FINANCIAL INCLUSION A STEP FORWARD

(Background paper on the Financial Inclusion workshop)

P.J.Khound Consultant & Trainer

India's per capita income increased at only around 1% rate in the three decades after Independence. In the late 2000s, India's growth has reached 7.5%. In spite of having an internationally competitive buoyant GDP growth, the country's two economies the Rural and the Urban as also urban rich and poor are increasingly growing apart. All the standard indicators reveal that only around less than 2/5th Indian citizens are in the fold of financial inclusion. Hence, the million dollar question is whether the fruit of such a significant growth is enjoyed by all sections of the society equally or inequalities persist? Whether the growth is exclusive or inclusive? INCLUSIVE GROWTH Inclusive growth focuses on economic growth which is necessary and crucial for poverty reduction. It adopts a long term perspective and related to sustainable growth. The growth will be sustainable only when it is broad-based across sectors, region and inclusive of countrys larger population. The picture of inclusive growth is extremely poor in India. Politically, till now, leaders touted inclusive growth to mean last years agricultural loan waiver and the National Rural Employment Guarantee Scheme. These doled out lots of cash but only time will speak the actual delivery of economic benefits. They may be treated as very basic social security schemes at best, but, lodestones of corruption at worst. Now these schemes throw money at the poor and destitute without actually helping them to climb the economic ladder. In the long run, they could perversely prevent people from moving out of their lowproductivity traps in rural India. True inclusive development would mean that even the poorest Indians get a chance to move into the modern, high-productivity sectors, improve their socio economic status, make them literate and develop skill in their performance area, self dependent and contribute for GDP growth of the country. The benefits of such growth shall be equally distributed. Real inclusive growth shall be only when equality of distribution of benefits of all the schemes for development and infrastructure made available to all irrespective of their religion, caste, creed, language, political affiliation, social status, location, region, sectors and segments etc. FINANCIAL INCLUSION The financial sector experienced revolutionary changes but the benefit of the revolution has not reached to the majority section of the society. As capital and savings are the vital component of growth, financial reach is a major area of inclusive growth. Financial exclusion, which is generally the outcome of poverty, ignorance and environmental factors, is to a great extent related to supply side issues, i.e. lack of appropriate financial services. The challenges of achieving more inclusive growth can be met by policies that encourage easier and affordable access to financial services. At the cross-country level, evidence indicates that various measures of financial development are positively related to economic growth. It is now widely acknowledged that financial exclusion leads to non accessibility, non-affordability and non-availability of financial products and services. Limited access to funds in an underdeveloped financial system restricts the availability of funds to individuals and also leads to high cost credit from informal sources such as moneylenders. Due to lack of access to a bank account and remittance facilities, the individual pays higher charges for basic financial transactions. Absence of bank account also leads to security threat and loss of interest by holding cash. These impose costs on individuals. Prolonged and persistent deprivation of banking services to a large segment of the population leads to a decline in investment and has the potential to fuel social tensions causing social exclusion. Thus, financial inclusion is an explicit strategy for accelerated economic growth and is considered to be critical for achieving inclusive growth in the country. The issue of financial inclusion in Indian context was deliberated in detail by the Committee on Financial Inclusion under the Chairmanship of Dr. C. Rangarajan, Chairman Economic Advisory Council to the Prime Minister of India. The Committee opined, The essence of financial inclusion is in trying to ensure that a

range of appropriate financial services is available to every individual and enabling them to understand and access those services. Apart from the regular form of financial intermediation, it may include a basic no frills banking account for making and receiving payments, a savings products suited to the pattern of cash flows of a poor household, insurance (life and non-life), money transfer facilities, etc. The objective of Comprehensive Financial Inclusion is to provide a whole gamut of financial services to the financially
unreached i.e. (Savings, Microcredit, Remittance & Micro-insurance)

In short the financial inclusion may be defined 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.
FINANCIAL INCLUSION - GOVERNMENT, RBI & NABARD INITIATIVES The financial sector in India is primarily dominated by the banking system. Scheduled commercial banks (SCBs) occupy around 75 percent of the financial sector. The share of public sector banks (PSBs) is around 75 per cent of the total assets of SCBs. Foreign banks operating in India accounted for about 8 per cent, whereas the Regional Rural Banks (RRBs) and the co-operative banks, (both ACBs & UCBs) also plays a prominent role in financial inclusion. Highlights of National Rural Financial Inclusion Plan (NRFIP) To provide comprehensive financial services to 50% (55.77 million) of rural households by 2012 through rural/semi-urban branches of commercial banks and RRBs. The remaining households are to be covered by 2015. Setting up of Financial Inclusion (Promotion and Development) Fund (FIF) and Financial Inclusion Technology Fund (FITF), for meeting the cost of developmental and promotional interventions and costs of technology adoption, respectively. Commercial banks to undertake targeted branch expansion in the excluded districts. To broad base the BC/BF model, locally settled ex-bankers, retired postmasters, school teachers, headmasters, ex-servicemen, etc., made eligible as business facilitators/business correspondents financial inclusion. Revival package for co-operative credit societies (CCS) to strengthen co-operative banks Strengthening SHG-bank linkage programme Remittance needs of poor to be made available at affordable cost Micro insurance (Life & Non-life) facility for vulnerable at very low insurance premium.

