Financial Inclusion and Urban Co-operative Banks* Anand Sinha
Shri Shashikant Bugde, Chairman, Shri
Krishnakumar Goyal, Vice-Chairman, Dr. Mukund
Abhyankar and other Directors of the Cosmos Bank,
Shri Sudhir Thakre, Secretary, Rural Development,
Govt. of Maharashtra, all the aspiring women
entrepreneurs present here this evening and ladies and
gentlemen. I am delighted to be here this evening
amongst all of you on the occasion of the launch of the
Cosmos Bank’s Financial Inclusion Programme. I would
like to thank the Cosmos Bank for inviting and giving
me an opportunity to be a part of this initiative which
seeks to address one of the most pressing issues of our
times.
2. Cosmos Bank is one of the oldest banks in the
country and has recently completed 105 years of
service. While nurturing the traditional values it has
inherited, of serving the small customer, the bank has
also moved with times and has prepared itself for the
future, by adopting new technologies and advanced
banking tools to add value to its services.
3. Today’s initiative by the bank in launching this
ambitious program of financial inclusion is very
commendable. Huge participation by women
entrepreneurs in today’s programme bodes well for the
financial inclusion initiatives being undertaken by the
bank. Like charity, virtues like thrift and discipline
begin at home and what could be a better way than
involving women in this ambitious program aimed at
inculcating thrift and including, into the financial fold,
the hitherto excluded. I am happy to note that the bank
is not only helping women by opening accounts and
granting loans but has also undertaken the task of
imparting training, educating them in preparing their
own accounts, helping them sell their produce, etc. I am sure this initiative by the Cosmos Bank would be a
great success and would turn a new leaf in the financial
inclusion program.
4. Today’s conference offers me a wide canvas to
speak on. Both Urban Co-operative Banks and the
Financial Inclusion are two interesting topics in
themselves. Combination of the two is, by extension,
a more interesting topic. In my speech today, I would
touch upon the issues related to financial inclusion
program and the role of co-operatives in taking forward
the objectives of financial inclusion.
Co-operative Banking
5. The co-operative movement involves autonomous
association of persons united voluntarily to meet their
common economic, social and cultural needs through
a jointly owned and democratically controlled
enterprise. Co-operatives, as business enterprises, are
different from other firms, in view of the fact that their
ownership and control are directly vested in the hands
of the members. The co-operative structure is designed
on the principles of mutual help, democratic decision
making and open membership. As remarked by Mr. Ban
Ki-moon, the UN Secretary General, Co-operatives are
a reminder to the international community that it is
possible to pursue both economic viability and social
responsibility. Incidentally, the current year 2012 is
declared by the UN as the International Year of Cooperatives.
Voluntary and open membership, democratic
control, economic participation, autonomy, training
and concern for the community are some of the
overarching values with which the co-operatives have
been associated with.
6. The Co-operative movement has a long history in
India. Co-operative societies were set up in India
towards the close of the nineteenth century drawing
inspiration from the success of experiments related to
the co-operative movement in Britain and the cooperative
credit movement in Germany. Since inception, the UCBs have been playing an important
role in the socio-economic development of the country
by making available institutional credit at affordable
cost, particularly, in the urban and semi-urban areas.
The extension of the Banking Regulation Act, 1949 to
co-operative societies, with effect from March 1, 1966,
brought the co-operative banks within the ambit of the
Reserve Bank’s regulation and supervision.
Correspondingly, deposit insurance cover was also
extended by Deposit Insurance and Credit Guarantee
Corporation (DICGC) to the co-operative banks. While
there has been a gradual growth in the UCB business
over the period, with deposits growing from `1.67
billion to `2,120.31 billion and advances growing from
`1.53 billion to `1,363.41 billion during the period 1966
to 2011, the growth of UCBs in the total banking
business has not been commensurate with the overall
growth of the banking sector. Despite their large
number, UCBs constitute a very small market share at
3.5 per cent (as of March 31, 2010) of the total banking
sector.
