Financial Inclusion : A panacea for sustainable Economic Growth

Financial Inclusion : A panacea for sustainable Economic Growth By N Sivaraman L&T Finance Holdings Limited October 5th 2012

What is Financial Inclusion • It is not just about • Opening of no frill bank accounts • Providing micro-credit to the under privilieged • It is about • Getting the underserved population to experience the benefit of broader financial services • Savings • Investments • Credit • Insurance • Remittances

Who needs to be covered in Financial Inclusion • Under-privileged in urban areas • Rural Households, which are underserved as bank branches are farther

Poor reach of organised financial services • Large part of India’s population do not have access to organised financial services: • More than 60% of India’s population is in the rural areas • 40% of population does not enjoy banking services • Only 30,000 of 600,000 habitations have bank accounts

Impact is limiting rural economic growth • Uncovered populations retains a large part of their earnings in cash • Cash remains outside the system, contributing to leakages • Economy deprived of capital • Cash holders lose an opportunity to earn on idle cash • Lack of credit flows • Drives the populace to money lenders, at exorbhitant rates • Limits entrepreneurial ambition • Rural economic activity at a lower levels • Saving not channelised into productive investments • Assets and lives under covered by insurance

Rural India.. The low productivity trap • According to the 2011 Census, Rural India has a pop. of 833 million • 70% of the Rural population is employed in Agri. & allied activities • These activities however contribute to less than a fifth of the GDP • This low productivity is the result of a vicious trap • It is imperative that for Rural India to grow sustainably, this cycle has to be broken Lack of Skills Low Productivity Low Income Low Savings Low Investment Lack of Opportunities Sources- Census India 2011, Ministry of Statistics and Program Implementation,

Financial Inclusion: Boosting Growth Skill Enhancement Buy Productive Assets Income Generation Additional Savings Savings Products Provide Credit Working Capital for services Protection Wealth Insurance Liquidity Increase Consumption • It is hoped that over time, this will help in • Improving the productivity of people employed in agriculture and allied activities • Shift people into more productive sectors and be gainfully employed

Financial Inclusion: Channeling Savings • According to a NCAER Survey*, about 45% of Rural Households do not use any saving or investment products • The quantum of M3 stands at Rs.78 trillion as of Sept 2012 • Out of this, Currency held accounts for Rs. 10.6 trillion. • Tapping these cash assets can provide the system with a huge pool of low cost funds Proximity of Institutions Lack of knowledge about products Reasons for Not Saving Lack of skills to evaluate products Concern on Safety of Capital * - How Households Save and Invest- NCAER Survey ;

This focus on Financial Inclusion has resulted in… An additional 60k BC and BC Agents A 170% growth in Banking outlets A 2-fold increase in No Frills A/Cs Source : RBI But we are still behind the curve… Source : RBI

Key Challenges for Financial Inclusion to succeed Reaching Out • Geographically dispersed ( Over 6.4 lakh villages) • Have low Income • Are under banked (Only 1.47 lakh villages have banking outlets) Targeted beneficiaries are : Product Design • Be Simple to facilitate better understanding of risks • Be Transparent to inspire trust and confidence • Consider unique Cash flow and financing needs of target segments Product Design should be Awareness • Low understanding of the benefits and risks of Financial products • Risk of mis-selling of products to uninformed customers • Ignorance about Grievance Redressal Mechanisms Lack of Awareness results in Business Risks • Credit Risk - Lack of adequate data on consumers • Operational Risk on account of high reliance on Cash transactions Key Business Risks : Sustainability • Generate adequate returns to justify risks involved • Constantly innovate to reduce Costs • Look at new ways of Increasing Revenues Financial Inclusion initiatives should

Benefits of financial inclusion • Preventing leakage of income and capital • Increases overall capital available in the economy • Increases income levels of the underserved • Consumption increases, resulting in economic growth • Large market drives innovation in products and services and delivery • Benefits other segments of society as well • Efficiency within the economy goes up

Given these benefits, Financial Inclusion is a key focus area “Financial inclusion is a key determinant of sustainable and inclusive growth, which in turn is essential for building an equitable society." Pranab Mukherjee, President of India and Former Finance Minister "Financial inclusion should be separate from the idea of getting credit... It means that everybody should have bank accounts, should be able to transact through them and also receive other benefits through them,” Montek Singh Ahluwalia, Dep. Chairman Planning Commission “Financial Inclusion programmes should be implemented on commercial lines and not on a charity basis. It is important that banking with the poor is perceived and pursued as a sustainable and viable business model,” KC Chakrabarty, RBI Deputy Governor Source : Various news reports

Developments in the country • RBI has been pushing opening of new branches • Use of BCs for extending banking services to rural areas • NREGA remittances through banking channels • Development of MFIs as a credit and services delivery • Draft Micro-Finance bill • Mobile payment services

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Financial Inclusion : A panacea for sustainable Economic Growth