At the outset, I take this opportunity to thank
the Planning Commission, the United Nations Development Programme (UNDP) and
the College of Agricultural Banking for inviting me to this very relevant program
on human development and State finances.
The central theme of the Millenium Development
Goals (MDGs) is reduction of poverty in all its forms . The MDGs emphasise human
development indicators, especially those relating to women and children, to
enable people to live a life of dignity. The role of the State in the achievement
of the MDGs through fiscal measures to increase investment in economic and social
capital is primary. The financial system can play a role in reinforcing many
of the objectives of the MDGs involving savings, livelihood and economic infrastructure
apart from providing an efficient payments system. The role of the community
based organisations and NGOs has been found to be vital in catalysing local
participation to enhance the efficiency and transparency in the delivery of
services essential for achievement of human development goals. Thus the State
Governments, the formal financial system and community based organisations can
be considered as the three pillars in achieving societal transformation. These
three pillars perform distinct but mutually reinforcing roles that can have
tremendous synergies.
By financial inclusion we mean the provision
of affordable financial services, viz., access to payments and remittance facilities,
savings, loans and insurance services by the formal financial system to those
who tend to be excluded. It is important to recognise that in the policy framework
for development of the formal financial system in India, the need for financial
inclusion and covering more and more of the excluded population by the formal
financial system has always been consciously emphasised. What has now come to
the fore is that even after decades of such emphasis there are large segments
of the society outside the financial system. Simultaneously the growth of the
NGO and the Self Help Groups has been significant and their linkage with banks
has facilitated greater financial inclusion. These groups are mainly of women
and the recovery rates are high. There is no subsidy element and the outreach
and penetration continues to grow. The coverage is several times that under
government sponsored schemes. Where groups have been consciously promoted under
government sponsored schemes, the recovery is just 50 per cent as compared to
90 per cent plus recovery under the voluntary movement. Furthermore, there are
reports that groups are promoted under the sponsored programmes just to avail
of the subsidy. It is, therefore, essential that the strengths of the voluntary
NGO/SHG movement are not lost while establishing linkages between this sector
and banks in achieving the MDGs. In the context of the overall fiscal constraint
faced by most States, the linkages between the formal financial system and the
community based organisations can be effectively exploited by the State Governments
to meet the challenges of ensuring achievement of the MDGs.
I would like to share with you two recent cases
witnessed by me that could be of some interest and relevance. The first relates
to women self help groups (SHGs) that I recently visited in Ajmer. The NGO,
has catalysed groups that consist of poor Muslim women and trained them in making
crochet caps for the nearby dargah. The groups now supply these caps and other
items to distant places. Initially the women were neither taken seriously nor
supported by their men folk, but after successive drought years when they found
that the supplementary income from the women enabled the families to be free
from starvation, the SHGs gained credibility and won the support of the men
folk. The leaders have become so empowered that they go to Ajmer and even to
Jaipur for procurement of yarn and for marketing the produce. In the process
of empowerment the women are actively encouraging their children including girls
to be regular in school and they have shown active interest in adult literacy
classes. They now want to learn how to keep their accounts on the computer.
There is much more consciousness on sanitation issues and preventive health
care. These women are also prepared to travel as far as Kutch for exchange of
experiences with other women SHGs involved with craft production. The SHG is
supported by banks and NABARD under the SHG bank linkage programme.
The other case relates to a visit to three villages
near Kolhapur where the Zilla Parishad with active involvement of the gram panchayat
and banks are building toilets with the entire expenditure of a toilet construction
met through bank loans given to individual families through a very simple procedure.
The loans are based on assessment of family’s cash flow and repayable over four
years. The toilets range from the simplest soak pit type to more elaborate ones
linked to bio gas units. The procurement of septic tanks and material has been
arranged on wholesale basis; locally trained masons are executing the work,
with labour inputs from the villagers themselves so as to keep costs and consequently
the loan amount low. There is no subsidy element in the financing. While returning
from this village, we passed through another village. It was dark and suddenly
as the cars headlights hit the road, we saw women from either side of the road
getting up hurriedly. This image starkly brought home the meaning of the MDGs
for ensuring human dignity.
These cases represent the progress that can
be made in achievement of MDGs where there is local leadership, community participation
and involvement of the financial sector with the Government playing a facilitating
role. What is significant is that in both these cases there is no subsidy or
budgetary support. The question is whether these are replicable and can we achieve
the desired scale? The answer is yes provided the three pillars, viz., the State
government, the formal financial system and the community based organisations
work together. Without connecting rural roads, there is very little that can
be achieved by the formal financial system or NGOs. Hence it is appropriate
that due emphasis is being placed on rural roads and rural connectivity. This
has to be an area for priority for state funding.
The SHG movement in India has enabled social
and economic inclusion of women. The SHG-bank linkage movement where SHGs are
linked to banks in a gradual way - initially through savings and later through
loan products - has been able to ensure financial inclusion to a certain extent.
However, there is a need to increase their credit absorptive capacity as a large
number of SHGs linked to the banking system are utilising the credit only for
consumption purposes. They have to migrate to employment generating activities
so as to be able to fully reap the benefits of economic freedom. Nevertheless,
the SHGs and in many cases SHG federations have played a pivotal role in the
creation of social capital and empowerment. There are hundreds of examples where
the SHGs have worked with NGOs and Government agencies to bring drinking water
to their villages, conduct regular health camps, organise adult literacy camps
and generally improve the social status of members. For example, the SHG Federations
active in Tamil Nadu have been able to provide life insurance products through
an internally administered scheme. In Kerala, the Kutumbashree model set up
by the Government covers a variety of financial services as also health insurance.
The Friends of Women's World Banking (FWWB) have started a Social Security Project
in association with micro finance agencies/NGOs and insurance companies to provide
life insurance to lakhs of persons and non life insurance products like livestock
insurance and health insurance. Other innovative products like hut insurance,
food security, pension scheme, etc., too have been launched. Since the SHG Federations/NGOs
or, the MFIs provide the gateway to a large number of families and absorb administrative
costs both in insuring and in claim settlement, such schemes have been able
to keep the premium to the minimum. In Orissa there are reports about an NGO
working amongst disabled women living in abject poverty. Their intervention
has resulted in finding a united voice for these women, getting the necessary
certificates and thus getting facilities due to them and also bank finance for
economic activities.
Apart from the SHG bank linkage, the experience
of the formal banking system partnering with micro finance organisations set
up as societies, cooperatives, trusts and NBFCs including Section 25 companies
has also been extremely encouraging. These tend to be on a larger scale with
services ranging from health, education, marketing apart from savings, loans
and insurance. These linkages have also grown without government intervention
and have proved to be efficient. In both models, the challenge is in reducing
transaction cost so as to keep the services affordable while covering costs
and thereby ensuring increase in outreach and sustainability.
The formal financial system has to recognise
the huge business potential coming from the unmet demand for financial services
from those who normally tend to be excluded. The focus on financial inclusion
comes from the recognition that financial inclusion has several externalities
which can be exploited to the mutual advantage of those excluded, the banking
system and society at large. Banks need to understand the market and develop
products suited to the clientele. They need to develop data sets to evolve risk
assessment models for proper rating and pricing. Financial inclusion has to
be viewed as a business strategy for growth and banks need to position themselves
accordingly. Further improvements in rural connectivity, through roads, power
and telecom, can ensure greater penetration by the financial system into remote
areas and provide safe and efficient financial services to large segments of
the financially excluded. Use of IT, apart from speeding up transaction time
and reducing cost, facilitates building automatic safeguards by ensuring on-line
identification, authorisation, monitoring, transparency and accountability and
in turn enables banks to deal with much larger numbers with minimum risk. The
State governments will need to ensure such rural connectivity and also facilitate
capacity building to use IT in a big way.
Let me now proceed to highlight some of the
recent initiatives that RBI has taken to promote financial inclusion
i. As a proactive measure, the RBI in its Annual
Policy Statement for the year 2005-06, while recognising the concerns in regard
to the banking practices that tend to exclude rather than attract vast sections
of population, urged banks to review their existing practices to align them
with the objective of financial inclusion. In the Mid Term Review of the Policy
(2005-06), the RBI exhorted the banks, with a view to achieving greater financial
inclusion, to make available a basic banking ‘no frills’ account either
with nil or very minimum balances as well as charges that would make such accounts
accessible to vast sections of the population. The nature and number of transactions
in such accounts would be restricted and made known to customers in advance
in a transparent manner. All banks have been urged to give wide publicity to
the facility of such ‘no frills’ account. A number of banks have since come
out with schemes for such ‘no frills’ account facility.
ii. Further, in order to ensure that persons
belonging to low income group both in urban and rural areas do not face difficulty
in opening the bank accounts due to the procedural hassles, the KYC procedure
for opening accounts has been simplified for those persons with balances not
exceeding rupees fifty thousand (Rs. 50,000) and credits in the accounts not
exceeding rupees one lakh (Rs.1,00,000) in a year.
iii. RRBs have been specifically advised to
allow limited overdraft facilities in ‘no frills’ accounts without any collateral
or linkage to any purpose. The idea is that provision of such overdraft facility
provides a ready source of funding to the account holder who is thereby induced
to open such accounts. From the bank’s point of view, the offering of a 'no
frills' account should represent the beginning of a sustainable relationship
that will be mutually beneficial. Looking at the numbers involved, there is
no doubt that banks should look at technology based solutions and low cost delivery
mechanisms that will reduce transaction cost of such services with the volumes
required to make such a model sustainable.
iv. For all borrowers where the principal amount
is less than Rs 25000, banks have been asked to offer a one time settlement
scheme. As there are large number of such very small NPAs with banks, offer
of such an OTS is expected to restore borrowing relationship with the formal
system and thereby obviate the need to go back to the informal system. Banks,
however need to give wide publicity to the scheme at their rural and semi urban
branches. In case where the loans are under government sponsored schemes the
State Level Bankers' Committee (SLBC) is expected to evolve a suitable policy.
v. In urban areas, credit cards enable households
to manage to get their credit needs met by the banking system, with not only
the ability to make purchases on credit but also facility to draw cash against
card. In the rural areas, there are no points of sale or outlets where plastic
cards can be used. Banks have been recently advised by RBI to provide a General
purpose Credit Card (GCC) facility at their rural and semi urban braches The
credit facility extended under the Scheme will be in the nature of revolving
credit. The GCC-holder will be entitled to draw cash from the specified branch
of bank up to the limit sanctioned. Banks would have flexibility in fixing the
limit based on the assessment of income and cash flow of the entire household.
