers clubs, government agencies, self-employed individuals and federations of SHGs. However, some SHGs have also been formed without any assistance from such SHPIs. 2.2. Joint liability Group (JlG): Joint Liability Group is an informal group comprising 4-10 individuals coming together for the purpose of availing bank loan with singly or against mutual guarantee. The JLG members are expected to engage in similar type of activities like crop production. Under this tenant farmers cultivating their land either as real users or share cropper and small farmers who do not have proper title of their land holding will be eligible for collateral free credit. 2.3. Partnership model: The new generation banks who came into existence with heavy reliance on technology but very limited branch network have taken innovative steps as bulk lending to micro finance institutions using them as Pass Through Agencies to tap new market. In this model the micro finance institutions evaluate and recommend and originate the loan. They also help in disbursal and subsequently tracks and collects loan. However the loans sit on the books of bank and not of the micro finance institutions and credit risk left to the bank. This model also overcomes the constraints of capitalization of MFI and double exposure that banks are exposed to. Under Partner-ship Model major private / foreign banks are leading. E.g. ICICI Bank is having partner-ship with SHARE and BASIX (MFI) that enabled them to expand their lendings. Banks like Axis, ABN Amro, ING Vysa, Standard Charter, and HSBC have supported number of Micro Finance Institutions. City Bank is providing core funding to Indian School of Micro Finance which is part of SEWA family institution in Ahmedabad.

The model has been conceptualized and executed with the following key characteristics: (i) Loan contracts directly between the bank and the borrowers. The loans are contracted directly between the bank and the borrowers and hence it does not reflect on the balance sheet of the MFI. The MFI continues to service the loans until maturity. The bank relies on the MFIs field operations for collection and supervision. The financial structure attempts to separate the risk of the MFI from the risk of the underlying portfolio. Since the bank directly lends to borrowers, it has recourse to them. In this case, even if a particular MFI is closed down for any reason, the bank can appoint another agency to recover the dues from the borrowers. Moreover, since the loans are not reflected on the balance sheet of the MFI, its own requirement for regulatory capital ceases to exist. The shift to asset based lending from organization based lending has crucial implications for rating, pricing and consequently marketability. Alignment of incentives with a first loss default guarantee (FLDG). The financial structure requires the MFI to provide a guarantee (a first loss default guarantee) through which the bank shares the risk of the portfolio with the MFI up to a certain limit. FLDG makes the provider of the guarantee liable to bear losses up to a certain specified limit, say for the first 10 or 20 per cent of loss on the portfolio. The FLDG forces the guarantor to prevent any losses at all as it is affected adversely right from the start. The quantum and pricing of the FLDG depend on the operating capability and maturity of the MFI. The MFI collects a service charge from the borrowers to cover its transactions costs and margins. The lower the defaults, the better the earnings of the MFI as it will not incur any penal charges vis--vis the guarantee it provides. The bank receives a fixed amount as interest on its loan. Transfer of implicit capital from the bank to the MFI through an overdraft facility to resolve the risk capital issue for the MFI, the banks have evolved a structure that combines the provision of both debt as well as mezzanine finance. Along with advancing of credit to meet the demand of the clients, the bank often provides an overdraft (OD) facility to the MFI. The OD facility is equivalent to the amount which the MFI is liable to provide as the FLDG. The OD represents funds committed but not utilized. The OD is drawn only in the event of default. On default, the MFI is liable to pay a penal rate of interest on the amount drawn from the OD facility.
(ii)
(iii)

(iv)
Partnership model and securitization: The microfinance assets originated under this partnership model facilitate participation of a wider investor base through the process of securitisation. This may involve sale of portfolio by the originating bank to another bank in the initial phases. When the microfinance pools become larger in size, issuance of securities that are backed by microfinance, assets become conceivable. The partnership model financing that separates risk of the MFI from the risk of microfinance loans is a precursor for securitising microfinance loans. The process of securitisation releases capital for the originator of fresh assets at a frequency that is more than what would be possible if MFIs held assets on their own balance sheet to maturity. The MFI also experiences rating arbitrage and the improved rating results in lower costs of financing. The lending rate has fallen from an average of 12% to 8.5% in a matter of two years with the transition in financing structure. The process catalyses development of a secondary market for microfinance, where some entities specialize as originators and others emerge as buyers/investors.
3. SelF helP GRouP-Bank lInkaGe PRoGRamme: SHGs Bank Linkage programme was started on Action Research Project in 1989 which was off shoot of a NABARD initiative in 1987 through sanctioning of Rs.10 lakh to MYRADA, NGO as social money assistance for experimenting credit management group. In the same year Ministry of Rural Development, Government of India provided PRADHAN (NGO) with support to establish SHGs in Rajasthan. The experience of these early efforts of NGOs led to approval of a pilot project by NABARD in 1992. The pilot project was designed as partnership models among three agencies; viz; SHGs, Banks and NABARD. RBI reviewed the working of the project and issued guidelines to banks to enable SHGs to open bank accounts based on simple intense agreement. This was coupled with a commitment by NABARD to refinance on promotional support to banks for the SHGs Bank Linkage Programme. models There are three main models of micro credit being followed under the scheme: i) Under the first model banks themselves assume role of SHG promoting institution by promoting and formation of SHGs and extending loans to them.
ii)
Under the second model SHGs are formed and nurtured by Government Organisations, Government Agencies or other community based organizations. These agencies act as facilitator. The banks open saving bank accounts of these SHGs and provide them credit in due course. Under the third model to NGO. Promote formation of SHGs. Banks provide bulk assistance to these Self Help Promoting Institutions (SHPIs) for undertaking financial intermediation.
iii)
The following criteria are adopted by NABARD for selecting SHGs. a) the group should be in existence for at least for six months b) the group should have actively promoted the savings habit c) groups could be formal (registered) or informal (unregistered) d) membership of the group could be 10 to 25 The NABARD extends support by way of refinance and also provides technical support and guidance to the agencies participating in the programme. The Scheduled Commercial Banks, Regional Rural Banks and Co-operative banks have participated in SHG Bank Linkage Scheme, which can be seen from the following table: table 10: Position of ShG-Bank linkage Scheme Number of SHG in 000s Agency Commercial Banks RRBs Credit Co-op Banks Total Pvt. Sec. Banks 2005 843 (52.1%) 564 (34.8%) 211 (13.0%) 1618 2008 2378 (65.6%) 875 (24.2%) 371 (10.2%) 3625 80 (2.2%) 2009 2831 (67.0%) 978 (23.2%) 415 (9.8%) 4224 2005 4159 (60.3%) 2100 (30.4%) 640 (9.3%) 6898 Bank loans Rs.crore 2008 11475 (67.5%) 4421 26.0%) 1103 (6.5%) 17000 545 (3.2%) 2009 16149 (71.2%) 5224 (23.0%) 1306 (5.8%) 22680 2008 Rs. Per SHG 48240 50485 29711 46894 67596
Model-wise Linkage position was as under:

table 11: model-wise linkage Position Number (000s) SHGs promoted and financed by Banks SHGs promoted by NGOs/Govt financed by Banks. SHGs promoted by NGOs & financed by Banks using NGOs as Financial intermediaries Total 343 (21.2%) 1158 (71.6%) 117 (7.2%) 1618 Amount (Rs. crores) 2005 1013 (14.7%) 5529 (80.2%) 356 (5.2%) 6898 Number (000s) 566 (19.4%) 2162 (73.9%) 197 (6.7%) 2925 Amount (Rs. crores) 2007 2383 (13.2%) 14633 (81.1%) 1024 (5.7%) 18040
Figures in brackets are per centages of total. Saving Bank a/cs of ShGs The number of Saving Bank deposit accounts of SHGs at the end of March 2009 were 51.46 lakhs with outstanding balance of Rs. 5546 crore. limitations & Concerns: limitations: i) The members have little knowledge about financial resources they borrow despite them being conduit for access to such credit through group. ii) Micro enterprises activities undertaken to be unviable in the absence of input related infrastructure, marketing capacity building, low level credit absorption capacity, low skill base. Lack of skill/experience for advisory technical support services to provide livelyhood/build sustainable interventions among the intermediary organization especially NGO. Access to credit as a focus has lost sight of fundamental issues such as access and control over common resources such as forest, water, etc. which are mainstays of large number of the rural poor. As of now SHGs have no legal status and operating as thrift and credit groups.
iii)
iv)
v)
Concerns: i) Study of RBI and NABARD has revealed that a certain element of evergreening of loans is taking place among credit linkage SHGs which is a matter of concern. ii) The maintenance of books of accounts is poor. There is need for better
8
transparency in the books of accounts maintained at group level as they should reflect position of deposits in members account and interest received savings, distribution of corpus or operating surplus among members, evergreening of loan accounts etc. iii) Many of the SHGs do not have practice of distributing surplus generated from the business activities within the group as awareness level on this issue is very low among the SHG members. iv) Rate of interest on loans to member SHGs ranges from 15 to 24 per cent per annum. v) Group Loans to SHGs and size of SHG Loans to Members: During the year 2005-06, the average loan provided to new SHGs was Rs.4000 per member. Many believe that such loan amounts are grossly inadequate for pursuing any meaningful livelihood activity. Impact of ShG Bank linkage Programme: The SHG movement has been instrumental in mainstreaming women l by-passed by banking system. 90 per cent of members of SHGs are women and most of them are poor and landless. Reduced the incidence of poverty through increase in income and l enabled the poor to build assets. Enabled house-holds to have access to it to spend more on education, l through more clients households. Empowered women by enhancing their contribution to house-holds l income increasing their value of their assets and generally giving them better control over decision that affect their lives. Reducing children mortality improved material health and ability of l the poor to combat disease through better nutrition, housing and health especially among women and children. Contributed to reduce dependency on informal money lenders. l Facilitated significant reach to the provision of financial services for the l poor or helped in building capacity at the SHG level. It offered space for different stake holders to innovate, learn and l replicate successful schemes and add micro insurance products to their portfolio. learning from ShGs: The significant learning from SHG oriented micro finance movement in India has been to: (a) Discover innovative methods of educating the cost intermediation. (b) Leverage peer pressure to mitigate default risks. (c) Use of CSO/informal groups for need and capacity assessment.

