IMPACT OF FINANCIAL

INCLUSION AND WAYS TO

MAKE FINANCIAL
INCLUSION MORE
EFFECTIVE

RISHU AGARWAL
PGDM, JAIPURIA INSTITUTE OF MANAGEMENT,
LUCKNOW
A Project Submitted As a Partial Fulfillment of
Post Graduate Diploma in Management
April 6th, 2009 - June 6th, 2009

Rishu Agarwal
 IMPACT OF FINANCIAL
INCLUSION AND WAYS TO
MAKE FINANCIAL
INCLUSION MORE
EFFECTIVE

SUBMITTED TO:
MR. S. GHATAK
Deputy Regional Manager, Bank of Baroda, Regional Office,
Lucknow

SUBMITTED BY :
RISHU AGARWAL
PGDM, Jaipuria Institute of Management, Lucknow

A Project Submitted As a Partial Fulfillment of

Post Graduate Diploma in Management
April 6th, 2009 - June 6th, 2009
Rishu Agarwal
 DECLARATION
This is to declare that Mr. Rishu Agarwal has done his Summer Project Training in
Bank of Baroda, Regional Office, Lucknow under kind guidance of
Mr.G.M.Dayal, under the overall supervision of Mr.S.Ghatak, Deputy Regional
Manager, Bank of Baroda, Regional office, Lucknow. The data obtained and the
report of the project has not been submitted by the investigator for any other degree
nor the project work is published in any of the journals. This is an original work.

Mr.S.Ghatak Mr.G.M.Dayal Mr. Rishu Agarwal

ACKNOWLEDGEMENT
No academic endeavor can be single handedly accomplished. This work is no
exception.

I Rishu Agarwal, from Jaipuria Institute of Management, Lucknow would like to

thank my project Supervisor Mr. S.Ghatak, Deputy Regional Manager, Bank of
Baroda, Regional Ofiice, Lucknow for his support and guidance during my project

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at Bank of Baroda. Sir, it was a great learning experience working for Bank of
Baroda under your supervision.

I would also like to thank Mr. G.M.Dayal for his kind guidance at every level. Sir,
this project could not be completed without your kind guidance.

Last but not the least, I would like to thank L.D.M. of Raebareli, Mr. J.N.Singh and
L.D.M. of Sultanpur Mr. H.P.Shukla for their kind support as and when I needed. I
would also like to acknowledge various Branch Heads of Bank of Baroda and
Business Correspondents of FINO and INTEGRA who facilitated me at every step.

THANK YOU ALL

Rishu Agarwal

CONTENTS

EXECUTIVE SUMMARY
• About Bank of Baroda
• About Reserve Bank of India
• Measures taken by RBI towards FI
• RBI guidelines on FI by extension of banking services

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 • Measurement of FI

CHAPTER 1 – INTRODUCTION
• What is FI
• Committee on FI
• FI in India
• Recent initiatives by RBI
• Indian scenario
• Steps towards FI
• Policy initiatives for FI

CHAPTER 2 – RESEARCH
METHODOLOGY
• Raebareli
• Sultanpur

CHAPTER 3 – DATA ANALYSIS

• Changing contour of Indian population
• Focus on FI in India

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 • Reasons for Exclusion
• RBI initiative for FI

CHAPTER 4 – INTERPRETATION
• Strategies and Approach
• Use of Intermediaries
• Role of Government
• A). FI through IT
• IT solution for FI
• Role of ICT in FI
• ICT for FI: RBI initiative

• B). FI through SHGs and Micro Finance

• SHG-Bank Linkage Program
• SHGs and MFI role in FI
• MF delivery model in India
• Recent initiatives by NABARD
• MF initiative by SIDBI

• C). FI through Prominent Organizations

• Branchless banking through Business Correspondents

• D). FI through Women Empowerment

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 • FI-Women Empowerment

CHAPTER 5 – DISCUSSION
• FI-Gateway as perceived
• Points

CHAPTER 6 – FINDINGS
• Interaction with LDM, Raebareli
• Interaction with LDM, Sultanpur
• Interaction with Branch Manager, Salon
• Interaction with Branch Manager, Musafirkhana
• Interaction with Fino agent, Dadra
• Interaction with Integra agent, Visaiya
• Interaction with Gram Pradhaan, Visaiya

CHAPTER 7 – MEASURES TO MAKE FI

MORE EFFECTIVE
• Mobile Banking Units

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 • Extension Counters
• Formalities for No Frill Accounts
• YoY Analysis of each service provided by the Bank
• What are the steps taken for the Micro Credit Planning
• SHGs for loans: Involvement of Village Development
Officer
• Guidance by Expert Panel to the villagers: For Micro
Credit Planning
• Banking through Mobile
• Restructuring SGSY

CHAPTER 8 – BIBLIOGRAPHY

CHAPTER 9 – APPENDIX
FINANCIAL INCLUSION AS PERCIEVED BY
EMINENT DIGNITARIES
• Speech by Shri V.Leeladhar, Deputy Governor, RBI
(Taking Banking services to common man-FI)
• Speech by Smt. Usha Thorat, Deputy Governor, RBI (FI
and IT)

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 • Speech by Smt. Usha Thorat, Deputy Governor, RBI (Role
of Banks in emerging economies)
• Speech by Smt. Usha Thorat, Deputy Governor, RBI
(Inclusive Financial system for the Aged)
• Speech by Smt. Usha Thorat, Deputy Governor, RBI (FI-
Indian Experience)
• Policy Seminar on FI through MF (Held at Udaipur)
• Minutes on National Conference on FI (Held in New Delhi)

EXECUTIVE SUMMARY

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 ABOUT BANK OF BARODA
A saga of vision and enterprise

It has been a long and eventful journey of more than a century across 25 countries. Starting in
1908 from a small building in Baroda to its new hi-rise and hi-tech Baroda Corporate Centre in
Mumbai, is a saga of vision, enterprise, financial prudence and corporate governance.
It is a story scripted in corporate wisdom and social pride. It is a story crafted in private capital,
princely patronage and state ownership. It is a story of ordinary bankers and their extraordinary
contribution in the ascent of Bank of Baroda to the formidable heights of corporate glory. It is a
story that needs to be shared with all those millions of people - customers, stakeholders,
employees & the public at large - who in ample measure, have contributed to the making of an
institution.

Mission statement

To be a top ranking National Bank of International Standards committed to augmenting stake

holders' value through concern, care and competence.

ABOUT THE RBI

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The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of
the Reserve Bank of India Act, 1934.

The Central Office of the Reserve Bank was initially established in Calcutta but was permanently
moved to Mumbai in 1937. The Central Office is where the Governor sits and where policies are
formulated.

Though originally privately owned, since nationalisation in 1949, the Reserve Bank is fully
owned by the Government of India.

Preamble

The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as:

"...to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary

stability in India and generally to operate the currency and credit system of the country to its

advantage."

Measures undertaken by Reserve Bank of India

towards Financial Inclusion
In November 2005, banks were advised to make available a basic banking ‘no-frills’ account
with low or nil minimum stipulated balances as well as charges to expand the outreach of such
accounts to vast sections of the population. Several banks have since introduced such 'no-frills'
account with and without value-added features. According to the information available with the
Reserve Bank, about five lakh no-frill accounts have been opened until March 31, 2006, of
which about two-third are with the public sector and one-third with the private sector banks.

In order to ensure that persons belonging to low income group, both in urban and rural areas do
not encounter difficulties in opening bank accounts owing to procedural hassles, the know your
customer (KYC) procedures for opening accounts has been simplified. The Reserve Bank has
directed banks to make available all printed material used by retail customers in English, Hindi
and the concerned regional language. More recently, in January 2006, banks were permitted to
utilise the services of non-governmental organisations (NGOs/SHGs), micro-finance institutions
and other civil society organisations as intermediaries in providing financial and banking
services through the use of business facilitator and business correspondent models.

To extend hassle-free credit to bank customers in rural areas, the guidelines on general credit
card (GCC) schemes were simplified to enable customers’ access credit on simplified terms and
conditions, without insistence on security, purpose or end-use of credit. With a view of providing
hassle free credit to customers, banks were allowed to issue general credit cards akin to Kisan
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credit cards. A simplified mechanism for one-time settlement of loans with principal amount up
to Rs.25,000 which have become doubtful and loss assets as on September 30, 2005 was
suggested for adoption. In case of loans granted under Government-sponsored schemes, banks
were advised to frame separate guidelines following a state-specific approach to be evolved by
the State-Level Bankers’ Committee (SLBC). Banks have been specifically advised that
borrowers with loans settled under the one time settlement scheme will be eligible to re-access
the formal financial system for fresh credit. Banks were advised to give effect to these measures
at all branches for achieving greater financial inclusion. Initiatives have also been undertaken
towards achieving greater financial inclusion in the North-Eastern region, which had perennially
remained under-banked.

The Reserve Bank considers that IT-enabled services can meet the challenges which need to be
addressed for increasing the scope and coverage of financial inclusion such as lack of adequate
infrastructure, higher transaction costs and low volumes of transactions. The Reserve Bank has
already initiated action in the North-Eastern region.

RBI Guidelines on Financial Inclusion by Extension of

Banking Services – Use of Business Facilitators(BFs)
and Business Correspondents (BCs)

Based on queries received from certain banks, we had clarified that there is no objection to banks
engaging individuals as Business Facilitators (BFs) depending on the comfort level of banks,
subject to their taking adequate precautions and conducting proper due diligence before engaging
individuals as BFs.

In the light of the announcement made in paragraph 92 of the Budget Speech 2008-2009 by the
Hon’ble Finance Minister, Govt. of India, it has been decided to permit banks to engage retired
bank employees, ex-servicemen and retired government employees as Business Correspondents
(BCs) with immediate effect, in addition to the entities already permitted, subject to appropriate
due diligence. While appointing such individuals as BCs, banks may ensure that these
individuals are permanent residents of the area in which they propose to operate as BCs and also
institute additional safeguards as may be considered appropriate to minimise agency risk.

Further, with a view to ensuring adequate supervision over the operations and activities of the
BCs by banks, it has been decided that every BC will be attached to and be under the oversight
of a specific bank branch to be designated as the base branch. The distance between the place of
business of a BC and the base branch, ordinarily, should not exceed 15 Kms in rural, semi-urban
and urban areas. In metropolitan centres, the distance could be upto 5 kms. However, in case a
need is felt to relax the distance criterion, the matter can be referred to the District Consultative
Committee (DCC) of the district concerned for approval. Where such relaxations cover adjoining
districts, the matter may be cleared by the State Level Bankers' Committee (SLBC), which shall

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also be the concerned forum for metropolitan areas. Such requests may be considered by the
DCC/SLBC on merits in respect of under-banked areas or where the population is scattered over
large area and where the need to provide banking services is imperative but having a branch may
not be viable, keeping in view the ability of the base branch of the bank making the request to
exercise sufficient oversight on the BC.

Where currently BCs are operating beyond the distance limits specified above, DCC/SLBC may
be kept informed and steps may be taken to conform to the stipulated limits within six months
time, unless specific approval is accorded by the DCC/SLBC on the grounds indicated in
paragraph 4 above. Needless to add, in the context of scaling up of BF/BC model which is a huge
challenge given the size of the country, banks should bring to the notice of RBI any important
issues to facilitate taking prompt corrective steps. The implementation of the BF/BC model
should be monitored closely by controlling authorities of banks, who should specifically look
into the functioning of BFs/BCs during the course of their periodical visits to the branches.
Further, banks should also put in place an institutionalized system for periodically reviewing the
implementation of the BF/BC model at the Board level.

Measurement of Financial Inclusion/Exclusion

While the importance of financial inclusion has been widely accepted, much less is known about
how inclusive the financial systems are and who has access to which financial services. The
literature on financial inclusion lacks a comprehensive measure that can be used to indicate the
extent of financial inclusion across countries. Though indicators of the depth of banking system,
capital markets, and insurance sector are widely available, there is less information available
about the degree of financial inclusiveness. Lack of information is more conspicuous in
developing countries where there is little systematic information on who is served by the formal
financial sector, which financial institutions or services are the most effective at supporting
access by poor households and small enterprises, or what practical and policy barriers may be
hindering the accessibility. Individual indicators, viz., number of bank accounts and 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. Financial services or products
rendered by banks, postal savings banks, credit unions, finance companies, micro-finance
institutions (MFIs), and other formal and quasi-formal non-bank institutions generally form the
basis for measuring the financial inclusion.

It is often observed that people may have access to financial services, but may not wish to use
them. Such voluntarily excluded persons, it is argued, should be included in measures of access
even if they do not use financial services. However, even among the ‘voluntarily excluded’, this
may in reality be because such services are unaffordable, unsuited to their needs, or because the
potential users fear that they will be declined upon request. Among the ‘involuntarily excluded’
from services such as credit, some represent high credit risk that lenders are discouraged to
prudently serve them.

There are various measures of access to finance. For instance, access to finance can be measured

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in terms of access to certain institutions (such as banks, insurance companies, and MFIs or in
terms of access to the functions that such institutions perform, or the services that they provide
(such as payments services, savings or loans and credits). Yet another approach is to look at
details on the uses of specific financial products such as debit cards, credit cards, life insurance
and home mortgages, among others. However, these are highly country-specific. The core access
indicators often used are generally based on institutional distinctions concerning specifically the
degree of formality of the financial institutions.

CHAPTER 1
INTRODUCTION

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 INTRODUCTION

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.

What is Financial Inclusion?

• Financial inclusion is delivery of banking services at an affordable cost to the vast

sections of disadvantaged and low income groups. Unrestrained access to public goods
and services is the sine qua non of an open and efficient society. As banking services are
in the nature of public good, it is essential that availability of banking and payment
services to the entire population without discrimination is the prime objective of the
public policy.

Indian economy in general and banking services in particular have made rapid strides in the
recent past. However, a sizeable section of the population, particularly the vulnerable groups,
such as weaker sections and low income groups, continue to remain excluded from even the most
basic opportunities and services provided by the financial sector. To address the issue of such
financial exclusion in a holistic manner, it is essential to ensure that a range of financial services
is available to every individual. These services are:

(i) A no-frills banking account for making and receiving payments,

(ii) A savings product suited to the pattern of cash flows of a poor household,
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 (iii) Money transfer facilities,
(iv) Small loans and overdrafts for productive, personal and other purposes, &
(v) Micro-insurance (life and non-life)

Committee on Financial Inclusion

The Committee has defined Financial Inclusion as "the process of ensuring access to financial
services and timely and adequate credit where needed by vulnerable groups such as weaker
sections and low income groups at an affordable cost .”

The major recommendations of the Committee include :

1). Launching of a National Rural Financial Inclusion Plan (NRFIP) in mission mode with a
clear target to provide access to comprehensive financial services, including credit, to at least
50% (say 55.77 million) of the financially excluded rural cultivator/non-cultivator households,
by 2012 through rural/semi-urban branches of Commercial Banks and Regional Rural Banks .
The remaining households have to be covered by 2015.For the purpose, a National Mission on
Financial Inclusion (NaMFI) is proposed to be constituted comprising representatives from all
stakeholders to aim at achieving universal financial inclusion within a specific time frame.

2). Constitution of two funds with NABARD – the Financial Inclusion Promotion &
Development Fund(FIPF) and the Financial Inclusion Technology Fund(FITF) with an initial
corpus of Rs. 500 crore each to be contributed by GoI / RBI / NABARD. The FIPF will focus on
interventions like, “Farmers’ Service Centres”, “Promoting Rural Entrepreneurship”, “Self-Help
Groups and their Federations”, “Developing Human Resources of Banks”, “Promotion of
Resource Centres” and “Capacity Building of Business Facilitators and Correspondents”, while
the FITF will focus on funding of low-cost technology solutions

3). Deepening the outreach of microfinance programme through finacing of SHG/JLGs and
setting up of a risk mitigation mechanism for lending to small marginal farmers/share
croppers/tenant farmers through JLGs

4). Use of PACSs as Business Facilitators and Correspondents

5). Micro finance – Non Banking Finance Companies (MF-NBFCs) could be permitted to
provide thrift, credit, micro-insurance, remittances and other financial services up to a specified
amount to the poor in rural, semi-urban and urban areas. Such MF-NBFCs may also be
recognized as Business Correspondents of banks for providing only savings and remittance
services and also act as micro insurance agents

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6). Opening of specialised microfinance branches / cells in potential urban centers for
exclusively catering to microfinance and SHG - bank linkages requirements of the urban poor.
An enabling provision be made in the NABARD Act, 1981 permitting NABARD to provide
micro finance services to the urban poor

Financial Inclusion in India – Key Elements

(i) Financial inclusion is delivery of banking services at an affordable cost to the vast sections of
disadvantaged and low income groups. Unrestrained access to public goods and services is the sine
qua non of an open and efficient society. As banking services are in the nature of public good, it is
essential that availability of banking and payment ser vices to the entire population without
discrimination is the prime objective of the public policy (Leeladhar, 2006).
(ii) Financial exclusion signifies lack of access by certain segments of the society to appropriate, low-
cost, fair and safe financial products and services from mainstream providers. Financial exclusion is
thus a key policy concern, because the options for operating a household budget, or a micro/small
enterprise, without mainstream financial services can often be expensive. This process becomes self-
reinforcing and can often be an important factor in social exclusion, especially for communities with
limited access to financial products, particularly in rural areas (Mohan, 2006).
(iii) Financial inclusion means the provision of affordable financial services, viz., access to payments
and remittance facilities, savings, loans and insurance services by the formal financial system to
those who tend to be excluded (Thorat, 2006).
(iv) The process of financial inclusion consists of seeking each household and offering their inclusion
in the banking system (Reddy, 2007).
(v) The process of ensuring access to financial services and timely and adequate credit where needed
by vulnerable groups such as weaker sections and low income groups at an affordable cost (The
Committee on Financial Inclusion, Chairman: Dr. C. Rangarajan, 2008).

The administrative framework for rural lending in India was provided by the Lead Bank Scheme
introduced in 1969, which was an important step towards implementation of the two-fold objectives
of deposit mobilisation on an extensive scale and stepping up of lending to weaker sections of the
economy. Realising that the flow of credit to employment oriented sectors was inadequate, the
priority sector guidelines were issued to the banks by the Reserve Bank in the late 1960s to step up
the flow of bank credit to agriculture, small-scale industry, self-employed, small business and the
weaker sections within these sectors. The target for priority sector lending was gradually increased to
40 per cent of advances in the case of domestic banks (32 per cent, inclusive of export credit, in the
case of foreign banks) for specified priority sectors. Sub-targets under the priority sector, along with
other guidelines including those relating to Government sponsored programmes, were used to
encourage the flow of credit to the identified vulnerable sections of the population such as scheduled
castes, religious minorities and scheduled tribes. The Differential Rate of Interest (DRI) Scheme was
instituted in 1972 to provide credit at concessional rate to low income groups in the country.
Since the 1970s, the promotional aspects of banking policy have come into greater prominence. The
major emphasis of the branch licensing policy during the 1970s and the 1980s was on expansion of
commercial bank branches in rural areas, resulting in a significant expansion of bank branches and
decline in population per branch. The branch expansion policy was designed, inter alia, as a tool for
reducing inter-regional disparities in banking development, deployment of credit and urban-rural

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pattern of credit distribution. In order to encourage commercial banks and other institutions to grant
loans to various categories of small borrowers, the Reserve Bank promoted the establishment of the
Credit Guarantee Corporation of India in 1971 for providing guarantees against the risk of default in
repayment. The scheme, however, was subsequently discontinued.
The National Bank for Agriculture and Rural Development (NABARD) was set up in 1982 mainly to
provide refinance to the banks extending credit to agriculture. RRBs, which were set up in 1975 to
cater, inter alia, to the credit requirements of the rural poor, have recently been restructured.

Recent initiatives by Reserve Bank of India

The period 1969 to 1991 saw a huge increase in the branch outreach in India as the average
population covered by a bank branch fell from 64,000 to 13,711. In 1991 along with reforms for
liberalising and opening the economy, financial sector reform aimed at deregulation, increased
competition and strengthening the banking sector through recapitalisation and adoption of
prudential measures. The Indian banking industry today is quite robust and strong to be able to
take on the challenges of achieving greater financial inclusion.

In the Annual Policy of the Reserve Bank for 2004-05, the Governor, Dr. Reddy observed and I
quote -
“There has been expansion, greater competition and diversification of ownership of banks
leading to both enhanced efficiency and systemic resilience in the banking sector. However,
there are legitimate concerns in regard to the banking practices that tend to exclude rather than
attract vast sections of population, in particular pensioners, self-employed and those employed
in unorganised sector. While commercial considerations are no doubt important, the banks have
been bestowed with several privileges, especially of seeking public deposits on a highly
leveraged basis, and consequently they should be obliged to provide banking services to all
segments of the population, on equitable basis.”

Pursuant to this, the Reserve Bank has undertaken a number of measures with the objective of
attracting the financially excluded population into the structured financial system. In November
2005, banks were advised to make available a basic banking ‘no-frills’ account with low or nil
minimum balances as well as charges to expand the outreach of such accounts to vast sections of
the population. Banks are required to make available all printed material used by retail customers
in the concerned regional language.

In order to ensure that persons belonging to low income group, both in urban and rural areas do
not encounter difficulties in opening bank accounts, the know your customer (KYC) procedures
for opening accounts has been simplified for those persons with balances not exceeding Rs
50000/- (about GBP 600) and credits in the accounts not exceeding Rs.100000/- (about GBP
1200) in a year. The simplified procedure allows introduction by a customer on whom full KYC
drill has been followed.

Banks have been asked to consider introduction of a General purpose Credit Card (GCC) facility
up to Rs. 25000/- at their rural and semi urban braches. The credit facility is in the nature of
revolving credit entitling the holder to withdraw upto the limit sanctioned. Based on assessment

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of household cash flows, the limits are sanctioned without insistence on security or purpose.
Interest rate on the facility is completely deregulated.