RBI

(BFs/BCs). RRBs to extend branch expansion to unbanked areas and set exclusive targets for microfinance &

Initiatives November 2005 - No Frill Account with provision of overdraft Reduced KYC norms for No frill account. Kisan Credit Cards (KCCs) a revolving credit facility to farmers and GCC facility up to Rs.25000. FLCC Financial literacy & credit counseling in villages. BC/BF model to extend secured, authentic and timely banking services and products to hitherto unreached section through ICT intervention. Consolidation of 196 RRBs into 92 RRBs. Liberalizing branch licensing policy for RRBs, Recapitalizing RRBs having negative net worth and capacity building facilities to upgrade their staff skills. Branch licensing policy for banks 50% to open in unbanked areas, however, commercial viability to be ascertained by banks. UCBs to take part in financial inclusion in their area of operation. Opening of Ultra Small Branch (USB) by Banks (Kiosk banking).

NABARD Initiatives Farmers Club, KCC, JLG and CIG SHG Bank linkage programmes Micro Enterprise development programme Monitoring doubling of Agricultural Credit by Commercial Banks and RRBs Monitoring Interest subvention on crop loan Implementing comprehensive recapitalization and reform package for the rural cooperative credit structure as per government of India scheme Technology up gradation of RRBs including adoption of CBS platform etc Management of FITF & FIF fund for Financial Inclusion. Financial Inclusion Why? Access financial markets including credit market. Learn financial matters (financial education). Uplift financial conditions and standard of living. Increase in economic activities and employment opportunities. Increase efficiency of social welfare schemes & reduce leakages

Financial Products and Services for unreached people may be: Savings and other basic banking services Credit and debit cards access, Overdraft facility Electronic fund transfer and Payment and remittance services All kinds of commercial loans including production loans Low cost other financial services Micro-Insurance (Life & Non life) Financial Literacy & advice (counseling) Various payments under Social security schemes like old age pension, women welfare, payments under MGNREGA, student scholarship etc. Financially excluded sections largely comprise of: Marginal farmers, Landless labourers, Oral lessees, artisans, Urban slum dwellers Self employed and unorganized sector enterprises, Scavengers, Migrants Ethnic minorities and socially excluded groups, Senior citizens, Women North East, Eastern and Central regions contain most of the financially excluded population. Factors affecting access to financial services Legal identity : Lack of legal identity like birth certificates, voter ID, driving license, employment identity card etc Limited literacy: Financial literacy and lack of basic education prevent access to financial services. Level of income: Income level and financial access is co-related. Low income people generally have the attitude of thinking that banks are only for rich. Terms and conditions: Formalities of opening bank account or getting loans appears to be difficult for unreached people. Psychological and cultural barriers: Many people voluntarily excluded themselves due to psychological barriers that they are excluded from accessing financial services. Place of living: People who lived in under developed areas find it very difficult to go to areas in which banks are located. Lack of awareness: Importance of wise spending and savings, Micro Insurance (both Life & Non life) for risk mitigation, Credit, Bank A/C, Cheque facility, remittance etc are not known to unaware person. Hence financial literacy plays an important role. ISSUES RELATED TO DEMAND & SUPPLY SIDE Demand Side Issues: (Illustrative only) (a) Lack of banking habits and credit culture. (b) Lack of awareness about savings, credit, remittance and micro insurance. (c) Non availability of ideal products and services for vulnerable section. (d) Very small volume/size transactions are not encouraged by formal banking institution. (e) Non availability of timely and doorstep banking services. (f) Rural customers contact cost to bank is very high for travel, wage losses, incidental expenses etc. (g) Hassles related to papers and documents necessary at bank level. (h) High level of rejection/indifference at bank branch level. (i) Perception levels of bankers are not positive towards vulnerable section. (j) Distance is a factor for servicing and supporting viable credit proposal (k) Lack of collateral security etc. Supply side issues: (Illustrative only) (a) Operating cost of financial inclusion seems to be very high as compared with the returns from services and products. (b) Customized and acceptable products and services are still in the research stage. (c) Appropriate delivery channel is yet to be percolated down the line. (d) Expansion of branch network is not feasible and viable due to cost factor. (e) Ultra Small Branch (Kiosk Banking) is in conceptual stage only. (f) High transaction costs particularly in dealing with a large number of small accounts with existing infrastructure. (g) Inability to evaluate and monitor cash flow cycles and repayment capacities due to information asymmetry, lack of data base and absence of credit history of people with small means. (h) Adverse security/law and order situation prevailing in some rural areas.