(d)
(e) (f) (g) (h) (i) (j)
Incentivise lending and thrift by forming a pool in which the scales are favourable for internal lending which in turn keeps the poor away from money lenders. Involve and facilitate NGOs/CSOs to help banks for building quality portfolios. Ensures proper utilization of fund available to groups which tend to function as self money lending units. Graduate from thrift to internal lending to consumption credit to micro enterprises by using the group approach. Empower through collective decision making, conflict resolution and better social activities. Help the poor and assist them to receive financial services through collateral substitutes and Identify risks that can be managed by involving peer groups, NGOs/ Co-operatives.
4. mICRo FInanCe: FutuRe ChallenGeS: Micro finance acts as a catalyst in the lives of the poor. It has helped them achieve a reasonable rise in their income level and improve their standards of living. Thus, micro finance is expected to play an important role in promoting financial inclusion and inclusive growth. However there is a large gap in the demand and supply of credit to the poor. As per estimates by NABARD the credit support for poor household in India has been assessed at about Rs. 4,50,000 crore. Some of the micro level studies indicate that the poor still continue to depend on informal sources of credit, accounting for 0 per cent to 0 per cent of the household demand. There are several challenges faced by the micro finance system. 4.1 Spread of ShGs: The spread of SHGs has been uneven on account of various factors like proactive role of State Governments, Social and Cultural factors, absence of well managed NGOs, or inadequacy of branch network of bank branches. While concentration of recent SHGs is in Southern States covering Andhra Pradesh, Karnataka, Kerala and Tamilnadu in the states such as Utter Pradesh, Bihar, Madhya Pradesh, North Eastern and Central part of the country the progress has been slow. One of the major road blocks in accelerating the pace of the programme has been that SHG formation and pre-linkage operations are process intensive and involve upfront investment in man power, time, and cost. This requires presence of NGOs of good
80
standing and values to be able to collaborate with banks. The absence of such NGOs has been one of the stumbling blocks. Addressing to the issues of regional imbalance of Self Help Groups is a challenging task. 4.2. Quality of ShGs: Sustainability in income generation is dependent on the quality of a SHG. Therefore ensuring quality of SHG is a big challenge. Owing to the fast growth of the SHG-Bank Linkage Programme, the quality of SHGs has come under stress. Some of the factors affecting the quality of SHGs are: (i) (ii) (iii) The target oriented approach of some of the government departments in promoting groups. Inadequate incentives to NGOs for nurturing them on a sustainable basis: and Low level of skills on the part of the SHG members in managing their groups.
The strength of the programme stems from the fact that the loan recovery levels under the programme are significantly higher than credit disbursed under various government sponsored programmes. However, the quality of SHGs is of paramount importance to sustain the higher recovery levels. 4.3. Training of SHPIs, banks, SHG members: The success of the programme depends on the role played by self-help promoting institutions (SHPIs) in the promotion of quality groups and easy hassle free availability of bank credit. The promotion of quality groups, in turn, depends on the internal strengths managerial and financial of SHPIs. Therefore, capacity building through training programmes in respect of various stakeholders remains a challenge in the absence of quality resource centers at the district level as also lack of adequate appreciation on providing training to various personnel involved in the programme implementation. 4.4. Graduation from credit to enterprise: The more critical challenge is to induce SHGs to graduate into matured levels of enterprise, livelihood diversification, increased access to the supply chain, linkage to the capital market and appropriate production and processing technologies. The SHG Bank-Linkage programme needs to enable SHGs to also meet the non-financial requirements for setting up business and enterprises. However, there are not many viable and sustainable livelihoods in the area. This has led to groups tuning morbid i.e. older SHGs not availing credit from banks after the initial few rounds of credit linkage. The job of
81
micro enterprise promotion is further compounded because of factors like self-confidence, ability to invest, and access to market opportunities being unequal among the groups. 4.5. emergence of ShG Federation: Of late, many SHPIs have started promoting federations of SHGs so that some of their functions can be performed by them in a cost effective and sustainable manner. However, no serious efforts have been made towards capacity building of federations. There are no established models which can be replicated across the country. The emergence of SHG Federations represents the aggregation of collective bargaining power and economies of scale. They are for addressing social and economic issues. However, every additional tier adds to its cost and thus, tends to weaken the primaries. It must, therefore be ensured that the quality of federations is good. To ensure the quality of federations, care needs to be taken by monitoring institutions engaged in promoting SHG Federations. One, federation should be evolved based on the felt need of the SHGs and the group should have freedom to or not to join the federation, Two, the federations need to be evolved as member-owned, member-driven institutions so that they can function in a democratic manner, keeping in view the aspirations of their constituents self help group. Three, the process and systems of federations need to be designed in such a way that these federations do not depend on the promoter perpetually and become selfmanaged in a reasonable period of time. 4.6. high Cost of delivery: MFI model is comparatively costlier in term of delivery of financial services due to low volume of loan and loan size as also the cost of funds. A good number of MFIs are subsidy dependent and only few MFIs are able to cover more than 90 per cent of their costs. High rate of interest charged by them has become an area of concern. While it is agreed that the cost of services offered by MFIs is high, there is no consensus on the floor limit of rate of interest that could be permitted to be charged by MFIs. They, therefore, need to develop strategies for increasing the range and volume of their financial services so that they can provide their services at a cost affordable by poor. 4.7. Capacity building of mFIs: Successful delivery of flexible, client driven and innovative micro finance services to the poor would not be possible without building up the capacities of the MFIs and their primary stakeholders. Innovations in various aspects such as social intermediation, strategic linkage and new approaches centered
82
on the livelihood issues surrounding the poor, and the re-engineering of the financial products offered by them are the need of the hour. Currently, the major emphasis of capacity building efforts is on bankers, NGOs and Government officials involved in promoting and financing SHGs. Since many of the SHGs are maturing and their business level has increased substantially, the focus should shift to capacity building of SHG members so that the accounts keeping, auditing and credit management at the group level improves. In this regard some of the very relevant recommendations made by Dr. Rangarajan Committee on Financial Inclusion are as under : (i) encouraging ShGs in excluded Regions Funding Support: In order to further increase efforts in addressing regional imbalances, there is a need to involve State Governments. In some States, the programme is driven mainly through NGOs and other SHPIs like banks, farmers clubs, individual rural volunteers, etc. The Committee is of the view that if the programme is to reach a critical scale, the Department of Women and Child Development at the State-level should be actively involved in promoting and nurturing of SHGs. The State Govts and NABARD may, therefore, set aside specific funds out of the budgetary support and the Micro Finance Development and Equity Fund (MFDEF) respectively for the purpose of promoting SHGs in regions with high levels of exclusion. The spread of SHGs in hilly regions, particularly in the North-Eastern Region, is poor. One of the reasons for this is that the population density in hilly areas is often low and the banking network is weak. There is a need to evolve SHG models suited to the local context of such areas. (ii) Capacity building of Government functionaries: Certain deficiencies in the involvement of Government Departments such as poor follow up ineffective monitoring and inadequate training and capacity building efforts which have, in turn, diluted the quality of programme implementation. The Committee is, therefore, of the view that adequate safeguards may be devised and built in future programme implementation strategies. NABARD can also facilitate this process by providing support for capacity building of Government functionaries from grass root level upwards within the SHG framework. (iii) legal Status for ShGs: As of now, SHGs are operating as thrift and credit groups. They may, in future, evolve to a higher level of
83
commercial enterprise. The question of providing a simplified legal status to the SHGs may have to be examined in full, in this context. This would also facilitate their becoming members of PACS. (iv) maintenance of participatory character of ShG movement: A movement of such large scale involving peoples participation could lead to attempts towards politicization. This must be avoided. Sufficient care has to be taken to ensure that the SHG movement retains its participatory and self-help character. (v) Incentive package for nGos: Many of the NGOs have played a commendable role in promoting SHGs and linking them with banks. NGOs, being local initiators with their low resources are finding it difficult to expand in other areas and regions. There is, therefore, a need to evolve an incentive package which should motivate these NGOs to diversify into other backward areas. Incentive package could be in the form of expeditious and hassle-free grant support. (vi) RBI/naBaRd to study the issue of evergreening: A certain element of evergreening of loans is taking place among credit linked SHGs. This, if established, is a matter of concern. The Committee advises RBI/NABARD to expeditiously study this aspect and come out with suggestions for reversing this unsettling trend. (vii) transparency in maintenance of records: In order to ensure sustainability of the SHGs, their activities and linkages, the Committee recommends that there should be better transparency in the books of accounts maintained at the group level. These books should reflect the position of deposits in members accounts, interest paid on savings, distribution of corpus or operating surplus among members, evergreening of loan accounts, etc. The banks, with the help of NABARD, should evolve a checklist for concurrent monitoring of SHGs. (viii) ShGs to evolve norms for distribution of surplus: Many of the SHGs do not have the practice of distributing the surplus generated from their business activities within the group and the awareness on this issue among the SHG members is very low there is a need to evolve norms for distribution of surplus (akin to dividend) especially at the time when a member drops out of the group. (ix) need to restructure design & direction of SGSy subsidy: Subsidies provided under SGSY be restructured as various studies conducted by the National Institute of Bank Management (NIBM) and National Institute of Rural Development (NIRD), point out that linking credit with subsidy is not an effective approach for reaching out to the
8
poor. The Committee is of the view that there is a need to formulate a single programme synergising the positive features of SGSY such as specific targeting of below poverty line (BPL) families, etc. and those of the SHG Bank Linkage Programme such as group cohesiveness, discipline, etc. (x) Interest rate subsidy: Although certain States are providing a subsidy on interest rates being charged by banks to the SHGs. The average rate of interest on banks lending to SHGs is around 12%, most SHGs charge rates of around 22%-24% to members. The margin available to SHGs is, thus, sufficient to take care of operational costs, even after considering the small amounts of loan provided to members. The Committee is of the opinion that a subsidy on interest rates cuts at the very root of the self help character of SHGs. The subsidy is redirected towards capacity building efforts or in providing input supplies and marketing support to the SHGs. (xi) Resource Centre: a) The SHG Bank Linkage Programme is now more than 15 years old. There are a large number of SHGs in the country which are well established in their savings and credit operations. The members of such groups want to expand and diversify their activities with a view to attain economies of scale. Many of the groups are organizing themselves into federations and other higher level structures. To achieve this effectively, resource centre can play a vital role. Resource centre can be set up by various stakeholders such as NGOs, banks, Government departments, NABARD at the State/District level to play an important role in preparing training modules, developing a cadre of trainers, conduct of field studies and in promoting interface between SHG members and service providers. The specific role of Resource Centre would be to: l Work towards a comprehensive capacity building of SHGs. l Share innovative ideas and models that can be replicated elsewhere. l Enhance functional literacy among SHG members. l Support livelihood interventions among SHG members. l Facilitate availability of all services to SHG members under one roof. The committee recommends that the cost for setting up Resource Centres can be met out of the Financial Inclusion Fund and/or the MFDEF.
b)
8
(xii) ShGs to provide alternative savings products: One of the distinguishing features of the SHGs is that it is a savings-led model providing opportunities to its members to pool their small savings within the group. Most of the SHGs encourage compulsory savings with equal small amounts by members on a regular basis. SHGs need to offer a wide range of savings products so as to capture the huge potential of savings that remains untapped. Groups should be free to design savings products suiting to members requirements. Certain level of experimentation could be attempted by the Resource Centre in designing new saving products and NABARD should encourage and support such experiments. (xiii) adoption of JlG model to cover marginalized groups: Based on the encouraging experience gained in implementation of the pilot project, a scheme for financing Joint Liability Groups of tenant farmers and oral lessees has been evolved by NABARD for implementation by all the commercial banks, RRBs and cooperatives. The committee recommends adoption of the concept of JLGs which, if properly grounded, could be another effective method for purveying credit to mid segment clients such as small farmers, marginal farmers, tenant farmers, etc. and thereby reduce their dependence on informal sources of credit. 5. uRBan mICRoFInanCe: There are no clear estimates of the number of people in urban areas with no access to organized financial services. This may be attributed, in part at least, to the migratory nature of the urban poor, comprising mostly of migrants from the rural areas. Even money lenders often shy away from lending to urban poor. There have been a few instances of MFIs venturing into this area of lending to urban poor who are undertaking micro-enterprises and small business activities. Urban branches of banks, even though having manpower and technology support, are not attuned to SHG lending or microfinance. They are busy with multiple and diversified activities and generally find no time to cater to the microfinance market segment. Lending opportunities in other sectors dissuade them from attempting the laborious task of micro-lending. The migratory nature of parts of the low income urban population is also contributing that urban bankers are not venturing into this field. Opening of specialized microfinance branches / cells in potential urban centers exclusively catering for microfinance and SHG bank linkages could be thought of, to address the requirements of the urban poor. BFs / BCs model could be the mechanism to reach the target clientele in these areas. However, banks need to implement proper risk management practices,
8
develop suitable models and products tailor-made to this segment. Banks can also consider associating with MFIs undertaking urban micro-lending as a viable option. 6. RuRal develoPment and SelF emPloyment tRaInInG InStItuteS (RudSetIS): Youth being a valuable human resource of the country, there is need to develop self-confidence in youth through training and developing skills to start a micro enterprise in rural areas. This will enable them not only to get themselves employed but also to generate employments for youth in the villages and contribute to economic development of rural areas. Keeping above objectives in view Shri Dharmasthala Manjunatheshwara Education Trust, Syndicate Bank and Canara Bank set up in 1982 an institute what is known as Rural Development & Self Employment Training Institute (RUDSETI). This was followed by other banks. These training institutes (a) (b) (c) Identify, motivate, train and assist rural unemployed youth to take self employment ventures; Train village level workers to work for rural development; Assist to take up research and development activities in entrepreneurship and rural development.
6.1. types of Programmes: These institutes offer variety of free entrepreneurship development programmes (EDP) in various fields to transform youth into productive assets. The duration of programmes varies from one week to six weeks and institutes provide free training, boarding and lodging facilities. The broad category of programmes include i) for 1st Generation Entrepreneurship (youth having aptitude to take up self employments in the age group of 18 to 35 years who can read and write local languages) Agriculturist EDPs agriculture and allied activities such as Dairy, Poultry, Horticulture, Sericulture, Mushroom Cultivation, Organic farming, etc. ii) Production EDPs Dress designing for men and women, Rexine utility articles, Agarbatti manufacturing, Bag making paper bags, Bakery products, etc. iii) Other EDPs (a) Repairs of pump sets, radio, TV, two-wheelers, Mobile telephones etc.;
8
(b) Beauty parlours/Hair Dressing; (c) Photography/Videography, Computer Hardware, Tally and DTP, screen printing, etc. iv) All round training such as formation of SHG, capacity building, skill development, etc., to SGSY Self Help Groups. The training methodology include identification and selection of candidates, campus and practical approach, simulation exercise, group discussion, role plays, field visits, experience sharing with role models, interaction with bankers and Government officials, etc. 6.2. escort Services: The Institutes undertake post training follow up for sustained motivation among trainees by way of (a) 2 year follow up regular correspondence and individual control; (b) unit visit, special follow up meeting involving banks/Govt. officials; (c) facilitating credit linkage for setting up of micro enterprises; (d) business linkage workshops, seminars, etc. 6.3. Syndicate Rural development trust (SRDT) formed on 2.10.2000 has set up Syndicate Institute of Rural Entrepreneurship Development (SIRD) on 20.10.2000. These institutes have been located mainly in the lead districts of Syndicate Bank where they have sponsored Regional Rural Banks in the states of Karnataka, Kerala, Andhra Pradesh, Haryana and Uttar Pradesh. While its objectives are the same as narrated above its operating mode is focused on convenience of the trainees. It conducts training programmes at the place of trainees or at a place near to the trainees, called as camp training. The institute provides inputs on entrepreneurship development and training on skills involved in that activity. The institute concentrates mainly on Self Help Groups conducting various types of Camp training programmes, such as i) ii) iii) iv) v) vi) SHG Awareness programme Basic Orientation programme Workshop on SHG SHG Management programme Skill up gradation programme SHG Facilitators programme
SIRD impart training to (a) member of SHGs sponsored by Taluk Panchayat to take up economic activities like dairying, jasmine cultivation, dry fish processing and cultivation of vegetables;
88 (b)
(c)
candidates under Prime Ministers Employment Generation Programme (PMEGP), a Government sponsored scheme, wherein the trained candidates will get bank finance to take up economic activities; candidates sponsored by NABARD in various economic activities such as (i) Rewinding of motors & pumpset repairs; (ii) Computer & Laptop repairs; (iii) TV repairs; (iv) Embroidery, Fabric painting & Soft toy making; (v) Mobile, Telephone repairs; (vi) Dress designing; (vii) Dairying, etc.
6.4. Faculty Selection: Members of faculty are selected from Syndicate Bank and the Regional Rural Banks sponsored by Syndicate Bank, who have worked in rural areas with exposure to lending to agriculture and allied activities. The Guest Faculty for skill development programme generally the persons trained in SIRD and well-settled as successful entrepreneurs who evince interest in imparting training. 6.5. Settlement: After completion of training in SIRD, the trainees have two opportunities either they can start their own venture using their owned funds and with the help of financial assistance from banks, or join any institution as an employee. To consider the trainees as settled, the SIRD looks into the following criteria: (a) (b) If the trainee starts his own venture, he should have a minimum monthly net income of Rs.3000/- and
If the trainee starts career as an employee, he has to earn minimum of Rs.100/- per day. The settlement position at present is 69%. The major public sector banks have also set up similar institutes to develop entrepreneurship among rural youth for self employment. These activities of banks are encouraged by respective State Governments, NABARD and SIDBI. They extend financial assistance to cover of cost of EDPs conducting EDPs.
Chapter vIII a micro Finance Institutions