A simplified mechanism for one-time settlement of overdue loans up to Rs.25,000/- has been
suggested for adoption. Banks have been specifically advised that borrowers with loans settled
under the one time settlement scheme will be eligible to re-access the formal financial system for
fresh credit.

In January 2006, banks were permitted to utilise the services of non-governmental organisations
(NGOs/SHGs), micro-finance institutions and other civil society organisations as intermediaries
in providing financial and banking services through the use of business facilitator and business
correspondent (BC) models. The BC model allows banks to do ‘cash in - cash out’ transactions at
the location of the BC and allows branchless banking.

Other measures include setting up pilots for credit counselling and financial education. A
multilingual website in 13 Indian languages on all matters concerning banking and the common
person has been launched by the Reserve Bank on 18 June 2007.

Indian Scenario

In India, growth with equity has been the central objective right from the inception of the
planning process. Accordingly, over the years, initiatives have been taken continuously by the
Government and the Reserve Bank to address the issue of inclusive growth. Notwithstanding the
rapid increase in overall GDP and per capita income in recent years, a significant proportion of
the population in both rural and urban areas still experiences difficulties in accessing the formal
financial system. Recent concerns have arisen from an inadequate reduction in poverty levels,
sectoral divergences in growth and employment opportunities and tardy improvement in other
social indicators, despite higher economic growth. The Eleventh Five Year Plan, therefore, re-
emphasised the need for a more inclusive growth in order to ensure that the per capita income
growth is more broad-based. The farming, micro, small and medium enterprises have immense
potential to play a critical role in achieving the objective of faster and more inclusive growth as
these sectors contribute to output and employment generation in a significant way with capacity
to expand regionally diversified production and generating widely dispersed off-farm
employment. Bringing the larger population within the structured and organised financial system
has explicitly been on the agenda of the Reserve Bank since 2005 (Mohan, 2006). While several
central banks focus solely on inflation, many in developed and emerging economies alike,
including India, also focus on growth. There is currently a perception that there are a large
number of people, potential entrepreneurs, small enterprises and others, who may not have
adequate access to the financial sector, which could lead to their marginalisation and denial of
opportunity to grow and prosper. The Reserve Bank has, therefore, introduced various new
measures to encourage the expansion of financial coverage in the country. Financial inclusion is
considered essential for fostering economic growth in a more inclusive fashion.

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In a fast growing economy, an important issue is how to sustain and diversify growth so that the
risk to growth process is diversified across sectors. It is in this context that the search for
potential sources of incremental growth, i.e., sectors that have difficulty in accessing financial
services, assumes importance. Therefore, including such segments or sectors would, on the one
hand, unleash their productive capacities, and on the other, would augment domestic demand on
a sustainable basis driven by income and consumption growth from such sectors. This would also
have strong inter-sectoral linkages.Bank nationalization in India marked a paradigm shift in the
focus of banking as it was intended to shift the focus from class banking to mass banking. The
rationale for creating Regional Rural Banks was also to take the banking services to poor people.
The branches of commercial banks and the RRBs have increased from 8321 in the year 1969 to
68,282 branches as at the end of March 2005. The average population per branch office has
decreased from 64,000 to 16,000 during the same period. However, there are certain under-
banked states such as Bihar, Orissa, Rajasthan, Uttar Pradesh, Chattisgarh, Jharkhand, West
Bengal and a large number of North-Eastern states, where the average population per branch
office continues to be quite high compared to the national average. As you would be aware, the
new branch authorization policy of Reserve Bank encourages banks to open branches in these
under banked states and the under banked areas in other states. The new policy also places a lot
of emphasis on the efforts made by the Bank to achieve, inter alia, financial inclusion and other
policy objectives. One of the benchmarks employed to assess the degree of reach of financial
services to the population of the country, is the quantum of deposit accounts (current and
savings) held as a ratio to the adult population. In the Indian context, taking into account the
Census of 2001 (ignoring the incremental growth of population thereafter), the ratio of deposit
accounts (data available as on March 31, 2004) to the total adult population was only 59%
(details furnished in the table). Within the country, there is a wide variation across states. For
instance, the ratio for the state of Kerala is as high as 89% while Bihar is marked by a low
coverage of 33%. In the North Eastern States like Nagaland and Manipur, the coverage was a
meager 21% and 27%, respectively. The Northern Region, comprising the states of Haryana,
Chandigarh and Delhi, has a high coverage ratio of 84%. Compared to the developed world, the
coverage of our financial services is quite low. For instance, as per a recent survey commissioned
by British Bankers' Association, 92 to 94% of the population of UK has either current or savings
bank account.

Steps towards financial inclusion

In the context of initiatives taken for extending banking services to the small man, the mode of
financial sector development until 1980’s was characterized by

• a hugely expanded bank branch and cooperative network and new organizational forms
like RRBs;
• a greater focus on credit rather than other financial services like savings and insurance,
although the banks and cooperatives did provide deposit facilities;

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 • lending targets directed at a range of ‘priority sectors’ such as agriculture, weaker
sections of the population, etc;
• interest rate ceilings;
• significant government subsidies channeled through the banks and cooperatives, as well
as through related government programmes;
• a dominant perspective that finance for rural and poor people was a social obligation and
not a potential business opportunity.

It is absolutely beyond any doubt that the financial access to masses has significantly improved
in the last three and a half decades. But the basic question is, has that been good enough. As I
mentioned earlier, the quantum of deposit accounts (current and savings) held as a ratio to the
adult population has not been uniformly encouraging. There is a tremendous scope for financial
coverage if we have to improve the standards of life of those deprived people.

With a view to enhancing the financial inclusion, as a proactive measure, the RBI in its Annual
Policy Statement for the year 2005-06, while recognizing the concerns in regard to the banking
practices that tend to exclude rather than attract vast sections of population, urged banks to
review their existing practices to align them with the objective of financial inclusion. In the Mid
Term Review of the Policy (2005-06), RBI exhorted the banks, with a view to achieving greater
financial inclusion, to make available a basic banking ‘no frills’ account either with nil or very
minimum balances as well as charges that would make such accounts accessible to vast sections
of the population. The nature and number of transactions in such accounts would be restricted
and made known to customers in advance in a transparent manner. All banks are urged to give
wide publicity to the facility of such no frills account so as to ensure greater financial inclusion.

Further, in order to ensure that persons belonging to low income group both in urban and rural
areas do not face difficulty in opening the bank accounts due to the procedural hassles, the KYC
procedure for opening accounts has been simplified for those persons who intend to keep
balances not exceeding rupees fifty thousand (Rs. 50,000/-) in all their accounts taken together
and the total credit in all the accounts taken together is not expected to exceed rupees one lakh
(Rs.1,00,000/-) in a year.

POLICY INITIATIVE FOR FINANCIAL INCLUSION

• Nationalization of banks
• Establishments of Regional Rural Banks
• Prescription of priority sector targets
• Lending to weaker sectors at concession
• Introduction of lead bank scheme
• Branch licensing norms with focus on rural/ semi urban branches
• No frill accounts

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 • Know your customer norms
• General credit card facility

CHAPTER 2
RESEARCH METHODOLOGY

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Working / Methodology followed by respective Lead Branches of B.O.B.

1) RAE BAREILLY (LDM: Mr. J.N.Singh)

Method:
• In step one, 100% financial inclusion done

• Teams made at village level

• Teams are told about the villages and number of families

• Teams go to every village and enquire about account holding in any institution

• Teams enquire about the family members, their work and income

• Step two will be total financial inclusion

• We will find out the total income

• What are the needs

• Where and how much is the expected expenditure

• If there are savings, then how much

• Tell them and guide them to invest judiciously

• Guide them, as to how improve wellness and savings

• We will conduct counseling

• After all the consideration, they are given the estimate for all the things and then
they are offered loan

Women empowerment:
• Women are trained to do the work

• Eg. Handicraft, homemade items, etc.

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 Results of women empowerment:
• Repaid loans of private money lenders (seths and sahukars) from the
revenue generated

• Liquor banned in many villages

Problems:
• Village people do not tell about their accounts

• If they work, they do not disclose it

• If they have rented their home or land, they do not tell that

• They just say, no income to deposit into the bank

2) SULTANPUR (LDM: Mr. H.P.Shukla)

Method:
• Basic objective is to join every family with the bank

• Involved private agencies to accomplish the task

• To identify the potential and then give loan to families

Problems:
• Lack of human resource with the bank so that the bank staff cannot go to the field
to mobilize more customers

• Private company which is contracted is doing the job for its own benefit

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 CHAPTER 3
DATA ANALYSIS

Changing Contours of Indian Population

India, the seventh largest country in size, continues to occupy the second largest populated
country after China. The aged population in India (i.e. over 60 years) that stood at 84.7 million
(7.5 per cent) in 2005 is expected to rise to 141 million (10.2 per cent) by 2020 and thereafter

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reach 194 million (13 per cent) in 2030. Even though income levels are going up and poverty
declining, it can be reasonably expected that a significant number among the aged population
would be in the low income category. The aged population requires additional attention both
from the society and from the Government. More funds need to be allocated for pension, health
and other social benefits of the aged people, while declining savings of the aged population could
pose a threat in meeting such additional expenditure. India is one of the highest savers among the
emerging market economies. Gross Domestic Saving, as percentage of GDP at current market
prices, increased from 23.5 per cent in 2001-02 to 34.8 per cent in 2006-07. Household savings
rose from 22.1 per cent in 2001-02 to 23.8 per cent in 2006-07. Financial savings however
constituted only 47.5 per cent of total household savings in 2006-07

Financial inclusion and Financial Protection

As you are aware RBI and the GOI have been pushing for greater financial inclusion. This
implies, first of all, providing an accessible and safe place to the people at large for putting their
savings which can be withdrawn in case of emergency. What RBI is trying, is to see that the un-
banked population gets access to bank accounts. Such bank accounts are also critical to ensure a
safe and reliable payments system for old age pensions. Pension payment for BPL families and
unorganised sector targeted at nearly 300 million workers, can be paid through bank accounts
thereby not only saving the cost of making the payments, but also minimising leakages and pre-
empting payments in the names of persons who do not actually exist. Bio metric smart cards
/mobile technology and use of business correspondents as agents by banks have made “no frills”
banking accounts accessible to low income families. A very successful example of using such
accounts for old age pension payments can be seen in the State of Andhra Pradesh, where a pilot
carried out in the Warangal district is being up-scaled to cover all districts. Building up savings
in such accounts and provision of small overdrafts facilitates creation of track record and gives
confidence to the saver that emergency needs will be met. RBI now treats such overdrafts upto
Rs.25,000/- against no frills accounts and credit provided under GCC at rural and semi urban
branches as priority sector under indirect credit to agriculture. Further, RBI has allowed banks to
use ex-servicemen, retired bank and government employees to be business correspondents to
provide doorstep banking to the customers in remote areas that are far from a bank branch. These
measures viz. use of intermediaries and IT solutions have now made it possible to provide
accessible banking facilities to the large parts of the population that were hitherto outside the
access of formal banking. It is easy to see how critical this payments infrastructure will be for
providing old age pensions, besides life, health, weather, asset and livestock insurance especially
in rural areas - Insurance is very important as it reduces credit risk and allows greater flow of
credit at lower cost. Thus there is a huge synergy between financial inclusion and financial
protection for achieving a more inclusive financial system.

Housing, Health and Life Style

As is found in surveys, savings in India is mainly for owning a house, meeting emergency needs,
education of children and social events such as marriages. Compared to the earlier period of high
interest rates, owning a house in India has became quite affordable with lower interest rates and
tax breaks. There has been a steady increase in housing loans from 3.4 per cent of GDP in 2001
to 8.5 per cent of GDP in 2006. As share of credit, it moved up to 12 per cent of NBC in March
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2007. The average interest rate on housing loans has consistently declined from around 16 per
cent in 1995-96 to around 8 per cent in 2004-05, though it hardened moderately thereafter (NHB,
2006). Reflecting these developments, housing stock in the country had also increased from 148
million units in 1991 to 187 million units in 2001 and is expected to further gone up to 218
million units in 2007 (NHB, 2006). While on the one hand, there is an improvement in longevity,
on the other hand, cost of good health care facilities is spiraling and there is little social security.
The availability of affordable health insurance services to senior citizens is limited. The
Government, on December 6, 2006, launched an exclusive health insurance scheme, Varistha
Mediclaim for Senior Citizens, offered by National Insurance Company. The Union Budget
2007-08 announced that the other three public sector insurance companies would also offer a
similar product to senior citizens..There is, however, still a large gap between the supply of
health insurance facilities available to older people and demand/requirement for the same. The
IRDA constituted a committee in April 2007 to look into, among others, issues relating to health
insurance schemes for senior citizens, streamlining procedures and suggest possible incentives to
the senior citizens for adopting healthier lifestyles. The Committee made various
recommendations including on proper product designing according to the needs of senior citizens
and their capacity to pay, drafting of insurance policies in simple language, uniform definition of
terminology and standard terms and conditions for the Industry, portability of covers, sharing of
information etc. Recently with the persuasion of GOI Jan Shree Bima Yojna has been launched
where in women beneficiaries of SHG get a protection up to Rs. 50000/= on a mere premium of
Rs.200/= p.a.

Focus of financial inclusion in India

The Indian economy is growing at a steady rate of 8.5 % to 9% in the last five years or so. Most
of the growth is from industry and services sector. Agriculture is growing at a little over 2 %.
The potential for growth in the primary and SME sector is enormous. Limited access to
affordable financial services such as savings, loan, remittance and insurance services by the vast
majority of the population in the rural areas and unorganised sector is believed to be acting as a
constraint to the growth impetus in these sectors. Access to affordable financial services -
especially credit and insurance - enlarges livelihood opportunities and empowers the poor to take
charge of their lives. Such empowerment aids social and political stability. Apart from these
benefits, FI imparts formal identity, provides access to the payments system and to savings safety
net like deposit insurance. Hence FI is considered to be critical for achieving inclusive growth;
which itself is required for ensuring overall sustainable overall growth in the country.

The approach to FI in developing countries such as India is thus somewhat different from the
developed countries. In the latter, the focus is on the relatively small share of population not
having access to banks or the formal payments system whereas in India, we are looking at the
majority who are excluded.

FI can be thought of in two ways. One is exclusion from the payments system –i.e. not having
access to a bank account. The second type of exclusion is from formal credit markets, requiring
the excluded to approach informal and exploitative markets. After nationalisation of major banks
in India in 1969, there was a significant expansion of branch network to unbanked areas and
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stepping up of lending to agriculture, small industry and business. More recently, the focus is on
establishing the basic right of every person to have access to affordable basic banking services.

Measures of financial exclusion

One common measure of FI is the percentage of adult population having bank accounts (Chart-
1). Going by the available data on the number of savings bank accounts and assuming that one
person has only one account, (which assumption may not be correct as many persons could have
more than one bank account) we find that on an all India basis 59 per cent of adult population in
the country have bank accounts – in other words 41 per cent of the population is unbanked. In
rural areas the coverage is 39 per cent against 60 per cent in urban areas. The unbanked
population is higher in the North Eastern and Eastern regions.

The extent of exclusion from credit markets is much more, as number of loan accounts
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constituted only 14 per cent of adult population (Chart-2). In rural areas, the coverage is 9.5 per
cent against 14 per cent in urban areas. Regional differences are significant with the credit
coverage at 25 per cent for the Southern Region and as low as 7, 8 and 9 per cent respectively in
North Eastern, Eastern and Central Regions.

The extent of exclusion from credit markets can be observed from a different view point. Out of
203 million households in the country, 147 million are in rural areas – 89 million are farmer
households. 51.4 per cent of farm households have no access to formal or informal sources of
credit while 73 per cent have no access to formal sources of credit. Similar data are not
available for non farm and urban households.

Looking at the different sources of credit, it is observed that the share of non institutional sources
reduced from 70.8% in 1971 to 42.9% in 2002. However after 1991, the share of non
institutional sources has increased; specifically, the share of moneylenders in the debt of rural
households increased from 17.5 % in 1991 to 29.6% in 2002. In urban areas the share of non
institutional sources has come down significantly from 40% in 1981 to around 25 % in 2002.

Who are the excluded?

The financially excluded sections largely comprise marginal farmers, landless labourers, oral
lessees, self employed and unorganised sector enterprises, urban slum dwellers, migrants, ethnic
minorities and socially excluded groups, senior citizens and women. While there are pockets of
large excluded population in all parts of the country, the North East, Eastern and Central regions
contain most of the financially excluded population.

Reasons for financial exclusion

There are a variety of reasons for financial exclusion. In remote, hilly and sparsely populated
areas with poor infrastructure, physical access itself acts as a deterrent. From the demand side,
lack of awareness, low incomes/assets, social exclusion, illiteracy act as barriers. From the
supply side, distance from branch, branch timings, cumbersome documentation and procedures,
unsuitable products, language, staff attitudes are common reasons for exclusion. All these result
in higher transaction cost apart from procedural hassles. On the other hand, the ease of
availability of informal credit sources makes these popular even if costlier. The requirements of
independent documentary proof of identity and address can be a very important barrier in having
a bank account especially for migrants and slum dwellers. It is becoming increasingly apparent
that addressing financial exclusion will require a holistic approach on the part of the banks in
creating awareness about financial products, education, and advice on money management, debt
counseling, savings and affordable credit. The banks would have to evolve specific strategies to
expand the outreach of their services in order to promote financial inclusion. One of the ways in
which this can be achieved in a cost-effective manner is through forging linkages with
microfinance institutions and local communities. Banks should give wide publicity to the facility
of no frills account. Technology can be a very valuable tool in providing access to banking
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products in remote areas. ATMs cash dispensing machines can be modified suitably to make
them user friendly for people who are illiterate, less educated or do not know English. To sum
up, banks need to redesign their business strategies to incorporate specific plans to promote
financial inclusion of low income group treating it both a business opportunity as well as a
corporate social responsibility. They have to make use of all available resources including
technology and expertise available with them as well as the MFIs and NGOs. It may appear in
the first instance that taking banking to the sections constituting "the bottom of the pyramid",
may not be profitable but it should always be remembered that even the relatively low margins
on high volumes can be a very profitable proposition. Financial inclusion can emerge as
commercial profitable business. Only the banks should be prepared to think outside the box!

RBI initiatives for FI

In the Annual Policy for 2005-06 , for the first time the word financial inclusion was used and
banks were asked to open “no frills” or a basic banking account to all those desirous of opening a
bank account. Several other aspects such as simplified KYC, OTS for loans upto Rs 25000,
offering a GCC/simplified overdrafts etc were also covered. A decentralized approach was
advocated through targeting 100% financial inclusion district by district involving the DCC and
bank and government officials to facilitate enrolment and identification. Another very important
policy measure in January 2006 was to allow banks to adopt the agency model or what is 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 RBI has shown that while
the first stage of opening no frills accounts has been quite impressive, due to inadequate f 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,

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satellite offices, extension counters or using intermediaries like SHGs/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.

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 recognize the opportunities
and take advantage of their specific strengths including location.

RBI to evaluate progress of financial inclusion

The Reserve Bank of India (RBI) proposes to evaluate the progress of districts under financial
inclusion through an independent external agency. The State Level Bankers’ Committee (SLBC)
will identify one district in each state for 100 per cent financial inclusion. To bring more such
districts under financial inclusion, RBI has asked banks to introduce more no-frill accounts and
general purpose credit cards (GPCCs) with limits of up to Rs 25,000 in rural and semi-urban
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branches. The credit facility will be in the nature of revolving credit entitling the holder to
withdraw up to the limit sanctioned. About 50 per cent of general credit card (GCC) loans could
also be treated by banks as part of priority sector lending Till June 2007 around 70 lakh no-frill
accounts have been opened by commercial banks. Of these, around 67 lakh accounts have been
opened by public sector banks and around 11 lakh accounts by private sector banks, besides
around 12,000 by foreign banks. so far, 68 districts have been fully financially included – 14 in
Kerala, 11 in Haryana, nine in Punjab, Pondicherry, 12 in Himachal Pradesh, 7 in Karnataka, 1 in
Tamil Nadu, 1 in Gujarat, 1 in Andhra Pradesh, 1 in West Bengal, 1 in Rajasthan, Diu, Dadar
and Nagar Haveli, 3 in Uttar Pradesh, 1 in Orissa, Daman, 1 in Maharashtra and 1 in Assam. In
certain less developed areas like the North East, Bihar, Chhattisgarh and Uttarakhand, working
groups headed by RBI representatives have been set up. The recommendations of these working
groups for financial inclusion, strengthening of financial institutions and improving currency and
payment systems are being implemented and monitored by Reserve Bank regional offices.

CHAPTER 5
INTERPRETATION

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 Strategies and Approach

At the regional level, a forum called the State Level Bankers’ Committee (SLBC) has been in
operation since nationalisation. SLBC is a group of bankers and government officials and is
convened by a bank having major presence in the State called the SLBC convenor bank. It meets
quarterly and reviews the banking developments in the State. At the district level, the district
level committee functions; it is headed by the District Magistrare and is convened by a
designated lead bank for the district. In early 2006, one district in each State was identified by
the SLBC for 100 per cent financial inclusion. So far, SLBCs have reported having achieved
100 per cent financial inclusion in the Union Territory of Puducherry and in some districts in
Haryana, Himachal Pradesh, Karnataka, Kerala and Punjab & Uttar Pradesh. Reserve Bank
proposes to undertake an evaluation of the progress made in these districts by an independent
external agency to draw lessons for further action in this regard.

In the districts taken up for 100% financial inclusion, surveys were conducted using various data
base such as electoral rolls, public distribution system, or other household data, to identify
households without bank account and responsibility given to the banks in the area for ensuring
that all those who wanted to have a bank account were provided with one by allocating the
villages to the different banks. Mass media was deployed for creating awareness and publicity.
The banks used different approaches to communicate the advantages of having a bank account.
Bank staff or their agents who are usually local NGOs or village volunteers would contact the
people at their households. Ration card / Electoral ID cards of the families were taken for
fulfilling the simplified KYC norms. Photographs of all the persons who opened bank accounts
were taken on the spot by a photographer accompanying the bank team. In most States, the
product used for launching the program for financial inclusion is the ‘No frills’ accounts. In one
State the farmer’s credit card or KCC is being used ensuring first to credit rather than savings. In
other States no frills account was followed by small overdraft facility or a general purpose
revolving credit upto pre-specified limit. Recognizing the need for providing social security to
vulnerable groups, in some cases in association with insurance companies, banks have provided
innovative insurance policies at affordable cost covering life, disability and health cover.

