Financial Inclusion :

Perspective of Reserve Bank of India

M.K.Samantaray
General Manager
Reserve Bank of India
Guwahati
 Financial Inclusion (FI)
 What is Financial Inclusion
• Large segment of population remaining excluded from
formal payments system & financial markets when financial
market developing & globalizing – Obvious market failure –
Government & financial sector regulators creating enabling
conditions for inclusive & affordable market
 Indian Focus
• Economy Growth rate = 8.5% - 9% (last 5 years) –
Growth primarily in industry & services – Agriculture at 2% -
Growth potential in SME sector enormous – Limited access to
savings, loans, remittance & insurance in rural/ unorganized
sector major constraint to growth – Above services enlarge
livelihood opportunity & empowers poor – Empowerment aids
socio-political stability – Financial inclusion provides formal
identity, access to payments system & deposit insurance
 Financial Inclusion (FI) …
• FI essential for inclusive growth which is necessary for
sustainable overall economic growth – In developed
economies, focus is on small population – In developing
economies (India), focus is on majority excluded
• Types of Financial Exclusion : (i) exclusion from payment
system : not having access to bank accounts (ii) exclusion
from formal credit markets leading to approaching informal/
exploitative markets
• Post-Nationalization (1969) : Expansion of branch network
to unbanked areas – Increased lending to agriculture, SSI,
business – Recent trend : access to basic banking services
 Measures of Financial Inclusion
• Common measure : % of adult population having bank a/c –
By this standard, 59% have accounts – 41% unbanked – In
rural areas 39% covered, 60% in urban areas – Unbanked
population highest in NE and Eastern regions
 Financial Inclusion (FI) …
• Exclusion from credit markets high : Number of loan a/cs
14% of adult population – Coverage 9.5% in rural & 14% in
urban areas – Regional disparity large : 25% in Southern, 7%
in NER, 8% in Eastern, 9% in Central region – Of 203 million
households, 147 million in rural areas – 89 million farmer
households – 51% have no access to formal or informal credit
– 73% have no access to formal credit – No data available for
non-farm & urban households
• Sources of credit – Non-institutional from 70.8% (1971)
reduced to 42.9% (2002) – Post-1991 increased – Share of
money-lenders in rural areas increased from 17.5% (1991) to
29.6% (2002) – Reduced from 40% (1981) to 25% (2002)
 Who are excluded
• Marginal farmers – landless labour – oral lessees – self
employed – unorganized sector – urban slum dwellers –
migrants – ethnic minorities – socially excluded groups – senior
citizens – women – NER, Eastern & Central regions most
excluded
 Financial Inclusion (FI) …
 Reasons for Exclusion :
• Remote, hilly & sparsely populated areas with poor infrastruc-
ture and difficult physical access
• Lack of awareness, low income, social exclusion, illiteracy
• Distance from bank branch, branch timings, cumbersome
documentation/procedures, unsuitable products, language,
staff attitude are common reasons – Higher transaction cost
• Ease of availability of informal credit
• KYC – documentary proof of identity/ address
 Recent RBI Initiatives :
• 1969-1991 : expansion of branch network – average
population covered per branch reduced from 64000 to 13711 –
liberalisation/opening of economy – financial sector reforms –
deregulation – increased competition – strengthening of banks
through recapitalization – prudential measures – Indian
banking now robust & able to achieve global financial inclusion
 Financial Inclusion (FI) …
• Annual Policy Statement -2004-05 : “..banks should be obliged
to provide banking services to all segments of population on
equitable basis.”
• November 2005 : banks advised to provide basic banking “no
frills” accounts with low or minimum balance/ charges –
expand banking outreach to larger sections of population –
printed material used by retail customers made available in
local language
• KYC principles simplified to open accounts for customers in
rural & urban areas – Balances not to exceed Rs. 50000 &
credits Rs. 1 lakh in a year – Introduction by a customer (KYC)
• General purpose Credit Card (GCC) facility up to Rs. 25000 at
rural & urban branches – Revolving credit – Withdrawal up to
limit sanctioned – Based on household cash flows – No
security or collateral – Interest rate deregulated
• One-Time Settlement (OTS) for overdue loans up to Rs. 25000
– Borrowers eligible (after OTS) for fresh credit
 Financial Inclusion (FI) …
• January 2006 : Bank allowed to use services of NGOs, SHGs,
micro finance institutions, civil society organisations as
business facilitators/ correspondents (BC) for extending
banking services – BCs allowed to do “cash in-cash out”
transactions at BC locations & branchless banking
• Credit counselling & financial education – Pilots set up
• June 2007 : Multilingual website in 13 Indian languages
launched by RBI providing information on banking services
• State/Regional Level : SLBC ( group of banks & government
officials) since nationalization – SLBC Convenor – Quarterly
review of banking developments
• District Level : DCC/DLRC meetings by District Commissioner
• April 2006 : 1 district in each state identified by SLBC for
100% financial inclusion – 13 district identified in NER for FI –
RBI evaluation of progress through an external agency
 Financial Inclusion (FI) …
• In identified districts : Survey conducted based on electoral
rolls, public distribution system etc., to identify households
with no bank accounts – Banks to open at least one account
per house – Mass media deployed for awareness/ publicity –
Bank staff/ NGOs/ volunteers take ration cards/ Electoral ID/
photos for fulfilling KYC norms & opening accounts
• KCCs used for credit first, then savings – with small overdraft
facility or GCCs with revolving credit up to a specified limit
• In association with insurance companies, banks providing
insurance cover for life, disability & health cover
• SCBs & RRBs being revived/strengthened with incentives for
better governance
• Payments system being improved to cater to less developed
parts of the country
 Financial Inclusion (FI) …
 Result of RBI Initiatives
• “No frills” accounts : 6 million new accounts added between
March 2006 & 2007 – 45000 rural & semi-urban branches of
RRBs & PSBs shown highest performance – FI now a big
business opportunity – Gives competitive advantage & growth
• SHG-Bank linkage – Access to banking system provided thru
SHGs (groups pooling savings & providing loans to members,
a NGO nurturing) – NABARD supporting group formation,
linking with banks, promoting best practices – Recovery
excellent – 2.6 million SHGs linked to banks touching 40
million households – SHGs given loans by banks against
group guarantees – Rate of interest reasonable – Loan size
small, mostly used for consumption purposes/ small business,
for agricultural activities – SHGs mostly linked to PSBs
 Financial Inclusion (FI) …
• Foreign & private banks : Access thru non bank companies
providing small value retail loans or by partnership with MFIs,
now an excellent substitute of formal sector – Rate of interest
charged very high (24% - 30%) – Reasons being high
transaction cost, small sized loans – Better than usurious
informal sector loans – Rates affordable ? Any surplus would
be left for borrowers & scale up their living standards ?