Micro Finance Institutions (MFIs) are those who facilitate/provide provision of thrift, credit and other financial services and products of very small amount to the poor. MFIs play a significant role in facilitating micro Finance as they are uniquely positioned to reaching out to the rural poor. Many of them operate in a limited geographical areas and have better understanding of the issues specific to the people. They enjoy greater acceptability among the poor and have flexibility in operations providing a level of comfort to their clientele. The MFI model in India is characterized by diversity of institutions and legal forms. The first and most well-known MFI SEWA was incorporated as Urban Co-operative Bank in 1974 and demonstrated that poor people are bankable. In 1980 number of registered societies and trusts commenced group based savings and credit activities on the basis of grant funds from donors. Micro Finance Institutions working under various legal forms are given below:
Type of Entity Association Non - profit Society under Societies Reg. Act, 1960 Charitable Trust Section 25 of Companies Act Mutual Benefit Co-operative which can be just savings and credit co-operative or be further licensed as co-operative banks Mutual benefit Trust Mutual Benefit (Sec. 620 of Nidhi Company) For Profit Association of persons Investment Trust Company which is either NBFC or Bank
Trust under Indian Trust Act, 1920 Company under Indian Companies Act, 1956
0
It is estimated that there are over 1000 NGO MFIs and more than 20 registered company MFIs. MFIs have a) Their own funds or built from donors grant in case of societies and trusts. b) Equity investments and promoters capital in case of companies. Share holders in case of co-operatives and c) Retained earnings in case of all categories. The main source of funds is debt borrowed from banks and apex institutions. A MFI that can cover its costs and has good financial performance can grow to serve more clients in more areas. Social performance of micro finance defined as The translation of mission into practice in line with social goals. These social goals relate to: l Reaching the poor or financially excluded people. Improving quality and appropriateness of financial service. l Contributing employment and enterprise growth. l Improving economic and social condition of clients and their l households. Encouraging social responsibility to clients, staffs and to communities l they operate in. leading nGos There have been certain NGOs which have taken initiatives in micro finance of their own since seventies and emerged as leading micro finance institutions. Some of the oldest NGOs and federations playing important role in the field are given below: myRada: Mysore Resettlement and Development Agency (MYRADA) was established in 1968. It concentrated from 1968 to 1978 in resettlement of 15000 Tibetan Refugees with the Indian Government. It shifted thereafter its focus to working with poor communities in rural areas and building of appropriate Peoples Institutions rather than on the delivery of goods. It makes attempts to motivate the people to contribute money and time and to absorb skills. It operates in Karnataka, Andhra Pradesh, and Tamilnadu through its 14 active projects. It has work force trained in community health care, animal husbandry, forestry, literacy and other relevant areas who provide services in the project areas. It is working with over 75000 families.
1
SeWa A group of self- employed women first formed their own organisation in 1972 when the Self Employed Womens Association (SEWA) was registered as a trade union in Gujarat, with the main objective of strengthening its members bargaining power to improve income, employment and access to social security. Sewa Bank (Shri Mahila Sewa Sahakari Bank) was established in 1 by SEWA with association of 4000 self-employed women in the slums of Ahmedabad. SEWA membership comprised three categories (a) Hawkers and Vendors vegetable/fruit vendors, small shop- keepers, flower vendors, etc.; (b) Home based workers weavers, carpenters, other artisans, beedi rollers, etc; (c) Manual workers and service providers, domestic servants. It began its banking activities in the rural districts of Gujarat in 1993. Through formation of self-help group it collects savings from members and deposit with the bank. The formation of these groups saw the culmination of SEWAs efforts to organize women agricultural labourers in rural areas. It mobilizes deposits at the door steps of poor women and gives loan to their economic activities. It has 3 lac deposit accounts and 1 lac borrowers. It is not just provider of credit but also assists poor self-employed women in their overall struggle to live a life in dignity enhancing their income, employment and ownership of their assets, improving housing, health care and intake of nutritious food. BaSIx: A micro finance institution based in the city of Hyderabad designed and set up in 1996, called itself a new generation financial institution to promote a large number of sustainable livelihoods including the rural poor and women through the provision of financial services and technical assistance in an integrated manner. It is working with over a million and a half customers comprising of over 0 per cent rural poor households and about 10 per cent urban slum dwellers. BASIX operates in 22400 villages spread over 15 states. The clientele of BASIX comprise: (i) Small enterprises and commercial farms assistance by way of individual loan with collateral security. (ii) Micro enterprises and small farmers assistance through Trust Liability Group.
92 (iii) (iv) (iv) (vi)
Subsistence workers and marginal farmers assistance through Self Help Groups. It extends technical assistance Quality improvement programme for existing SHGs. Micro Finance Agents for forming new SHGs. Dry-land agriculture productivity enhance Plants of Andhra Pradesh Dairy Development Co-operative Federation was revived, etc.
Sa-dhan was established in 1998 by 10 leading micro finance organisations (MFOs) in India including Sewa Bank, BASIX, Friends of Womens World Banking (FWWB), Sangha Mithra (set up by MYRADA), Rashtriya Grameena Vikas Nidhi (RGVN), Professional Assistance for Development Activity (PRADAN), Society for Helping, Awakening Rural Poor through Education (SHARE) and Development of Human Action (DHAN) Foundation. It is an apex membership body that brings together diverse views, models and concerns in Indian Micro Finance Sector from wide spectrum of stake holders. The association has 49 members based in 15 States of India. 2. InItIatIve to StRenGthen mFIS: The SHG Bank Linkage programme, implemented through the formal banking system, gained momentum and taken rapid strides forward. With a view to further accelerate the availability of banking services in rural areas and leverage existing micro finance institutions, Government of India, Reserve Bank of India and NABARD enunciated following measures: (i) Identify MFIs seek to provide small scale credits and other financial services to low income household and small scale informal business and classify and rate such institutions and empower them to intermediate between the lending banks and the beneficiaries. (ii) As MFIs require capital, Government of India has created Micro Finance Development and Equity funds to provide capital and equity support to MFIs. A scheme has been evolved by NABARD which enables MFIs to leverage capital/equity for accessing commercial and other funds from banks for providing financial services at an affordable cost to the poor and enable MFIs to achieve sustainability in other credit operations over a period of 3-5 years. 2.1. Salient Features of the Scheme 2006 type of mFIs: - MFI, NBFC and MFOs comprising societies, Trust, Section 25 Companies, Co-operatives would be eligible for capital support. mode of support : a) Long Term Debt or soft loans to Micro Finance Organization Society, Trust, Section 25 Companies, Co-operative Society. b) Equity, Preference Shares with law corporate to MFIs NBFC.
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Quantum of Capital/equity Support: The maximum capital support available for MFO, under the scheme is linked to the outreach and amount of loan outstanding as under: table 12 Outreach of No. clients Upto 10000 10001 20000 20001 30000 30001 50000 Loan amount outstanding Less than Rs. 2 crores Less than Rs. 4 crores Less than Rs. 6 crores Less than Rs.10 crores Capital support Maximum Rs.25 lakhs Maximum Rs.50 lakhs Maximum Rs.75 lakhs Maximum Rs.1 crore
In case of MFI-NBFCs equity support would be upto 10 per cent of paid up capital of the equity with maximum equity support restricted to Rs.2 crores.
l
To facilitate the process of setting of MFIs, NABARD has introduced a scheme for financial assistance to banks for rating MFIs. NABARD grant assistance to banks for undertaking Rural Non- farm Sector promotional activities/programmers for capacity building of rural youth and also members of SHGs to enable them to set up micro enterprises as these programmes are tools for enhancing credit flow and creation of gainful employment in rural areas. RBI permitted banks to open Savings Bank accounts on behalf of SHGs and also participate in SHG linkage programme by treating such lending as normal business activity of banks. Banks were permitted to treat such lending as advance to weaker sections. Banks were asked to identify branches having potential for linkage and provide necessary support and include such lending within service area plan under Service Area Approach. (To get the benefit of catalytic services of NGOs the names dealing with SHGs are indicated on blockwise basis in service area credit plans). To give boost to the SHG, banks linkage programme for credit flow to the unorganized sector banks were asked to monitor programme in District Level Consultative Committee and State Level Bankers Committee meetings.
2.2. micro Finance Sector development Regulation Bill 2007 Government of India has proposed to streamline and give a separate legal status to micro finances institutions, enacting a separate law. Some of the important features in the proposed Bill are as under. The proposed (Micro Finance Sector Development Regulation) Bill 2007 defines.

A) Micro Finance services as providing financial assistance to an individual or an eligible client either directly or through a group mechanism for: i) An amount not exceeding rupees fifty thousand in aggregate per individual for small and tiny enterprises, agriculture, allied activities (including for consumption purpose) of such individual, OR ii) An amount not exceeding rupees one lakh fifty thousand in aggregate per individual for housing purpose. B) Micro Finance Institution as an organization or association of individual including the following if it is established for the purpose of carrying on business of extending micro finance services. i) A Society created under the societies Registered Act, 1960; ii) A Trust created under the Indian Trust Act,1880 or public trust registered under any State Enactment Governing Trust or public, religious or charitable purposes; iii) A Co-operative society / mutual benefit society / mutually aided society registered under any State enactment relating to such societies or any Multi-State Co-operative society registered under the Multi State Co-operative Societies Act, 2002 but not including : l a co-operative bank as defined in Clause (cci) of Section 5 of the Banking Regulation Act, 1949 or l a co-operative society engaged in agricultural operations or industrial activity or purchase or sale of any goods and services. C) Eligible borrower as a member of SHG or Self Help Group itself or any other group formed for the purpose of providing micro finance belonging to any one of the following categories: a) Farmers owning not more than 2 hectares of Agricultural loan or/ and b) Disadvantaged cultivation of agricultural land including oral lessees, tenants, and share croppers. c) Landless labourers and marginal laborers. d) Artisans, micro entrepreneurs and persons engaged in small and tiny economic activities. e) Women. 2.3. The micro finance organization has to obtain a certificate of Registration from NABARD before commencing or carrying on business of forming thrift services to eligible clients. The net owned funds of the Micro Finance Organization are at least Rs.5 lakhs, which have been created out of promoters contributions or grants or donations received by micro finance organization.

