Financial Inclusion and Information Technology Usha Thorat: Speech
Financial Inclusion and Information Technology Usha Thorat: Speech
Financial Inclusion and Information Technology Usha Thorat: Speech
Introduction
The banking system has grown enormously in the last five years keeping pace with and in some cases leading the country's remarkable economic growth. Simultaneously, the banking system has improved its strength, efficiency and resilience. There have also been significant improvements in the payments and settlements system and electronic payments and RTGS is now much more in use. IT has played a major role in these achievements. Today banks have centralised operations, more and more banks and branches are moving to CBS, network based computing, new delivery channels such as networked ATMs, internet banking, smart card based products, mobile access, etc., and are using IT for customer relationship management, customer transaction pattern analysis credit profiling and risk management. At the same time, large number of households continues to be excluded from the formal banking system and as per some recent surveys their share has increased. The extent and reasons for exclusion are many and have been well documented in the Rangarajan Committee (RC) and more recently in the very comprehensive and analytical section on financial inclusion in the Reserve Banks latest Report on Currency and Finance (RCF) released a few days ago. The RCF points out that despite the broad international consensus regarding the importance of access to finance as a crucial poverty alleviation tool, it is estimated that globally over two billion people are currently excluded from access to financial services (United Nations, 2006).
RBI Monthly Bulletin October 2008
* Keynote address on 'Financial Inclusion and Information Technology' by Smt. Usha Thorat, Deputy Governor, Reserve Bank of India at 'Vision 2020 - Indian Financial Services Sector' hosted by NDTV at The Ballroom, Taj Lands End, Mumbai on September 12, 2008.
1643
SPEECH
Financial Inclusion and Information Technology Usha Thorat
Definitional Issues
No universally accepted definition of financial inclusion is available. Financial inclusion has generally been defined in terms of exclusion from the financial system. Broadly, financial exclusion is construed as the inability to access necessary financial services in an appropriate form due to problems associated with access, conditions, prices, marketing or self-exclusion. The working or operational definitions of financial exclusion generally focus on ownership or access to particular financial products and services. There is no single comprehensive measure that can be used to indicate the extent of financial inclusion across economies. Specific indicators such as number of bank accounts, number of bank branches, that are generally used as measures of financial inclusion, can provide only partial information on the level of financial inclusion in an economy.
income, higher the degree of exclusion. These findings are corroborated by Invest India Incomes and Savings Survey (2007). The survey showed that 32.8 per cent of households had borrowed from institutional sources and 67.2 per cent had borrowed from non institutional sources. The survey also found that 70 per cent of earners in the annual income bracket of more than Rs.400,000 borrowed from institutional sources as compared with only 27.5 per cent in the case of earners in the income bracket of less than Rs.50,000.
1644
SPEECH
Financial Inclusion and Information Technology Usha Thorat
three purposes accounted for about 53 per cent of the loans availed of by indebted earners. Furthermore, more than 60 per cent earners, indebted to non-institutional sources, took loans for the aforesaid three purposes. In the case of emergencies, people may find it convenient to approach noninstitutional sources for their credit needs. Financial emergencies, for instance, include unplanned expenditure on business, consumption and marriage, among others, which may not be financed by banks and other institutional agencies. Some of the other causes for greater recourse to non institutional sources as identified by the RCF are deceleration in bank credit to households in the context of change in banks' behaviour in the 1990s due to their impaired balance sheets and tightening of prudential norms and the slowdown in formal credit to households in the context of the slowdown in agriculture and allied activities that may have induced such households to approach non-institutional sources to meet their credit requirements. The RCF has however noted that the last round of NSSO survey related to the year 2002. Subsequently, several policy initiatives have been taken by the Government/ Reserve Bank to improve the credit flow to agriculture and the needy sectors. These measures had a significant positive impact on financial inclusion as revealed by the data for subsequent period.
financial inclusion has to be an urgent national priority if we are to achieve inclusive growth. The major challenges in banks extending services to the excluded are large costs of covering the huge numbers (cost of enrollment), relative high maintenance costs for such accounts, small ticket size for each transaction, need for communication modes suited to the illiterate and in local language, affordability of the product or service, need for local acceptance and involvement of locally acceptable
Table 2 : Access to Savings Accounts Since 2002
Savings No. of Accounts with Institutions - in Millions 2002 Scheduled Commercial Banks 246.5 Regional Rural Banks 36.7 Sub total 283.2 Other: Primary Agriculture Credit Societies 102.1 Urban Co-operative Banks 41.6 Post Offices 60.2 Total 487.1 No. of Accounts per 100 Adults All Institutions 72 Source : Report on Currency & Finance 2006-08. RBI Monthly Bulletin October 2008 2007 320.9 52.7 373.6 125.8 50.0 60.8 610.2 82
1645
SPEECH
Financial Inclusion and Information Technology Usha Thorat
personnel, need for large scale coverage including over difficult geographic terrain and areas where there is no electric power or normal telecommunication facilities. Further, as is now very obvious from the recent surveys by AIDIS and IIMS, the challenge also lies in offering to low income households and unorganised enterprises a simple loan product which is not based on or linked to the purpose of the loan, the collateral or assets held or income earned by the household but is purely based on cash flow and credit record of the household.
Vision 2020
Looking to 2020, it is even more apparent that the task of banking the unbanked will be truly daunting. Nearly 600 million new customers' accounts will have to be opened and serviced through a variety of channels leveraging on IT.
known as the Business facilitator/Business Correspondent model for achieving greater outreach through intermediaries /agents. The results have been extremely impressive. In just two years the number of no frills accounts opened by banks has increased from around half a million accounts in March 2006 to 15 million in 2008. Going by the data from service providers offering smart card solutions, it may be assumed that smart card accounts probably account for 2 to 3 million of these no frills accounts. Evaluation by external agencies appointed by Reserve Bank has shown that while the first stage of opening no frills accounts has been quite impressive, due to inadequate follow up, cost of transaction and access constraints, in many cases the accounts have not been operated upon at all after having been opened. In order to improve access and use of these accounts, banks will have to offer the services much closer to the customer either through mobile branches, satellite offices, extension counters or using intermediaries like selp-help groups (SHGs)/micro finance institutions (MFIs) or through business correspondents using IT to increase scale, access and reduce cost. Also as is obvious from the results of these recent studies and surveys, the credit product that has to be offered, if the low income borrowers have to be brought into the formal system, has to be simple covering all the needs of small borrowers. I have absolutely no doubt that the simple overdraft or GCC based on cash flow/ track record is the way forward to meet the challenges of providing access to the large numbers currently excluded.
1646
SPEECH
Financial Inclusion and Information Technology Usha Thorat
areas and across multiple channels of delivery, offer multiple financial products (banking, insurance, capital market) through same delivery channel while ensuring consumer protection, develop comprehensive and reliable credit information system so essential for efficient credit delivery and credit pricing, develop appropriate products tailored to local needs and segments, provide customer education and counseling, enable use of multi media and multi language for dissemination of information and advice.
Role of ICT in FI
To be able to ensure that the challenges of banking the unbanked are met effectively and converted into growing and sustainable business for banks, there is no alternative to adoption of ICT solutions on a very large scale and range. ICT solutions are required to capture customer details, facilitate unique identification, ensure reliable and uninterrupted connectivity to remote
Table 3 : No-Frills Accounts Banks Progress
No. of accounts opened by banks as on: Category Mar. 31, Mar. 31 Mar. 31, 2006 2007 2008* Public Sector Banks 332,878 5,865,419 13,925,674 Private Sector Banks 156,388 856,495 1,879,073 Foreign Banks 231 2,753 33,115 Total 489,497 6,724,667 15,837,862 * Provisional. Source : Reserve Bank of india.
1647
SPEECH
Financial Inclusion and Information Technology Usha Thorat
Bank had placed a paper on mobile banking in the public domain and the guidelines are now being finalised. The NFS is able to offer nationwide networking of ATMs and can facilitate banking transactions including remittances through ATMs linked to the NFS. Effective from April 1, 2009 a customer will be able to use any ATM (including other bank ATMs) to operate his/her account at no cost. Other initiatives include those aimed at ensuring quicker, safer currency and funds transfer. In fact the Reserve Bank has put on its web-site yesterday an approach paper on rationalisation of service charges for usage of electronic products, which would facilitate easier movement of funds at lower costs
have been opened to receive government benefits/payments can become the base for a host of other financial services and facilitate the objective of financial inclusion.
Regulatory Framework
The regulations relating to IT solutions for banking services in general and financial inclusion in particular relate to ensuring integrity of banking system and ensuring customer protection. These cover customer identification/ authentication, customer confidentiality/ privacy, KYC/AML issues, outsourcing, bank's responsibility for their agents, ensuring inter-operability and open standards, imaging standards and adherence to payments system regulations.
Way Forward
On the way forward the challenges are going to be banks using multiple channels for delivery of variety of financial services, developing synergies with MFIs and SHGs by introducing seamless ICT based models linked to such intermediaries, availability of skilled manpower to facilitate the adoption of IT on such large scale, use of IT for credit information and efficient credit delivery and risk management in a much bigger way, moving away from the use of cash and emergence of enough leaders in the banking system especially in the public sector banks/RRBs and cooperative banks to recognise the opportunities and take advantage of their specific strengths including location.
1648