7. Having briefly touched upon UCBs, let me now
draw your attention to the other important topic of the
day, Financial Inclusion.
Financial Inclusion
8. Financial Inclusion is the process of ensuring
access to appropriate financial products and services
needed by all sections of the society in general, and
vulnerable groups such as weaker sections and low
income groups in particular, at an affordable cost and
in a fair and transparent manner by regulated
mainstream institutional players.
Financial Inclusion for an Inclusive
Growth
9. Traditionally, we have observed that the poor are
not welcomed to the banking fold with a misconception
that they are not bankable and that there is no business
opportunity in offering services to them. Banks and
financial institutions had been, till recent times,
financially excluding these people on the pretext that;
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They have no or few assets,
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They have nothing to offer as collateral,
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They have no business experience,
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They cannot be trained for availing financial
services,
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They have no credit history, and
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They cannot understand the nuances of banking
due to illiteracy or lower education.
10. The misconceptions are slowly giving way to the
belief that inclusive growth is necessary for the overall
growth and development and that the excluded need
to be brought into the fold of financial system. Given
the belief that credit is a basic human right, as advocated
by the Nobel Laureate, Professor Muhammad Yunus,
and that the poor can overcome poverty by generating
their own employment and income, we have to develop,
on an urgent basis, a financial system which takes care
of the needs of the poor. Access to affordable financial
services – especially credit and insurance – enlarges
livelihood opportunities and empowers the poor to
take charge of their lives. Such empowerment aids
social growth of the economy on a sustainable basis.
Apart from these benefits, Financial Inclusion imparts
formal identity, provides access to the payments system
and to safety nets such as deposit insurance.
11. Financial Inclusion is critical for achieving
inclusive growth in the country. To achieve that, we
have to expand our scope of financial inclusion
initiatives to reach out to people at the grass-root level.
We have adopted a two pronged strategy to achieve this
objective:
a. Through voluntary effort by the banking
community by evolving various strategies to bring
unbanked people within the ambit of the banking
sector, and, more importantly;
b. By creating a demand by the people themselves
to pull the banks, financial institutions and other
service providers towards them to offer banking
and financial services at a competitive and
affordable rate.
12. The Financial Inclusion initiatives will go a long
way in not only financially empowering the people but
also as an avenue of providing excellent business
opportunities for the financial market participants.
Contrary to the common perception, financial inclusion
is a potentially viable business proposition because of the huge untapped market that it seeks to bring into
the fold of banking services. Financial inclusion, prima
facie, needs to be viewed as ‘money at the bottom of
the pyramid’ and business models should be so
designed to be at least self-supporting in the initial
phase and profit-making in the long run. It is important
to keep in mind that service provided should be at an
affordable cost.
Self Help Groups:
13. The SHG-bank linkage model draws inspiration
from the co-operative movement and involves an
intensive effort to move away from traditional reliance
on concessionary refinance from financial institutions
and envisages making the rural poor self-supporting
and self-sustaining. This delivery mechanism is indeed
a blend of the proximity, responsiveness & flexibility
of an informal system and the financial & infrastructural
back-up of a formal system. Self Help Groups (SHGs)
have come to play a very important role in the process
of financial inclusion. SHGs are groups of people who
get together and pool money from their savings and
lend money among themselves. The SHG is given loans
against the group members’ guarantee. Peer pressure
within the group helps in improving recoveries.
14. The SHG-Bank linkage program, in India, which
commenced in 1992, has grown phenomenally. The
program which started with a target of 500 SHGs in
1992 now has 7.46 million SHGs covering over 97 million rural households. Of the total 7.46 million
SHGs, over 4.78 million SHGs have access to direct
credit facilities from banks with an outstanding loan
amount of `312.21 billion as at end of March 2011. One
of the most distinguishing features of the program is
that a majority (81.7 per cent) of the SHGs are exclusive
woman groups. Women SHGs have accounted for 75.5
per cent of the total savings and 83.7 per cent of the
total loan outstanding of SHGs in 2010-11.