3.
InItIatIveS oF Small InduStRIeS develoPment Bank oF IndIa (SIdBI): SIDBI launched its micro finance programme in February 1994 on a pilot basis. The programme provided small doses of credit funds to the NGOs all across the country. NGOs acted as financial intermediaries and on-lent funds to their clients. Limited amount of capacity building grant was also provided to the NGOs. With a view to reducing the procedural bottlenecks, expanding the outreach, meeting the huge unmet demand of the sector and striving towards its formalization, SIDBI reoriented its policy and approach to create a sustainable micro finance model that would significantly increase the flow of credit to the sector. To take the agenda forward, the SIDBI Foundation for Micro Credit (SFMC) was created in January 1999. SFMCs mission is to create a national network of strong, viable and sustainable Micro Finance Institutions from the informal and formal financial sector to provide micro finance services to the poor. SIDBI was one of the first institutions that identified and recognised NGO/ MFI route as an effective delivery channel for reaching financial services to those segments of the population not reached by the formal banking network. As a result of bulk lending funds provided, coupled with intensive capacity building support to the entire micro finance sector, it has come to occupy a significant position in the Indian micro finance sector. Today, SIDBI is one of the largest providers of micro finance through the MFIs. SIDBIs pilot programme of 1994 brought out one of the major shortcomings in micro finance lending programme. It showed that collateral-based lending does not work insofar as micro finance is concerned. NGOs / MFIs acting as financial intermediaries do not have tangible collateral to offer as security for the loans. Doing away with collateral-based lending in MF necessitated that a mechanism be developed which would minimise the risks associated with lending. With a view to catering to this objective, SIDBI pioneered the concept of Capacity Assessment Rating (CAR) for the MFIs. As part of its developmental agenda, SIDBI encouraged a private sector development consulting firm to develop a rating tool for the MFIs which was rolled out in 1999. Today, rating is a widely accepted tool in this sector. SIDBI has also succeeded in developing a market for rating services. Two mainstream rating agencies, viz., CRISIL and CARE have also started undertaking micro finance ratings, besides M-CRIL. SIDBI has also adopted the institutional capacity assessment tool (I-CAT) of access development services (ADS), a private sector consulting organisation, for rating of start-up/small and midsized MFIs.

B RatInG oF mICRo FInanCe InStItutIonS

Banks, Financial Institutions, or Donors invariably obtain rating and due diligence study from credit rating agency and also conduct due diligence study of MFI, before taking a decision to fund those who approach them for financial assistance. It is therefore felt worth while to give in the following paragraphs broad factors considered for credit ratings and due diligence studies of MFIS and SHG Federations. Rating of micro Finance Institutions 1. Large amount of research has been undertaken in this area. Basically, the rating tools attempt to assess whether the MFI is operating on sound lines and on a sustainable basis. Most often, rating is a prerequisite for extension of financial arrangements/partnerships. Further, the rating tool can also give a comparative position of the MFI in relation to its peers. The more popular of the rating methodologies used are ACCION's CAMEL, WOCCU's PEARLS, and the rating methodologies of Micro Rate and M-CRIL. Overall these assessment tools use more than 170 indicators to evaluate MFIs. 2. Broadly, all the agencies look at the issues of: (i) Transparency, both operational and financial (ii) Sound Operating Methods (iii) Scale of Operations (iv) Sustainability In all these elements, both qualitative and quantitative variables are examined. Given below are key parameters that are examined while arriving at the rating of an MFI. 1. non-FInanCIal PaRameteRS: (a) Governance: The main aspects examined here are (i) Whether the MFI has a clearly defined Mission Statement and Charter, which are known to both the employees and the clientele. (ii) Whether the Board membership is diversified and independent directors are present on the board and actually participate in meetings, and (iii) Whether the Board takes the major policy decisions. (b) Management: The qualification and competence of the top management of the MFI and their experience in the sector is assessed. The presence of a second line of leadership which gives greater strength to the MFI.

(c) HR Policies: MFI operations are heavily dependent on the performance of the frontline staff. Therefore, the critical areas to study would be whether the MFI has a well laid out recruitment and training system, tolerable levels of staff attrition and suitable delegation of operational powers. (d) Systems and Procedures: As the scale of operations of a MFI grows, the systems and procedures play a critical role. The MFI should have well laid down policies for processing and authorisation. (e) Organisational Structure: The key strength of a MFI is its ability to reach its clientele. In this context, the physical organisational structure of the MFI and its level and regularity of contact with the clientele are important parameters. (f) Information System: The key to MFI operations is the ability to track its portfolio on a near real time basis. The information system should be able to provide portfolio performance to the Corporate Office as quickly as possible from the time of occurrence of a default.
(g) Product Range: A good MFI would need to have a range of products in tune with the requirements of the client group. (h) Geographical Spread: Better geographical spread would give the MFI the capacity to spread its risk over a larger expanse and give it greater scope for scalability in its level of operations. (i) Client Assessment: A MFI can also be rated on the basis of how its client group assesses the performance of the MFI. Independent studies, if done, as well as direct independent interaction with clients and dropouts can be referenced. Growth Problems: The future plans of the MFI should be clear and well planned, that is what the lending agency would be closely looking at.
(j)
2. FInanCIal PaRameteRS: Under the financial parameters, the key parameters that are examined are: (a) Capital Adequacy: Capital adequacy is a measure of an institution's financial strength and the extent to which an institution's capital charge allows it to absorb potential losses on its asset portfolio. As with other formal financial institutions, a capital adequacy of 8% or more is suggested. However, this would depend on the comfort level of the lending institution with the MFI. An 8% capital adequacy would
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(b)
(c)
(d)
(e)
(f)
translate to a 12.5 times leverage. As raising of equity continues to be a challenge for MFIs, Donor Funds and other Quasi Equity are also reckoned towards equity apart from the accumulated reserves. While making future expansion plans, the MFI would also be required to indicate how it plans to raise equity to meet future requirements. Asset Quality: Under this parameter, the key issue that is examined is the extent of portfolio at risk (PAR). PAR is defined as the total balance of loans that are past due. Past due is usually defined as installments that are due for more than 30 days. In such cases, the entire loan outstanding against such accounts is classified as portfolio at risk. Ideally, the PAR of any MFI should be in the range of 0-3% and in any case should not exceed 10%. All rescheduled loans are reckoned as part of PAR, even if the installments after reschedulement have not fallen due. Also under Asset quality, the provisioning and write-off policy of the MFI is examined. An MFI is considered to be good if it is able to make full provisioning for the PAR and has a well laid out writeoff policy. Earnings: All MFIs have long-term need to cover their costs including overheads. Two indicators that are used in this regard are operating self-sufficiency (OSS) and financial self-sufficiency (FSS). OSS indicates that the MFI is fully covering its costs. FSS on the other hand assesses whether the MFI is covering its cost and earning surpluses even after factoring in the donor grants and implicit subsidies that the MFI is obtaining. Liquidity: The liquidity dimension of the MFI is examined from the point of view of whether the MFI is able to manage its finances in a manner that enable it to meet all external liabilities as and when they fall due. Asset-Liability Matching: This parameter examines the maturity profile of the assets of the MFI and the Liabilities to establish that there are no mismatches likely in the future when the liabilities fall due for payment. Transparency and Disclosure: The presentation of statement of accounts of the MFI are also examined from the point of view of transparency and full disclosure, including making available all requisite details to both financers and the clients. due dIlIGenCe FoR SeleCtInG aS the BuSIneSS FaCIlItatoR / CoRReSPondent
The due diligence on MFIs to be engaged as the Business Facilitator/ Correspondent shall factor the key risks and other risks identified of different capacities of entities. Some of the indicative parameters for due diligence

of MFIs/ other entities while considering agency/ funding relationship with them are given below. 1. due dIlIGenCe In CaSe oF nGo/ mFI: (a) Charter and Registration The foremost would be to examine whether the charter and objectives of the MFI / NGO permit it to undertake the kind of activities proposed, especially if it is some form of financial intermediation. (b) Presence in the area MFI / NGOs with adequate presence in the area for a reasonable time period would be preferable, as they would have developed better networking and understanding of local conditions. (c) Management and Governance Structure Many NGO/ MFIs are almost solely driven by the founders. It is essential to examine the composition of the governing body of the entity to assess if it can function independent of the promoter and if there is a second tier of management. (d) Manpower Quality and Retention Rates The quality of manpower from the perspective of undertaking the new task needs to be assessed. If not available in sufficient number, plans of the MFI / NGO to strengthen their manpower through recruitment and training are to be considered. (e) Social vs. Profit Orientation Often MFI / NGOs are social service oriented, which may hamper undertaking a task like financial intermediation. This needs to be carefully assessed as the two are vastly different competencies. (f) Accounting Systems The accounting systems and methods need careful study, especially in case the MFI / NGO is being considered for acting as a financial intermediary. (g) Secular and Social Orientation The MFI / NGOs should preferably be non-discriminatory on caste, gender, political affiliation and religious lines. While its work could focus on specific groups or communities, it should not have any negative discrimination. The commitment of the entity for catering to the unserved, poor, and disadvantaged sections including women, etc. may be seen. (h) Assessment of Donors Partners and Peers Assessment of the MFI / NGO by the donors, partners and peers would be a crucial input in assessing the capabilities of the MFI / NGO. This can be obtained from independent discussions with the donors, partners and peers and the government agencies connected with such programmes.
100 (i)
Financial Reporting The financial reporting of the MFI / NGO will indicate both the transparency and compliance to the laws of the land. It is to be seen whether there is consistency in financial reporting to the reporting authority, government, and donors etc.
due dIlIGenCe In CaSe oF ShG FedeRatIon lIke SoCIetIeS undeR maCS: In the case of the federated structure, the strength of the federation would depend on the health of the constituent SHGs, as the financial assets would be with the members of SHGs. Hence, the due diligence parameters would be a little different from a typical MFI. Some parameters for rating a Federation could be as follows: (a) Governance Related: l The federation should have a system of rating its constituent SHGs at periodic intervals, preferably six monthly. At least 75% of the SHGs should be rated on all the defined parameters. l The federation should be a registered body and have capacity to enter into legal obligations. l The federation should have a defined area of operation and have only primary SHGs as members. l The federation should have an elected board which should meet at regular intervals. l The accounts of the federation should have been audited and placed before the General Body within months of the closing of the accounting period. l The federation should have filed all the statutory returns before the appropriate authority. (b) Finance Related: l The federation should be in operating profit from the thrift and credit operations. l The thrift collections at the SHG level should be at least 90% of the determined amount. l The share capital mobilization should not be in arrears. l The federation should demonstrate a repayment performance of 90% or more on a continuous basis. l At least 95% of the Loan Assets should be in performing category. l The federation should have made adequate loan loss provisions. l The federation should have defined exposure norms for individuals and groups.
Source: RBI Working Group Report on Microfinance.
2.
Chapter Ix Global Scale of Microfinance &