Cooperative banks and regional rural banks being local level institutions are well suited for
achieving financial inclusion. These banks are being revived and strengthened with incentives for
better governance. Being local institutions they are ideally suited for achieving FI.

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The role of an efficient payments system for FI cannot be overstressed and we efforts are being
made to bring about Improvements in the payments system especially in the relatively less
developed parts of the country.

Huge increase in No Frills Accounts

The outcome of the efforts made is reflected in the increase of 6 million new ‘no frills’ bank
accounts opened between March 2006 and 2007. In view of their vast branch network (45000
rural and semi urban branches) public sector banks and the regional rural banks have been able to
scale up their efforts by merely leveraging on the existing capacity. FI is being viewed by these
banks as a huge business opportunity in an overall environment that facilitates enterprise and
growth. It provides them a competitive advantage and defines a clear niche for their growth.

Use of intermediaries

One of the ways in which access to formal banking services has been provided very successfully
since the early 90s is through the linkage of Self Help Groups (SHGs) with banks. SHGs are
groups of usually women who get together and pool their savings and give loans to members.
Usually there is a NGO that promotes and nurture these groups. National Bank for Agriculture
and Rural Development has played a very significant role in supporting group formation, linking

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them with banks as also promoting best practices. The SHG is given loan against guarantee of
group members. The recovery experience has been very good and there are currently 2.6 million
SHGs linked to banks touching nearly 40 million households through its members. Banks
provide credit to such groups at reasonable rates of interest. However the size of loans is quite
small and used mostly for consumption smoothening or very small businesses. In some SHGs,
credit is provided for agricultural activities and other livelihoods and could be several times the
deposits made by the SHG. Most of the SHGs have been linked to public sector banks in view of
the latter’s dominant presence in the rural areas.

The foreign banks and private sector banks have approached the access issue through either
setting up relatively lower cost non bank companies for providing small value retail loans or
have partnered with micro finance institutions that provide financial services to the relatively
higher risk segments of the population. Microfinance has drawn attention to an entire sector of
borrowers who had been previously poorly served by the formal financial sector - and MF has
demonstrated how to make lending to this sector a viable proposition. However the rates of
interest charged are quite high, typically 24 to 30 per cent, mainly on account of the high
transaction cost for the average loan size that can be quite small. Compared to the informal
sector, perhaps the rates are lower, but issues are raised whether these rates are affordable - in the
sense whether they would leave any surplus in the hands of the borrowers and lead to higher
levels of living.

For commercial banks, the lower cost of funding, advantages of size and scale gives scope for
cross subsidization and their interest rates are more competitive compared to the MFIs, but they
have not been as successful in dealing with the last mile issue. The partnering with SHGs and
MFIs with reasonable cost of funding by the banks has been seen as a more optimal approach till
now.
As indicated earlier, a recent important regulatory measure is the permission given to banks to
use post offices, cooperative societies, non government organisations set up as trusts or societies,
as business correspondents (agents) for doing branchless banking after conducting due diligence
on such intermediaries. Agency risk is sought to be minimised by using well respected local
organisations and use of IT solutions for tracking transactions in the bank accounts. Many banks
are exploring the use of this model to increase their outreach and deliver doorstep banking
services at lower cost. The viability and scalability of the model would require some flexibility in
charging of interest rates or services charges to cover costs.

Role of Government

State Governments can play a pro –active role in facilitating FI. Issuing official identity
documents for opening accounts , creating awareness and involving district and block level
functionaries in the entire process, meeting cost of cards and other devices for pilots, undertaking
financial literacy drives are some of the ways in which the State and district administration have
involved themselves.

India Post is also looking to diversify its activities and leverage on its huge network of post
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offices, the postman’s intimate knowledge of the local population and the enormous trust reposed
in him. Banks are entering into agreements with India Post for using post offices as agents for
branchless banking.

FINANCIAL INCLUSION THROUGH IT

IT solutions for Financial Inclusion

The use of IT solutions for providing banking facilities at doorstep holds the potential for
scalability of the FI initiatives. Pilot projects have been initiated using smart cards for opening
bank accounts with bio metric identification. Link to mobile or hand held connectivity devices
ensure that the transactions are recorded in the bank’s books on real time basis. Some State
Governments are routing social security payments as also payments under the National Rural
Employment Guarantee Scheme through such smart cards (see pictures below). The same
delivery channel can be used to provide other financial services like low cost remittances and
insurance. The use of IT also enables banks to handle the enormous increase in the volume of
transactions for millions of households for processing, credit scoring, credit record and follow
up.

Initiative of a State Government - pictures of technology at work

INTEGRA agent giving payment to the NREGA employees

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 Pensioners with Bio-metric cards line-up to receive payments

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 Biometric validation of Smart Card

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 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.

ICT for FI - RBI initiatives

I now turn to the specific initiatives of RBI in regard to ICT for Financial Inclusion. The very first
initiative was emphasizing the use of IT solutions while adopting the agency or BC model for
financial inclusion. A paper placed on the RBI website has envisaged a scheme with RBI support for
providing satellite connectivity for remote area branches. The reports of three working groups set up
by RBI to consider support to RRBs and UCBs in computerizing their operations and adopt IT
solutions for financial inclusion have been placed in public domain for comments. These groups have
recommended that the IDRBT could offer interest free loans to UCBs and RRBs for adoption of IT.
Based on comments and response RBI will be firming up these schemes. Recognizing the

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penetration of mobile phones (including amongst the low income population) and the enormous
opportunities they offer in extending the banking outreach. RBI had placed a paper on mobile
banking in the public domain and the guidelines are now being finalized. 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 RBI 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

Electronic Benefit Payments

Recognising the several advantages of using bank accounts for disbursal of government benefits,
many State Governments have decided to disburse NREGA payments social security benefits
electronically through no frills bank accounts and in some States with such accounts operated
through smart cards with bio–metric identification. A Committee set up by RBI examined the various
models through which such payments can be made and has recommended a bank led model with
sharing of costs between Government and banks. Appropriate support from the RBI or the Financial
Inclusion Technology Fund could also be thought of in the initial stages. Such accounts that 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.

Role of Technology

Technology can play an important role in reducing operating cost of providing banking services,
particularly in the rural and low income groups segments. The technology, if blended
appropriately with the right business model and policy, holds the key to extending affordable,
viable and sustainable access to finance for the population at large. There are three broad types of
technologies that have been identified to drive the growth of financial services. These are (i) pro-
poor new information and communication technology, primarily low-cost cell phones; (ii) ATMs
and other point of sales devices; and (iii) smart plastic card.

The centralised data processing system and the non-conventional methods based on computer

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systems, which do not require uninterrupted electric supply and radio frequency network, can
significantly reduce the cost of extending financial services. There are a number of cases where
banks have expanded the coverage of banking services to remote and un-banked areas with
affordable infrastructure, while keeping operating costs low with the use of appropriate
technology. Technology has the potential to lead to new delivery mechanisms and business
models. For instance, technology will allow branchless banking and establishment of new
partnerships between financial service providers and a range of other service providers that was
not feasible before to provide services to clients in remote areas and low-population density
areas.

Mobile phone-based services are revolutionising micro-finance services in a number of countries

(Asian Development Bank, 2007). Mobile banking (or mobile payment) is a term used for
performing balance checks, account transactions, payments, etc. via a mobile device such as a
mobile phone, PDA or other such device. Most of the mobile payment platforms fall into four
categories: (i) mobile banking enabling users to perform banking transactions using mobile
phone like, balance checks, fund transfers, bill payments;(ii) remote purchase; (iii) person to
person transfers; and (iv) point of sale, i.e., using phones to pay for goods at merchant location.
These services can be provided using various available connectivity technologies, each one of
which has its own pros and cons (Table 7.37). However, the extent to which technology will be
integrated into the financial service industry at the low end will depend on supportive
government policies and the quality of the infrastructure, particularly in rural areas.

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Different technologies have been successfully adopted in many countries to promote financial
inclusion .Banks in India have initiated pilot projects utilising smart cards/mobile technology to
increase their outreach. Biometric methods for uniquely identifying customers are also being
increasingly adopted. Banks are also increasingly adopting technological solutions for delivery
of credit at affordable price and to a wider section of the population. State Bank of India (SBI)
initiated a project called the SBI Tiny Card Accounts (SBITCAs) recently in Aizwal. The project
is a combination of ‘no-frills’ account and BCs/BFs model. The SBITCAs are operated through
new generation mobile phones based on near-field communication (NFC) technology, enhanced
with fingerprint recognition software and attached to receipt printer. The card allows activation
of transaction of funds for the purpose of micro-savings (SBI-tiny no-frills pre-paid account),
cash deposits and withdrawal, micro-credit (including KCCs, GCCs), money transfer (account-
to-account within the system), micro-insurance, cashless payments to merchants, SHG savings-
cum-credit accounts and attendance systems, disbursements of Government benefits like the
national rural employment guarantee scheme, for equated monthly instalments (EMIs), utility
payments, coupons, vouchers and tickets, loyalty points, automatic fare collection systems,
portable and fixed positions for front-end devices (fully inter-operable).

Rishu Agarwal
 Technology and Financial Inclusion

In the Philippines, two cell phone companies – Smart and Globe Telecoms – offer innovative cell
phone based facilities, also called electronic wallet, to transfer money, pay bills, and make
payments for purchases from stores, among other things, called Smart Money and G-Cash,
respectively. In February 2005, the Rural Bankers Association of the Philippines Microenterprise
Access to Banking Services (RBAP-MABS) launched a project called Text-A-Payment (TAP).
TAP is an innovative mobile technology product that uses the SMS technology of Globe
Telecom (powered by G-Cash) to pay for micro finance loan payments of borrowers. TAP seeks
to bring in new and low cost technology tools to improve efficiency and outreach. Small
borrowers can utilise the service for payments of their micro-finance loans. The other
applications of TAP are remote deposit taking, cash withdrawal, international and domestic
remittances, purchases and bills payment.

In South Africa, banking institutions, together with mobile phone companies, have begun to
expand access to financial services targeting low-income customers with an interest-bearing bank
account accessible through mobile phones, and debit card with which they can make purchases at
retail outlets and deposit or withdraw money at ATMs. Customers can use their mobile phones to
make person-to-person payments and transfer money.

Prodem, the first micro-finance organisation to create a chartered bank, BancoSol, in Bolivia
started Prodem Smart ATM, a smart card cum ATM recently. The smart card stores customer’s
account balance every time the transaction is made using the card. This enables Prodem Smart
ATM to operate even in the absence of internet connectivity, thereby, making it an ideal
instrument to extend financial services in many rural parts of Bolivia that lack the technological
infrastructure for a wide-reaching, online network.

FINANCIAL INCLUSION THROUGH SHGS AND

MICRO FINANCE

Self-Help Group – Bank Linkage Program

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An SHG is a group of about 15 to 20 people from a homogenous class who join together to
address common issues. They involve voluntary thrift activities on a regular basis, and use of the
pooled resource to make interest-bearing loans to the members of the group. In the course of this
process, they imbibe the essentials of financial intermediation and also the basics of account
keeping. The members also learn to handle resources of size, much beyond their individual
capacities. They begin to appreciate the fact that the resources are limited and have a cost. Once
the group is stabilised, and shows mature financial behaviour, which generally takes up to six
months, it is considered for linking to banks. Banks are encouraged to provide loans to SHGs in
cer tain multiples of the accumulated savings of the SHGs. Loans are given without any
collateral and at interest rates as decided by banks. Banks find it comfortable to lend money to
the groups as the members have already achieved some financial discipline through their thrift
and internal lending activities. The groups decide the terms and conditions of loan to their own
members. The peer pressure in the group ensures timely repayment and becomes social collateral
for the bank loans.

Generally, the SHGs need self-help promoting institutions (SHPIs) to promote and nurture them.
These SHPIs include various NGOs, banks, farmers’ clubs, government agencies, self-employed
individuals and federations of SHGs. However, some SHGs have also been formed without any
assistance from such SHPIs.

There are three different models that have emerged under the linkage programme:
• Model I: This involves lending by banks directly to SHGs without intervention/facilitation by
any NGO.
• Model II: This envisages lending by banks directly to SHGs with facilitation by NGOs and
other agencies.
• Model III: This involves lending, with an NGO acting as a facilitator and financing agency.
Model II accounted for around 74 per cent of the total linkage at end-March 2007, while Models
I and III accounted for around 20 per cent and 6 per cent, respectively.

SHGs and MFIs role in FI

The need for informality in credit delivery and easy access is demonstrated by the fact that SHGs
and MFIs constitute the fastest growing segment in recent years in reaching out to small
borrowers. These institutions are able to effectively address the small ticket and last mile issues.
In the four years between 2003 and 2007, small borrower bank accounts (credit) i.e upto Rs
25000 increased marginally from 36.9 million to 38.6 million, while SHGs’ borrowing members
grew from 10 million to 40.5 million and MFIs’ borrowers grew from 1.1 million to 8 million.
In 2007-08, MFIs have added 6 million clients increasing their outreach to 14 million as per data
brought out by Sa Daan.
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Micro finance is the provision of thrift, credit and other financial services and products of very
small amounts to the poor for enabling them to raise their income levels and improve their living
standards. It has been recognised that micro finance helps the poor people meet their needs for
small credit and other financial services. The informal and flexible services offered to low-
income borrowers for meeting their modest consumption and livelihood needs have not only
made micro finance movement grow at a rapid pace across the world, but in turn has also
impacted the lives of millions of poor positively.

In the case of India, the banking sector witnessed large scale branch expansion after the
nationalisation of banks in 1969, which facilitated a shift in focus of banking from class banking
to mass banking. It was, however, realised that, notwithstanding the wide spread of formal
financial institutions, these institutions were not able to cater completely to the small and
frequent credit needs of most of the poor. This led to a search for alternative policies and reforms
for reaching out to the poor to satisfy their credit needs.

The beginning of the micro finance movement in India could be traced to the self-help group
(SHG) - bank linkage programme (SBLP) started as a pilot project in 1992 by National Bank for
Agricultural and Rural Development (NABARD). This programme not only proved to be very
successful, but has also emerged as the most popular model of micro finance in India. Other
approaches like micro finance institutions (MFIs) also emerged subsequently in the country.

Recognising the potential of micro finance to positively influence the development of the poor,
the Reserve Bank, NABARD and Small Industries Development Bank of India (SIDBI) have
taken several initiatives over the years to give a further fillip to the micro finance movement in
India.

Micro Finance Delivery Models in India

The non-availability of credit and banking facilities to the poor and underprivileged segments of
the society has always been a major concern in India. Accordingly, both the Government and the
Reserve Bank have taken several initiatives, from time to time, such as nationalisation of banks,
prescription of priority sector lending norms and concessional interest rate for the weaker
sections. It was, however, realised that further direct efforts were required to address the credit
needs of poor. In response to this requirement, the micro finance movement started in India with
the introduction of SHG-bank linkage programme (SBLP) in the early 1990s. At present, there
are two models of micro finance delivery in India: the SBLPmodel and the MFI model. The
SBLP model has emerged as the dominant model in terms of number of borrowers and loans
outstanding. In terms of coverage, this model is considered to be the largest micro finance

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programme in the world. The Reserve Bank, NABARD and SIDBI have also taken a range of
initiatives to provide a momentum to the micro finance movement in India.

Recent Initiatives by NABARD

NABARD has been playing a crucial developmental role for the micro finance sector in India.
NABARD has been organising/ sponsoring training programmes and exposure visits for the
benefit of bank officials, NGOs, SHGs and Government agencies to enhance their effectiveness
in the field of micro finance. The best practices and innovations with respect to the sector are
widely circulated among Government agencies, banks and NGOs. NABARD also provides
support for capacity building, exposure and awareness building of the SHGs and NGOs.

NABARD launched the ‘Micro-Enterprise Development Programme’ (MEDP) for skill

development in March 2006. The basic objective was to enhance the capacities of matured SHGs
to take up micro enterprises through appropriate skill upgradation. The programme envisaged
development of enterprise management skills in existing or new livelihood activities, both in
farm and non-farm sectors. The duration of training can vary between 3 to 13 days depending
upon the objective and the nature of training. During the year 2007-08, 394 MEDPs were
conducted covering 9,182 SHG members on activities like bee-keeping, mushroom cultivation,
horticulture and floriculture, vermi-compost/ organic manure preparation and dairy. As on March
31, 2008, 674 MEDPs had been conducted covering 16,761 participants.

In 2005-06, a pilot project for ‘promotion of micro-enterprises’ was launched among members of
matured SHGs. This is being implemented by 14 NGOs acting as ‘micro-enterprise promotion
agency’ (MEPA) in nine districts, viz., Ajmer (Rajasthan), Chandrapur (Maharashtra), Kangra
(Himachal Pradesh), Madurai (Tamil Nadu), Mysore (Karnataka), Panchmahal (Gujarat), 24
north Pargana (West Bengal), Puri (Orissa) and Rae Bareli (Uttar Pradesh). The project is being
implemented by each NGO in two blocks in each of the selected district. As on March 31, 2008,
2,759 micro-enterprises were established under the project involving bank credit of Rs.238 lakh.

NABARD also provides marketing support to the SHGs for exhibiting their products. During the
year 2007-08, NABARD supported three exhibitions of products prepared by various SHGs at
Bhopal, Chennai and Navi Mumbai involving grant of Rs.3.8 lakh. In addition, NABARD also
provides promotional grant support to NGOs, RRBs, DCCBs, farmer’s clubs and individual
volunteers and assists in developing capacity building of various partner agencies. NABARD has
been making efforts to increase the number of partner institutions as self-help promoting
institutions (SHPIs).

NABARD launched a pilot project in December 2003 to link post-offices with the SHGs with the
objective of examining the feasibility of utilising the vast network of post offices in rural areas
for disbursement of credit to rural poor on an agency basis .

The SHG Federations are emerging as important players in nurturing SHG, increasing the
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bargaining power of group members and livelihood promotion. The features and functions of
SHG federation models promoted in the country vary, depending on the promoting agencies.
Recognising the growing role of the SHG Federations and their value addition to SHG
functioning, NABARD, during the year 2007-08 decided to support the Federations on a model
neutral basis. Support is extended to the Federation by way of grant assistance for training,
capacity building and exposure visits of SHG members. NABARD has also formulated the broad
norms for deciding the grant of financial assistance to SHG Federations. During the year 2007-
08, grant assistance amounting to Rs 10 lakhs was sanctioned to two federations.

Recognising the role played by MFIs, in extending micro finance services in the unbanked areas,
NABARD extends support to these institutions through grant and loan based assistance.
NABARD has been selectively supporting MFIs for experimenting with various micro finance
models such as replication of Grameen Model, NGO networking (bigger NGOs supporting
smaller NGOs), credit unions and SHGs federations, among others, to meet credit requirements
of the unreached poor. NABARD provides loan funds in the form of revolving fund assistance
(RFA) on a selective basis to MFIs to be used by them for on-lending to SHGs or individuals.
This loan has to be repaid along with service charge, within a period of 5 to 6 years. During the
year 2007-08, RFA amounting to Rs.8 crore was sanctioned to six agencies taking the
cumulative credit sanctioned to Rs.36 crore covering 35 agencies.

In order to identify, classify and rate MFIs, NABARD introduced a scheme for commercial
banks and RRBs to enable them to avail the services of accredited rating agencies for rating of
MFIs. Banks can avail the services of credit rating agencies like CRISIL, M-CRIL, ICRA,
CARE and Planet Finance for rating of MFIs and avail financial assistance by way of grant to the
extent of 100 per cent of the total professional fees of the credit rating agency, subject to a

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maximum of Rs. one lakh. The assistance is available for the first rating of MFIs with a
minimum loan outstanding of Rs.50 lakh and maximum loan outstanding of Rs.500 lakh. During
the year 2007-08, rating support amounting to Rs 3 lakh to four agencies was provided.
Recognising the need for upscaling the micro finance intervention in the country, the Union
Finance Minister, in the budget for the year 2000-01, announced creation of a Micro Finance
Development Fund (MFDF). The objective of the MFDF is to facilitate and support the orderly
growth of the micro finance sector through diverse modalities for enlarging the flow of financial
services to the poor, particularly for women and vulnerable sections of society, consistent with
sustainability. Consequently MFDF with a corpus of Rs.100 crore was established in NABARD.
The Reserve Bank and NABARD contributed Rs.40 crore each to the fund, while the balance
was contributed by eleven select public sector banks.
As per the Union Budget announcement for the year 2005-06, the MFDF was re-designated as
‘Micro Finance Development and Equity Fund’ (MFDEF) with an increased corpus of Rs.200
crore. The fund is being managed by a board consisting of representatives of NABARD,
commercial banks and professionals with domain knowledge. The Reserve Bank is a member of
the Advisory Committee of the MFDEF. The MFDEF maintained by NABARD is used for
promotion of micro finance through scaling-up of the SHG-bank linkage programme, extending
RFA and capital support to MFIs and undertake various promotional initiatives. During 2007-08,
Rs.27 crore was utilised from the fund towards micro finance related activities.

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The North-Eastern Council (NEC), Shillong parked a fund of Rs.50 lakh with NABARD during
the year 2007-08 for facilitating miscellaneous training programmes involving Government/bank
officials, NGOs, SHGs from States in the NER and Sikkim. During the year 2007-08, 73
programmes were sanctioned out of the fund involving a total grant assistance of Rs.45 lakh.