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15. SHGs have also proven to be profitable propositions
for rural and semi-urban bank branches with over 95
per cent of recovery and aggregated transactions (one
SHG means 10 to 20 individual members). Unlike the
majority of agriculture and rural clients, SHGs operate
their saving accounts on a regular basis, and maintain
credit balances in their accounts. It is a unique model
with many challenges and many more opportunities.
Above all, the SHG has given the poor women an
identity, access to information, and bargaining power.
16. Poor women have always had to bear the double
burden of being poor and women. The SHG model
opens up new possibilities for the member-borrowers
especially women. Interaction among members affords
an insight into the inter & intra-household dynamics
with women gaining a greater say in household
decision-making. Economic upliftment through this
linkage gives a sense of purpose, direction and new
meaning to lives of member-borrowers.
17. It is a well-known fact that every individual,
howsoever poor he/she may be, has the potential to
save. SHGs have become effective instruments in
realising that potential. It should be noted that the SHG
model generally requires compulsory savings from
members. SHGs have inculcated the saving habit among
the poor and it is observed that the SHG saving amounts
and their corpuses are growing at very high rate year
after year.
18. To achieve better results, banks purveying micro
credit would have to strive to graduate from enterprise
formation orientation to enterprise transformation
orientation in terms of providing technical assistance
and training to help the existing micro-enterprises
make a quantitative and qualitative leap in terms of
scale of production and marketing.
19. An extremely important benefit of this model is
the empowerment effect. Broad indicators of poverty
such as vulnerability, physical & social isolation,
powerlessness, insecurity and lack of self-respect have
always been major roadblocks in the development of
the poor. Interface with member-borrowers has
revealed that the impact of SHG interactions on the
borrowers’ sense of self has been remarkable and this
transformation is bound to result in many other
significant socio-economic changes. In fact, the courage
with which some of the women today spoke on the
stage is a manifestation of the empowerment brought
about by SHG.
20. Now let me come to the crucial part of my talk
today – Role of banks, particularly UCBs, in furthering
financial inclusion, the facilitating role played by the
Reserve Bank and the road ahead.
21. It is well-recognised that there are many supply
side and demand side factors impeding the inclusive
growth, such as lack of awareness about the financial
products, unaffordable products, high transaction costs,
and products which are not convenient or flexible.
Addressing demand side factors is as much important
as addressing the supply side factors. Opening of more
bank branches, offering of customised products, etc.,
address the supply side factors while the financial
literacy initiatives address the demand side factors by
sensitising the people of the need for, and, benefits of,
joining the formal financial system.
22. UCBs, by their structure and nature of clientele,
are well designed to cater to financial inclusion. The
very basis of co-operative structure is mutual help and
thrift. Considering the specific features of UCBs such
as their organisational structure (member-driven),
clientele, easy access and reputation as a friendly
neighbourhood bank, these highly localised institutions
have the potential for widening and deepening financial
inclusion in their area of operation.
Measures undertaken to Promote Financial
Inclusion
23. It has been RBI’s endeavour to remove all hurdles
in the way of its regulated entities in achieving financial
inclusion objectives. Some of the salient measures
undertaken in this regard are:
Introduction of New Products
i. Opening of ‘No-Frills’ Accounts: A ‘No Frills’
account is one for which no minimum balance is
insisted upon and for which there are no service
charges for not maintaining the minimum balance,
introduced as per RBI directive in 2005. Banks have
been advised to provide small Over Drafts in these
‘no frills’ accounts.
ii. General Credit Cards (GCC)/Kisan Credit Cards
(KCC): GCCs/KCCs help purvey credit in the nature
of a revolving credit entitling the holder to
withdraw up to the limit sanctioned. Limits are
sanctioned without insistence on security or
purpose, based on the assessment of household
cash flows. Interest rate on the facility is completely
deregulated.