Innovations of Some Countries
CuRRent SCale oF mICRo FInanCe oPeRatIonS In the WoRld: More than 3 billion poor people in the world lack access to the basic financial services essential to managing their precious life. It has been recognized by United Nation in its summit held in September 2005 the need for access to financial services in particular for the poor .There was also consensus at the International Conference On Financing Development held in 2002 that the micro finance and credit for micro small and medium enterprises are important for enhancing social and economic impact of financial sector. No systematic effort to mop the distribution of micro finance has been undertaken. A useful recent benchmark was established by an analysis of alternative institutions in development world in 2004. The institution consisted of 665 million clients accounts at over 3000 institutions that are serving people who are poor that these served by commercial banks. Of these accounts 120 million were with the institutions normally understood to practice micro finance. Reflecting the diverse historical roots the management however they included postal savings bank (318 million accounts) State Agricultural and Development banks (172 million accounts) Financial Co-operatives and Credit Union (135 million accounts) and specialized rural banks (1 million accounts) Regionally the high constitution of these accounts was in India (188 million accounts) representing nearly 18 per cent of the total population. The lowest concentration was Latin America representing 3 per cent of the total population and Africa (27 million) representing 4 per cent of the total population. According to Micro Banking Bulletin at the end of 2000 704 MFIs were serving 52 million borrowers. Of these clients 70 per cent were in Asia, 20
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per cent in Latin America and balance in the rest of the world. 2. CGaP mICRo FInanCe PRInCIPleS: Some principles that summarize a century and a half of development practices were encapsulated in 2004 by Consultative Group to Assist Poor (CGAP) and endorsed by the group of eight leaders at the G8 Summit on June 10, 2004 are as under: l Poor people need not just loan but also savings, insurance and money transfer services. l Micro finance must be useful to poor household, helping them to raise income build up assets and or cushion themselves against external shocks. l Micro Finance can pay for itself. Subsidies from donor or Government are scarce and uncertain and so to reach large number poor people, micro finance must pay for itself. l Micro Finance means building permanent local institutions. l Micro Finance also means building integrating the financial needs of poor people into countrys main stream financial system. l Job of government is to enable financial services not to provide them. l Donor funds should complement private capital, not to compete with it. The key bottleneck is the shortage of strong institutions and managers. l Donors should focus on capital building. l Interest rate ceiling hurt poor people by preventing micro finance institutions from covering their costs which chokes off the supply of credit. l Micro Finance Institutions hold measure and disclose their performance both financially and socially. The obstacles and challenges to build a sound commercial micro financial industry include: l Inappropriate donors subsidies. l Poor regulations and supervision of deposit taking MFIs. l Few MFIs that mobilize savings. l Limited management capacity of MFIs. l Institutional inefficiencies. l Need for more dissemination and adoption of rural, agricultural, micro finance methodologies. 3. InItIatIveS and InnovatIonS In mICRo FInanCe oF Some CountRIeS: In evolving a comprehensive strategy for deepening and widening services to the rural poor, many countries in the world have taken initiatives by innovating and experimenting new methods to reach the unreached.
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The Bangladesh Grameen Bank model in Bangladesh has received world attention. Similarly the experience of BRI unit in Indonesia and micro finance experience of Philippines are quite well-known. 3.1 Grameen Bank Bangladesh: The Grameen Bank (GB) was launched as a project in a village of Bangladesh in 1 to assist the poor families by providing credit to help them overcome poverty. In 1983, it was transformed into a formal bank under a special law passed for its creation. It is owned by the poor borrowers of the bank who are mostly women. GB has reversed conventional banking practice by obviating the need for collateral. It has created a banking system based on mutual trust, accountability, participation and creativity. GB provides credit to the poorest of the poor in rural Bangladesh, without any collateral. As GB was initiated as a challenge to the conventional banking, it rejected the basic methodology of the conventional banking and created its own methodology. The most distinctive feature of Grameen credit is that it is not based on any collateral, or legally enforceable contracts. It is based on trust and not on legal procedures and system. It offers credit for creating self-employment, income-generating activities and housing for the poor, as opposed to consumption. It provides service at the doorstep of the poor based on the principle that the people should not go to the bank, bank should go to the people. In order to obtain loans, a borrower must join a group of borrowers. Although each borrower must belong to a five-member group, the group is not required to give any guarantee for a loan to its member. The repayment responsibility solely rests on the individual borrower, while the group and the centre/branch oversee that everyone behaves in a responsible way and none gets into repayment problem. There is no form of joint liability, i.e., group members are not responsible to pay on behalf of a defaulting member. Loans can be received in a continuous sequence. New loan becomes available to a borrower if her previous loan is repaid. All loans are to be paid back in installments (weekly or bi-weekly). The GB initially focused on providing credit facilities and paid little attention to voluntary deposit mobilization. This policy was changed in 2000 with increased emphasis on deposit mobilization. GB currently offers four kinds of savings, namely personal savings account, special savings account, Grameen Pension Savings and credit-life insurance savings fund. After operating group lending for 25 years, the GB switched to individual lending recognising that with repeated loan cycles and greater credit exposure, homogeneity of the group would weaken as loan requirements vary with variation in the levels of upliftment attained. Thus, the more flexible Grameen II is more appropriate for reaching the poor because its products can be conveniently used for everyday money management as well as for micro-enterprises. GB II dispensed with the general loans, seasonal loans, family loans, and more than a dozen other types of loans. It also gave up the
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group fund; the branch-wise and zone-wise loan ceiling; fixed size weekly installment; the rule to borrow for one whole year, even when the borrower needed the loan only for three months. The Government of Bangladesh has fixed interest rate for government-run microcredit programmes at 11 per cent at flat rate, which amounts to about 22 per cent on a declining basis. The interest rate charged by the Grameen Bank is lower than that fixed by the Government of Bangladesh. There are four interest rates for loans from Grameen Bank: 20 per cent (declining basis) for income generating loans, 8 per cent for housing loans, per cent for student loans, and 0 per cent (interest-free) loans for struggling members (beggars). All interests are simple interest, calculated on declining balance method. This implies an annual interest rate of 10 per cent for income-generating loan which is less than that (11 per cent) fixed by the Government of Bangladesh. GB offers attractive rates for deposits ranging from 8.5 per cent to 12 per cent. As of March, 2008, it had 7.46 million borrowers, 97 per cent of whom were women. With 2,504 branches, GB provides services in 81,574 villages, hence covering more than 97 per cent of the total villages in Bangladesh.
Source: Website of Grameen Bank; www.grameeninfo.org.
a comparison of features of ShG linkage programme in India & Grameen Bank Bangladesh Scheme SHG-bank Linkage Programme India 1. Group independent of the bank. 2. Group normally consists of about 15 members. 3. Group is jointly liable to repay the loans. 4. Members of group or group leader have to sign an agreement for taking loan from bank. 5. There is normally an additional layer of NGOs or MFIs between the bank and the SHG. 6. Both men and women are covered. 7. No interest rate ceiling. Grameen Bank (GB) Bangladesh Members of the group are also owners of the bank. Group normally 5 members. consists of
Liability to repay loan lies with the individual, though he/she has to be a member of a group to take loan. No agreement or document is required; loan is given on the basis of trust. GB directly lends to members.
Major focus is on women borrowers. Government of Bangladesh stipulated a ceiling of 11 per cent.
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3.2 Banking Correspondents in Brazil: Brazil shares several similarities with India, the main being the huge geographical area. However unlike India, Brazil does not have significant rural branch network. Out of its 188 million population 80 per cent of whom live in urban areas. A large number of people were out from banking services as they were too poor or had no time away from work or too timid to even set foot in a bank. They had nowhere to deposit their money, no access to credit, except from family, friends or loan sharks and no change of building accredit history needed to apply for a loan. In 1997 banks and regulators responded to the situation by creating a network of Correspondent branches or banking correspondents small outlets with scattered working hours that offered basic banking services. At that time there were 0 million out of 8 million economically active Brazilians and no access to formal financial services. Today an additional 4 million have using banks for the first time through 27000 banking correspondents. Under these arrangements banks are permitted to appoint a wide variety of institutions/entities as correspondent/Agents which are causing accessible to people e.g. stores, petrol pumps, super market, small stores, post office and even lottery shops. The Brazilian model is technology driven and uses kiosks, automated teller machines by such agents to accept payments, open account without cheque book facility to take small deposits, provide micro credit, savings, savings bonds and insurance. Another initiative in Brazil has been the use of post office network and post office staff to deliver banking services through Banco Postal. 3.3 aCCIons Service Company model of latin america: ACCION International, a micro finance resource institution based in the USA and working in American continents has promoted the service model to expand micro finance operations. The micro finance service company is a non-financial company that provides loans origination and credit administration services to a bank by way of sponsoring, evaluating, appraising, lending and collecting loans for a fee. The loans themselves off the books of bank. The service company can be wholly owned subsidiary of the Bank and may involve additional investor. 3.4 South africa: South Africa has a population of 44.8 million. The formal banking system characterized by absence of public sector / government controlled institutions and dominance of five big private sector banks. In term of financial inclusion the country has been able to significantly accelerate the process as a result of institutional innovations. There are a variety of institutions in South
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Africa that caters to a multiplicity services needs of the people and support financial system. In South Africa, Taba Bank which was providing financial services to the mining industry since 1 started targeting low income households in small towns and rural areas having limited banking facilities since 2000. The bank engages agents who are given hand held mobile point of sale (POS) services. This wireless device has a built-in GSM modem, card reader and micro pointer. The customer can use their debit card at the terminal to deposit and withdraw cash make enquiry and transfer funds. 3.5 Indonesia: In Indonesia there are several types of MFIs like commercial banks including Bank Rayat Indonesia (BRI) owned by the government with a large Unit Desa network operating at sub-district level privately owned rural Bank Perkedition Rakyat (BPRs) credit co-operatives etc. After the financial reforms 1983, BRI transformed its unit Desa network from loss making agents to commercial microfinance intermediaries. 3.6. housing and Financial Inclusion u.k. & uSa: In developed countries, mortgage lending to people living in deprived parts of the country has been recognized as a key instrument of financial inclusion and is considered to act as a catalyst for economic and social development. Expansion of mortgage finance to low income groups by mortgage companies, non-bank finance companies and banks seems to have helped in bringing a large part of the financially excluded population under the fold of the formal financial system in the developed countries. Housing associations in developed countries have taken a lead in combating financial exclusion amongst their tenants and residents and also supporting community financial institutions such as credit institutions through partnership and investment. Housing finance is generally availed to invest in new houses or home improvements. There is also great diversity in the sources of mortgage funding, including retail deposits, mortgage backed securities and covered bonds. In some countries such as the UK, alongside the competitive mainstream mortgage lending, there is access to mortgage credit for buyers with low housing equity, or uncertain incomes (HM Treasury, 2007). First time housing buyers in particular, face difficulties in getting housing finance. In order to provide affordable housing in the UK and Scotland, mortgage lenders are working on the Governments Open Market Home Buy Scheme, a shared equity scheme designed to finance first time buyers, workers and social tenants. Furthermore, customers who are shared owners also get access
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to the other financial products and services offered by the financial entity. Under this scheme both the Government and the lenders take responsibility for sharing equity in properties to allow people to enter the housing market. There have also been innovations in the methods of delivery and outreach work employed, for example, by entering into partnerships with local housing associations. In the UK, the Government target is to deliver more than 70,000 new affordable homes a year by 2010-11. In order to provide credit facility to tenants who otherwise cannot obtain loans from the main financial institutions, the Royal Bank of Scotland has reached an agreement with the Grampian Housing Association to devise a new savings and loans scheme. In the United States, the federal government introduced the Community Reinvestment Act in 1997, under which federal bank regulatory agencies rate banks on their efforts and effectiveness at serving low-income communities. The main criterion is mortgage loans but regulators also consider the extent to which banks make retail banking services available to low and moderate income communities. The sub-prime mortgage or refinance loans are also recognised to have led to spread of credit among the Black and Hispanic communities, who generally lack easy access to credit. The LowIncome Housing Tax Credit (LIHTC) programme has also helped finance developments with units set aside for low or moderate income households. The intent of the programme was to provide enough incentives to ensure an adequate supply of low-income housing by granting tax credits to the owners of selected rental housing developed for occupancy by low or moderate income households. Although the subsidy is provided entirely through the federal tax code, it is administered through state government agencies, generally the state housing finance agency. The LIHTC programme has emerged as a primary mechanism for encouraging the production of housing to be occupied by low or moderate income households (Wallace 1995). In the context of developed countries, it is argued that access to mortgage finance could be enhanced if lenders restructured and optimized the structure and processes associated with the existing mortgage products to align more closely with the needs and characteristics of the target market. Measures such as improved loan servicing processes, redefined borrower, property or area criteria, loan level product features such as insurance or collateral requirements, as well as portfolio interventions such as guarantees are all mechanisms that could be considered. However, it is also contended that there is a limit to the extent that mortgage products can facilitate access to housing finance across the target market. The nature of the housing needs and the financial and risk profile of households in the target market underlines the need for diversified housing finance products.
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References: 1. Bank of Scotland, 2007. Delivering our Financial Inclusion Agenda in Scotland, March, 2. H.M. Treasury, 2007. Financial Inclusion: the Way Forward, HM Treasury, UK, March, 3. Kempson, E. 2006. Policy Level Response to Financial Exclusion in Developed Economies: Lessons for Developing Countries, Paper for Access to Finance: Building Inclusive Financial Systems, World Bank, Washington, May, 4.Wallace, James E., 1995. Financing Affordable Housing in the United States, Housing Policy Debate 6(4). 3.7 technology and Financial Inclusion: In the Philippines, two cell phone companies Smart and Globe Telecoms offer innovative cell phone based facilities, also called electronic wallet, to transfer money, pay bills, and make payments for purchases from stores, among other things, called Smart Money and G-Cash, respectively. In February 2005, the Rural Bankers Association of the Philippines Microenterprise Access to Banking Services (RBAP-MABS) launched a project called Text-A-Payment (TAP). TAP is an innovative mobile technology product that uses the SMS technology of Globe Telecom (powered by G-Cash) to pay for micro finance loan payments of borrowers. TAP seeks to bring in new and low cost technology tools to improve efficiency and outreach. Small borrowers can utilize the service for payments of their micro-finance loans. The other applications of TAP are remote deposit taking, cash withdrawal, international and domestic remittances, purchases and bills payment. In South africa, banking institutions, together with mobile phone companies, have begun to expand access to financial services targeting low-income customers with an interest-bearing bank account accessible through mobile phones, and debit card with which they can make purchases at retail outlets and deposit or withdraw money at ATMs. Customers can use their mobile phones to make person-to-person payments and transfer money. Prodem, the first micro-finance organisation to create a chartered bank, BancoSol, in Bolivia started Prodem Smart ATM, a smart card cum ATM recently. The smart card stores customers account balance every time the transaction is made using the card. This enables Prodem Smart ATM to operate even in the absence of internet connectivity, thereby, making it an ideal instrument to extend financial services in many rural parts of Bolivia that lack the technological infrastructure for a wide-reaching, online network.
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Reference: Asian Development Bank, 2007. Low Income Households. Access to Financial Services International Experience, Measures for Improvement and the Future. EARD Special Studies. 4. PRoduCt InnovatIonS FoR mICRo SavInGS: Recent international experience indicates that micro savings are as important as micro credit. The following are some micro savings product introduced in different countries. 4.1 Pigmy deposit Scheme India: The earliest micro finance innovation is Pigmy deposit Scheme introduced by the Syndicate Bank in 1928. Through its agents, the bank used to collect as low as 2 annas daily at the door steps of the depositors and provided small value credit to the needy persons. The pigmy agents are practically the financial intermediaries between banks and the rural poor. There are at present over 1 Pigmy agents of the bank collect small deposits from over 10.94 lac depositors daily and also help in recovery of small nonperforming loans. The Bank has provided Hand Held Machines to Pigmy Agents which facilitate issue of receipt of cash to depositors on the spot and housekeeping of the accounts under the scheme in the bank. The Bank is planning to utilize the Pigmy Agents as Point of Sale for disbursement or collection of small amount of cash to the Smart Card/ Debit Card holders in their area of operation which will enhance the availability of banking services to the customers located at the remote areas at the time of their convenience. 4.2 Contractual Savings Agreement by BURO Tangail, Bangladesh: BURO Tangail, an MFI operating in Tangail district of Bangladesh undertaking micro credit since 1989, has introduced unique savings product called "Contractual Saving Agreement". Under this, clients open deposit accounts and are required to make weekly deposits for an agreed tenure. The effective rate of interest on this deposit is higher than the usual saving deposit products. Failure to regularly deposit Installments attracts stiff penalty and failure to pay three deposits during the tenure of the scheme results in transfer of the deposit to a general savings account earning less interest. Almost 50% of the saving portfolio of the BURO Tangail today is under the Contractual Saving Agreement. The clients using this product are reported to be saving up in order to buy small parcels of land or to add/ renovate housing.
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4.3 Jijenge Savings account in kenya: Equity Building Society in Kenya has developed the Jijenge Savings Account, a contractual savings product with an emergency loan facility. The client defines the length of the contract and the periodicity of the deposits, which could be weekly or monthly. A premium interest rate is offered to those who take out longer term contracts and there are significant penalties for premature withdrawals. All Jijenge savings account holders have guaranteed immediate access to an emergency loan of 0 per cent of the amount in their Jijenge savings account. As well as providing a disciplined way to save, this product allows clients to meet their "illiquidity" preference and protects their savings against the demands of petty spending or "marauding relatives". The account is already proving extremely popular with existing and new clients. 4.4 micro Payments using text messaging: In Kenya, Commercial Bank of Africa in conjunction with local mobile operator Safaricom is enabling mobile subscribers to make micro payments from mobile phones. The majority of the people in Kenya do not hold bank accounts but purchase prepaid mobile refill cards. The technology allows settlement of bills by building up credit balance on the mobile phone and sending text message to make payments. 4.5 thailand the School-based banking scheme: The school-based bank is a model bank operated by students, with their teachers and the staff of The Government Savings Bank (GSB) of Thailand playing an advisory role. Students who behave well and have a sense of responsibility and thoughtfulness are selected to serve as the manager, finance officer, counter-service officer, and teller. Deposit and withdrawal services are provided before the morning class or during the lunch hour. The GSB branch that plays an advisory role performs audits and collects savings after the banking hours of the school-based bank. Support from GSB for the school-based bank includes training on banking operations and the provision of equipment. Pass books and printed forms are specially designed for the purpose. GSB also provides the students who participate in the scheme with scholarships, educational material, and it organises study tours for them (WSBI, 2004, p. 17).
Chapter x Importance of Co-operatives & RRBs

