Financial Inclusion: A Road India
Needs to Travel*
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.
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 recognised 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) emphasises 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.
Broader Financial Inclusion
India has, for a long time, recognised 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 nationalisation
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 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.
Branches of Scheduled Commercial Banks
Despite all these efforts, a significant proportion
of the households, especially in rural areas, still
remained outside the coverage of the formal banking
system. It is estimated that about 40 per cent of Indians
lack access even to the simplest kind of formal financial
services.
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 the Reserve Bank, in its annual policy
statement of 2005-06, while recognising 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.
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 6,00,000
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:
• A savings-cum-overdraft account
• A remittance product for electronic benefit
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)
The Reserve Bank 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, The Reserve Bank 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:
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.
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.
Engaging business correspondents (BCs): In January
2006, the Reserve Bank 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.
Use of technology: Recognising 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.
Adoption of EBT: 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.
General Credit Cards: 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 `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.
Simplified branch authorisation: 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 the Reserve Bank in each case, subject to
reporting.
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
per cent of the total number of branches to be opened
during a year to unbanked rural centres.
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. The
Reserve Bank advised banks that such banking services
need not necessarily be extended through a brick-andmortar
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.
Financial inclusion plans of banks for three years:
The Reserve Bank 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 brickand-
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.
Long Way to Go
As indicated above, while India has made
enormous strides towards greater financial inclusion,
there is a long way to go, about 5,00,000 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 5,00,000
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:
-
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 brick-and-mortar
branch banking. They should speed up
enrolment of customers and opening of UIDenabled
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 ageold
system of subsidy and public distribution
system with cash transfers.
The success of the BC model 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 brick-and-mortar structure is available
to support about 8-10 BCs at a reasonable distance of
2-3 k.m. 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
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 organisations 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
organisational 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 microentrepreneurs
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.
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.
* |