Relaxed regulatory requirements
i. Relaxed regulatory dispensation on Know Your
Customer (KYC) norms: KYC requirements for
small accounts were relaxed in August 2005, by
stipulating that introduction by an account holder,
who has been subjected to full KYC drill, would
suffice for opening such accounts, or, that the bank
can take any evidence to its satisfaction as to the
identity and address of the customer. During the
year, it has been further relaxed to include job card
issued by NREGA duly signed by an officer of the
State Government or the letters issued by the Unique Identification Authority of India containing
details of name, address and AADHAAR number
as a valid identity proof.
ii. Simplified branch authorisation: To increase the
reach of banking network, domestic scheduled
commercial banks have been permitted to freely
open branches in Tier 2 to Tier 6 centres (with
population of less than 1,00,000) under general
permission, subject to reporting. Further, domestic
scheduled commercial banks have also been
permitted to open branches in rural, semi urban
and urban centres in the North-Eastern States and
Sikkim, without the need to take permission from
Reserve Bank in each case, subject to reporting.
iii. Business Correspondent/Business Facilitator: In
January 2006, the Reserve Bank permitted banks
to engage Business Facilitators and Business
Correspondents (BC) as intermediaries for
providing financial and banking services. The BC
model allows banks to provide door step delivery
of services especially ‘cash in - cash out’ transactions
at a location much closer to the rural population,
thus addressing the last mile problem. The list of
eligible individuals/entities who can be engaged
as BCs is being enlarged from time to time. ‘For profit’ companies have also been allowed to be
engaged as BCs. As on September 2011, banks have
reported deploying 75,316 BCs which covered
97,979 villages.
iv. Opening of branches in unbanked rural centres: A need was felt for opening of more brick and
mortar branches, besides the use of BCs, to further
improve banking penetration and, more
importantly, financial inclusion. Accordingly,
banks have been mandated in the Monetary Policy
Statement – April 2011, to allocate at least 25 per
cent of the total number of branches to be opened
during a year, in unbanked rural centres.
v. Special Dispensation scheme for opening of
branches in NER- To improve banking penetration
in hitherto unbanked North-East region, the
Reserve Bank asked the State Governments and
banks to identify centres where there is a need
for setting up either full-fledged branches or those offering forex facilities, handling government
business or meeting currency requirements. It has
also offered to fund the capital and running costs
for five years, provided the State Government
concerned is willing to make available the
premises and put in place appropriate security
arrangements.
vi. Financial Inclusion Plan for Banks: In our efforts
to achieve a sustained, planned and structured
financial inclusion, all public and private sector
banks were advised to put in place, a Board
approved three year Financial Inclusion Plan (FIP).
These plans broadly include self determined
targets in respect of rural brick and mortar
branches to be opened; business correspondents
(BC) to be employed; coverage of unbanked villages
with population above 2000 as also other
unbanked villages with population below 2000
through branches/BCs/other modes; no-frill
accounts opened including through BC-ICT; Kisan
Credit Cards (KCC) and General Credit Cards
(GCC); 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
implementation of these plans is being closely
monitored by the Reserve Bank.
vii. Measures specific to UCBs: UCBs have been
advised to step up their financial inclusion efforts
by utilising appropriate technology. Certain other
measures such as enhancing maximum limits on
unsecured loans and advances, revising credit
limits permitted for individual housing loans,
extension of area of operations for UCBs,
permitting lending to SHGs and JLGs and
permitting the use of BCs have been undertaken
to further the financial inclusion drive.
Untapped Potential for the UCBs – Financial
Inclusion
25. The client profile of UCBs today predominantly
consists of priority sector segments viz. small business
establishments, SSI, retail traders, self-employed, etc., who would not, normally, find it easy to access
commercial banks. The priority sector loans of the UCBs
are today at 46 per cent as against the prescribed target
of 40 per cent. Nearly 90 per cent of the loan accounts
are less than ` 0.5 million in value. To this extent, UCBs
are already contributing to financial inclusion. However,
there remains a huge hidden potential waiting to be
tapped. Given the large number of urban co-operative
banks, and with 271 districts not having any presence
of UCBs, there exists a huge potential for UCBs to
increase their spread and business and also participate
in the national mission of financial inclusion. Given
their respective sizes, it may well appear to be a Davidvs. Goliath contest as UCBs need to compete with larger
commercial banks in vying for the unbanked pie.