a Co-oPeRatIveS hIStoRICal BaCkGRound: The Co-operative movement gathered momentum in 19th century as it spread to the deep interiors of rural places where 75% of Indian population lived, The Government also passed a separate Act governing co-operative credit with simple business procedure in 10, liberating societies from provision of Company Act 1813. With passage of time co-operative societies of different character appeared and various central unions and central banks came up to finance and control primary co-operative societies. Recognizing this fact, in 1912 an Act was passed making provisions for these kinds of societies viz., Unions among co-operative societies, central co-operative banks and provincial co-operative banks. The co-operative agencies acted as credit providers to cultivators, rural artisans and persons of smaller means. Although there were 1.08 lakh co-operative societies well spread in the villages, they lacked financial strength and operating capacity. Many of them had low membership and were incurring losses. Majority co-operative societies were located in Maharashtra and Madras (Tamil Nadu) states. Agriculture, despite being an important sector of the economy, received very little credit from commercial banks. Committee of Directors of All India Rural Credit Survey made an attempt to give a new direction to co-operative credit movement and co-ordinate its growth with planned effort for the development of rural sector. Its recommendations aimed at i) Reorganization and strengthening of primary co-operative societies. ii) Introduction of production oriented crop loan system instead of usual security oriented one.
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Reorganization and strengthening of the State and Central Cooperative banks through share capital participation by the Government and liberal credit facility from RBI so that in turn they would be in a position to extend appropriate support to primary institutions for providing credit to agriculturists. Integration of co-operative credit with co-operative marketing & procuring activities and to provide suitable training arrangements for personnel of co-operative credit institutions.
iv)
The above recommendations had become part of Second Five-Year Plan and were implemented vigorously by RBI and State Governments. The progress of co-operative banks 11 - 1 is summarised below: table 14 Year No. of Co-op. Banks No. of Branches Deposits (Rs. in crore) Advances (Rs. in crore) 1951 415 837 99.90 73.40 1956 578 1229 184.40 134.40 1961 427 1564 184.40 386.70 1965 412 2375 330.06 678.90
2. Co-oPeRatIve BankInG StRuCtuRe: Co-operative banking structure in the country is broadly divided into urban co-operative banks and rural co-operative credit institutions. The rural cooperative system is divided into long term and short term credit institutions. The short term co-operative system comprises state Co-operative Banks, Central Co-operative Banks and primary agricultural Societies not banks but only societies. The regulation and supervision of co-operative banks has multiple controls. While urban co-operative banks are under supervisory control of Reserve Bank of India, rural co-operative banks are regulated by the NABARD. Supervisory control of State co-operative banks/societies by State governments is in matters relating to registration, membership and allocation of financial assistance, lending powers, business operations loan recovery and audit. There is no clear demarcation of regulatory powers, which at times has resulted in cross directives from different controlling agencies, thereby undermining the working of the co-operatives. 3. ImPoRtanCe oF Co-oPeRatIve SeCtoR FoR FInanCIal InCluSIon: Co-operative sectors has high relevance for financial inclusion of lower income people especially the Short Term Rural Credit Structure (STRCS) which is providing short term credit besides financial services. The three tier STRCS consist according to statistics of the National Federation of State
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Co-operative Banks (NAFSCOB) of nearly 1.09 lakhs Primary Agricultural Credit Societies (PACS) 368 District Central Co-operative Banks (DCCB) with 12858 branches and 30 State Co-operative Banks (SCBs) with 935 branches or a total 1,22,590 service outlets. On an average there is one PACS for every 6 villages. These societies have total membership of more than 127 million rural people making it one of the largest rural financial systems in the world. Primary Agriculture Credit (PAC) Societies, the credit institutions at the grass root level directly deal with individual members/clients. A large proportion of PACs also same as outlets for inputs and for public distribution system for essential items. ed 35%. The position of PACs from 1994-2007 is given in the following table. table 15: Position of Primary agriculture Credit Societies
[End-March]
Particulars 1. No. of PACS (thousand) 2. Members (Million) 3. Borrowers (Million) 4. Owned Funds (Rs. Crore) 5. Deposits (Rs. Crore) 6. Borrowings (Rs. Crore) 7. Total Resources (4+5+6) 8. Loans Outstanding (Rs.Crore) 1994 91.6 89.0 60.5 2,694 2,102 9,117 13,913 10,534 1995 91.1 90.6 38.0 3,412 2,962 10,176 16,550 12,141 2000 101.5 108.6 43.0 5,338 12,459 22,350 40,147 28,546 2002 98.2 102.1 55.5 6,855 14,846 29,475 51,176 40,779 2003 112.3 123.6 63.9 8,198 19,120 30,278 57,596 42,411 2004 105.7 135.4 51.3 8,397 18,143 34,257 60,797 43,873 2005 108.8 127.4 45.1 9,197 18,976 40,249 68,422 48,785 2006 106.4 125.2 46.1 9,292 19,561 41,018 69,871 51,779 2007 97.2 125.8 47.9 11,039 23,484 43,714 78,237 58,620
Source: Performance of Primary Agricultural Credit Societies (various issues); NAFSCOB
As per data available with NAFSCOB Small/Marginal farmers constitute 70 per cent of total membership of PAC at national level. The average membership at All India is 1171 persons. Southern Region has higher at 2986 and borrowing membership is 414 persons. Co-operative Credit institution is significant not merely in absolute numbers but also in terms of out lets. The number of PAC located in hilly terrains, deserts and other areas with poor access. Similarly the number of agricultural accounts the credit co-operative have 50% more accounts than scheduled commercial banks (including RRBs) and of this 70% estimated to be marginal and sub marginal farmers. AT the end of March 2008 there were 94942 PACs with 132 million membership and million plus borrower memberships with resources of Rs.84281 crore (owned funds Rs.10984, Deposits Rs.25449 and Borrowings 47848 crore).They would be ideal instruments for promoting financial inclusion through SHGs.
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As financial inclusion envisages delivery of financial services at an affordable cost, the STCCs being accessible at the door steps of the financially excluded sections of the society will be in a better position to render these services more effectively and comply with KYC norms will not be a major hindrance as they have better knowledge of their existing and potential clients. 4. hoW Co-oPeRatIveS Can helP FoR FInanCIal InCluSIon: i) The Co-operatives are a good forum for enabling Financial Inclusion through SHGs. ii) There are large number of PACs which are defunct but can originate credit proposals, disburse loans, collect repayments and even collect savings as Business Correspondents/Business Facilitators. iii) Co-operatives can adopt group approach for financially excluded group. B ReGIonal RuRal BankS
BaCkGRound:
The entry of commercial banks in to the field of Agricultural Finance after nationalization of banks mainly took care of big farmers, mobilised rural savings and invested them in urban/metropolitan centres. The small farmers (having land holding of less than acres), marginal farmers (having land holding of less than 2.5 acres) who constituted nearly 62% of land holdings, did not receive due attention. Similarly, rural artisans did not get adequate credit from commercial banks. As commercial banks were not able to make a dent in rural lending because of lack of expertise and the high cost of operations, Government of India set up Working Group under the Chairmanship of Sri M. Narasimham, to examine the issue. The Working Group recommended establishment of Regional Rural Banks (RRBs) to provide credit and other banking facilities especially to small and marginal farmers, agricultural labourers, artisans and small entrepreneurs in rural areas. The recommendation of the Working Group was accepted and ordinance was issued on 26th September, 1975 to establish Regional Rural Banks (RRBs). RRBs were created under Regional Rural Bank Act 1976. RRBs had authorized capital of Rs.1 crore and paid up capital of Rs.25 lakhs subscribed by Central Government (50%), State Government (15%) and sponsor bank i.e. lead bank (35%). The lead districts where co-operative banks were weak and commercial banks operations were low, were selected for establishment of RRBs to supplement efforts of existing lending institutions to extend credit to
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small/ marginal farmers, agricultural labourers, rural artisans and small borrowers to improve their economic level. Each sponsor bank was given the responsibility of establishing RRB with jurisdiction of 1 to 3 contiguous districts and also to provide managerial and administrative assistance for its smooth running till it recruits and develops its personnel and organisation. RRBs are scheduled banks with separate Boards of Directors nominated by Central Government, State Government and sponsor banks. The first Regional Rural Bank was set up by Syndicate Bank on 2nd October, 1975 in the name of Prathama Bank in Moradabad District, U.P. Establishment of RRBs gave further impetus for opening of bank branches in unbanked rural centres and extending credit to small/marginal farmers and other weaker sections. Over 92% of their advances were to these categories. 2. amalGamatIon oF RRBS: In the wake of introduction of banking sector reforms in 1991-92 the commercial viability of RRBs emerged as the most crucial factor in deciding about their desired role to provide agriculture and rural credit to the target group. The financial health of RRBs turned weak mainly due to its limited business flexibility with hardly any scope of expansion/diversification, small size of loans with higher exposure to risk prone advances. To strengthen RRB Government of India has been infusing capital through budgetory allocation from 1994-95. To improve their performance the RBI allowed RRBs to lend non target groups, deregulated their deposits and lending rates and permitted investment of their surplus funds in profitable avenues. RRBs were also permitted to setup off site ATMs, issue debit credit card and also to handle pension and Cash business as sub agents of banks and conduct certain types of Foreign exchange transactions. In order to improve the operational viability of RRBs and to take advantage of the economies of scale the route sponsor bank wise amalgamation of RRBs at state level was initiated in Sept. 2005.As a result of the restructuring of RRBs initiated 196 RRBs were reduced to 84 (46 amalgamated RRBs and 38 stand alone RRBs.The total deposits of all RRBs at the end of March 2009 stood at Rs. 1.18 lakh crore. The outstanding advances were Rs. 69030 crore with credit deposit ratio of 58.5 per cent. The share of advances to priority sector was 83.3 per cent. As on June 30, 2009 there were 86 RRBs with 15144 branches spread over 593 districts in 26 states and 1 Union Territory. Total deposits and advances of RRBs were Rs. 1.16 lakhs crore and Rs. 67079 crore respectively (March 2009).
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3. PoWeRFul InStRument FoR FInanCIal InCluSIon: Regional Rural Banks can act as a powerful instrument for financial inclusion. Their outreach vis--vis other commercial banks particularly in the regions and across the population groups facing burnt of the financial exclusions is impressive which can be observed from the following paragraphs. RRBs coupled with local feel and familiarity of the command area are in a unique position to play decisive role in financial inclusion. Rural Bank network: In rural areas RRBs account for nearly 20% of total offices of all commercial banks and 95% of these banks are in rural and semi-urban areas. man Power: 91 per cent of total workforce in RRBs is posted in rural and semi-urban areas compared to 38 per cent of other scheduled commercial banks. Although RRBs share 25 per cent of workforce in rural and semi urban areas (All India level), manpower of RRBs constitute 7 per cent of the total manpower of scheduled commercial banks. mobilization of deposits: At all India level RRBs account 12 per cent of all deposit accounts and meager 3.5 per cent of deposit amounts of scheduled commercial banks. However in rural areas RRBs share in deposit accounts is a significant 31 per cent and 19 per cent in deposit amounts. This shows that average deposit amount is lower in RRBs than commercial banks. Credit disbursed: All India level RRBs account for 18 per cent of loan accounts of all commercial banks and 3 per cent in loans outstanding. In rural areas share of RRBs in loan accounts is 38 per cent and 21 per cent in total credit outstanding in rural areas, implying thereby they better reach to small borrowers. This significant from the point of future role of RRBs in Financial Inclusion as rural branches are closer and more active in extending outreach to remote and interior villages. The RRBs had at the end of March 2008 74 million of deposit accounts and 16.17 million borrower accounts of which 15.7 million were of small borrowers. FlCCs Banks have set up Financial Literacy and Credit Counselling Centers (FLCC) on pilot basis. To begin with lead banks have taken initiative of setting up FLCC at district headquarter. Keeping in view the importance of RRBs, GOI has taken a decision to cover all the districts of the country by RRBs. It has also asked the sponsor banks to draw action plan to cover all branches of RRBs under Centralized Banking Solution (CBS) by March 2011 to take advantage of technology to reach the unreached in remote areas.
Chapter xI Pilot Projects/Case Studies India