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 Micro Finance Initiatives by SIDBI

SIDBI launched its micro finance programme in February 1994 on a pilot basis. The programme
provided small doses of credit funds to the NGOs all across the country. NGOs acted as financial
intermediaries and on-lent funds to their clients. Limited amount of capacity building grant was
also provided to the NGOs.
With a view to reducing the procedural bottlenecks, expanding the outreach, meeting the huge
unmet demand of the sector and striving towards its formalisation, SIDBI reoriented its policy
and approach to create a sustainable micro finance model that would significantly increase the
flow of credit to the sector. To take the agenda forward, the SIDBI Foundation for Micro Credit
(SFMC) was created in January 1999. SFMC’s mission is “to create a national network of strong,
viable and sustainable Micro Finance Institutions from the informal and formal financial sector
to provide micro finance services to the poor, especially women’’.
SIDBI was one of the first institutions that identified and recognised NGO/MFI route as an
effective delivery channel for reaching financial services to those segments of the population not
reached by the formal banking network. As a result of bulk lending funds provided, coupled with
intensive capacity building support to the entire micro finance sector, it has come to occupy a
significant position in the Indian micro finance sector. Today, SIDBI is one of the largest
providers of micro finance through the MFIs.
SIDBI’s pilot programme of 1994 brought out one of the major shortcomings in micro finance
lending programme. It showed that collateral-based lending does not work insofar as micro
finance is concerned. NGOs/ MFIs acting as financial intermediaries do not have tangible
collateral to offer as security for the loans. Doing away with collateral-based lending in MF
necessitated that a mechanism be developed which would minimise the risks associated with
lending. With a view to catering to this objective, SIDBI pioneered the concept of capacity
assessment rating (CAR) for the MFIs. As part of its developmental agenda, SIDBI encouraged a
private sector development consulting firm to develop a rating tool for the MFIs which was
rolled out in 1999. Today, rating is a widely accepted tool in this sector. SIDBI has also
succeeded in developing a market for rating services. Two mainstream rating agencies, viz.,
CRISIL and CARE have also started undertaking micro finance ratings, besides M-CRIL. SIDBI
has also adopted the institutional capacity assessment tool (I-CAT) of access development
services (ADS), a private sector consulting organisation, for rating of start-up/small and mid-
sized MFIs.
SIDBI introduced a product called ‘transformation loan’ in 2003 to enable the MFIs to transform
themselves from an informal set up to more formal entities. This loan is a quasi-equity product
with longer repayment period and features for conversion into equity at a later date, when the
MFI decides to convert itself into a corporate entity. Consequently, a number of MFIs went
ahead with the transformation and some of them have now grown significantly and are serving
millions of clients across several states. Recognizing the need to offer the MFIsequity capital so
as to adequately capitalise them, SIDBI set up a fund of Rs. 50 crore which was christened as
SIDBI Growth Fund for MFIs. The fund takes care of equity investment in large corporate MFIs,
as also equity capital in start-up/smaller institutions, along with quasi-equity support for MFIs on
the verge of transformation.

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SIDBI also supports incubation of potential local community based organisations through two-
tier/umbrella NGOs/MFIs. The approach not only helps SIDBI to increase its outreach through
double intermediation but also enables it to channelise finance to smaller NGOs that otherwise
may not meet the criteria for availing direct assistance from SIDBI. SIDBI has also been able to
nurture and develop a few new intermediaries set up by experienced professionals. Another
approach in this direction involves incubation of new start-up MFIs promoted by first-generation
development/micro finance professionals. The incubation support is either given through well-
reputed management institutes or through institutions specialising in capacity building and
technical support services.

As at March 31, 2008, the SIDBI had 58 partners in the underserved States, out of its total
partner base of 104. The increased thrust on development of underserved States has also resulted
in the share of these States going up from 19 per cent (Rs.38 crore) in the total outstanding micro
finance portfolio of SIDBI in the financial year 2005 to over 31 per cent (Rs.299 crore) in the
financial year 2007-08.

Substantial growth of the micro finance sector would be possible only if the capacities of all
stakeholders are built up adequately. SIDBI has taken some initiatives in this direction. One such
initiative has been in the area of human resources where SIDBI has tried to address the issue both
from the demand and supply side factors. On the demand side, MFIs are encouraged to hire
young management/accounting graduates from reputed institutes through campus placement and
SIDBI provides partial salary support for these young professionals (YPs) for a period of two
years. Additionally, MFIs are also provided grant funds for hiring trained and experienced
professionals as second line managers. This helps in bringing and retaining the talent in the
micro finance sector. On the supply side, some of the management training institutes have been
provided support in the form of training and exposure visit of their faculty members to reputed
national and international training programmes and other MFIs across the world. Besides, SIDBI
was instrumental in bringing international experts to lend support to these institutes for
developing a course on micro finance that has been incorporated as an elective in their rural
management courses.

Other major initiatives towards capacity building of the sector comprised developing the
capacities of consultants and technical service providers (TSPs), developing a common chart of
accounts for the sector, creating gender and environment awareness, promoting innovations and
action research on emerging concepts.

FINANCIAL INCLUSION THROUGH

PROMINENT ORGANISATIONS
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 Branchless Banking through Business Correspondents

Corporation Bank has taken up an outreach programme through the use of technology in order to
provide very simple and basic financial services to the poor and the disadvantaged in the rural
areas. To accomplish the task, the bank conducted a survey in the identified villages to gather
information regarding the structure and size of village, family/household details such as
occupation, asset ownership and the use of financial services. The automation of the survey
facilitated generation of Corp Pragathi Savings Bank (CPSB) Account opening forms along with
the photograph of the user at the site for the family members who expressed their desire to open
an account with the bank.

The survey, inter alia, indicated that the villagers were generally reluctant to approach the bank
as the branches were far off from their residence or workplace and hence they needed to spend
money on commuting and time to carry out normal banking activities. Further, being semi-
literate or illiterate, they found the procedures difficult to comprehend and follow. They were
also not sure of the treatment that would be meted out to them when they approached the bank
for remitting or withdrawing small sums of money. To mitigate these hardships faced by the
villagers, the Corporation Bank adopted a branchless banking model in August 2007. After
evaluation of different technologies ranging from palm-tops, simputers, hand held storage
devices and diverse communication channels, the bank opted for a branchless banking model
based on business correspondents (BCs) and use of a small hand held device. This model is more
or less similar to that followed in pilot project in Andhra Pradesh (see Box VII.7). The
branchless banking model has enabled the bank to reach out to the villagers by offering them
savings and loan products at their doorsteps. The information collected through survey has
enabled to meet the KYC requirements also.

The benefits of the model to the customers include saving of their time and cost of travel to the
branch, comfort in dealing with BC as he is a familiar face, and convenience of transacting
business practically at any time of the day. The advantage for the BC is that it is an alternative
source of income. The benefits for the bank are that they are able to reach out to the hitherto
unreached segments and mop up rural savings at lower transaction costs.

FINANCIAL INCLUSION THROUGH WOMEN

EMPOWERMENT

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 Financial Inclusion: Women Empowerment

The Mann Deshi Mahila Bank, based in Mhaswad, in Satara District, Maharashtra, is an
organisation that works towards the holistic development of women entrepreneurs into women
business owners’ and bank customers. Founded in 1997, by Chetna Vijay Sinha, the Mann Deshi
Mahila Bank has created 17,000 women entrepreneurs. The regulated co-operative that received
an “A” grade from District Cooperative Department in 2000, equips its clients with liquid assets
which help financial empowerment that, in turn, enables women to become entrepreneurs and
plan a stable future for their families. Services which the bank offers include savings, loans,
insurance and pensions. A partnership with UTI Mutual Fund had enabled the bank to be the first
to offer pension schemes to its clients in Maharashtra.

The bank’s success led to the creation of several sub-organisations, one of which is the Mann
Deshi Business School for Rural Women. Set up in partnership with HSBC Bank, the school
primarily aims at making its range of courses accessible to women who, due to financial and
cultural constraints, would be unable to access such training in neighbouring urban hubs. Unlike
traditional business schools that delve into the theor y of microeconomics, accounting,
organisational behaviour and so on, this business school focusses on imparting simple business
skills. The school’s courses can be categorised into basic business-oriented courses, such as
financial literacy, marketing and product development and entrepreneurial or skill-based courses.
The business school in Vaduj, Mhaswad attracts women from the surrounding villages as well as
larger towns. As most of the women who attend the school are part of larger joint families, the
school’s courses are designed so as to enable them to attend the school after completing their
household chores and supplement their household income with their earnings.

In 2007, in partnership with the Deshpande Foundation, which supports innovation and
entrepreneurship in India, Mann Deshi and Mann Vikas (the NGO wings of the bank) established
the Business School on Wheels for Rural Women. This currently operates in the Hubli-Dharwad
district in the neighbouring State of Karnataka. A specially designed bus travels the district and
offers courses similar to those of the business school. What is striking about the Mann Deshi
Business School and the Business School on Wheels is that all their courses are designed not just
to teach skills, but also at a larger level, to cater to the needs of the society. By enforcing a strict
no educational qualification, no age bar policy, and with fees ranging from Rs.180 to Rs.1,800,
the school has been able to attract, during the last year, 650 women from all social backgrounds
and capacities, and provide them with skills they otherwise would never have been able to
acquire.

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 CHAPTER 6
DISCUSSION

FINANCIAL INCLUSION – GATE WAY AS PERCIEVED

I begin by looking at exactly the opposite of financial inclusion, i.e., financial exclusion. Broadly
defined, financial exclusion signifies the lack of access by certain segments of the society to
appropriate, low-cost, fair and safe financial products and services from mainstream providers.
Financial exclusion is thus a key policy concern, because the options for operating a household
budget, or a micro/small enterprise, without mainstream financial services can often be

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expensive. This process becomes self-reinforcing and can often be an important factor in social
exclusion, especially for communities with limited access to financial products, particularly in
rural areas.

Two major factors have often been cited as the consequences of financial exclusion:

First, it complicates day-to-day cash flow management - being financially excluded means
households, and micro and small enterprises deal entirely in cash and are susceptible to irregular
cash flows.

Second, lack of financial planning and security in the absence of access to bank accounts and
other saving opportunities for people in the unorganised sector limit their options for providing
for themselves for their old age.

From the macroeconomic standpoint, being without formal savings can be problematic in two
respects:

First, people who save by informal means rarely benefit from the interest rate and tax advantages
that people using formal methods of savings enjoy.

Second, informal saving channels are much less secure than formal saving facilities. Those who
can afford it least suffer the highest risk. The resultant lack of savings and saving avenues means
recourse to non-formal lenders, like money lenders. This, in turn, could lead to two adverse
consequences –

a) Exposure to higher interest rates charged by formal lenders.

b) The inability of customers to service the loans or to repay them.

As loans from non-formal lenders are often secured against the borrower’s property, this raises
the problem of inter-linkage between two apparently separate markets. Judged in this specific
context, financial exclusion is a serious concern among low-income households, mainly located
in rural areas.

Once access to financial institutions improves, inclusion affords several benefits to the consumer,
regulator and the economy alike. Establishment of an account relationship can pave the way for
the customer to avail the benefits of a variety of financial products, which are not only
standardised, but are also provided by institutions that are regulated and supervised by credible
regulators, and are hence safer. The bank accounts can also be used for multiple purposes, such
as, making small value remittances at low cost and making purchases on credit. Furthermore, the
regulator benefits, as the audit trail is available and transactions are conducted transparently in a
medium that can be monitored. The economy benefits, as greater financial resources become
transparently available for efficient intermediation and allocation, for uses that have the highest

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returns. In other words, the single gateway of a banking account can be used for several purposes
and represents a beneficial situation for all the economic units in the country.

In addition, I would like to flag an important perspective. Improvements in rural infrastructure in

terms of availability of electricity, improvement in connectivity through provision of rural roads
and telecommunications, and construction of warehouses, are expected to lead to better overall
supply chain management, enhance productivity of physical resources in the rural areas and
greater addition in agriculture. These developments would lead to much greater demand for
banking activity in rural areas. The two-fold implications of these developments for the banking
sector are apparent. First, with higher financing needs of such new activities vis-a-vis traditional
ones, the overall financing intensity of agriculture is likely to experience a manifold rise. Second,
along with growth in rural infrastructure, there is also likely to be an increase in rural non-farm
activities, such as repair activities, education, housing, restaurants and medical services. These
activities, both traditional and emerging ventures, would be available for financing by the
banking sector.

Thus, as the economy begins to grow rapidly, the rate of financial intermediation is expected to
increase further. In other words, the banking system will be expected to increasingly provide
larger quantum of funds to existing and emerging enterprises. And without adequate deposit
growth, however, credit expansion might not be sustainable over the medium-term, without
putting immense pressure on real interest rates and impacting the overall stability of the financial
system.

Notwithstanding the widely recognised importance of financial inclusion, it has no universally

accepted definition. The working or operational definitions of financial inclusion generally focus
on ownership or access to particular financial products and services such as deposits, credit,
long-term savings, money transfer and insurance provided by the mainstream financial service
providers. Based on this definition, financial inclusion is often measured in terms of indicators
such as number of bank accounts. There is, however, broad agreement that the financial
exclusion cannot be measured by a single indicator. Therefore, multiple indicators have been
used which include proportion of population with a bank account, population which uses the
services of any formal financial institution, people receiving money regularly through formal
financial instruments, people keeping money in formal financial institutions, and persons who
have obtained or have loan or credit facility outstanding from a formal financial institution.

In the Indian context, financial inclusion has been described as the provision of affordable
financial services, viz., access to payments and remittance facilities, savings, loans and insurance
services by the formal financial system to those who are excluded. Deepening the financial
system and widening its reach is crucial for both accelerating growth and for equitable
distribution. The major causes of financial exclusion often cited include relatively low extension
of institutional credit in rural areas due to perception of high risk, high operating costs, lack of
rural infrastructure, and vast geographical spread of the country with more than half a million
villages, some sparsely populated. The micro factors, which are perceived to inhibit credit flow
to disadvantaged groups, mainly include factors such as lack of awareness of financial products
and services, the procedures for obtaining agricultural non-farm loans, staffing and human

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resources, and lack of effective legislation for regulating money lending. From the demand
perspective, low income and savings level could lead to lower demand for financial services,
particularly the deposit facilities.
India has adopted a multi-pronged approach towards financial inclusion as has been the case in
several other countries. Though the term financial inclusion is of recent origin, the efforts to
bring the poorer and weaker segments of the society within the fold of the formal banking system
were initiated both by the Reserve Bank and the Government beginning as back as the late
1960s. The specific policy initiatives towards financial inclusion in India broadly fall under three
phases with the first one starting in the late 1960s through the 1980s with the focus on credit
channelling to ensure equitable growth. The nationalisation of banks, directed lending to priority
sectors, suitable changes in the branch licensing policy, introduction of specific schemes,
establishment of specialised institutions and interest rate regulation were some of the major
policy initiatives undertaken by the Government and the Reserve Bank to bring the weaker
sections within the fold of the banking system. The second phase of financial inclusion spanning
the early 1990s to early 2005 focussed on strengthening the financial institutions. The major
financial inclusion initiatives taken in this phase were introduction of SHG-bank linkage
programme in the early 1990s and introduction of KCCs. Efforts to bring financially excluded
people within the banking fold received a major boost in April 2005, when financial inclusion
was explicitly made a major policy objective. Introduction of ‘no-frills’ accounts in November
2005 was another major step for providing safe savings deposit facility to the rural and urban
poor. Thus, a wide network of institutions has been established in order to expand the outreach of
financial services to people.

Formal financial services have expanded rapidly in recent years. The question, therefore, arises
as to what has been the impact of various measures on financial inclusion. Arriving at firm
conclusions on the extent of financial inclusion or its obverse, i.e., exclusion, is not easy from the
existing data sources. There are differences in the data available from various sources and much
more work needs to be done to reconcile these data. Nevertheless, the available information
suggests that beginning from the late 1960s, significant progress has been made to bring more
and more people within the fold of formal financial institutions. This trend continued even in the
1990s. Data on the household surveys by the NSSO suggest that the share of number of
households accessing credit from non-institutional sources declined significantly from the late
1960s through 1980s. The share, however, increased in the 1990s. A detailed analysis of various
aspects, however, suggests that number of indebted households and their outstanding debt
increased sharply between 1991 and 2002. The increased debt was mainly for consumption and
similar other purposes for which the finance could not be easily availed of from formal sources.
As a result, the share of household indebtedness to non-institutional sources increased between
1991 and 2002 even as credit to households by various institutional sources grew broadly at the
same rate between 1991 and 2002 as between 1981 and 1991. Within institutional sources, credit
by banks grew at a marginally lower rate between 1991 and 2002 compared with that between
1981 and 1991. However, it needs to be viewed in the context of banks’ increased focus in the
1990s on strengthening of their balance sheets and some risk aversion developed by banks on
account of application/tightening of prudential norms, as a result of which banks’ overall credit
portfolio also slowed down.

The reference year for the latest NSSO data was 2002. An analysis of more recent BSR data

Rishu Agarwal
reveals that there has been a distinct improvement in credit penetration (credit accounts per 100
persons) and credit flow to the rural sector in general and to agriculture, in particular, since the
early 2000s, that is, after the release of the NSSO data. Responding to the initiatives taken in
recent years, the number of credit accounts with all organised financial institutions (commercial
banks, RRBs, UCBs, PACS, MFIs and SHGs) per 100 adults improved from 18 in 2002 to 25 in
2007.

On the deposit side also, the outreach of organised financial institutions expanded over the years.
The number of savings accounts with all formal institutions increased to 54 per 100 persons (82
per 100 adults) in 2007 from 51 in 1993. However, after factoring in people below poverty line,
who have little or no capacity to save, there are a little more than 100 savings accounts per 100
adults above poverty line. With faster growth in income, people may move into higher income
brackets. As poverty levels decline and households income levels rise, their propensity to save
would also go up. Such people would need easy access to the formal financial system to develop
the banking habits. Banks, therefore, would need to innovate and devise newer methods of
bringing such customers into their fold.

Through housing and retail credit, banks have been able to bring an increasing number of
households into the fold of formal credit. However, most of the expansion has taken place in
cities and large towns. There is an enormous potential for expanding financial services in semi-
urban and rural areas. With increasing urbanisation on the one hand, and spread of non-farm
based activities in rural areas on the other, credit demand is expected to increase. Agricultural
activity is also getting increasingly commercialised which would generate new business
opportunities for banks. Banks, therefore, would also need to carefully examine the benefits of
increasing penetration in rural areas. These developments suggest that the demand for financial
services, both for savings and production purposes, would be greater than that has been in the
past. To meet the growing credit demand, banks would need to mobilise resources on a larger
scale than hitherto. This would promote financial inclusion and strengthen financial deepening.
Along with extending credit to a variety of enterprises in both organised and unorganised sectors,
the financial system would have to simultaneously enhance the risk assessment and risk
management capacities in order to maintain credit quality and sustain the credit growth.

The key to enhanced financial inclusion is reduction in transaction costs. The operating cost of
providing small accounts at times is a hindrance to the expansion of banking services to low
income groups. The experience of some institutions in the country as well as in other countries,
however, suggests that an appropriate use of technology could significantly reduce the operating
cost of financial inclusion and make it a viable and sustainable activity. The availability of new
information technology, expansion of credit information services, innovations in micro-finance
and the non-conventional modes of delivery of financial products offer further opportunities for
reducing transaction costs in dealing with small savers and borrowers. The challenge, thus, is to
increase the scope and coverage of financial inclusion by addressing deficiencies such as lack of
adequate infrastructure, higher transaction costs and low volumes of transactions.

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From the perspective of institutional development, the role of RRBs and co-operative banks,
which were established to expand the delivery of financial services in the unbanked sectors/
segments, suffered a setback due to their poor financial health. With the recent initiatives to
strengthen them, it is expected that they would play a greater role in promoting financial
inclusion. Considering the significance of moneylenders, especially in the rural credit delivery
system, there is also a need for expeditious implementation of the model money lending
legislation by the State Governments.

Sustainable financial inclusion process depends on several factors. Credit counselling can play a
crucial role in improving the prospects of repayment of loans. Though a beginning has been
made in India to provide credit counseling, there is a need to step up effor ts in this direction. The
Government can help in improving the absorptive capacity of financial services by creating an
enabling environment by strengthening the basic infrastructure. Investment in human
development such as health, water and sanitation, and education would also improve the credit
absorptive capacity of borrowers. Apart from this, efforts to promote financial literacy can go a
long way in improving the use of various financial services, particularly by the weaker and
poorer sections of the society.

The economy is presently in a phase of rapidly rising incomes, rural and urban, arising from an
expansion of extant economic activities as well as the creation of new activities. Corporate
profitability has exhibited sustainable trends and consumer incomes are increasing rapidly, riding
on the growth momentum. All of these developments suggest that the demand for financial
services, both for savings as well as production purposes, will be greater than has been the case
in the past, and there will be many new entrants in need of financial services who have not
hitherto been served. At present our financial depth is much lower than that of other Asian
countries, though it has picked up in the recent past. While there is evidence of an increase in
financial deepening, particularly during the present decade, the increase in the breadth and
coverage of formal finance has been less than adequate. Deepening the financial system and
widening its reach is crucial for both accelerating growth and for equitable distribution, given the
present stage of development of our country.

There has been a burst of entrepreneurship across the country, spanning rural, semi-urban and
urban areas. This has to be nurtured and financed. It is only through growth of enterprises across
all sizes that competition will be fostered. A small entrepreneur today will be a big entrepreneur
tomorrow, and might well become a multinational enterprise eventually if given the comfort of
financial support. But we also have to understand that there will be failures as well as successes.
Banks will therefore have to tone up their risk assessment and risk management capacities, and
provide for these failures as part of their risk management. Despite the risk, financing of first
time entrepreneurs is a must for financial inclusion and growth.As poverty levels decline and
households have greater levels of discretionary incomes, they will be first time financial savers.
They will, therefore, need to have easy access to formal financial systems to get into the banking
habit. Banks will need to innovate and devise newer methods of including such customers into
their fold. The importance of 'no-frills' account and expanding the range of identity documents
that is acceptable to open an account without sacrificing objectivity of the process in this milieu

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can never be over-emphasised. Banks will need to go to their customers, rather than the other
way around.