However, there exists a distinct first mover advantage
which the UCBs have, in addition to their vast customer
base. UCBs need to capitalise on this advantage, else
their potential customers will be covered by the
commercial and Regional Rural Banks and UCBs will
lose a good business opportunity. Initially, it may
appear that taking banking services to the sections
constituting the ‘bottom of the pyramid’ may not be
possible or viable, but as various studies reveal, even
the relatively low margins on high volumes can be a
profitable proposition.
26. In semi-urban and rural areas, there are a number
of unbanked and under banked districts inhabited by
people like artisans, migrant labour, small businessmen,
retailers, etc., who find it difficult to join the formal
financial sector and make use of various opportunities.
It is highly desirable on social as well as economic
grounds that members of this class are brought into
the banking fold and the UCBs can certainly take a lead
in this. UCBs should design their business model to be
self-supporting initially, and profitable in the long run.
They should integrate their financial inclusion plan
into their annual business plans. UCBs should give wide
publicity to their services to connect with large
population segments. It is also important to keep in
mind that the service provided should be at an
affordable cost and in this regard, technology will play
a big part. With the wide reach of mobiles, mobile
banking as an avenue for furthering financial inclusion has to be explored.Adoption of appropriate and
effective technology, therefore, could be the key for
financial inclusion efforts to succeed.
Conclusion
27. The current policy of inclusive growth with
financial stability cannot be achieved without ensuring
universal financial inclusion. Though the efforts for
universalisation of financial inclusion are already
underway, there are a number of challenges in this
endeavour going forward with about 0.48 million
villages yet to be provided with banking services. The
financial inclusion for the underprivileged will lead to
host of downstream opportunities such as jobs for the
participants to work as BCs at remote villages,
technology providers, etc., not to speak of the huge
economic growth the financial inclusion measures
trigger. Banks need to perceive Financial Inclusion as
a profitable business model and not as an obligation.
This would be possible only if banks strive towards
offering more and more credit products to customers
captured as part of the Financial Inclusion Plan and
lower transaction cost by leveraging technology. The
key is to establish an appropriate business delivery
model through the involvement of all stakeholders to
make Financial Inclusion a reality.
28. With regard to financial education, it is crucial to
harness the power of women. Just as it is said that a
woman getting educated would educate the family, a
woman being financially literate and included, would
pave way for inclusion of all members in the family.
Given that levels of general and financial literacy are
fairly low among women, the effort should be to devise
innovative programmes of financial literacy targeted
towards women. In this context, it would be useful to
study successful experiments from NGOs such as Self-
Employed Women’s Association (SEWA) which has
started a financial counselling training service for poor
self-employed women, including training for trainers,
and identify how these one-off successes can be
replicated on a larger scale in a cost effective way.
29. Financial inclusion will act as a source of
empowerment and allow people to participate more
effectively in the economic and social process. Banking on the poor could turn out to be a rich banking
proposition. Financial inclusion is a win-win opportunity
for the poor, for the banks and for the nation. Urban
Co-operative Banks have a duty to rise up to meet these
aspirations, convert the perceived weakness into
exciting opportunities and facilitate inclusive growth.
I wish the Cosmos Bank the very best in their Financial
Inclusion initiatives.
References:
1. Chakrabarty, K.C.(2011), ‘Financial Inclusion - A
road India needs to travel’, Article published in www.
livemint.com on Oct 22, 2011
2. Rangarajan, C. (2008), Report of the Committee on
Financial Inclusion
3. Status of Microfinance in India: 2010-11, NABARD
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