India has seen historic progress
and growth in the past decade. While the growth story has been impressive,
there are causes for concern on other dimensions. We have a long way to go in
addressing concerns of absolute poverty. Low-income Indian households in the
informal or subsistence economy often have to borrow from friends, family or
usurious moneylenders. They have little awareness and practically no access to
insurance products that could protect their financial resources in unexpected
circumstances such as illness, property damage or death of the primary
breadwinner.
Unrestrained
access to public goods and services is an essential condition of an open and
efficient society. It is argued that as banking services are in the nature of a
public good, it is essential that the availability of banking services to the
entire population without discrimination is the prime objective of public
policy. Expectations of poor people from the financial system is security and
safety of deposits, low transaction costs, convenient operating time, minimum
paper work, frequent deposits, and quick and easy access to credit and other
products, including remittances suitable to their income and consumption.
It is now
well understood that commerce with the poor is more viable and profitable,
provided there is ability to do business with them. The provision of
uncomplicated, small, affordable products can help bring low-income families
into the formal financial sector. Taking into account their seasonal inflow of
income from agricultural operations, migration from one place to another, and
seasonal and irregular work availability and income, the existing financial
system needs to be designed to suit their requirements. Mainstream financial
institutions such as banks have an important role to play in this effort, not
as a social obligation, but as a pure business proposition.
What is Financial Inclusion
Financial inclusion is
the availability of banking services at an affordable cost to disadvantaged and
low-income groups. In India the basic concept of financial inclusion is having
a saving or current account with any bank. In reality it includes loans,
insurance services and much more.
The present picture of India in regard to Banking & Financial Services System are
The present picture of India in regard to Banking & Financial Services System are
- · Only 34% of Indian individuals have access to or receive banking services. In order to increase this number the Reserve Bank of India had the Government of India take innovative steps. One of the reasons for opening new branches of Regional Rural Banks was to make sure that the banking service is accessible to the poor.
- The first-ever Index of Financial Inclusion to find out the extent of reach of banking services among 100 countries, India has been ranked 50.
- With the directive from RBI, our banks are now offering “No Frill” Accounts to low income groups. These accounts either have a low minimum or nil balance with some restriction in transactions. The individual bank has the authority to decide whether the account should have zero or minimum balance. With the combined effort of financial institutions, six million new ‘No Frill’ accounts were opened in the period between March 2006-2007. Banks are now considering FI as a business opportunity in an overall environment that facilitates growth.
- · Also , It is estimated that about 40% of Indians lack access even to the simplest kind of formal financial services.
Problems in Implementing Financial Inclusion
- · The main reason for financial exclusion is the lack of a regular or substantial income. In most of the cases people with low income do not qualify for a loan.
- · The proximity of the financial service is another fact. The loss is not only the transportation cost but also the loss of daily wages for a low income individual.
- · Most of the excluded consumers are not aware of the bank’s products, which are beneficial for them.
- · Getting money for their financial requirements from a local money lender is easier than getting a loan from the bank.
- · Most of the banks need collateral for their loans. It is very difficult for a low income individual to find collateral for a bank loan.
- · Moreover, banks give more importance to meeting their financial targets. So they focus on larger accounts. It is not profitable for banks to provide small loans and make a profit.
Financial inclusion
mainly focuses on the poor who do not have formal financial institutional
support and getting them out of the clutches of local money lenders. As a first
step towards this, some of our banks have now come forward with general purpose
credit cards and artisan credit cards which offer collateral-free small loans.
The RBI has simplified the KYC (Know your customer) norms for opening a ‘No
frill’ account. This will help the low income individual to open a ‘No Frill’
account without identity proof and address proof.
In such cases banks can
take the individual’s introduction from an existing customer whose full KYC
norm procedure has been completed. And the introducer must have a satisfactory
transaction with the bank for at least 6 months. This simplified procedure is
available to those who intend to keep a balance not exceeding Rs.50,000 in all
accounts taken together. With this facility we can channel the untapped,
considerable amount of money from the low income group to the formal economy.
Banks are now permitted to utilize the service of NGOs, SHGs and other civil
society organizations as intermediaries in providing financial and banking
services through the use of business facilitator and business correspondent
models.
Self Help Groups are playing a very important role in the
process of financial inclusion. SHGs are usually groups of women who get
together and pool money from their savings and lend money among them. Usually
they are working with the support of an NGO. The SHG is given loans against the
group members’ guarantee. Peer pressure within the group helps in improving
recoveries. Through SHGs nearly 40 million households are linking with the
banks. Micro finance is another tool which links low income groups to the
banks.
Yet, banks are fighting
to fulfill the Financial Inclusion dream. The main reason is that the products
designed by the banks are not satisfying the low income families. The provision
of uncomplicated, small, affordable products will help to bring the low income
families into the formal financial sector. Banks have limitations to reach
directly to the low income consumers. Correspondents can be considered to be an
excellent channel which banks can use to distribute their product information.
Educating the consumers about the financial benefits and products of banks
which are beneficial to low income groups will be a great step to tap their
potential.
Banks are now using new technologies like mobile phones to
reach low income consumers. It is possible that the telephone providers
themselves will start basic banking services like savings and payments. Indian
telecom consumers have few links to financial institutions. So without much
difficulty telecom providers can win the battle with banks. Banks should
therefore be proactive about transferring this technology into an opportunity.
History of Financial Inclusion in India
The Indian Government
has a long history of working to expand financial inclusion. Nationalization of
the major private sector banks in 1969 was a big step. In 1975 GOI established
RRBs with the same aim. It encouraged branch expansion of bank branches
especially in rural areas. The RBI guidelines to banks shows that 40% of their
net bank credit should be lent to the priority sector. This mainly consists of
agriculture, small scale industries, retail trade etc. More than 80% of our
population depends directly or indirectly on agriculture. So 18% of net bank
credit should go to agriculture lending. Recent simplification of KYC norms are
another milestone.
Financial inclusion is a
great step to alleviate poverty in India. But to achieve this, the government
should provide a less perspective environment in which banks are free to pursue
the innovations necessary to reach low income consumers and still make a
profit. Financial service providers should learn more about the consumers and
new business models to reach them.
The requisite need can
be fulfilled & implemented in the following ways :
1)Appropriate
financial products
Financial inclusion is the
process of ensuring access to appropriate financial products and services
needed by vulnerable groups such as weaker sections and low-income groups at an
affordable cost in a fair and transparent manner by mainstream institutional
players. Financial inclusion has become one of the most critical aspects in the
context of inclusive growth and development.
The
importance of an inclusive financial system is widely recognized in policy
circles and has become a policy priority in many countries. Several countries
across the globe now look at financial inclusion as the means to more
comprehensive growth, wherein each citizen of the country is able to use
earnings as a financial resource that can be put to work to improve future
financial status and adding to the nation’s progress.
Initiatives
for financial inclusion have come from financial regulators, governments and
the banking industry. The banking sector has taken a lead role in promoting
financial inclusion. Legislative measures have been initiated in some
countries. For example, in the US, the Community Reinvestment Act (1997)
requires banks to offer credit throughout their entire area of operation and
prohibits them from targeting only the rich neighbourhoods. In France, the law
on exclusion (1998) emphasizes an individual’s right to have a bank account.
The German
Bankers’ Association introduced a voluntary code in 1996 providing for a
so-called “everyman” current banking account that facilitates basic banking
transactions. In South Africa, a low-cost bank account, called Mzansi, was
launched for financially excluded people in 2004 by the South African Banking
Association. In the UK, a Financial Inclusion Task Force was constituted by the
government in 2005 in order to monitor the development of the process.
Several
African countries have harnessed the unique aspects of mobile banking to drive
financial inclusion. A G-20 (Group of Twenty) Financial Inclusion Experts Group
has been launched. The Principles for Innovative Financial Inclusion serve as a
guide for policy and regulatory approaches with the objectives of fostering
safe and sound adoption of innovative, adequate, low-cost financial delivery
models, helping provide conditions for fair competition and a framework of
incentives for the various banking, insurance, and non-banking entities
involved and delivery of the full range of affordable and quality financial
services.
2) Broader
financial inclusion
India has,
for a long time, recognized the social and economic imperatives for broader
financial inclusion and has made an enormous contribution to economic
development by finding innovative ways to empower the poor. Starting with the
nationalization of banks, priority sector lending requirements for banks, lead
bank scheme, establishment of, regional rural banks (RRBs) service area
approach, self-help group-bank linkage programme, etc., multiple steps have
been taken by the Reserve Bank of India (RBI) over the years to increase access
to the poorer segments of society.
It
encouraged expansion of bank branches, especially in rural areas, resulting in
multifold increase in branch network from around 8,000 in 1969 to more than
89,000 today, spread across the length and breadth of the country. The
accompanying chart and graph show population group-wise distribution of bank
branches of scheduled commercial banks, including RRBs, over all these years.
The major
barriers to serve the poor, apart from socioeconomic factors such as lack of
regular income, poverty, illiteracy, etc., are the lack of reach, higher cost
of transactions and time taken in providing those services. Products designed
by the banks are not tailored to suit the needs of low-income families. The
existing business models do not pass the test of scalability, convenience,
reliability, flexibility and continuity.
In India,
the term financial inclusion first featured in 2005, when RBI, in its annual
policy statement of 2005-06, while recognizing the concerns in regard to the
banking practices that tend to exclude rather than attract vast sections of the
population, urged banks to review their existing practices to align them with
the objective of financial inclusion.
3) National
commitment
Moving
towards universal financial inclusion has been both a national commitment as
well as a public policy priority for our country. To achieve the ultimate
objective of reaching banking services to all the 600,000 villages, financial
inclusion has to become a viable business proposition for the banks.
For this
to happen, the delivery model needs to be devised carefully so as to move from
a cost-centric model to a revenue-generation model. This will help in providing
customers with quality banking services at their doorstep and at the same time
generating business opportunities for the banks.
This is sustainable only if delivery of banking services, at the minimum, includes the following four products:
This is sustainable only if delivery of banking services, at the minimum, includes the following four products:
• A
savings-cum-overdraft account
• A
remittance product for electronic benefits transfer (EBT) and other remittances
• A pure
savings product, ideally a recurring deposit scheme
•
Entrepreneurial credit in the form of a kisan credit card (KCC) or a general
credit card (GCC).
RBI has
been undertaking financial inclusion initiatives in a mission mode through a
combination of strategies ranging from provision of new products, relaxation of
regulatory guidelines and other supportive measures to achieve sustainable and
scalable financial inclusion.
In India,
RBI has initiated several measures to achieve greater financial inclusion, such
as facilitating no-frills accounts and GCCs for small deposits and credit. Some
of these steps are:
4 )Opening
of no-frills accounts: Basic banking no-frills accounts with nil or very low
minimum balance as well as charges that make such accounts accessible to vast
sections of the population. Banks have been advised to provide small overdrafts
in such accounts.
5 )Relaxation
on know-your-customer (KYC) norms: KYC
requirements for opening bank accounts were relaxed for small accounts in
August 2005, thereby simplifying procedures by stipulating that introduction by
an account holder who has been subjected to the full KYC drill would suffice
for opening such accounts.
The banks
were also permitted to take any evidence as to the identity and address of the
customer to their satisfaction. It has now been further relaxed to include the
letters issued by the Unique Identification Authority of India containing
details of name, address and Aadhaar number.
6 )Engaging
business correspondents (BCs): In
January 2006, RBI permitted banks to engage business facilitators (BFs) and BCs
as intermediaries for providing financial and banking services. The BC model
allows banks to provide doorstep delivery of services, especially cash in-cash
out transactions, thus addressing the last-mile problem. The list of eligible
individuals and entities that can be engaged as BCs is being widened from time
to time. With effect from September 2010, for-profit companies have also been
allowed to be engaged as BCs.
7 )Use
of technology:
Recognizing
that technology has the potential to address the issues of outreach and credit
delivery in rural and remote areas in a viable manner, banks have been advised
to make effective use of information and communications technology (ICT), to
provide doorstep banking services through the BC model where the accounts can
be operated by even illiterate customers by using biometrics, thus ensuring the
security of transactions and enhancing confidence in the banking system.
8) Adoption
of EBT(Electronic Benefit Transfer): Banks have been
advised to implement EBT by leveraging ICT-based banking through BCs to
transfer social benefits electronically to the bank account of the beneficiary
and deliver government benefits to the doorstep of the beneficiary, thus
reducing dependence on cash and lowering transaction costs.
9 ) GCC(General Purpose Credit Card):
With a view to helping the poor and the disadvantaged
with access to easy credit, banks have been asked to consider introduction of a
general purpose credit card facility up to Rs.25,000 at their rural and semi-urban branches. The
objective of the scheme is to provide hassle-free credit to banks’ customers
based on the assessment of cash flow without insistence on security, purpose or
end use of the credit. This is in the nature of revolving credit entitling the
holder to withdraw up to the limit sanctioned.
10 )Simplified
branch authorization: To
address the issue of uneven spread of bank branches, in December 2009, domestic
scheduled commercial banks were permitted to freely open branches in tier III
to tier VI centres with a population of less than 50,000 under general
permission, subject to reporting. In the north-eastern states and Sikkim,
domestic scheduled commercial banks can now open branches in rural, semi-urban
and urban centres without the need to take permission from RBI in each case,
subject to reporting.
11 )Opening
of branches in unbanked rural centres:To
further step up the opening of branches in rural areas so as to improve banking
penetration and financial inclusion rapidly, the need for the opening of more
bricks and mortar branches, besides the use of BCs, was felt. Accordingly,
banks have been mandated in the April monetary policy statement to allocate at
least 25% of the total number of branches to be opened during a year to
unbanked rural centres.
13) Road
map for providing banking services in unbanked villages with a population of
more than 2,000: Banks
were advised to draw up a road map to provide banking services in every unbanked
village having a population of over 2,000 by March 2012. RBI advised banks that
such banking services need not necessarily be extended through a bricks and
mortar branch, but could also be provided through any of the various forms of
ICT-based models. About 73,000 such unbanked villages were identified and
allotted to various banks through state-level bankers’ committees.
14 ) Financial
inclusion plans of banks for three years: RBI advised all public and private sector banks to
submit a board-approved, three-year financial inclusion plan (FIP) starting
April 2010. These plans broadly include self-set targets in respect of rural
bricks and mortar branches opened; BCs employed; coverage of unbanked villages
with a population above 2,000 as also other unbanked villages with population
below 2,000 through branches; BCs and other modes; no-frills accounts opened,
including through BC-ICT; KCCs and GCCs issued; and other specific products
designed by them to cater to the financially excluded segments.
Banks were
advised to integrate board-approved FIPs with their business plans and to
include the criteria on financial inclusion as a parameter in the performance
evaluation of their staff. The progress by commercial banks (excluding RRBs)
during the year 2010-11 clearly indicates that banks are on the right path
towards deploying BCs, villages covered, opening of no-frills accounts, and
grant of credit through KCCs and GCCs. The numbers would be much higher if the
figures pertaining to RRBs were to be added.
Future Challenges & Objectives
As
indicated above, while India has made enormous strides towards greater
financial inclusion, there is a long way to go, about 500,000 villages are yet
to be provided with banking services. The financial inclusion for the
underprivileged will lead to hosts of downstream opportunities with an
estimated 500,000 jobs for the participants to work as BCs at remote villages.
In a
networked India in which banking services are extended to all villages,
ultimately, a so-called model will emerge where customers will have the option
to transact with the bank of their choice in any village by using UID (unique
identity)-enabled micro-ATMs (automated teller machines), reducing the
dependence on cash and lowering transaction costs.
The task is gigantic, but definitely achievable by following a systematic approach:
The task is gigantic, but definitely achievable by following a systematic approach:
•
Awareness in general, coupled with financial awareness on opening and operating
accounts, must accompany the financial inclusion initiative.
• Banks
should prepare comprehensive plans to cover all villages, through a mix of
branchless banking and bricks and mortar branch banking. They should speed up
enrolment of customers and opening of UID-enabled bank accounts. It envisages
putting in place a system that enables routing of all social benefits to bank
accounts electronically as also seamless cash transfer to the poor, as and when
the government replaces the age-old system of subsidy and public distribution
system with cash transfers.
The is highly dependent on the kind of support provided by
base branches, especially for cash management, documentation and redressal of
customer grievances. Hence, it is necessary that a bricks and mortar structure
is available to support about 8-10 BCs at a reasonable distance of 2-3km. These
branches can be low-cost intermediary simple structures comprising minimum
infrastructure for operating small customer transactions and can act as an
effective supervisory mechanism for BC operations.
•As
mentioned earlier, banks must provide a minimum four products—a no-frills
savings account with an overdraft facility, a pure savings product,
entrepreneurial credit and remittance services, and new products tailored to
income streams of poor borrowers and according to their needs and interests.
Banks must be able to offer the entire suite of financial products and services
to poor clients at attractive pricing.
Though the
cost of administering small-ticket personal transactions is high, this can be
brought down if banks effectively leverage ICT solutions. This can be attained
through product innovation with superior cost efficiency. They must understand
and penetrate the rural markets efficiently to cross-sell products and
services. Mobile banking has tremendous potential and the benefits of
m-commerce need to be exploited.
• It is
important that adequate infrastructure such as digital and physical
connectivity, uninterrupted power supply, etc., is available. All stakeholders
will have to work together through sound and purposeful collaborations. Local
and national-level organizations have to ensure that these partnerships look at
both commercial and social aspects to help achieve scale, sustainability and
impact.
This
collaborative model will have to tackle exclusion by stimulating demand for
appropriate financial products, services and advice with the appropriate
delivery mechanism, and by ensuring that there is a supply of appropriate and
affordable services available to those that need them.
• Mindset,
cultural and attitudinal changes at grass roots and cutting-edge technology
levels of branches of banks are needed to impart organizational resilience and
flexibility. Banks should institute systems of reward and recognition for
personnel initiating, ideating, innovating and successfully executing new products
and services in the rural areas.
Conclusion
Empirical
evidence shows that economic growth follows financial inclusion. Boosting
business opportunities will definitely increase the gross domestic product,
which will be reflected in our national income growth. People will have safe
savings along with access to allied products and services such as insurance
cover, entrepreneurial loans, payment and settlement facility, etc.
Our dream
of inclusive growth will not be complete until we create millions of micro-entrepreneurs
across the country. All budding entrepreneurs have to face these challenges and
find solutions. People working in the social sector should work for filling up
the deficit existing in the economic and social arena.
In India Financial
inclusion will be good business ground in which the majority of her people will
decide the winners and losers.
To sum up,
financial inclusion is the road that India needs to travel toward becoming a
global player. Financial access will attract global market players to our
country and that will result in increasing employment and business
opportunities. Inclusive growth will act as a source of empowerment and allow
people to participate more effectively in the economic and social process.