The micro-credit and the Self Help Group movements are in their infancy but are gathering
force. More innovation in the form of business facilitators and correspondents will be needed for
banks to increase their outreach for banks to ensure financial inclusion. New entrants to the
banking system need households at their doorstep.

To conclude, I wish to stress that with increasing liberalisation and higher economic growth, the
role of banking sector is poised to increase in the financing pattern of economic activities within
the country. To meet the growing credit demand, the banks need to mobilise resources from a
wider deposit base and extend credit to activities hitherto not financed by banks. The trend of
increasing commercialization of agriculture and rural activities should generate greener pastures,
and banks should examine the benefits of increasing penetration therein. Financial inclusion will
strengthen financial deepening and provide resources to the banks to expand credit delivery.
Thus, financial inclusion will lead to financial development in our country which will help to
accelerate economic growth.

Points
• There has been communication gap between bank staff and business correspondents.
Business correspondents do not timely report to the branch the work done by them. So,
there is a need of collaboration of branches and the business correspondents.

• The branches need further awareness regarding the project. So, there is a need of regular
meetings of branch heads, business correspondents and heads of regional offices.

• The accounting system is not followed properly, neither by the branches, nor by the
business correspondents.

• Collaborating with the State Governments to work on the extension of banking services.
Rishu Agarwal
 • There is a need to sensitize branch managers about financial inclusion.

• There has to be inspirational leadership and a change in mindset. Otherwise, it may not be
able to deliver services at the grassroots level.

CHAPTER 7
FINDINGS

Rishu Agarwal
 FINDINGS

I have followed exploratory method in which I have referred to secondary data. Also I visited the
area where actual work is going on. Here is a report on my findings:

Interaction with L.D.M. Raebareli, Mr. J.N.Singh

Mr. Singh told that 100% financial inclusion in the villages of Raebareli has been completed.

He told that, the teams are made at village levels and they were told the villages and the family
numbers. They go to every family and enquire about their accounts in any formal institution with
the type of account. Financial inclusion of districts along with the villages is being done. He told
that there are a total of 176 branches in the area for this purpose with 1745 villages and 269
mohallas making it a total of 2014.

There were 501513 families in rural areas and 47581 families in the urban areas making it a total
of 549094 families to be covered for the purpose. It opened 46592 no frill accounts and issued
6145 general purpose credit cards.

He also told about the success of women empowerment and loans given through SHGs. He told
that Raebareli has started smart cards in 5 branches namely, Salon, Dalmau, Lalganj,
Maharajganj and Tiloi. It issued a total of 10000 cards through INTEGRA under the NREGA
families selected.

Rishu Agarwal
He told that there are a total of 34000 SHGs working in the area each comprising of 10 families
approximately. A total of 350000 families are involved into it. He told that we have 5 lakhs in
Raebareli and 5 lakhs in Sultanpur making it a total of 10 lakhs out of which, 7 lakhs were in
rural areas and 3 lakhs were in urban areas. 3.5 lakhs have been already covered in the rural
areas.

He told that DLRC meetings are conducted on a regular basis to get feedback about the work
done by every branch and how much inclusion is done.

Interaction with L.D.M. Sultanpur, Mr. H.P.Shukla

He told that the prime motive of the bank is to join every family with the bank. For this, it
involved private agencies.secondary objective was to give loan to every family. He told that
sultanpur region covers 5 branches namely, Musafirkhana, Koireepur, Lambhua, Dostpur and
Gauriganj which covers around 50 villages. FINO use to work in this area as Business
Correspondent.

Interaction with Branch Manager, Salon, Raebareli

He told that Salon branch covers 21 villages which are divided into 3 groups comprising 7
villages each. It had a total of 4 smart card machines. It has issued 3500 smart cards out of
which, 1500 are operational.

Interaction with Integra agent, Salon, Raebareli

He told that there is always a security threat of the machine holder as he has to carry it from
village to village with good amount of cash with him. He told that the limit for withdrawal from
the machine is only 40000 per day which become short many times. Also individual withdrawal
limit is only 3000 per day and deposit limit is 10000 per day which is also very less. He also told
that the smart card account holders cannot access the branches so, they have to wait for the agent
to come in their respective villages.

But after discussion with Mr. Dayal, I came to know that the account holders can access the
branches but the villages as well as the branch heads are unaware of it. There is a provision of
one machine to be kept in the bank with the cashier where smart card holder can come and
access.

Rishu Agarwal
 Interaction with Gram Pradhan, Visaiya Village, Salon, Raebareli
He told that there is always a delay in the payment of the workers. Sometimes the machine do
not recognize the thumb prints. So, instant cash is not available due to these complications. There
is a shortage of withdrawal limit which is only 4000 per individual per day. People use to get
nervous and they use to panic if they do not get the money in time due o their illiteracy.

Interaction with Branch Manager, Musafirkhana, Sultanpur

He told that there are 2000 smart card accounts out of which, 784 are functional in pindara and
962 in dadra. There are a total of 2 machines, one in each village.

Interaction with FINO agent, Dadra, Musafirkhana, Sultanpur

He told about the working and requested for the banners containing FINO and BOB logo which
he can put outside his house. He told that there are 1000 smart card accounts out of which 962
are operational. The problem comes in cheque as there is no provision for it and withdrawal of
large amounts.

Rishu Agarwal
 CHAPTER 8
MEASURES TO MAKE
FINANCIAL INCLUSION
MORE EFFECTIVE

Mobile Banking Units

To make Financial Inclusion more effective, Mobile Banking facility should be provided to the
villagers where Mobile Van of the bank visits the village twice a week and collects and disburse
cash to the villagers. It acts like a branch for them. The bank contains a manual ledger which
records all the transactions done by the Van during the visit which it updates in the CBS System
when it comes back. This reduces the burden of the branch also it facilitates villagers as they
have to travel all the way to the branch leaving their one day wage and above that, conveyance
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expenses. It increases the banking as people shows confidence in the bank as Van visits their
doorsteps.

Extension Counters
Like the mobile banking units, permanent extension counters can be opened in the villages. The
villages can access these counters for deposit and withdrawal up to some limit. This decrease
some pressure of the branch also it facilitates the villagers as he does not have to travel all the
way to the branch neither he has to wait for the Mobile Banking Units.

Formalities for No Frill Accounts

The formality which is required at the time of opening No Frill accounts has to be checked. The
need of any introducer for the account should be eliminated and the account should be opened at
good faith as the villager access the bank from his door step only so, the case of fraud is nil.

Yearly Analysis of each service provided by the Bank

There should be proper accounting for the work done by the bank. There should be comparison
done internally by the bank on yearly basis so that the actual position as what work has been
done by the bank in any given period is known. It reflects the deviations, then the reasons for the
deviations and then only the corrective measures could be taken. It facilitates further planning.

What are the steps taken for the Micro Credit: Micro Credit Products
In Bank of Baroda, pilot project for smart cards was launched in Raebareli and Sultanpur. It also
established Micro Loan Factory with its head-quarter at Malikmau, Raebareli. This loan factory
is specially for women empowerment for Rajiv Gandhi Mahila Vikas Pariyojana. Under this,
Bank of Baroda finance SHGs. This program is going on since 15 months.

Rishu Agarwal
SHGs for loans: Involvement of Village Development Officer
At the time of sanctioning of loan to the SHGs, the involvement of the Village Development
Officer has to be checked. Sometimes he acts as intermediary between Gram Pradhan and the
beneficiary and cuts some slice and give it to the Pradhan and some part he keep with him. So it
has to be checked properly that the end user is benefited.

Guidance by Expert Panel to the villagers: For Micro Credit Planning

As far as Micro Credit Planning is concerned, villagers will not listen to any new face. They
want some old face which they recognize and which has some face value or goodwill in their
mindset. So, local people who are ready to motivate others should be used for guiding the
villagers for the Micro Credit Planning.

Banking through Mobile

Another method for banking for the villagers which I think will work is banking through Mobile
Phones. As IT revolution is taking place in India, every village has good access to almost all the
leading service providers which also includes the Government owned BSNL. Government can
give some toll free numbers to bank which they can give to their customers through which they
can access their accounts. As majority of the villagers know how to use a mobile phone, whether
they are literate or illiterate. So, they can check their account balances by dialing that toll free
number and their 15 digit account access number. Also they can transfer their balance to any
other account of the same bank through this service. This service will bring a boom in formal
banking as it overlaps the problems of time, distance, conveyance and literacy.

Restructuring SGSY
In SGSY, restructuring is needed. The loan given to the groups which are made through
government organizations contains several heterogeneous groups because of which their
recovery is only 23-25% whereas the groups which are made through NGOs contains
homogenous groups and their recovery is up to 90-95%.

Rishu Agarwal
Rishu Agarwal
 CHAPTER 9
BIBLIOGRAPHY

BIBLIOGRAPHY

www.cab.org.in

www.bankofbaroda.com

www.rbi.org.in

www.nabard.org

Rishu Agarwal
 CHAPTER 10
APPENDIX
Rishu Agarwal
 FINANCIAL INCLUSION AS PERCIEVED BY
EMINENT DIGNITARIES
Taking Banking Services to the Common Man – Financial Inclusion
(Speech by V.LEELADHAR, Deputy Governor, RBI)

Ladies and Gentlemen,

I am truly honoured to deliver the Fedbank Hormis Memorial Foundation commemorative
lecture. The illustrious list of the previous years’ speakers indicates the kind of significance this
commemorative lecture has acquired over the years. The late Shri K.P.Hormis, founder of
Federal Bank, was a visionary and left behind an institutional set up in the form of Federal Bank
which has been doing yeoman service for well over seventy five years. The Fedbank Hormis
Memorial Foundation, a public charitable trust, has been furthering the cause of banking and
finance by providing knowledge and training in the areas of banking, finance, economics and
management to banking professionals as well as deserving students who are specializing in these
areas. As the life and times of late Shri K.P.Hormis were spent largely in taking banking to the
masses, which is indicated by Federal Bank’s mix of urban and rural coverage, I thought it would
be appropriate for me to speak on taking banking services to the common man – financial
inclusion, a topic of contemporary significance and relevance.
The banking industry has shown tremendous growth in volume and complexity during the last
few decades. Despite making significant improvements in all the areas relating to financial
viability, profitability and competitiveness, there are concerns that banks have not been able to
include vast segment of the population, especially the underprivileged sections of the society,
into the fold of basic banking services. Internationally also efforts are being made to study the
causes of financial exclusion and designing strategies to ensure financial inclusion of the poor
and disadvantaged. The reasons may vary from country to country and hence the strategy could
also vary but all out efforts are being made as financial inclusion can truly lift the financial
condition and standards of life of the poor and the disadvantaged.

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3. What is Financial Inclusion?
• Financial inclusion is delivery of banking services at an affordable cost to the vast
sections of disadvantaged and low income groups. Unrestrained access to public
goods and services is the sine qua non of an open and efficient society. As
banking services are in the nature of public good, it is essential that availability of
banking and payment services to the entire population without discrimination is
the prime objective of the public policy.

4. The scope of financial inclusion

The scope of financial inclusion can be expanded in two ways.
(a) through state-driven intervention by way of statutory enactments ( for instance the
US example, the Community Reinvestment Act and making it a statutory right to
have bank account in France).
(b) through voluntary effort by the banking community itself for evolving various
strategies to bring within the ambit of the banking sector the large strata of society.
When bankers do not give the desired attention to certain areas, the regulators have to step in to
remedy the situation. This is the reason why the Reserve Bank of India is placing a lot of
emphasis on financial inclusion. In India the focus of the financial inclusion at present is
confined to ensuring a bare minimum access to a savings bank account without frills, to all.
Internationally, the financial exclusion has been viewed in a much wider perspective. Having a
current account / savings account on its own, is not regarded as an accurate indicator of financial
inclusion. There could be multiple levels of financial inclusion and exclusion. At one extreme, it
is possible to identify the ‘super-included’, i.e., those customers who are actively and persistently
courted by the financial services industry, and who have at their disposal a wide range of
financial services and products. At the other extreme, we may have the financially excluded, who
are denied access to even the most basic of financial products. In between are those who use the
banking services only for deposits and withdrawals of money. But these persons may have only
restricted access to the financial system, and may not enjoy the flexibility of access offered to
more affluent customers.

5. Consequences of Financial Exclusion

Consequences of financial exclusion will vary depending on the nature and extent of services
denied. It may lead to increased travel requirements, higher incidence of crime, general decline
in investment, difficulties in gaining access to credit or getting credit from informal sources at
exorbitant rates, and increased unemployment, etc. The small business may suffer due to loss of
access to middle class and higher-income consumers, higher cash handling costs, delays in
remittances of money. According to certain researches, financial exclusion can lead to social
exclusion.

Rishu Agarwal
6. International experience in promoting financial inclusion
An interesting feature which emerges from the international practice is that the more developed
the society is, the greater the thrust on empowerment of the common person and low income
groups. It may be worthwhile to have a look at the international experience in tackling the
problem of financial exclusion so that we can learn from the international experience. The
Financial Inclusion Task Force in UK has identified three priority areas for the purpose of financial
inclusion, viz., access to banking, access to affordable credit and access to free face-to-face money
advice. UK has established a Financial Inclusion Fund to promote financial inclusion and assigned
responsibility to banks and credit unions in removing financial exclusion. Basic bank no frills accounts
have been introduced. An enhanced legislative environment for credit unions has been established,
accompanied by tighter regulations to ensure greater protection for investors. A Post Office Card
Account (POCA) has been created for those who are unable or unwilling to access a basic bank account.
The concept of a Savings Gateway has been piloted. This offers those on low-income employment £1
from the state for every £1 they invest, up to a maximum of £25 per month. In addition the Community
Finance Learning Initiatives (CFLIs) were also introduced with a view to promoting basic financial
literacy among housing association tenants. A civil rights law, namely Community Reinvestment
Act (CRA) in the United States prohibits discrimination by banks against low and moderate
income neighborhoods. The CRA imposes an affirmative and continuing obligations on banks to
serve the needs for credit and banking services of all the communities in which they are
chartered. In fact, numerous studies conducted by Federal Reserve and Harvard University
demonstrated that CRA lending is a win-win proposition and profitable to banks. In this context,
it is also interesting to know the other initiative taken by a state in the United States. Apart from
the CRA experiment, armed with the sanction of Banking Law, the State of New York Banking
Department, with the objective of making available the low cost banking services to consumers,
made mandatory that each banking institution shall offer basic banking account and in case of
credit unions the basic share draft account, which is in the nature of low cost account with
minimum facilities. Some key features of the basic banking account are worth-mentioning here.
• The initial deposit amount required to open the account shall not exceed US $ 25
• The minimum balance, including any average balance, required to maintain such
account shall not exceed US $ 0.10
• The charge for periodic cycle for the maintenance of such accounts to be declared up
front
• The minimum number of withdrawal transactions which may be made during
any periodic cycle at no charge to the account holder must at least be eight
• A withdrawal shall be deemed to be made when recorded on the books of the
account holder’s banking institution
• Except, as provided below, an account holder shall not be restricted as to the
number of deposits which may be made to the account without incurring any additional
charge
• The banking institution may charge account holders for transactions at electronic
facilities which are not operated by the account holder’s banking institution as well as
other fees and charges for specific banking services which are not covered under
the basic banking account scheme

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 • Every periodic statement issued for the basic banking account should invariably
cover on it or by way of separate communiqué maximum number of withdrawals
permitted during each periodic cycle without additional charge and the
consequences of exceeding such maximum and the fee if any, for the use of
electronic facilities which are not operated by the account holder’s banking
institution.
An interesting feature of basic banking account scheme is the element of transparency i.e. the
banking institution should, prior to opening the account, furnish a written disclosure to the
account holder describing the main features of the scheme i.e. the initial deposit amount required
to open the account, minimum balance to be maintained, charge per periodic cycle for use of
such account, maximum number of withdrawal transactions without any additional charge and
other charges imposed on transactions for availing electronic facility not operated by the account
holder’s banking institution, etc.

7. Indian Scenario
Bank nationalization in India marked a paradigm shift in the focus of banking as it was intended
to shift the focus from class banking to mass banking. The rationale for creating Regional Rural
Banks was also to take the banking services to poor people. The branches of commercial banks
and the RRBs have increased from 8321 in the year 1969 to 68,282 branches as at the end of
March 2005. The average population per branch office has decreased from 64,000 to 16,000
during the same period. However, there are certain under-banked states such as Bihar, Orissa,
Rajasthan, Uttar Pradesh, Chattisgarh, Jharkhand, West Bengal and a large number of North-
Eastern states, where the average population per branch office continues to be quite high
compared to the national average. As you would be aware, the new branch authorization policy
of Reserve Bank encourages banks to open branches in these under banked states and the under
banked areas in other states. The new policy also places a lot of emphasis on the efforts made by
the Bank to achieve, inter alia, financial inclusion and other policy objectives.
One of the benchmarks employed to assess the degree of reach of financial services to the
population of the country, is the quantum of deposit accounts (current and savings) held as a ratio
to the adult population. In the Indian context, taking into account the Census of 2001 (ignoring
the incremental growth of population thereafter), the ratio of deposit accounts (data available as
on March 31, 2004) to the total adult population was only 59% (details furnished in the table).
Within the country, there is a wide variation across states. For instance, the ratio for the state of
Kerala is as high as 89% while Bihar is marked by a low coverage of 33%. In the North Eastern
States like Nagaland and Manipur, the coverage was a meager 21% and 27%, respectively. The
Northern Region, comprising the states of Haryana, Chandigarh and Delhi, has a high coverage
ratio of 84%. Compared to the developed world, the coverage of our financial services is quite
low. For instance, as per a recent survey commissioned by British Bankers' Association, 92 to
94% of the population of UK has either current or savings bank account.

Rishu Agarwal
8. Steps towards financial inclusion

In the context of initiatives taken for extending banking services to the small man, the mode of
financial sector development until 1980’s was characterized by
• a hugely expanded bank branch and cooperative network and new organizational
forms like RRBs;
• a greater focus on credit rather than other financial services like savings and
insurance, although the banks and cooperatives did provide deposit facilities;
• lending targets directed at a range of ‘priority sectors’ such as agriculture,
weaker sections of the population, etc;
• interest rate ceilings;
• significant government subsidies channeled through the banks and cooperatives,
as well as through related government programmes;
• a dominant perspective that finance for rural and poor people was a social
obligation and not a potential business opportunity.
It is absolutely beyond any doubt that the financial access to masses has significantly improved
in the last three and a half decades. But the basic question is, has that been good enough. As I
mentioned earlier, the quantum of deposit accounts (current and savings) held as a ratio to the
adult population has not been uniformly encouraging. There is a tremendous scope for financial
coverage if we have to improve the standards of life of those deprived people.

With a view to enhancing the financial inclusion, as a proactive measure, the RBI in its Annual
Policy Statement for the year 2005-06, while recognizing the concerns in regard to the banking
practices that tend to exclude rather than attract vast sections of population, urged banks to
review their existing practices to align them with the objective of financial inclusion. In the Mid
Term Review of the Policy (2005-06), RBI exhorted the banks, with a view to achieving greater
financial inclusion, to make available a basic banking ‘no frills’ account either with nil or very
minimum balances as well as charges that would make such accounts accessible to vast sections
of the population. The nature and number of transactions in such accounts would be restricted
and made known to customers in advance in a transparent manner. All banks are urged to give
wide publicity to the facility of such no frills account so as to ensure greater financial inclusion.
Further, in order to ensure that persons belonging to low income group both in urban and rural
areas do not face difficulty in opening the bank accounts due to the procedural hassles, the KYC
procedure for opening accounts has been simplified for those persons who intend to keep
balances not exceeding rupees fifty thousand (Rs. 50,000/-) in all their accounts taken together

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and the total credit in all the accounts taken together is not expected to exceed rupees one lakh
(Rs.1,00,000/-) in a year.

9. The Way Forward

The banks should come out of inhibited feeling that very aggressive competition policy and
social inclusion are mutually exclusive. As demonstrated elsewhere, the mass banking with
no-frills etc. can become a win-win situation for both. Basically banking services need to be
“marketed” to connect with large population segments and these may be justifiable
promotional costs. The opportunities are plenty.
• In the context of India becoming one of the largest micro finance markets in the world
especially in the growth of women’s savings and credit groups (SHGs) and the sustaining
success of such institutions which has been demonstrated by the success of SEWA bank
in Gujarat, low cost banking is not necessarily an unviable venture/proposition.
• The IBA may explore the possibility of a survey about the coverage in respect of
financial inclusion keeping in view the geographical spread of the banks and extent of
financial services available to the population so as to assess the constraints in extension
of financial services to hitherto unbanked sections and for initiating appropriate policy
measures.
• It may be useful for banks to consider franchising with other segments of financial sector
such as cooperatives, RRBs etc. so as to extend the scope of financial inclusion with
minimal intermediation cost.
• Since large sections of low income groups transactions are related to deposits and
withdrawals, with a view to containing transaction costs, 'simple to use' cash dispensing
and collecting machines akin to ATMs, with operating instructions and commands in
vernacular would greatly facilitate financial inclusion of the semi urban and rural
populace. In this regard, it is worthwhile to emulate the example of ‘e-Choupal’ project
brought forth through private sector initiative
Conclusion
It is becoming increasingly apparent that addressing financial exclusion will require a holistic
approach on the part of the banks in creating awareness about financial products, education, and
advice on money management, debt counseling, savings and affordable credit. The banks would
have to evolve specific strategies to expand the outreach of their services in order to promote
financial inclusion. One of the ways in which this can be achieved in a cost-effective manner is
through forging linkages with microfinance institutions and local communities. Banks should
give wide publicity to the facility of no frills account. Technology can be a very valuable tool in
providing access to banking products in remote areas. ATMs cash dispensing machines can be
modified suitably to make them user friendly for people who are illiterate, less educated or do
not know English. To sum up, banks need to redesign their business strategies to incorporate specific
plans to promote financial inclusion of low income group treating it both a business opportunity as well as
a corporate social responsibility. They have to make use of all available resources including technology
and expertise available with them as well as the MFIs and NGOs. It may appear in the first instance that
taking banking to the sections constituting “the bottom of the pyramid”, may not be profitable but it
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should always be remembered that even the relatively low margins on high volumes can be a very
profitable proposition. Financial inclusion can emerge as commercial profitable business. Only the banks
should be prepared to think outside the box!
Financial Inclusion and Information Technology
(By Smt. Usha Thorat, Deputy Governor, Reserve Bank of India)

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 Bank’s 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).