100 PeR Cent 1St StaGe FInanCIal InCluSIon In kaRnataka: In Karnataka, with the encouragement from the Reserve Bank of India, Bangalore and the lead bank Syndicate Bank, the SLBC Convener, the banks successfully launched and completed the First Phase of Financial Inclusion viz. provision of no frills accounts to every household in all the 29 districts. Subsequently, SLBC took decision to implement Smart Card project on pilot basis in 3 districts viz., Bellary, Chitradurga and Gulbarga for payment of wages under NREGP and Social Security Pensions. Accordingly, the concerned lead banks of the districts entered into an MOU with Govt. of Karnataka for implementation of the project. The Bellary district is the pilot of the pilots. Syndicate Bank, being lead bank of Bellary district, prepared a detailed project report and operational guidelines for implementation of the project under the brand name of Syndshakthi for empowerment of rural mass. What is Syndshakthi? It is an ICT solution of Syndicate Bank, wherein, each customer is given a Smart Card-a biometric enabled multi-function card. The Solution provides services that have the following attributes: l Banking services such as deposits, withdrawals and funds transfer to begin with. l Each customer would be identified uniquely by fingerprints. Biometric authentication using fingerprints proved to be more secure than through Personal Identification Numbers (PIN). As most customers are illiterate, they would not be able to use PINs to authenticate themselves.
l
Both online and offline transactions would be possible.
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l l l
Balance enquiry and mini-statement showing last ten transactions at all terminals. Cash dispensation at the village through the Business Correspondent. Reliable, timely and accurate MIS, transaction history to banks/ Government, at specified intervals.
An authorized person from a bank i.e. Business Correspondent, carries the terminal (Hand Held Machine) to a user for providing banking services in villages. The user desirous of a banking transaction identifies him/her by keeping the contact less smart (RFID) card in the slot meant for the purpose. The transaction terminal upon identifying the registered user authenticates him/her and connects to the banking system. It then guides the user to transact and finally confirms the transaction by voice in regional language updating the bank record and issuing a printed slip to the user and disconnecting itself from the banking system. Scope of product To begin with, payments by the Government on account of all the Social Security Pensions and NREGP would be routed through smart cards in the selected districts. Thereafter, the Govt. may plan for routing of all their Government sponsored schemes, PDS and Fertilizer distribution also in a phased manner, if they deem it necessary. The smart cards can also be used for: a) Providing Govt. benefits/subsidy/services to the customer b) Getting required information of the customer and his family c) Making utility payments d) Micro- credit/micro- insurance facilities e) Access to banking facilities in unconnected areas f) Serving SHGs at their door steps. 2. PRoJeCt In PondICheRRy: Indian bank was the first bank to implement financial inclusion project on pilot basis in Union territory of Pondicherry in 2006, where it had lead bank responsibility and was convener of state level bankers committee. It implemented the project with the cooperation of all the banks operating in UT of Pondicherry involving all the banks allotting the villages & urban wards among various bank branches operating in the UT. Its initiative set the ball rolling by implementing the concept of financial inclusion in Mangalam village of UT of Pondicherry. The bank covered entire 744 households in the village and 1661 SB accounts were opened after taking care of requirement of KYC norms. Besides opening No frills / Zero balance SB accounts, small overdrafts and credit cards were issued to 1661 persons.
11
3. CaSe Study oF andhRa PRadeSh: The Rural Development Department of Government of Andhra Pradesh launched a pilot project in six Mandals of Warangal District for payment of Social Security Pensions (SSP) and National Rural Employment Guarantee Scheme (NREGS) benefits to the beneficiaries. The pilot programme involved six banks viz., State Bank of India, Union Bank of India, State Bank of Hyderabad, Andhra Bank, A.P.Grameena Vikas Bank and Axis Bank. The benefits are paid to the villagers by the business correspondents of banks at the habitation level in the villages. The Rural Development Department, Government of Andhra Pradesh, played a very active role in the project and has financed a major portion of the cost of the cards and the devices. The project was coordinated by the Reserve Bank with the Regional Director, Hyderabad being the Convener of the Steering Group for the project. The Institute for Development and Research in Banking Technology (IDRBT) was given the role of providing the management information systems (MIS) to the Government in the required format. In the second phase, the project will be scaled up to 50,000 villagers. The State proposes to scale up the efforts to the entire State in due course. The Andhra Pradesh Government also proposes to issue smart cards to all the SHG members in the State. The project involves payment of SSP and NREGS benefits through BCs with the use of smart card and mobile technology. The BC uses a fingerprint scanner cum identifier, a mobile and a printer to process the payments. The beneficiaries hold smart cards with their photographs and images of their fingerprints pre-loaded at the time of their enrolment. The photograph and fingerprint are used for identification and authentication of the beneficiary. Once authenticated, the radio frequency identification device (RFID) chip embedded in the card gets charged. When the card with charged chip is brought close to the mobile phone, message templates for deposit, withdrawal and balance enquiry are generated in the mobile. The BC needs to select the relevant option and feed the amount of transaction through the mobile keypads and send the message to the back-end server. The server authenticates the message, processes the transaction and sends an update back to the mobile, which, in turn, writes back to the card. When the card is brought close to the printer, transaction report is printed in triplicate. The BC carries cash physically for making payments to the beneficiary. Thus, in effect, each BC carries a pocket ATM to the village in which it operates. The technology holds potential for whole range of activities that banks can conduct through BCs and this includes other products like fixed deposits, various loans, and insurance, among others. The mobiles connect to a central data base server of the banks. The application has an off-line model also, which enables its operation in remote areas where there is
120
no connectivity. Presently, the SSP and NREGS benefits are being paid through post offices which are given a commission of 2 per cent. The State Government, for the initial pilot covering six mandals, agreed to pay Rs.90 per smart card, Rs.10,000 per hand held device and 2 per cent commission on transactions. The Government agreed to meet a part of the infrastructure costs to kick start the project. For the scaled up project, it is expected that the 2 per cent commission on turnover will be maintained and banks will fund the infrastructure. However, the model may have to be different in States with lesser turnover, as fixed cost per village is almost the same. The banks pay Rs.1,000 to the village organisation member in the village who is the representative of the BC of the bank. The cost of cards is a one-time exercise and enrolment of beneficiaries also involves an expense of Rs.50 per person in addition to the card cost. The advantages to the bank are that the cost of transactions is reduced and there is scope for other services like crop loans, access to cheap savings in villages and micro-insurance, among others. The State Government can make all its payments through this mechanism. This would include salaries, pensions and contractor payments. The model ensures cost savings in the payment delivery mechanism and payments can be made centrally from the district or the State headquarters. An added benefit is that several bogus beneficiaries have been weeded out because of bio-metric identification and the State Government is expecting to save substantial amount on that account. 4. BRanChleSS BankInG thRouGh BuSIneSS CoRReSPondentS: Corporation Bank has taken up an outreach programme through the use of technology in order to provide very simple and basic financial services to the poor and the disadvantaged in the rural areas. To accomplish the task, the bank conducted a survey in the identified villages to gather information regarding the structure and size of village, family/household details such as occupation, asset ownership and the use of financial services. The automation of the survey facilitated generation of Corp Pragathi Savings Bank (CPSB) Account opening forms along with the photograph of the user at the site for the family members who expressed their desire to open an account with the bank. The survey, inter alia, indicated that the villagers were generally reluctant to approach the bank as the branches were far off from their residence or workplace and hence they needed to spend money on commuting and time to carry out normal banking activities. Further, being semi-literate or illiterate, they found the procedures difficult to comprehend and follow.
121
They were also not sure of the treatment that would be meted out to them when they approached the bank for remitting or withdrawing small sums of money. To mitigate these hardships faced by the villagers, the Corporation Bank adopted a branchless banking model in August 2007. After evaluation of different technologies ranging from palm-tops, simputers, hand held storage devices and diverse communication channels, the bank opted for a branchless banking model based on business correspondents (BCs) and use of a small hand held device. This model is more or less similar to that followed in pilot project in Andhra Pradesh. The branchless banking model has enabled the bank to reach out to the villagers by offering them savings and loan products at their doorsteps. The information collected through survey has enabled to meet the KYC requirements also. The benefits of the model to the customers include saving of their time and cost of travel to the branch, comfort in dealing with BC as he is a familiar face, and convenience of transacting business practically at any time of the day. The advantage for the BC is that it is an alternative source of income. The benefits for the bank are that they are able to reach out to the hitherto unreached segments and mop up rural savings at lower transaction costs. Reference
Kamath, Raghav. 2007. Branchless Banking: Corp Banks Answer for Financial Inclusion; CAB Calling July- September; Vol. 31, No. 3.
5. uRBan FInanCIal InCluSIon dhaRavI (mumBaI) model IndIan BankS: There is generally a feeling that financial exclusion is a problem only in rural areas. However, in reality, a large number of people in urban centres also do not have easy access to banking facilities and financial exclusion is very common even in urban areas, particularly in the case of informal sector workers who do not have regular jobs. Moreover, many migrants who do not have bank accounts and knowledge of banking facilities send money to their family members through informal sources such as friends, relatives or carry cash whenever they visit their native place. The situation is not too different in Dharavi, Asias largest slum, in the countrys commercial capital, Mumbai. Dharavi is inhabited by about 300,000 to 350,000 workers many of whom do not have bank accounts. After the KYC norms were rationalised to enable opening of no frills accounts, Indian Bank opened a core banking branch and ATM facility in Dharavi in February 2007. The bank introduced smart card based banking
122
which has enabled doorstep banking transactions for the slum dwellers. The facility has enabled the workers to save and migrants are able to utilise the services of easy and reliable remittance of money to their family members at their places of origin. Life and health insurance products are also offered to the residents. Thus, some financially excluded people in urban areas have been provided banking access. Indian Bank has now also extended the Dharavi model to Guntur town of Andhra Pradesh and Tharamani, Chennai where the urban poor did not have bank accounts. References
1. Rajan, M.S.S. 2007. Replication of Financial Inclusion: Opportunities and Challenges Indian Bank Experience; CAB Calling July-September, Vol.31, No.3. 2. Indian Bank Website, www.indianbank.in
Financial inclusion drive for hawkers in mumbai by unIon Bank of India Hawkers find it difficult to visit bank branches during regular work hours for fear of loss of business. But they have intentions to save. To provide banking services at their doorstep, Union Bank of India has given smart cards to hawkers and opened no-frill account for them with the help of Hawkers Association of Mumbai and its partnership with FINO Fintech foundation. The Business Correspondents appointed by the bankers go to these hawkers with the point of transaction (POT) terminals. By swiping the card on these handheld devices hawkers can deposit their savings or withdraw money. The data from the cards get stored and transferred to the bank terminals. It proposes to cover one lakh hawkers and also provide insurance cover to them through a group policy from the Life Insurance Corporation of India. The use of IT solutions for providing banking facilities at door step at affordable cost with low entry levels operated by local persons are attempted by banks through Business Correspondents as their pilot projects. 6. CaSe StudIeS oF mICRo-FInanCe model PRathama Bank: The Swayam Krishi Sangam (SKS) and the Prathama Bank are two good illustrations of successful models of SHGs. While the SKS model represents an SHG formed by a formal agency, other than the banks but directly financed by banks; the Prathama model, on the other hand, is a specimen of those SHGs formed and financed by the banks. The SKS has emerged as one of the catalytic forces behind the spread of micro-finance
123
movement in Andhra Pradesh. The Prathama Bank, being the first Regional Rural Bank, commands a long-standing experience in the field in the state of Uttar Pradesh. The SKS and the Prathama Bank target the rural poor women, with the SKS focussing especially on the drought-prone region. The methodology adopted for group formation under the SKS, inter alia, includes (a) selection of villages based on the levels of poverty, main economic activities and type of land, and (b) conducting project meetings to create awareness. A group is formed with five members and a sangam evolves when eight such groups are constituted. The Prathama Bank, on the other hand, relies on the expertise of the vikas volunteer vahinis (VVV) - a club consisting of volunteers, who command local acceptability and goodwill and act as informal ambassadors of the bank to the villages. Village meets, with the help of VVVs, are organized by the bank to impart awareness among the people. The SKS and Prathama models leverage technology and novelty in the promotion of SHGs. The SKS offers a variety of savings and loan products meant both for consumption and income generating activities and has pioneered smart cards and palm pilots (electronic passbooks). It has developed fully automated and integrated in-house management information systems (MIS), which enable virtual real time access to portfolio, client and staff information in all its branches. It has also developed Microsoft Excel-based financial models for different periodicities to monitor cash management, track financial performance against targets and project operational growth. These new initiatives have proved helpful in lowering the cost of transactions, increasing the productivity, reducing the scope for error and fraud and improvement in the accuracy and timeliness of management information systems. The Prathama Bank has also taken several initiatives such as setting up of an exclusive Women Development Cell, Micro Credit Innovation Cell, launching of Rural Entrepreneurship Development Programme for training SHG members in various crafts, starting of SHG primary school in each village, launching of novel schemes like Prathama Swachata (Sanitation) Yojana and Gas (LPG) Connection Scheme. Within a short span, both have posted an improved outreach and coverage. As at end-June 2003, the outreach and network of SKS has grown to cover 8 branches encompassing 524 village centre, serving 17,058 customers. As at end-fiscal 2003, with an outstanding credit portfolio of Rs.4.9 crore and savings portfolio of Rs.36 lakh, it has achieved the annual targets, maintaining a repayment rate of 99 per cent. Over 85 per cent of its clients
124
are marginalised members of society. The total loans outstanding at about Rs.0.02crore in the year 1999 have grown, within four years to Rs.5.12 crore in 2002-03. In the case of the Prathama Bank, as at end-March 2003, more than 4,500 SHGs encompassing 65,000 members were credit-linked with an amount of Rs.12.6 crore, disbursed for various income generating activities comprising dairy, retail shops, zari work, and other related activities. (In the case of the Prathama Bank, as at the end of March 2009, nearly 9850 SHGs encompassing around one lakh members were credit-linked with an amount of Rs.33.77 crore, disbursed for various income generating activities comprising dairy, retail shops, zari work, and other related activities. The total disbursements made by Prathama Bank since inception of the scheme is Rs.78.98 crore covering 17,456 SHGs) A cost-benefit analysis involving the case studies under review reveal divergent trends, though administrative expenses for administering an outstanding loan of Rs.100 witnessed a decline in both cases in the recent years. While interest earning on an outstanding loan of Rs.100 increased in the case of the SKS, it, however, declined for the Prathama Bank. Furthermore, the gap between income and expenditure widened for SKS, while the Prathama Bank recorded a surplus income continuously over the years. While the SKS depends on foreign donations, the dependence of the Prathama Bank on outside agencies in the form of borrowings has been quite minimal.
Source: Report on trend and progress of banking in India 2002-2003 RBI
Conclusion It is widely recognized in economic literature that there are at least five different types of capital.
l l l l l
Physical (roads, buildings, plant and machinery, infrastructure) Natural (land, water, forests, livestock, weather) Human (nutrition, health, education, skills, competencies) Social (kinship groups, associations, trust, norms, institutions) and Financial.
One of the causes as well as consequences of poverty and backwardness is inadequate access to all these forms of capital. The financial inclusion has to be looked from its entirety and not in an isolated way. Merely pumping a backward region with financial capital is not going to be enough in the absence of improvements on the side of human, social and physical capital. The people in the first place have to be healthy and educated to be productive, so that they can use finance effectively. There has to be a substantial degree of thrust and functioning institutions, in
125
other words social capital, for economic transactions to take place in an atmosphere of confidence. There has to be adequate access to physical capital in terms of roads, bridges, canals, warehouses and market yards, in addition to electric power and telecommunication, for financial capital to be useful. In the absence of all these, merely insisting on financial inclusion will not work. There is direct relation to economic development of the country and financial inclusion. This can be seen from the fact that developed economies in the world have high degree of financial inclusion covering majority of their population against developing and under developed countries which are striving hard for the purpose. Financial inclusion is an ongoing process. It requires concerted and team effort from all the stake holders, the government, financial institutions, Banks, the regulators, the private sector and community at large for accomplishing this mission. References 1. Report of Committee on Financial Inclusion headed by Dr C.Rangrajan, Chairman Economic Advisory Council to Prime Minister (2008). 2. Report of Internal Group on Rural Credit and Micro Finance RBI (July 2005). 3. Report on Financial Inclusion (2009) NABARD. 4. Report on Currency and Finance 2007-08. 5. Building Inclusive Financial Sector for Development. (United Nation - 2006) 6. Policy Level response to Financial Exclusion in developed countries, Paper for Access Finance- Building inclusive financial system World Bank. May 2006. Elaine Kempson. 7. Extract of speech at the Federal Bank on Financial Inclusion, Dec 2 2005 by Shri V.Leeldhar, Dy Governor, RBI, selected by International Banks of Settlements for its website. 8. Address on Financial Inclusion & Information Technology by Smt. Usha Thorat, Deputy Governor on 12.9.2008. 9. Reports on Trend and Progress 2008-09 RBI). of Banking in India (2006-07,
10. Cab CallingJuly-September 2007 Vol.31, No. 3 11. Approach Paper on IT-enabled financial inclusion. Indian Banks Association.
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list of abbrevations
Automated Teller Machine Asian Development Bank Banking Regulations Act British Pound Below Poverty Line Business Correspondent Business Facilitator Core Banking Solution Clearing Corporation of India Limited CDMA Code Division Multiple Access CFMS Centralized Funds Management System CRAR Capital to Risk Weighted Assets Ratio CRA Community Reinvestment Act. CSO Civil Society Organization CTS Cheque Truncation System CVC Chief Vigilance Commission DCC District Consultative Committee DFI Development Financial Institution DRI Differential Rate of Interest ECS Electronic Clearing Service EFT Electronic Fund Transfer EDP Entrepreneurship Development Programme FIF Financial Inclusion (promotion & development) Fund FITF Financial Inclusion Technology Fund FLCC Financial Literacy and Credit Counseling Centre GCC General Credit Card GPRs General Packet Radio Services GSM Global System for Mobile communication ICT Information and Communication Technology IDRBT Institute for Development and Research in Banking Technology INFINET Indian Financial Network IT Information Technology IRDA Insurance Regulations & Development Authority JLB Joint Liability Group KVIB Khadi and Village Industries Commission Board KYC Know Your Customer LAB Local Area Bank LIC Life Insurance Corporation of India MFI Micro Finance Institution MFO Micro Finance Organization ATM ADB BR Act BP BPL BC BF CBS CCIL MICR Magnetic Ink Character Recognition MIS Management Information System NABARD National Bank for Agriculture and Rural Development NSSO National Sample Survey Organisation NBFC Non Banking Finance Company NDS Negotiated Dealing System NEFT National Electronic Fund Transfer NFC Near Field Communication NGO Non-Government Organisation NIRD National Institute of Rural Development NPA Non-Performing Asset NPL Non-Performing Loan NREGS National Rural Employment Guarantee Scheme PACS Primary Agriculture Credit Societies PCO Public Call Office PDS Public Distribution System POS Point Of Sale PIN Personal Identification Number PSB Public Sector Banks R&D Research and Development RBI Reserve Bank of India RIDF Rural Infrastructural Development Fund RRB Regional Rural Bank RTGS Real Time Gross Settlement System RUDSETI Rural Development & Self Employment Training Institute SAA Service Area Approach SCB Scheduled Commercial Bank SEBI Securities and Exchange Board of India SHPI Self Help Promoting Institute SHG Self-Help Group SIM Subscriber Identity Module SIDBI Small Industries Development Bank of India SLBC State Level Bankers Committee SMS Short Message System SGSY Swaran Jayanti Gram Swarojgar Yojana TAP Tax A Payment UK United Kingdom USA United States of America UN United Nations

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OVERVIEW OF FINANCIAL INCLUSION ANd MICRO CREdIT

Copyright 2010, D. T. Pai

(Late) Shri T. A. PAI

101 - 110 111 - 116

: Comparison of Rating Models : Position of Primary Agriculture Credit Societies

Part 1 Financial Inclusion

Statistics Relating to Scheduled Commercial Banks at a Glance

31.0 53.5 37.1 8.4

34.8 53.8 38.7 7.1

35.1 56.9 41.3 6.3

34.5 55.9 45.0 7.2

36.7 62.6 47.3 6.4

35.3 70.1 40.0 6.7

34.3 73.5 35.3 7.2

32.9 74.6 35.5 9.7

35.2 73.9 35.7 7.3

Chapter I Financial Inclusion Global Concern

Overview of Financial Inclusion and Micro Credit

Overview of Financial Inclusion and Micro Credit

Overview of Financial Inclusion and Micro Credit

Chart 2: Financial exclusion

Overview of Financial Inclusion and Micro Credit

Loans Services (SME)

GDP per capita (US$)

Min. amt. to open (% of GDP per capita)

Cost of transfer funds internationally ($250)

Amt. of fee for using ATM cards (% of $ 100)

 of 8 countries covered under the study

Overview of Financial Inclusion and Micro Credit

Chart 3 : dimensions of access Problems

Very large proportion is underserved

Significant member depends on services of unsustainable institutions

Proportion with access to banking services is very limited

Access to insurance services is extremely limited

High product Low

Source: Asian Development Bank 2007.

Overview of Financial Inclusion and Micro Credit

Overview of Financial Inclusion and Micro Credit

Korea U.K. India Indonesia USA Mexico Brazil China Russia

Overview of Financial Inclusion and Micro Credit

Overview of Financial Inclusion and Micro Credit

Overview of Financial Inclusion and Micro Credit

Overview of Financial Inclusion and Micro Credit

Overview of Financial Inclusion and Micro Credit

United States of America

First Account, 2002 Individual Development Account (IDA), 11

Electronic Transfer Account,1

Overview of Financial Inclusion and Micro Credit

Basic Bank Account

Mzansi Account 2004

Generic Account 2002

Caixa Aqui Account

Chapter II Financial Inclusion Initiatives in India

Overview of Financial Inclusion and Micro Credit

246.0 30.5 276.5 41.6 89.0 47.5 454.6

246.5 36.7 283.2 41.6 102.1 60.2 487.1

320.9 52.7 373.6 50.0 125.8 60.8 610.2

43.3 12.6 55.9 4.4 55.5

76.6 15.0 91.6 7.1 47.9

Overview of Financial Inclusion and Micro Credit

------23.6 4.3 7.1

99.2 110.2 149.1 159.7

97.8 253.0 280.0 343.4 373.5

Source: Basic Statistical Returns of SCBs in India

of 8 countries covered under the study

First Account, 2002 Individual Development Account (IDA), 11

Electronic Transfer Account,1