(i) Human resources related constraints both in terms of inadequacy of manpower and lack of proper orientation/expertise and acceptance of FI channel by employees. (j) Information-shadow due to geographical barriers. (k) Inadequacy of extension services which is crucial to improve production efficiency of the farmers leading to better loan repayments (l) Ensuring quality delivery mechanism is a big challenge for banks. (m) Current corporate BC and CSP model tested in some parts of the country may not be sustainable with the present structures in all the places. (n) High rate of attrition of BC/CSP/BF is observed as the present scheme is not remunerative and sustainable to them. (o) A success story of PSBs & Private Sector Banks in some locations has not been found feasible in all locations due to social and other issues. (p) RBI guidelines on apex level BC agent for banks for the state are yet to implement due to field level impediments. (q) Common model BC protocol and interoperability of software of different banks are yet to be resolved. (r) Major trust deficit of BC/BF by last mile clients as most of them are not from same locality.

Progress under Financial Inclusion in Assam::

Opening of No Frill A/C
Sl No Bank Name No of A/C OD A/c No A/C

(Amount in Rs. Lakhs) GCC A/C

of Limit

KCC A/C
No of A/C Limit

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. Total 1 2 Total 1 TOTAL (Source:

Allahabad Bank NA Andhra bank 26 Axis Bank 0 Bank of Baroda 444 Bank of India 20720 Bank of Maharashtra 999 Canara bank 4585 Central Bank of India 197551 Dena Bank 4473 Federal Bank NA HDFC Bank 1897 ICICI Bank 2735 IDBI Bank 3016 Indian Bank 17058 Indusind Bank 0 Indian Overseas Bank 5155 Oriental bank of Commerce 2470 Punjab National Bank 5048 Punjab & Sind Bank 10597 State Bank of India 271078 Syndicate Bank 12900 United Bank of India 290282 UCO Bank 159920 Union Bank of India 4591 Vijaya Bank 23 All SCB 1015578 AGVB 2151004 LDRB 151679 RRB 2302683 Assam Apex Coopt Bank NA All Banks 5111686 SLBC Assam, Figure relates to June 2012)

NA 0 0 0 350 0 0 8196 0 NA 0 0 0 3 0 0 0 670 0 0 0 0 0 0 0 9219 9330 0 18549 NA 10148

NA 1 0 0 0 12 198 197627 8 NA 345 0 0 7 0 0 0 499 0 2040 1 2421 3435 0 0 206594 49878 9657 59535 19344 285473

NA 0.75 0 0 0 3.60 32.35 340.20 2.00 NA 13.75 0 0 0.55 0 0 0 209.85 0 481.31 0.25 104.72 2245.00 0 0 3434.42 10010.35 1041.18 11051.53 116.69 14602.64

26709 0 0 1758 4256 0 696 64294 72 7 5022 207 39 1972 0 1732 20 30012 0 350661 926 159592 53442 12886 0 714303 362583 33572 396155 120 1110578

8368 0 325 2117 0 177 15033 6 36 9030 149 15 2423 0 779 4 8402 0 76229 338 50530 23462 3587 0 201010 111932 4465 116397 29 317436

In spite of having various field level issues banks in Assam are taking some initiatives in financial inclusion. Drishtee Foundation an NGO has entered into a partnership with State Bank of India to offer micro savings services as a banking correspondent and has registered remarkable uptake in terms of number of no-frill accounts opened in the states of Assam. As per latest policy guidelines, banks are being given targets by RBI to open USBs across the state. Steps are also being initiated by SLBC Assam calling RFP to appoint state level corporate BC. Corporate BC shall take care of appointment of field level BCs, CSPs and

TSPs to provide branchless banking in the rural Assam through ICT based hand held devices (HHD). It is expected that in the coming days banks shall be able to resolve all the field level issues and outreach of disadvantaged people with comprehensive Financial Inclusion shall come true. Financial Education - Way forward One of the major hindrances in the way of delivery of financial services to the poor is the lack of basic knowledge and lack of awareness of the products and services available. In fact, education is a great facilitator. The delivery of financial education would ensure :-

(i) Increasing knowledge of financial matters, (ii) Developing understanding of financial products and (iii) Building skills in financial management.

Intensive awareness, education and promotion drive to create an in-depth impact on the masses is the need of the hour. Some steps from government, regulator and banks are also warranted, they are: Government should promote introduction of basic banking, piggy banking, story of currency & coins, wise spending and savings in all primary school curriculum. Government should promote introduction of basic banking, banking products & services, remittance, insurance and their merits as a topic in secondary and higher secondary classes in all education institutions. Government sponsored publicity campaigns through all medias radio; jingles, television; newspapers; movies; local stage shows, nukkar natak, e-choupal ; village panchayat etc. Banks in support from government should design and organize aggressive education cum promotion campaigns in different parts of urban, semi urban and rural areas to enhance financial literacy and awareness, as well as to remove the doubts and apprehensions that the masses can have access to the banking. Banks should involve the knowledgeable and well-informed local inhabitants in such activities to avoid trust deficit. This will help the banks to consolidate and ensure, prompt and extensive response from the populace. Banks should gather support from the NGOs, retired bank personals, academic institutions, to reach the desired numbers within a limited span of time. Once the fallacy is removed from the minds of the unreached people, they automatically will join the mainstream. The all round awareness and education simulation will drive them to open savings accounts. This will mark the beginning of basic banking in true sense. The major question as to whether the employees of banks on whom the responsibility of extending financial services and product lies is aware about financial inclusion? Bank employees at large have an inhibition that the financial inclusion channel is loss making and their jobs may be at stake on its encouragement. Moreover, outsourcing of basic banking services is very new in India and employees have doubt on its viability and effectiveness. Hence, it is pertinent that bank

employees irrespective of rank and colour should be sensitized on financial inclusion at the earliest.

Addressing Costs: Bank is not a charitable organization, its activities must relate to business proposition. Hence, CBS system should be tuned to cater to the needs of both: a) Complex needs of high value corporate customers of urban and metro areas and b) Simple scalable, cost effective, reliable, easily accessible, standardized, viable, safe, secured, interoperable platform to outreach the hitherto unreached small value large quantity populace of both rural and urban areas. Banks cost is manifold, such as: (illustrative only) Large fixed cost for network and connectivity and delivery channel to the customer. Processing and transaction cost of deposits, overdrafts etc. Cost at the last mile reaching customers through agents, SHG-MFI model and other network. Cost of salaries/commission to agents/supervisors/employee and other human resources etc. Multiple small and repeat transaction cost per customer Cost of hardware and software and their maintenance . Costs towards KCC/GCC cards and cost on credit deployment. Cost on small value money transfer in government scheme, pension, insurance etc. Cost towards purchase of biometric hand held devices, tool kits, micro ATMs etc. Stationary costs, Cost relating to TSPs etc.

Conclusion Rapid pace of growth is unquestionably necessary for substantial poverty reduction, but for this growth to be sustainable in the long run, it should be increasingly broad-based across sectors, regions and labour force of the country. Thus, inclusive growth implies a direct link between the macro and micro determinants of growth and captures the importance of structural transformation for economic diversification and competition. Financial Inclusion seeks to overcome the frictions that hinder the functioning of market mechanism to operate in favour of the poor and underprivileged. It also envisages low cost banking services to the unreached, but at the same time it must be cost effective business proposition for banks. This is possible by harnessing low cost, authentic, interoperable and effective technology. Policy support from Government of India, RBI and NABARD is also very important in achieving the goal. Profitable FI model in the form of No frill accounts, BC, BF and SHG-Bank linkage programme, CBS and ICT enabled KCC, GCC, JLG, CIG, Farmers club, multipurpose biometric smart card, mobile banking, USB and mobile banking van in the supply side need to be adopted. Government has to take initiative in creating demand side through ICT innovations, rural infrastructure development, transportation and communication, linking of government payments through BC model, market linkage, e-Choupal, post harvest facilities, better land use policy etc for wide spread and sustainable financial inclusion. It is expected that this august house shall deliberate on the issues relating to both Supply and Demand side and through light in resolving the same and draw a road map in achieving the goal. References 1) Financial inclusion - an Overview : Occasional Paper of National Bank for Agriculture & Rural Development, Department of Economic Analysis and Research; Mumbai, 2009 2) Inclusive growth in India a dream or reality: rediff.com, rediff business world 3) Financial Inclusion; Wikipedia, the free encyclopedia 4) Financial Inclusion - An Assessment of New Modalities and Alternative Models: R.N.Dash, General Manager, RBI 5) Inclusive growth the role of banks in emerging economies; Independence Commemoration Lecture, 2008 by Ms Usha Thorat, Past Deputy Governor, Reserve Bank of India, at the Central Bank of Sri Lanka, Colombo, 28 February 2008. 6) Indias Financial Inclusion, A case for comprehensive Revenue model; BANCON 2011; paper by Dr Achintan Bhattacharya, Joint Secretary, DFS, GoI. 7) Review note on BANCON 2011; paper Subhankar Jha, Country Coordinator, ISMW, Ahmedabad 8) Financial Inclusion in India Emerging Profitable Models Dr Debesh Roy, AGM, NABARD.