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.

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Measures of Financial Exclusion

Whatever measure one may use for India, it is apparent that the financially excluded constitute a
significant share of the population especially amongst the low income groups. Based on the
AIDIS 2002 survey, RC showed that 111.5 million households had no access to formal credit. It
also showed that 17 million households were indebted to moneylenders. The recent Arjun
Sengupta Report on financing enterprises in the unorganised sector has pointed out that only 2.4
million out of 58 million units in this sector (with investment of less than Rs 25000 ) have got
credit from commercial banks. The AIDIS 2002 also showed that lower the asset class or
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.

Causes of Increased Indebtedness from Non-institutional Sources

A very interesting analysis by the RCF shows that the major reason for increase in the overall
household debt and the increase in the share of households indebted to non-institutional sources
between 1991 and 2002 was a significant increase in current farm expenditure and household
expenditure, especially in rural areas. The 'household expenditure' includes expenditure incurred
on purchase of residential plot; purchase, construction, addition/alteration of building for
residential purposes; purchase of durable households assets, clothes, among others and
expenditure on medical treatment, education, marriages, and ceremonies. Thus, the 'household
expenditure' includes many items for which households may find it difficult to obtain loans from
institutional sources. The IIMS Survey also suggests that a large portion of loan is taken by the
households for meeting financial emergency, medical emergency and social obligations. These
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 non-institutional 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

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had a significant positive impact on financial inclusion as revealed by the data for subsequent
period.

Challenges in Achieving FI for Inclusive Growth

Looking at the findings of these surveys and analysis, it is quite clear that

Table 1 : Access to Credit - Since 2002

- Accounts with Institutions
Credit
No. of Accounts with Institutions - in Millions
2002 2007
Scheduled Commercial Banks 43.3 76.6
Regional Rural Banks 12.6 15.0
Sub total 55.9 91.6
Other: Primary Agriculture
Credit Societies 55.5 47.9
Urban Co-operative Banks 4.4 7.1
Self Help Groups 7.4 40.5
Total 123.3 187.1
No. of Accounts per 100 Adults
All Institutions 18 25
Source : Report on Currency & Finance 2006-08.

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 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

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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.

Table 2 : Access to Savings Accounts -

Since 2002
Savings
No. of Accounts with Institutions - in Millions
2002 2007
Scheduled Commercial Banks 246.5 320.9
Regional Rural Banks 36.7 52.7
Sub total 283.2 373.6
Other: Primary Agriculture
Credit Societies 102.1 125.8
Urban Co-operative Banks 41.6 50.0
Post Offices 60.2 60.8
Total 487.1 610.2
No. of Accounts per 100 Adults
All Institutions 72 82
Source : Report on Currency & Finance 2006-
08.

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.

RBI Initiatives for FI

In the Annual Policy for 2005-06 , for the first time the word financial inclusion was used and
banks were asked to open 'no frills' or a basic banking account to all those desirous of opening a
bank account. Several other aspects such as simplified KYC, OTS for loans upto Rs 25000,
offering a GCC/simplified overdrafts, etc., were also covered. A decentralized approach was
advocated through targeting 100 per cent financial inclusion district by district involving the

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DCC and bank and government officials to facilitate enrolment and identification. Another very
important policy measure in January 2006 was to allow banks to adopt the agency model or what
is 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.

SHGs and MFIs Role in FI

The need for informality in credit delivery and easy access is demonstrated by the fact that SHGs
and MFIs constitute the fastest growing segment in recent years in reaching out to small
borrowers. These institutions are able to effectively address the small ticket and last mile issues.
In the four years between 2003 and 2007, small borrower bank accounts (credit), i.e., upto Rs
25000 increased marginally from 36.9 million to 38.6 million, while SHGs' borrowing members
grew from 10 million to 40.5 million and MFIs' borrowers grew from 1.1 million to 8 million. In
2007-08, MFIs have added 6 million clients increasing their outreach to 14 million as per data
brought out by Sa Daan.

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
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.

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 Table 3 : No-Frills Accounts -
Bank’s Progress
No. of accounts opened by banks as on:
Category Mar. 31,Mar. 31 Mar. 31,
2006 2007 2008*
Public Sector Banks 332,878 5,865,41913,925,674
Private Sector156,388 856,495 1,879,073
Banks
Foreign Banks 231 2,753 33,115
Total 489,497 6,724,66715,837,862
* Provisional.
Source : Reserve Bank of india.

ICT for FI - Reserve Bank Initiatives

I now turn to the specific initiatives of the Reserve Bank in regard to ICT for Financial Inclusion.
The very first initiative was emphasising the use of IT solutions while adopting the agency or BC
model for financial inclusion. A paper placed on the Reserve Bank website has envisaged a
scheme with the Reserve Bank support for providing satellite connectivity for remote area
branches. The reports of three working groups set up by the Reserve Bank to consider support to
RRBs and UCBs in computerising their operations and adopt IT solutions for financial inclusion
have been placed in public domain for comments. These groups have recommended that the
IDRBT could offer interest free loans to UCBs and RRBs for adoption of IT. Based on
comments and response Reserve Bank will be firming up these schemes. Recognising the
penetration of mobile phones (including amongst the low income population) and the enormous
opportunities they offer in extending the banking outreach. Reserve 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

Electronic Benefit Payments

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Recognising the several advantages of using bank accounts for disbursal of government benefits,
many State Governments have decided to disburse NREGA payments social security benefits
electronically through no frills bank accounts and in some States with such accounts operated
through smart cards with bio-metric identification. A Committee set up by the Reserve Bank
examined the various models through which such payments can be made and has recommended
a bank led model with sharing of costs between Government and banks. Appropriate support
from the Reserve Bank or the Financial Inclusion Technology Fund could also be thought of in
the initial stages. Such accounts that 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.

*
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.

Inclusive Growth - The Role of Banks in Emerging Economies

( By Usha Thorat, Deputy Governor, RBI)

Rishu Agarwal
I am delighted to be here in Colombo and honoured by the invitation of the Central Bank of Sri
Lanka to deliver this year’s ‘Independence Commemoration Lecture’. It is my proud privilege to
join the illustrious list of previous speakers, who have added laurels to this prestigious lecture
series. Today, I would like to share with you India’s experiences on ‘Inclusive Growth’ - a topic
which is both current and close to the hearts of public policymakers and central bankers of
emerging economies.
Having chosen my topic, I am faced with the, not so unusual, speaker’s dilemma as to from
where I should begin. And I thought it is best to begin at the very beginning – some three
millennia ago. Yes, some three millennia ago!! I refer to the ‘Shanti Mantra’ – a peace hymn –
from the ‘Kato Upanishad’ of the Hindu scriptures which runs like this:
"Om Sahana Vavatu Sahanau Bhunaktu, Saha Viryam Karawavahai, Tejasvinavaditamastu, Ma
Vidvishavahai, Om Shanti hi Shanti hi Shanti hi"
and translates to:
"Together may we be protected, together may we be nourished, together may we work with great
energy, may our journey together be brilliant and effective, may there be no bad feelings
between us, Peace, Peace, Peace"
Indeed, the significance and importance of the ‘inclusive’ concept has been well recognised
millennia ago.
Coming to current times, there is growing realisation that while the ‘trickle down’ effect of
economic growth no doubt works, it takes too long a time and hence there is a need to focus on
inclusive growth. "Inclusive growth", is a little more than just the benefits of growth being
distributed equitably and evenly; it is the participation of all sections and regions of society in the
growth story and their reaping the benefits of growth.

I. Why inclusive growth?

While it is quite evident that inclusive growth is imperative for achieving the equity objective,
what is, perhaps, not so obvious is, why inclusive growth is now considered essential even to
sustain the growth momentum.
First, in many of the emerging market economies, the major chunk of population is based in rural
areas. Significant increase in demand for manufacturing and services sectors has to come from
the rural population. The average monthly per capita consumption expenditure (MPCE) in urban
areas in India is almost double that of rural areas. In some States, the disparities are even more
glaring. Therefore, it is important to ensure that growth takes place in agriculture, allied sectors
as also in secondary and services sectors in rural areas, and amongst urban poor to provide a
growing market for the goods and services produced by the expanding corporate sector.
Second, from supply-side management, growth in agriculture is necessary in order to keep
manufacturing prices under check, provide food security and keep inflation under control. Price

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stability is not merely important as an anti poverty measure but also as an instrument to ensure
stable and sustained growth.
Third, higher growth in agriculture and rural areas coupled with demographic dividend (i.e.
growing proportion of population in the working age group of 15-65) will lead to a rise in the
savings level for financing the increasing level of investments necessary to sustain the overall
growth momentum.
Fourth, the limitations on increasing production and productivity in agriculture are driving
migration to urban areas leading to population pressure in urban areas and increase in urban
poor. Infrastructure in urban areas needs considerable investment to handle the migration - this
requires significant investment in housing, water, sanitation, lighting and power, waste
management, education, health facilities, and other infrastructure. Hence, urban development
policies have to focus on inclusive investment to deal with the huge armies of low-income
population likely to move into these areas.
Fifth, since in many countries such as India, the growth process is knowledge-based and
services-led, the requirement of skilled labour is quite substantial in comparison to the present
availability. In order to ensure adequate supply of skilled labour force, huge social sector
investment is required covering the vast majority of people who may not be able to afford such
education and skill development.
Sixth, whenever we talk of the majority population living in rural areas, it is often identified with
the agriculture sector. However, it is the unorganised non-farm sector that is increasingly
absorbing most of the labour force. This sector has huge potential for growth once there is
sufficient investment in infrastructure ensuring linkage to markets and easier access to assets and
skills. Infusion of appropriate technology, skills, and easier access to credit, especially start-up
capital, apart from facilitating market development, can make this segment an expanding base for
self-sustaining employment and wealth generation and also foster a culture of creative and
competitive industry. Entrepreneurial development has to be encouraged by having an enabling
competitive environment and easy availability of finance for newer projects and enterprises. In
Prof. C. K. Prahalad's words,
'If we stop thinking of the poor as victims or as a burden, and start recognising them as resilient
and creative entrepreneurs and value conscious consumers, a whole world of opportunity will
open up1.'
Thus, there are several factors to be considered for inclusive growth. Uppermost among these, is
the need for raising the allocative efficiency of investment and resource use across different
sectors of economy – this can be met by addressing two basic supply-side issues viz. (i) effective
credit delivery system to facilitate productive investment in employment impacting sectors
especially, agriculture, micro, small and medium enterprises and (ii) large scale investment in
infrastructural facilities like irrigation, roads, railways, communication, ports, power, rural/urban
reconstruction and in social infrastructure such as health care, education and sanitation.

II. Financial Inclusion for Inclusive Growth

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The challenges of achieving more inclusive growth can be met by policies that encourage easier and
affordable access to financial services. Both theoretical and empirical researches highlight the role of
financial development in facilitating economic development (Rajan and Zingales, 2004)2. At the
cross-country level, evidence indicates that various measures of financial development are positively
related to economic growth (King and Levine, 1993; Levine and Zervos, 1998)4. Even the recent
endogenous growth literature, building on 'learning by doing' processes, assigns a special role to
finance (Aghion and Hewitt, 1998 and 2005)5. While in developed countries, the formal financial
sector comprising mainly the banking system serves most of the population, in developing countries,
a large segment of the society, mainly the low-income group, has little access to financial services,
either formal or semi formal. As a result, many people have to necessarily depend either on their own
sources or informal sources of finance, which are generally at high cost. Most of the population in
developed countries (99 per cent in Denmark, 96 per cent in Germany, 91 per cent in the USA and 96
per cent in France) have bank accounts (Peachy and Roe, 2004). However, formal financial sectors in
most developing countries serve relatively a small segment, often no more than 20-30 per cent of the
population, the vast majority of who are low income households in rural areas (ADB, 2007) 7. Owing
to several factors such as the sharp increase in urbanisation, rural to urban migration as also the
increase in urban poverty, the share of poor and the low-income households not having any access to
finance in the urban areas is also increasing in several countries. Recent data shows that countries
with large proportion of population excluded from the formal financial system also show higher
poverty ratios and higher inequality.
Financial Inclusion and Development Indicator
Country Composite Index ofPoverty Unemployment Gini Index
Financial Inclusion(per cent ofduring 2000-04
(per cent of populationpopulation (per cent)
with access tobelow
financial services) poverty line)
1 2 3 4 5
India 48 28.6 (1999-00) 4.3 32.5 (1999-00)
Bangladesh 32 49.8 (2000) 3.3 31.8 (2000)
Brazil 43 22.0 (1998) 9.7 58.0( 2003)
China 42 4.6 (1998) 4.0 44.7 (2001)
Indonesia 40 27.1 (1999) 9.9 34.3 (2002)
Korean Republic 63 .. 3.5 31.6 (1998)
Malaysia 60 15.5 (1989) 3.5 49.2 (1997)
Philippines 26 36.8 (1997) 9.8 46.1 (2000)
Sri Lanka 59 25.0 (1995-96) 9.0 33.2 (1999-00)
Thailand 59 13.1 (1992) 1.5 42.0 (2002)
8 9
Source: World Bank (2006) and (2008) .

III. Inclusive growth in India

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From an annual average growth rate of 3.5 per cent during 1950 to 1980, the growth rate of the
Indian economy accelerated to around 6.0 per cent in the 1980s and 1990s. In the last four years
(2003-04 to 2006-07), the Indian economy grew by 8.8 per cent. In 2005-06 and 2006-07, the
Indian economy grew at a higher rate of 9.4 and 9.6 per cent, respectively. Reflecting the high
economic growth and a moderation in population growth rate, the per capita income of the
country also increased substantially in the recent years. An important characteristic of the high
growth phase in recent years is its resilience to shocks. The Indian economy, for instance,
successfully avoided any adverse contagion impact of the East Asian crisis, sanctions like
situation post-Pokhran nuclear test, and border conflict with a neighbouring country during May-
June 1999.

Despite the impressive numbers, growth has failed to be sufficiently inclusive, particularly after
the mid-1990s. Agricultural sector which provides employment to around 60 per cent of the
population lost its growth momentum from that point, though there has been a reversal of this
trend since 2005-06. The percentage of India’s population below the poverty line has declined
from 36 per cent in 1993-94 to 26 per cent in 1999-2000. The approach paper to the Eleventh
Plan indicated that the absolute number of poor is estimated to be approximately 300 million in
2004-05.

Concerns about financial exclusion, especially in rural areas have surfaced in India in recent
years following the results of the NSSO's All-India Debt and Investment Survey (AIDIS), 2002.
According to the Survey results, though the share of non-institutional sources of credit for the
cultivator households had declined from 92.7 per cent in 1951 to 30.6 per cent in 1991, it had
increased to 38.9 per cent in 2002 mainly due to increase in moneylenders’ share.
Simultaneously, the share of institutional sources such as commercial banks, co-operative
societies, etc. increased from 7.3 per cent in 1951 to 66.3 per cent in 1991, before declining to
61.1 per cent in 2002. While data later than 2002 are not available in this regard, it is expected
that the doubling of agriculture credit and other measures since 2004 would have led to some
improvement in the share of institutional sources.

IV. Financial Sector Policy and Regulatory Framework in India for inclusive
growth

The financial sector in India has been primarily dominated by the banking system. Scheduled
commercial banks (SCBs) occupy a predominant position in the financial system, accounting for
around three-fourths of the total assets. As at end-March 2007, the public sector banks (PSBs)
accounted for 70 per cent of the total assets of SCBs. Foreign banks operating in India accounted
for about 8 per cent of the assets of SCBs. The RRBs and the co-operative banks, with two broad
segments of urban and rural co-operative banks also form an integral part of the Indian financial
system. Broadly speaking, one can observe two distinct phases in the developments relating to
public policy objectives underlying banking policy. The first phase viz. the two decades since
1970 represented the period of State control over the banking system, pre-emption of the major
part of bank resources by the public sector and directed lending with administered interest rates.
During this period, the nationalisation of major banks in 1969 saw banking policy giving a thrust
to branch expansion in the rural and semi urban areas and stepping up of lending to the so called
priority sectors viz. agriculture, small scale industry, self employed and small business sectors
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and weaker sections within these sectors. As a result, the branches of scheduled commercial
banks increased from 8,262 in June 1969 to 69,471 in March 2006. The average population per
branch office decreased significantly from 64,000 to 16,000 during the above period, with the
share of rural branches increasing from 22.2 per cent in June 1969 to a little over 51 per cent in
March 1998. Lending to the priority sectors was increased to the mandated target of 40 per cent.
Specialised Regional Rural Banks were set up in 1975, especially in backward and tribal districts
to cater to the needs of the weaker sections amongst farmers and non-farm small businesses
entrepreneurs. National Bank for Agriculture and Rural Development (NABARD) largely
provided concessional refinance for lending done by the rural cooperative credit structure. The
second phase after the early 1990s, represents the period of financial sector reform, higher
allocation of credit to the private sector, lower pre-emption by the government sector, moving
away from administered interest rates to market determined rates even for government
borrowing, introduction of international best practices and regulatory policies for strengthening
the financial sector, increased competitiveness with entry of new private sector banks and more
foreign banks, and allowing private shareholding in public sector banks. Listing of public sector
banks on the stock exchanges made them consciously focus on bottom line, control NPAs, make
investments in technology and skills and bring about other efficiencies. This period also saw
consolidation of banking system in terms of branches. Although priority sector lending norms
continued, the definitions became progressively wider with several sectors and activities getting
included. In a sense, this period demonstrated the recognition that inclusive banking cannot be at
the cost of weakening financial institutions and that policies for inclusive banking have to go
hand in hand with encouraging strong and efficient financial institutions. The thrust of inclusive
financing for the poor in this phase was mainly through government sponsored credit-cum-
subsidy programmes. The recovery performance in these schemes was not encouraging and their
success in achieving desired outcomes was also tepid. A notable development in the second
phase of inclusive banking was the launching of the SHG Bank Linkage programme by
NABARD in 1992. The programme gained momentum when Reserve Bank allowed banks to
open savings accounts for SHGs despite their not having any legal form. The group leaders
operate the SHG accounts. SHGs facilitate collective decision - making and provide ‘door step’
banking to the poor. The banks, as wholesalers of credit, provide the resources, while the NGOs
are the agencies that organise the poor, build their capacities and facilitate the process of
empowering them. Interest rates on loans granted by banks to SHGs are deregulated. Loans to
SHGs of individual farmers are treated as direct agricultural finance, provided the details of such
loans are maintained by the bank/SHG. As at March 31, 2007, over 2.9 million SHGs have been
linked to banks involving a total credit flow of over Rs.180 billion. The other strategic move in
this phase was the creation of Rural Infrastructure Development Fund (RIDF) in NABARD, into
which public sector banks were required to make deposits towards part of the shortfall in their
priority sector lending. The Fund is utilised to make loans to State Governments for creation of
rural infrastructure. A similar fund was set up in Small Industries Development Bank of India
(SIDBI) out of shortfall in meeting priority sector lending targets by foreign banks.

V. Recent Strategies for Inclusive Banking

As the economy began to grow at higher rates, the regional and societal disparities called for new
strategies to ensure that the banking system met the requirements of inclusive growth. Such
strategies needed to be fashioned in a manner that they did not undermine the stability and

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efficiency of the financial system. Accordingly, over the last four years or so, several measures
have been taken by the Reserve Bank and Government of India to ensure better banking
penetration and outreach, particularly that the credit needs of agriculture and small enterprises
are met while allowing sufficient flexibility to each bank to evolve its own policies and strategies
for the purpose. We shall now discuss some of these initiatives. Specific focus on financial
inclusion commenced in November 2005, when Reserve Bank advised banks to make available a
basic banking ‘no-frills’ account with low or ‘nil’ minimum balance as well as charges, with a
view to expanding the outreach of such accounts. In such accounts, banks are required to make
available all printed material used by retail customers in the regional language concerned. In
order to ensure that persons belonging to low income groups, both in the urban and rural areas do
not encounter difficulties in opening bank accounts, the know your customer (KYC) procedure
for opening accounts has been simplified. Besides the Kisan Credit Cards (KCCs), banks have
been asked to consider introduction of a General purpose Credit Card (GCC) facility up to
Rs.25000 at their rural and semi urban braches. This facility is in the nature of revolving credit,
which entitles the holder to withdraw up to the limit sanctioned. Based on assessment of
household cash flows, limits are sanctioned without insistence on security or purpose. Interest
rate on the facility is completely deregulated. Fifty per cent of GCC loans can be treated as
priority sector lending.
Financial inclusion is intended to connect people to banks with consequential benefits. A
decentralised strategy has been adopted for ensuring financial inclusion. The SLBC identifies
one district for 100 per cent financial inclusion. So far, SLBCs have reported having achieved
100 per cent financial inclusion in 68 out of 611 districts in the country. 12 million "No frills"
accounts have been opened so far, with 11 million of them having been opened by public sector
banks. An external evaluation of the progress made in these districts is being undertaken to draw
lessons for further action in this regard. Recognising that the Regional Rural Banks (RRBs) with
their dominant presence in backward and tribal areas can become powerful instruments of
financial inclusion, measures have been taken to strengthen them through consolidation of the
196 banks into 92 banks, making sponsor banks responsible for their performance, liberalising
branch licensing in their area of operation, recapitalising RRBs having negative net worth and
providing them with facilities to upgrade their staff skills. Working groups have been set up to
explore how these banks could be supported to bring in core banking solutions and adopt ICT
solutions for financial inclusion. A growing component of inclusive banking is the lending by
MFIs that are societies, trusts, cooperatives or "not for profit" companies or non-banking
financial companies registered with the RBI. This sector currently covers 8.32 million borrowers
(Sa-Dhan Report 2007). The NBFC segment within this sector accounts for 42.8 per cent of the
borrowers and is the fastest growing segment. Interest rates on lending to MFIs/NBFCs are
completely deregulated; bank lending to such entities for micro finance is treated as priority
sector lending. Private sector and foreign banks are observed to be actively supporting this
sector, which is also attracting private equity funding and philanthropy funding from outside the
country.

In order to step up lending to agriculture, in 2004-05, Government of India launched a special

programme monitored by NABARD for doubling of agricultural credit, and providing relief to
distressed farmers through rescheduling and settlement schemes. A programme of interest rate
subvention of 2 per cent on crop loans to farmers was also introduced and this scheme, which is

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being operated for the last three years, is still in force. In 31 districts identified as distressed, a
special package was put in place for interest waiver and rescheduling of principal over a long
period to minimise debt burden, together with provision of fresh loans to distressed farmers.
Government of India and respective State Governments share the burden of write off. Some State
Governments have, on their own, introduced farmers’ debt relief programmes.

Government of India has introduced a comprehensive recapitalisation and reform package for the
rural cooperative credit structure, both short term and long term, as this sector was plagued by
overdues and accumulated losses resulting in choking of credit flow. The reform package has
financial governance and regulatory components to ensure that the sector once strengthened is
self- sustaining. The programme is currently under implementation. Measures are also being
taken by the Government to revamp crop insurance and also introduce weather insurance.

Reserve Bank has modified the prudential accounting norms for classification of asset quality
with respect to agricultural loans, keeping in mind the seasonality of crops and cash flows.
Standing instructions are in place for rescheduling loans in areas affected by natural calamities
and disasters. In order to enable small farmers with loans up to Rs.25000 to re-enter the credit
system, banks have been advised to introduce a simplified one-time settlement scheme for such
loans. In order to help distressed farmers who have defaulted on loans due to natural calamities,
or for reasons beyond their control, banks have been permitted to offer one time settlement under
a Board approved policy. Both in rural and urban areas, the poorer sections of the society
commonly avail of loans against gold and silver ornaments. These loans entail relatively low risk
as they are extended with adequate margins and the collateral (gold or silver) is easily
marketable, particularly where the size of the loan is small. Therefore, the risk weight on such
loans up to Rs.100000 has been reduced to 50 per cent from the level of 125 per cent for all
categories of banks.

Similar measures have been taken to step up credit to the micro, small and medium enterprises
(MSME) sector. The Government operates a credit guarantee scheme through SIDBI for
providing credit guarantee to banks for their loans to MSME so that they can give such loans
based on the viability of the project and not insist on collateral. The guarantee premium has been
reduced and coverage increased for smaller loans and backward areas. Credit rating by SIDBI at
concessional rates and the putting in place of a comprehensive credit information system for this
sector will go a long way in better credit allocation and pricing. Reserve Bank has issued detailed
guidelines for debt restructuring for this sector. In view of the importance of creation of
employment opportunities in rural areas, especially with a focus on women and weaker sections
of the society, Reserve Bank’s guidelines stipulate that 60 per cent of total advances to the small
enterprises sector should go to micro enterprises.

In 2002, there were more than 2000 small urban cooperative banks in the country providing
banking services to local communities. Many of these banks were weak and public confidence in
the system had got eroded. Over the recent period, recognising the important role that these
banks can play in financial inclusion, a regulatory and supervisory framework has been put in
place to weed out the non viable banks in a non disruptive manner through a consultative process
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with the registrar of cooperative societies and sector representatives. This strategy has paid huge
dividends and confidence has slowly come back to the sector.

Over the years, concentration of bank branches in metropolitan areas became a concern. To
mitigate this problem, since 2006, the Reserve Bank approves opening of new branches for any
bank only on the condition that at least half of such new branches are opened in under-banked
areas as notified by it. Banks too have found that the branches in semi-urban and rural areas are
commercially viable.

In January 2006, the Reserve Bank permitted banks to utilise the services of non-governmental
organisations (NGOs/SHGs), micro-finance institutions and other civil society organisations as
intermediaries in providing financial and banking services through the use of business facilitator
(BF) and business correspondent (BC) models. The BC model allows banks to do ‘cash in-cash
out’ transactions at a location much closer to the rural population, thus addressing the last mile
problem. Banks are also entering into agreements with Indian Postal Authorities for using the
enormous network of post offices as business correspondents for increasing their outreach and
leveraging the postman’s intimate knowledge of the local population and trust reposed in him.

The Reserve Bank of India has been encouraging the use of Information Communication
Technology (ICT) solutions by banks for enhancing their outreach with the help of their Business
Correspondents. The BCs carry hand held devices, which are essentially smart card readers. The
information captured is transmitted to a central server where the accounts are maintained. These
devices are used for making payments to rural customers and receiving cash from them at their
doorsteps. Mobile phones have also been developed to serve as card readers. Account holders are
issued smart cards, which have their photographs and finger impressions. Pilot studies have
clearly shown that the technology is practical and robust, besides being affordable. Scaling up is,
at present, the challenge, and some States like Andhra Pradesh are keen that all Government
payments should be routed through these accounts to ensure transparency and efficiency in such
payments, apart from providing a huge opportunity for ensuring financial inclusion.

In the Union Budget 2007-08, the Government announced the creation of two funds - Financial
Inclusion Fund and Financial Inclusion Technology Development Fund - for meeting the costs of
development, and promotional and technology interventions as recommended by the Rangarajan
Committee10.

Recognising that lack of awareness is a major factor for financial exclusion, the Reserve Bank is
taking a number of measures for increasing financial literacy and credit counselling. A
multilingual website in 13 Indian languages on all matters concerning banking and the common
person has been launched by the Reserve Bank on June 18, 2007. Comic type books introducing
banking to school children have already been put on the website. Financial literacy programmes
are being launched in each State with the active involvement of the State government and the
SLBC.

Credit counselling services in addition to financial literacy and financial education are being
perceived as important tools to enable people to overcome the problem of indebtedness and seek
re-access to banking system. Each SLBC convenor has been asked to set up a financial literacy-
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cum-credit counselling centre in one district as a pilot, and extend it to all other districts in due
course.

Easy availability of up to date credit records would go a long way in helping small borrowers to
access credit and get better pricing. As a step in this direction, the Credit information Companies
Act has been enacted. Comprehensive records take time to get established and it is hoped that
this activity will gain momentum once the rules are notified and such companies are licensed.

In the context of the finding that the share of moneylenders in total dues of rural households had
increased, the Reserve Bank constituted, in 2006, a Technical Group consisting of senior Reserve
Bank Officers and Secretaries from select State Governments to review the efficacy of the
existing legislative framework which governs money lending, as also the enforcement machinery
in different States. A model draft of legislation on money lending has been prepared by the
Group for consideration and adoption by the State Governments for improving the legal and
enforcement framework for protecting the interest of rural households. The model legislation
provides for a hassle free procedure for compulsory registration with State Governments. The
Group has also proposed establishing a link between the formal and informal credit providers, to
be called 'Accredited Loan Providers" for use as an additional credit delivery channel. The report
has been sent to the State governments for their consideration.

VI. Some Learning Points

First - Is providing affordable financial services to the excluded regions and sections of society a
risk to the bottom lines of banks? In other words, does the public policy objective of financial
inclusion conflict with commercial objectives? Banks are special and the banking licence, which
enables banks to be highly leveraged institutions, casts responsibilities on them to make available
basic banking services to all. At the same time sustained growth of their balance sheets would
imply that they penetrate remote and hitherto un-reached segments of population requiring
investments in technology and skills for scaling-up. In one sense, it seems to be a time horizon
issue as, such investments- if made early enough and market share enhanced- can actually help
the bottom line. This would then represent a win-win situation for the financial system and
society. At the same time in the effort to enhance scale and profits, there could be a risk of
predatory and irresponsible lending as the sub prime crisis shows. The use of local community
based organisations and social capital such as SHGs in low-income communities is a way of
handling this challenge. It also points out to the fact that interest rates, while covering cost and
risk should not be so high so as to add to the risk of default because of high burden. There is thus
the need to ensure a fair balance between sustainability of operations through coverage of costs,
and interest burden on the borrower. Irresponsible lending also highlights the issue of recovery
practices, use of agents and the need to be sensitive to the needs of the poor, as in majority of
cases there is no intent to default. In this context, the need for affordable health, accident and life
insurance as part of a slew of products for financial inclusion, in addition to financial education
and credit counselling, cannot be overstated.

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This brings me to the second lesson viz. the issue of subsidised credit; in this context, I would
like to quote from a recent speech by Governor Dr. Y.V.Reddy11:

"Interest rates have been deregulated to a significant degree not only to aid movement of
monetary policy to the use of more effective indirect instruments, but also because administered
interest rate regime proved to be inefficient and costly, without necessarily ensuring flow of
credit to the needy. The RBI’s recommended approach, however, does not preclude subsidisation
by the Government but it disfavours excessive use of banking system to cross subsidise,
especially if it were to favour non-poor. RBI favours a financial system that provides incentives
to encourage flow of credit at justifiable terms and conditions and for purposes that ensure
servicing of interest and principal, i.e., bankability of schemes. There has been broad agreement
between the Government and the RBI on the above approach, and accordingly, subsidies on
interest rates through the banking system to small farmers and small exporters are currently
provided for a limited period. There are several Government-sponsored programmes intended
for the vulnerable sections and these are small-sized loans for which Government provides
subsidy, particularly for employment generation. Thus, the financial sector, in particular the
banking system, is utilised as a conduit by the Government’s fiscal policy, to subsidise select
activities or vulnerable sections, and RBI plays a supporting role in enabling such measures
while emphasising the longer term goals of a conducive credit culture. The overall objective
remains growth with stability, but with elements of selective fiscal support for ensuring inclusive
and equitable growth. Currently, the aggregate annual fiscal burden of subsidisation on account
of the above measures, through the financial sector, is estimated to be about a quarter per cent
of GDP."

The third important lesson from the Indian experience is the value of having multiple channels of
credit, given the scale and diversity of the country. Thus, direct lending by banks, use of SHGs
and MFIs for indirect lending, use of post offices, local organisations and cooperatives as agents,
focus on RRBs, the revamp of the cooperative credit structure, both urban and rural, NBFCs
purveying micro-finance and even the possible use of accredited loan providers under money
lending legislation – all these reflect this approach.

Fourth, inclusive growth needs financial institutions to be strong and efficient. The experience
with cooperative banks under dual regulation, and deposit taking NBFCs with poor governance,
points out the challenges in ensuring effective regulation and supervision of entities allowed to
access public deposits. While aligning regulation with international best practices, a more
relaxed approach is adopted in India for smaller units such as regional rural banks and small
urban cooperative banks operating within a district, without compromising on solvency and
liquidity principles.

Fifth, the outcomes of various programmes and policy measures get greatly enhanced if there is
good understanding and coordination between the government machinery responsible for
development and the banks operating in the area. While the Government functionaries have to
appreciate that banks have a responsibility to their depositors as much as to their borrowers, if
not more, it is equally important for banks to strengthen their functioning at the local level for
meeting developmental objectives of the Government. The various fora under the Lead Bank
Scheme have been very useful in sorting out mutual coordination issues. RBI plays a catalytic, as

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well as a coordinating role, in these initiatives for enhancing co-operation between the States and
the banking system. Where the State Governments play a pro-active role in updating and
computerising land records, routing of government payments through the bank accounts,
supporting IT based solutions for maintaining and operating bank accounts, and providing
extension services to farmers and small businesses, the results, indeed, can be dramatic.

Sixth, in agriculture, minimising yield risk and price risk can bring down credit risk and lower
the cost of providing credit. This is an area where banks have also taken initiative of setting up
rural training centres for small enterprises, farmers clubs, knowledge centres and credit
counselling centres. NABARD and SIDBI, the two development financial institutions, are also
engaged in providing such credit plus services. Efforts in this area need to be scaled up further.

Seventh, given the rapid urbanisation, the needs of urban poor have to get a separate focus.
Significant investments will be required in housing, water and sanitation, lighting and power,
waste management, education and health facilities, and other required infrastructure in urban
areas - the banking system can play a very important role in this. A High Level Committee
recently set up by RBI to review the Lead Bank Scheme is examining how focussed attention can
be paid to the urban areas especially big cities for more inclusive banking.

Finally, other elements of financial services like insurance and affordable remittances are also
necessary for achieving the objective of inclusive growth – These are areas in which much more
needs to be done.

Inclusive Financial System for the Aged

(By Usha Thorat, Deputy Governor, RBI)

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Changing Contours of Indian Population

India, the seventh largest country in size, continues to occupy the second largest populated
country after China. The aged population in India (i.e. over 60 years) that stood at 84.7 million
(7.5 per cent) in 2005 is expected to rise to 141 million (10.2 per cent) by 2020 and thereafter
reach 194 million (13 per cent) in 2030. Even though income levels are going up and poverty
declining, it can be reasonably expected that a significant number among the aged population
would be in the low income category. The aged population requires additional attention both
from the society and from the Government. More funds need to be allocated for pension, health
and other social benefits of the aged people, while declining savings of the aged population could
pose a threat in meeting such additional expenditure.

India is one of the highest savers among the emerging market economies. Gross Domestic
Saving, as percentage of GDP at current market prices, increased from 23.5 per cent in 2001-02
to 34.8 per cent in 2006-07. Household savings rose from 22.1 per cent in 2001-02 to 23.8 per
cent in 2006-07. Financial savings however constituted only 47.5 per cent of total household
savings in 2006-07

Preserving the value of savings

Till as late as 10 years ago, we had a fairly long period high inflation and interest rates; many
persons planned their savings for old age, assuming that these rates would continue for long. The
drop in rates after 1998 led to decline in returns for the retired who were dependent on interest
income. Employers providing defined benefit schemes found that the extent of unfunded portion
of the liability was increasing. Not all persons realised that they needed to save at rates higher
than the inflation rate; inflation could erode the value of their savings and that health care and
typical old age expenses could eat into their capital. The Reserve Bank’s goal of inflation of
around 3 per cent in the medium term, as articulated in its monetary policy statements, is thus
critical not only for maintaining self accelerating growth and greater integration with global
economy, but also to ensure that the value of savings for the old age is preserved. The best that
Reserve Bank can do for ensuring a sustainable pension system is to accord high priority to price
stability, which is precisely what it is doing.

Financial protection awareness and financial literacy

Recent surveys such as those conduced by NCAER in conjunction with Max Life show that
higher rate of household savings at macro level can be explained in terms of increasing concerns
for social security, high cost of education, health and meeting other social commitments. Saving
for old age is not found to be a dominant factor. At the same time an overwhelming 96 per cent
of households feel that they cannot survive for more than one year on their current savings in
case they lose their major source of household income; yet 54 per cent households feel that they

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are financially secure. Financially-at-risk urban Indians appear to be even more optimistic than
their rural counterparts. This clearly indicates that Indians do not take a long-term view of their
financial security. There is therefore, a pressing need for financial literacy for better
understanding of financial risks. At the global level, Olivia Mitchell, Wharton professor of
insurance and risk management, and chaired professor at Singapore Management University is
also of the same view: “Global ageing makes for a much riskier world, inasmuch as people tend
to retire too young, save and diversify too little, and outlive their assets.” Her research shows that
many workers are underestimating retirement challenges, including the risk of outliving their
assets, the future cost of healthcare and the erosive power of inflation in retirement and she too,
therefore, stresses the importance of financial literacy.

Another compelling reason for financial literacy is the fact that most employers have moved or
are moving away from defined benefit schemes to defined contribution schemes, which require
employees to be able to better estimate their old age needs and plan accordingly, starting
sufficiently early. Such schemes also allow workers to take their savings with them when they
change jobs. In this new environment, where individuals have greater responsibility for
determining their own retirement income, factors such as general financial knowledge, an
understanding of the retirement saving process become critical to achieving one’s retirement
objectives. A survey showed that only 18 per cent of the people surveyed answered correctly the
question as to how much $200 would grow to, at the end of two years, at 10 per cent per annum
interest! The importance of starting early is illustrated in a case where two persons of same age
save Rs 5000 per month at 9 per cent per annum interest. One starts early at the age of 25 and the
other at 35. At 60, the former has Rs 1.23 crore while the latter ends up with only Rs 53 lakh!

Greater efforts by employers can assist workers in their retirement planning and enable them to
achieve their retirement objectives. We, in the RBI, offer an excellent retirement planning
program for employees; only, it is offered towards the end of one‘s career rather than an earlier
period when time value of money makes all the difference.

Financial literacy alone is not enough

While focus on financial literacy could lead to informed and responsible consumers, it cannot by
itself ensure consumer protection. There has to be “responsible” selling of products; especially to
vulnerable sections of society including, among others, senior citizens and low income groups. In
particular, banks selling insurance, capital market and pension products have to be sensitive to the
fact that the essence of financial services is trust. A bank accepts deposits on trust and assures a
return. A bank customer relationship is fiduciary and not based on transaction –it is a long standing

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relationship and there is every need for banks to act with responsibility. As a recent Penn study on
financial literacy put it, “Nothing is inherently wrong with consumers or the modern, complex, and
ever-changing financial services marketplace, but the interaction between the two creates welfare-
impairing outcomes. Potential general approaches to improve that interaction include enhancing the
resources with which consumers approach the market, changing the financial decision environment,
or bringing seller incentives in line with consumer incentives." Various approaches suggested include
providing affordable expert advice, akin to pro bono legal services, having true transparency
requiring simplified products where benefits and costs are clearly understood and rules of thumb can
be applied, having retirement savings rules with default rules that place consumers into higher
welfare enhancing rates of retirement savings; aligning incentives of sellers of consumer financial
products to bring them into closer alignment with consumers’ best interests. According to the study,
regulatory interventions must navigate the heterogeneity of consumer knowledge, skills, and
behavioral traits, taking care not hinder marketplace changes that would enhance consumer welfare.

Financial inclusion and Financial Protection

As you are aware RBI and the GOI have been pushing for greater financial inclusion. This implies,
first of all, providing an accessible and safe place to the people at large for putting their savings
which can be withdrawn in case of emergency. What RBI is trying, is to see that the un-banked
population gets access to bank accounts. Such bank accounts are also critical to ensure a safe and
reliable payments system for old age pensions. Pension payment for BPL families and unorganised
sector targeted at nearly 300 million workers, can be paid through bank accounts thereby not only
saving the cost of making the payments, but also minimising leakages and pre-empting payments in
the names of persons who do not actually exist. Bio metric smart cards /mobile technology and use of
business correspondents as agents by banks have made “no frills” banking accounts accessible to low
income families. Building up savings in such accounts and provision of small overdrafts facilitates
creation of track record and gives confidence to the saver that emergency needs will be met. RB now
treats such overdrafts upto Rs.25,000/- against no frills accounts and credit provided under GCC at
rural and semi urban branches as priority sector under indirect credit to agriculture. Further, RBI has
allowed banks to use ex-servicemen, retired bank and government employees to be business
correspondents to provide doorstep banking to the customers in remote areas that are far from a bank
branch. These measures viz. use of intermediaries and IT solutions have now made it possible to
provide accessible banking facilities to the large parts of the population that were hitherto outside the
access of formal banking. It is easy to see how critical this payments infrastructure will be for
providing old age pensions, besides life, health, weather, asset and livestock insurance especially in
rural areas - Insurance is very important as it reduces credit risk and allows greater flow of credit at
lower cost. Thus there is a huge synergy between financial inclusion and financial protection for
achieving a more inclusive financial system.
Housing, Health and Life Style
As is found in surveys, savings in India is mainly for owning a house, meeting emergency needs,
education of children and social events such as marriages. Compared to the earlier period of high
interest rates, owning a house in India has became quite affordable with lower interest rates and tax
breaks. There has been a steady increase in housing loans from 3.4 per cent of GDP in 2001 to 8.5
per cent of GDP in 2006. As share of credit, it moved up to 12 per cent of NBC in March 2007. The
average interest rate on housing loans has consistently declined from around 16 per cent in 1995-96
to around 8 per cent in 2004-05, though it hardened moderately thereafter (NHB, 2006). Reflecting

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these developments, housing stock in the country had also increased from 148 million units in 1991
to 187 million units in 2001 and is expected to further gone up to 218 million units in 2007 (NHB,
2006). While on the one hand, there is an improvement in longevity, on the other hand, cost of good
health care facilities is spiralling and there is little social security. The availability of affordable
health insurance services to senior citizens is limited. The Government, on December 6, 2006,
launched an exclusive health insurance scheme,Varistha Mediclaim for Senior Citizens, offered by
National Insurance Company. The Union Budget 2007-08 announced that the other three public
sector insurance companies would also offer a similar product to senior citizens. There is, however,
still a large gap between the supply of health insurance facilities available to older people and
demand/requirement for the same. The IRDA constituted a committee in April 2007 to look into,
among others, issues relating to health insurance schemes for senior citizens, streamlining procedures
and suggest possible incentives to the senior citizens for adopting healthier lifestyles. The Committee
made various recommendations including on proper product designing according to the needs of
senior citizens and their capacity to pay, drafting of insurance policies in simple language, uniform
definition of terminology and standard terms and conditions for the Industry, portability of covers,
sharing of information etc. It also recommended that insurers should offer Personal Accident
coverage as an optional rider along with the senior citizen health insurance products. This would
help offer both forms of protection simultaneously.
Banking/Financial Products and Services for Senior Citizens
I turn next to some of the specific measures relating to financial products and banking services for
senior citizens taken by GOI, RBI and the banking system in the recent period.

(i) Senior Citizens Savings Scheme

Government of India had launched the Senior Citizens Savings Scheme, 2004 (SCSS) with attractive
interest rate exclusively for the benefit of senior citizens, with effect from August 2, 2004. SCSS
accounts can be opened with Post Offices and Agency banks. The salient features of the scheme are
available in the RBI’s website. An important advice to senior citizens is to fill in Form 15 G and
15H, if they do not attract TDS provisions.

(ii) Senior citizen friendly measures - investment in Government Securities

Several friendly measures for senior citizens have been incorporated in the Government Securities
Act, 2006 (Act) and the Government Securities Regulations, 2007 (Regulations), which have come
into force with effect from December 1, 2007. These include -
• Automatic redemption facility for Government securities, including Relief/Savings Bond.
• Simplified procedure in the event of death of holder
• Ability to pledge or borrow against such securities
• Nomination is permitted
(iii) Facilities for pensioners
Almost all the pensioners, by virtue of the retirement age fixed by the Government, are senior
citizens. The following facilities, among other, are available to pensioners:

• Credit of pension to pensioners’ accounts on last 4 days of month so that the pensioner can
draw pension on the 1st day of the next month itself.
• Joint account with spouse allowed.
• Pension slips to be issued at first time and thereafter whenever there is a change.

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 • For incapacitated pensioners - branch to depute an officer to the residence of the pensioner
for getting/certifying the life certificate.
• Banks to access the Government website and effect payment of revised Dearness Relief
without waiting for RBI instructions.
• Banks to accept nominations furnished by pensioners in Form ‘A’ or ‘B’ in respect of
payment of arrears of pension of the deceased pensioner.

RBI has issued necessary instructions to all the banks disbursing pension to ensure that the
pensioners get the best possible customer service. Most of the agency banks have since set up
Centralised Pension Processing Centres (CPPCs) which will be responsible for receipt of the Pension
Payment Orders (PPOs), calculation of pension/Dearness Relief etc. and crediting the amount
directly to the pensioners’ accounts through this system.

(iv) Deposit Scheme for senior citizens

Banks have been permitted to formulate, with the approval of their Boards, fixed deposit schemes
specifically for resident Indian senior citizens offering higher and fixed rates of interest as compared
to normal deposits of any size. These schemes should also incorporate simplified procedures for
automatic transfer of deposits to nominee of such depositors in the event of death. Deposits over five
year have enjoy tax exemption under 80C. TDS is applicable unless Form 15 H is submitted to the
bank. Since RBI receives many complaints that tax is deducted, senior citizens would do well to file
Form 15 H in time.

(v) Reverse Mortgage Loans

Reverse mortgage provides an opportunity to house owners to avail of a monthly stream of income
against the mortgage of his/her house, while remaining the owner and occupying the house
throughout his/her lifetime, without repayment or servicing of the loan. Realising the potential
benefits, the Union Budget 2007-08 announced the introduction of 'reverse mortgage' by NHB. NHB
issued the final operational guidelines for reverse mortgage loans (RMLs) on May 31, 2007. Many
banks have already introduced RMLs. For tax purposes it have been clarified that reverse mortgage
would not amount to “transfer”, and stream of revenue received by the senior citizen would not be
“income”.

(vi) Simplification of procedure - deceased account holders

Another area, where Reserve Bank has accorded a lot importance relates the simplification of the
procedure for handling the accounts of deceased account holders so as to ensure that settlement of a
deceased account holders account proceedings is smooth and without any impediment. For those with
non resident legatees, inheritance can be remitted within the liberalised remittance scheme of
$200,000 per annum available to every resident.

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(vii) Specific instructions issued by RBI to banks in dealing with senior
citizens
• Banks have been issued with special instructions aimed at facilitating opening and operations
of accounts by old and incapacitated people.
• The banks have been advised to invariably provide passbooks to all account holders. Such an
advice to banks was issued only in keeping in mind the interests of the senior citizens.
• Changes in any instructions on the operation of Senior Citizens deposit accounts should be
confirmed within one month to the depositor in writing.

(viii) Facilities for remittances and operations on NRE accounts join with NRI
Some of the facilities that may be of interest to senior citizens are -

• Under the Liberalized Remittance Scheme, Residents are permitted to remit up to USD
200,000 per financial year (April-March) for any permitted current or capital account
transactions or a combination of both. This would also include remittances towards gift and
donation, acquisition of houses, shares, MFs, etc.
• Residents are eligible to obtain USD 100,000 or its equivalent for medical treatment abroad.
A person visiting abroad for medical treatment can obtain foreign exchange exceeding the
above limit, provided the request is supported by an estimate from a hospital/doctor in
India/abroad.
• In connection with private visits abroad, viz., for tourism purposes, etc., foreign exchange up
to USD10,000, in any one financial year may be obtained by Residents from an authorised
dealer on a self-declaration basis.
• A resident can transfer property to his NRI heirs by a deed of settlement i.e. facility whereby
the property is passed on to the legatees, during the lifetime of the owner/parent who
normally retains a life interest in the property.
• Housing loans taken by NRIs can be repaid by his close relatives in India.
• Resident power of attorney holder can remit funds out of the balances in NRE account to the
non-resident account holder provided specific powers for the purpose has been given.
• Banks can also allow operations on an NRO account in terms of such a Power of Attorney,
provided such operations are restricted to (i) all local payments in rupees including payments
for eligible investments and (ii) remittance outside India of current income in India of the
non-resident individual account holder, net of applicable taxes.

Monitoring of Customer Service

Reserve Bank is continuously taking steps to ensure that customers get treated fairly. The quality
of service rendered by banks is monitored by Reserve Bank with special emphasis on service
rendered by banks to pensioners. Banks have been advised to include senior citizens in their
Branch level Customer service committees. Any non observance of the RBI guidelines or bank’s
code of commitment to the individual customer can be taken up first with the bank’s own
consumer redressal machinery and if no satisfactory response is obtained by the customer he can
complain to the Reserve Bank’s Banking Ombudsmen who have offices at 15 centres, details of
which are available on the Bank’s website.

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Some tips to the Senior Citizen

• Obtain from bank and read the BCSBI's Code of Banks' Commitment to Customers
• Clearly understand the concept 'Average Quarterly Balance' before opening accounts.
• Do not keep the card and its PIN together and never disclose the card number or CVV
number to others. Beware of 'phishing attacks' in the online transactions and ensure that
no information about the bank accounts and passwords is revealed except in making a
transaction in a secured site.
• Note that there is no interest payable on the post maturity in the various senior citizen
Government deposit schemes.
• Finally, if you have a complaint, first approach his bank for resolution and then take up
with the Banking Ombudsman if the bank does not resolve your complaint.

Banks’ sensitivity to senior citizens

Senior citizens can be forgetful, they pay attention to detail , they need to be patiently handled
and finally we all must realize that one day we too will be a senior citizen expect to be treated
with respect and sensitivity.
1
Speech delivered by Ms. Usha Thorat, Deputy Governor, RBI at the 8th Annual IEEF
Retirement Policy Conclave jointly hosted by Invest India Economic Foundation (IEEF) and the
PFRDA at New Delhi on April 30, 2008.,
2
‘ How India Earns, Spends and Saves’ Results from the Max New York Life-NCAER India
Financial Protection Survey, Rajesh Shukla
3
‘Managing Retirement Risk in an Ageing World: The Global Picture’ – an article from the
Singapore Management University’s website http://knowledge.smu.edu.sg/index.cfm?
fa=viewfeature&id=1074
4
Against Financial Literacy Education, Lauren E. Willis (2008), University of Pennsylvania Law
School
Financial Inclusion – The Indian Experience
(By- Usha Thorat, Deputy Governor, RBI)

We, in India, have been greatly impressed by the focused attention being paid by the UK
Government to the subject of Financial Inclusion (FI). I had read a very detailed report by the
British Banker’s Association in 2000 dwelling upon the issues involved in providing greater
access to financial services and the concept of a basic banking account. The setting up of the
Financial Inclusion Task Force and the Financial Inclusion Fund reflect the priority attached by
the Government to the subject. DFID has been involved in a number of livelihood diversification
projects in India and other countries, especially for the marginalised, and DFID’s stake in the
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subject obviously derives from the development aspect of FI. The interest shown by authorities
in different countries in FI clearly show that there are concerns that large segments of the world’s
population are excluded from formal payments system and financial markets while financial
markets are developing and
globalising rapidly. There is an obvious market failure and thus governments and financial sector
regulators are seeking to create enabling conditions such that markets become more open, more
competitive, affordable and inclusive.
Focus of Financial Inclusion in India
The Indian economy is growing at a steady rate of 8.5 per cent to 9.0 per cent in the last five
years or so. Most of the growth is from industry and services sector. Agriculture is growing at a
little over 2 per cent. The potential for growth in the primary and SME sector is enormous.
Limited access to affordable financial services such as savings, loan, remittance and insurance
services by the vast majority of the population in the rural areas and unorganised sector is
believed to be acting as a constraint to the growth impetus in these sectors. Access to affordable
financial services - especially credit and insurance - enlarges livelihood opportunities and
empowers the poor to take charge of their lives. Such empowerment aids social and political
stability. Apart from these benefits, FI imparts formal identity, provides access to the payments
system and to savings safety net like deposit insurance. Hence FI is considered to be critical for
achieving inclusive growth; which itself is required for ensuring overall sustainable growth in the
country. The approach to FI in developing countries such as India is thus somewhat different
from the developed countries. In the latter, the focus is on the relatively small share of population
not having access to banks or the formal payments system
whereas in India, we are looking at the majority who are excluded. FI can be thought of in two
ways. One is exclusion from the payments system – i.e., not having access to a bank account.
The second type of exclusion is from formal credit markets, requiring the excluded to approach
informal and exploitative markets. After nationalisation of major banks in India in 1969, there
was a significant expansion of branch network to unbanked areas and stepping up of lending to
agriculture, small industry and business. More recently, the focus is on establishing the basic
right of every person to have access to affordable basic banking services.

Measures of Financial Exclusion

One common measure of FI is the percentage of adult population having bank accounts (Chart
1). Going by the available data on the number of savings bank accounts and assuming that one
person has only one account, (which assumption may not be correct as many persons could have
more than one bank account) we find that
on an all India basis 59 per cent of adult population in the country have bank accounts – in other
words 41 per cent of the population is unbanked. In rural areas the coverage is 39 per cent
against 60 per cent in urban areas. The unbanked population is higher in the North Eastern and
Eastern regions. The extent of exclusion from credit markets is much more, as number of loan
accounts constituted only 14 per cent of adult population (Chart 2). In rural areas, the coverage is
9.5 per cent against 14 per cent in urban areas. Regional differences are significant with the
credit coverage at 25 per cent for the Southern Region and as low as 7, 8 and 9 per cent,

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respectively, in North Eastern, Eastern and Central Regions. The extent of exclusion from credit
markets can be observed from a different view point. Out of 203 million households in the
country, 147 million are in rural areas – 89 million are farmer households. 51.4 per cent of farm
households have no access to formal or informal sources of credit, while 73 per cent have no
access to formal sources of credit. Similar data are not available for non-farm and urban
households. Looking at the different sources of credit, it is observed that the share of non
institutional sources reduced from 70.8 per cent in 1971 to 42.9 per cent in 2002. However after
1991, the share of non institutional sources has increased; specifically, the share of moneylenders
in the debt of rural households increased from 17.5 per cent in 1991 to 29.6 per cent in 2002. In
urban areas the share of non institutional sources has come down significantly from 40 per cent
in 1981 to around 25 per cent in 2002.
Who are the Excluded?
The financially excluded sections largely comprise marginal farmers, landless labourers, oral
lessees, self employed and unorganised sector enterprises, urban slum dwellers, migrants, ethnic
minorities and socially excluded groups, senior citizens and women. While there are pockets of
large excluded population in all parts of the country, the North East, Eastern and Central regions
contain most of the financially excluded population.
Reasons for Financial Exclusion
There are a variety of reasons for financial exclusion. In remote, hilly and sparsely populated
areas with poor infrastructure, physical access itself acts as a deterrent. From the demand side,
lack of awareness, low incomes/assets, social exclusion, illiteracy act as barriers. From the
supply side, distance from branch, branch
timings, cumbersome documentation and procedures, unsuitable products, language, staff
attitudes are common reasons for exclusion. All these result in higher transaction cost apart from
procedural hassles. On the other hand, the ease of availability of informal credit sources makes
these popular even if costlier. The requirements of independent documentary proof of identity
and address can be a very important barrier in having a bank account especially for migrants and
slum dwellers.

Recent Initiatives by Reserve Bank of India

The period 1969 to 1991 saw a huge increase in the branch outreach in India as the average
population covered by a bank branch fell from 64,000 to 13,711. In 1991 along with reforms for
liberalising and opening up of the economy, financial sector reform aimed at deregulation,
increased competition and strengthening the banking sector through recapitalisation and adoption
of prudential measures. The Indian banking industry today is quite robust and strong to be able to
take on the challenges of achieving greater financial inclusion. In the Annual Policy of the
Reserve Bank for 2004-05, the Governor, Dr. Reddy observed and I quote - “There has been
expansion, greater competition and diversification of ownership of banks leading to both
enhanced efficiency and systemic resilience in the banking sector. However, there are legitimate
concerns in regard to the banking practices that tend to exclude rather than attract vast sections of
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population, in particular pensioners, selfemployed and those employed in unorganised sector.
While commercial considerations are no doubt important, the banks have been bestowed with
several privileges, especially of seeking public deposits on a highly leveraged basis, and
consequently they should be obliged to provide banking services to all segments of the
population, on equitable basis.” Pursuant to this, the Reserve Bank has undertaken a number of
measures with the objective of attracting the financially excluded population into the structured
financial system. In November 2005, banks were advised to make available a basic banking ‘no-
frills’ account with low or nil minimum balances as well as charges to expand the outreach of
such accounts to vast sections of the population. Banks are required to make available all printed
material used by retail customers in the concerned regional language. In order to ensure that
persons belonging to low income group, both in urban and rural areas do not encounter
difficulties in opening bank accounts, the know your customer (KYC) procedures for opening
accounts has been simplified for those persons with balances not exceeding Rs. 50,000/- (about
GBP 600) and credits in the accounts not exceeding Rs.1,00,000/- (about GBP 1,200) in a year.
The simplified procedure allows introduction by a customer on whom full KYC drill has been
followed. Banks have been asked to consider introduction of a General purpose Credit Card
(GCC) facility up to Rs. 25,000/- at their rural and semi urban branches. The credit facility is in
the nature of revolving credit entitling the holder to withdraw upto the limit sanctioned. Based on
assessment of household cash flows, the limits are sanctioned without insistence on security or
purpose. Interest rate on the facility is completely deregulated. A simplified mechanism for one-
time settlement of overdue loans up to Rs.25,000/ - has been suggested for adoption. Banks have
been specifically advised that borrowers with loans settled under the one time settlement scheme
will be eligible to re-access the formal financial system for fresh credit. In January 2006, banks
were permitted to utilise the services of non-governmental organisations (NGOs/SHGs), micro-
finance institutions and other civil society organisations as intermediaries in providing financial
and banking services through the use of business facilitator and business correspondent (BC)
models. The BC model allows banks to do ‘cash in – cash out’ transactions at the location of the
BC and allows branchless banking. Other measures include setting up pilots for credit
counselling and financial education. A multilingual website in 13 Indian languages on all matters
concerning banking and the common person has been launched by the Reserve Bank on June 18,
2007.
Strategies and Approach
At the regional level, a forum called the State Level Bankers’ Committee (SLBC) has been in
operation since nationalisation. SLBC is a group of bankers and government officials and is
convened by a bank having major presence in the State called the SLBC convenor bank. It meets
quarterly and reviews the banking developments in the State. At the district level, the district
level committee functions; it is headed by the District Commissioner and is convened by a
designated lead bank for the district. In early 2006, one district in each State was identified by
the SLBC for 100 per cent financial inclusion. So far, SLBCs have reported having achieved 100
per cent financial inclusion in the Union Territory of Puducherry and in some districts in
Haryana, Himachal Pradesh, Karnataka, Kerala and Punjab. The Reserve Bank proposes to
undertake an evaluation of the progress made in these districts by an independent external
agency to draw lessons for further action in this regard. In the districts taken up for 100 per cent
financial inclusion, surveys were conducted using various data base such as electoral rolls, public
distribution system or other household data, to identify households without bank account and

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responsibility given to the banks in the area for ensuring that all those who wanted to have a
bank account were provided with one by allocating the villages to the different banks. Mass
media was deployed for creating awareness and publicity. The banks used different approaches
to communicate the advantages of having a bank account. Bank staff or their agents who are
usually local NGOs or village volunteers would contact the people at their households. Ration
card / Electoral ID cards of the families were taken for fulfilling the simplified KYC norms.
Photographs of all the persons who opened bank accounts were taken on the spot by a
photographer accompanying the bank team. In most States, the product used for launching the
program for financial inclusion is the ‘No frills’ accounts. In one State the farmer’s credit card or
KCC is being used ensuring first to credit rather thansavings. In other States no frills account was
followed by small overdraft facility or a general purpose revolving credit upto pre-specified
limit. Recognising the need for providing social security to vulnerable groups, in some cases in
association with insurance companies, banks have provided innovative insurance policies at
affordable cost covering life, disability and health cover. Cooperative banks and regional rural
banks being local level institutions are well suited for achieving financial inclusion. These banks
are being revived and strengthened with incentives for better governance. Being local institutions
they are ideally suited for achieving FI. The role of an efficient payments system for FI cannot be
overstressed and new efforts are being made to bring about improvements in the payments
system especially in the relatively less developed parts of the country.
Huge Increase in No Frills Accounts
The outcome of the efforts made is reflected in the increase of 6 million new ‘no frills’ bank
accounts opened between March 2006 and 2007. In view of their vast branch network (45000
rural and semi urban branches) public sector banks and the regional rural banks have been able to
scale up their efforts by merely leveraging on theexisting capacity. FI is being viewed by these
banks as a huge business opportunity in an overall environment that facilitates enterprise and
growth. It provides them a competitive advantage and defines a clear niche for their growth.

Use of Intermediaries
One of the ways in which access to formal banking services has been provided very successfully
since the early 90s is through the linkage of Self Help Groups (SHGs) with banks. SHGs are groups
of usually women who get together and pool their savings and give loans to members. Usually there
is a NGO that promotes and nurture these groups. National Bank for Agriculture and Rural
Development hasplayed a very significant role in supporting group formation, linking them with
banks as also promoting best practices. The SHG is given loan against guarantee of group members.
The recovery experience has been very good and there are currently 2.6 million SHGs linked to
banks touching nearly 40 million households through its members. Banks provide credit to such
groups at reasonable rates of interest. However the size of loans is quite small and used mostly for
consumption smoothening or very small businesses. In some SHGs, credit is provided for agricultural
activities and other livelihoods and could be several times the deposits made by the SHG. Most of the
SHGs have been linked to public sector banks in view of the latter’s dominant presence in the rural
areas. The foreign banks and private sector banks have approached the access issue through either
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setting up relatively lower cost non bank companies for providing small value retail loans or have
partnered with micro finance institutions that provide financial services to the relatively higher risk
segments of the population. Microfinance has drawn attention to an entire sector of borrowers who
had been previously poorly served by the formal financial sector - and MF has demonstrated how to
make lending to this sector a viable proposition. However the rates of interest charged are quite high,
typically 24 to 30 per cent, mainly on account of the high transaction cost for the average loan size
that can be quite small. Compared to the informal sector, perhaps the rates are lower, but issues are
raised whether these rates are affordable - in the sense whether they would leave any surplus in the
hands of the borrowers and lead to higher levels of living. For commercial banks, the lower cost of
funding, advantages of size and scale gives scope for cross subsidisation and their interest rates are
more competitive compared to the MFIs, but they have not been as successful in dealing with the last
mile issue. The partnering with SHGs and MFIs with reasonable cost of funding by the banks has
been seen as a more optimal approach till now. As indicated earlier, a recent important regulatory
measure is the permission given to banks to use post offices, cooperative societies, non government
organisations set up as trusts or societies, as business correspondents (agents) for doing branchless
banking after conducting due diligence on such intermediaries. Agency risk is sought to be
minimised by using well respected local organisations and use of IT solutions for tracking
transactions in the bank accounts. Many banks are exploring the use of this model to increase their
outreach and deliver doorstep banking services at lower cost. The viability and scalability of the
model would require some flexibility in charging of interest rates or services charges to cover costs.
IT Solutions for Financial Inclusion
The use of IT solutions for providing banking facilities at doorstep holds the potential for scalability
of the FI initiatives. Pilot projects have been initiated using smart cards for opening bank accounts
with bio metric identification. Link to mobile or hand held connectivity devices ensure that the
transactions are recorded in the bank’s books on real time basis. Some State Governments are routing
social security payments and also payments under the National Rural Employment Guarantee
Scheme through such smart cards. The same delivery channel can be used to provide other financial
services like low cost remittances andinsurance. The use of IT also enables banks to handle the
enormous increase in the volume of transactions for millions of households for processing, credit
scoring, credit record and follow up.

Role of Government
State Governments can play a pro-active role in facilitating FI. Issuing official identity
documents for opening accounts, creating awareness and involving district and block level
functionaries in the entire process, meeting cost of cards and other devices for pilots, undertaking
financial literacy drives are some of the ways in which the State and district administration have
involved themselves. India Post is also looking to diversify its activities and leverage on its huge
network of post offices, the postman’s intimate knowledge of the local population and the
enormous trust reposed in him. Banks are entering into agreements with India Post for using post
offices as agents for branchless banking.
Work in Progress
The Finance Minister in his budget for 2007-08 has announced the setting up of two funds for FI;
the first called Financial Inclusion Fund for developmental and promotional interventions and the

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other called Financial Inclusion Technology Fund to meet cost of technology adoption of about $
125 million each. The scope of these funds is being worked out. Setting up of financial literacy
centres and credit counseling on a pilot basis, launching a national financial literacy campaign,
forging linkages with informal sources with suitable safeguards through appropriate legislation,
evolving industry wide standards for IT solutions, facilitating low cost remittance products are
some of the initiatives currently under way for furthering FI.

Policy Seminar on Financial Inclusion through Micro Finance

Venue: Manikya Lal Verma Tribal Research Institute, