Financial Inclusion : Perspective of Reserve Bank of India

1. Financial Inclusion :Perspective of Reserve Bank of India M.K.Samantaray General Manager Reserve Bank of India Guwahati

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. Financial Inclusion (FI) … • Foreign & privatebanks : 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

11. 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

12. 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

13. 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

14. 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

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