However, the total credit facility under GCC for an individual should not exceed
Rs.25,000. Interest rate on the facility may be charged as considered appropriate
and reasonable. The borrowers would be eligible for availment of the credit
facilities provided under GCC, as per their requirement, without any insistence
on security and the purpose or end-use of the credit. Fifty per cent of credit
outstanding under GCC up to Rs.25,000 will be eligible for being treated as
indirect agricultural financing coming under the ambit of priority sector lending
norms. The eligibility criteria will be subject to review. It is not necessary
that GCC should be linked to purchases and GCC may not necessarily be in the
form of a card. GCC can be issued in the form of a Pass Book, if the holder
of GCC desires to operate cash withdrawals from bank branches. It is expected
that banks will come out with their own schemes to popularise this product amongst
the rural clientele.
vi. A major recommendation made by the Internal
Group set up by RBI on micro finance (Khan Committee), currently under consideration,
is to permit banks to use micro finance institutions as business facilitators
and correspondents to enable banks to increase their outreach and ensure greater
financial inclusion. This recommendation which will lead to provision of micro-finance
services at the doorstep of the customer, can make substantial change in the
availability of comprehensive financial services in rural areas and to the poor
and the disadvantaged in both, rural and in urban areas.
Banks need to view these recent measures as
an opportunity to provide timely and adequate financial services and increase
their share in a rapidly growing market. In case of GCC or overdfrafts in ‘no
frills’ accounts, the interest rates can be appropriately fixed while building
in incentives for prompt payment.
Financial inclusion has several benefits. Establishment
of an account relationship can pave the way to the customer availing of a variety
of savings products, loan products for consumption livelihood and housing. The
account can be used for making small value remittances at low cost and making
purchases on credit. The same banking account can also be used by State Governments
to provide social security services like health and calamity insurance under
various schemes for the disadvantaged. It is often felt that some contribution
should be made by the beneficiary so that he has some stake. However, the deterrent
is that the cost of collection of the premium that can be more than the premium
itself. If however it is collected through a no frills account, the cost is
practically nil. From the bank’s point of view, having such social security
cover makes the financing of such persons less risky and hence can be covered
by the loan component. Reduced risk means more flow of funds at better rates.
Furthermore there is a complete audit trail and transparency. In other words
the single gateway of a banking account can be used for several purposes and
represents a win-win situation. The Employment Guarantee Scheme being rolled
out in 200 districts in the country which would bring in large number of people
through their savings accounts into the banking system is another opportunity
to promote financial inclusion in its fullest sense.
I would now like to focus on the role of the
State governments. While there is no alternative to raising revenue through
taxes and user charges so as to have the resource base to undertake huge investment
in physical and social capital, it is possible, even in the present milieu to
give focused attention to a few areas.
- Firstly, there are many programmes where the central assistance
is not drawn down due to the inability on the part of States to provide matching
contribution and such allocations often lapse. It could be considered whether
contribution from the beneficiary (supported by a loan from a bank) can be
blended with the State’s contribution to achieve the amount required to use
the Central assistance. Banks can tie up with community based organisations
having a good track record to provide the comfort of knowledge of the borrower.
- Secondly, States can leverage on the provision of guarantees.
There is a recent instance where the State housing board has partnered with
a bank for housing schemes for families below poverty line (BPL) in urban
areas where the housing board provides a first loss guarantee to the extent
of 10 per cent of the loan amount. The housing board identifies the beneficiaries
and helps in recovery. The title is passed only on completion of loan repayment.
In addition to making available the housing loan, health insurance cover is
also provided with either the premium being fully or partly provided by the
State Government. There could be calamity or accident cover as well. Like
I mentioned earlier, such insurance reduces the risk of the loan asset and
can lead to more flow of funds and better pricing.
- Thirdly, in urban areas, there is considerable scope for
better pricing of services. It is common knowledge that the poor end up paying
more for various public goods, such as, water, power, sanitation. Efficient
provision of services, with minimum leakages, and their comparative pricing
is critical. Formulation of schemes that have a viable pricing policy will
enable the involvement of the financial system to ensure that adequate funds
are available for such infrastructure projects.
This initiative of the Planning Commission in
conducting this programme in collaboration with the United Nations Development
Programme and the College of Agricultural Banking is indeed a very welcome one
to build synergy through mutuality and convergence of the efforts of all the
major stakeholders in the progress towards achievement of MDGs.
I find that your time here has been structured
well with presentations by a number of eminent persons on various aspects having
a critical bearing on human development, such as, public health, livelihood,
government and group work as well as experience sharing ending up with an interesting
quiz. I wish you a fruitful week ahead.