• PSBs advantaged with lower cost of funds, size, scale –
Cross subsidization of loans & lower rate of interest
• Solution = Partnering of banks with SHGs & MFIs with
reasonable cost of funding – Current approach now
• Business Correspondents (BCs) : Post offices, co-operative
societies, NGOs (trusts/societies) being used as BCs for
branchless banking – Agency risk reduced thru local
organisations & IT solutions for tracking transactions – Door
step banking at lower cost – Viability & scalability dependent
on lower interest rate & service charges
 Financial Inclusion (FI) …
• IT Solutions : Essential for doorstep banking – Pilot projects
by SBI using smart cards for opening a/c with bio-metric
identification – Link to mobile/ hand held connectivity devices
ensures transactions getting recorded in banks’ books on real
time basis – State governments making pension & other
payments under NREGS thru smart cards – Other financial
services (low cost remittances, insurance) provided thru cards
– IT solutions enable large transactions like processing, credit
scoring, credit record & follow up etc.
• Role of Government : Proactive role by issuing identity
cards for a/c opening, thru awareness campaigns by district/
block level officials, meeting cost of cards, financial literacy
drives – India Post being used as BCs
• FM’s Budget Speech 2007-08 : 2 Funds : (i) Financial
Inclusion Fund - developmental/promotional work (ii) Financial
Inclusion Technology Fund – technology adoption/innovation
– Each Fund of $ 125 million
 Financial Inclusion (FI) …
• Recent Initiatives : Setting up of financial literacy centers
– Credit counselling centers – National financial literacy drive
– Linkage with informal sources with safeguards – IT
solutions – Low cost remittance products etc.
• Committee for FI : Dr. C. Rangarajan’s (Chairman : PM’s
Economic Advisory Council) 10-Member Committee
TOR : Pattern of exclusion from access to financial services
– Region, gender & occupational variation – Constraints for
vulnerable groups – Institutional constraints – International
experience/ practices – Relevance/ applicability to India –
Strategy to extend financial services to small/ marginal
farmers – Streamlining/ simplifying procedures – Reduce
transaction costs – Transparent operations – Institutional
changes to be introduced (FIs) – Monitoring mechanism to
assess quality/ quantity of financial inclusion – Indicators for
assessing progress
 Financial Education …
 Definition : Familiarity with/understanding of financial
market products, rewards, risks & make informed decisions –
Personal financial education & capability to take decisions for
one’s well-being & avoid financial distress – Ability to grow,
monitor, effectively use financial resources for economic
security of self, family & business – Financial markets now
very complex, asymmetry of information – Informed decision
making very difficult
 Financial Education & RBI : Poverty, illiteracy & large
section of population out of formal financial set-up –
Economic/ financial sector reforms have created higher
disposable income – New financial products in credit &
investment side provided by financial intermediaries –
Informed decision difficult – Those excluded form formal
financial system need to be educated about banking & need
for relationship with banks
 Financial Education …
 Project Financial Literacy : Disseminate information
about central bank, general banking concepts to target
groups (school/college children, women, rural/ urban poor,
defence personnel, senior citizens) – 2 Modules : (1) Focus
on economy, RBI (2) General banking – Material in Hindi,
English, Regional language – Dissemination thru banks, local
govt. depts., schools, colleges, pamphlets, posters, films,
RBI Website (link for accessing in 13 Indian languages
 Credit Counselling Centers : Need for financial
counselling to avoid informal sector & debt trap – A few
banks have started in rural/ semi-urban centers – Provide
information about banks, financial management, repayment
obligations, avoiding indebtedness, rehabilitation of
distressed – Knowledge Centers : Train farmers/ women – In
May’ 06, SLBC convener banks advised to set up at least one
center in each district – Lead bank to set up more
Thank You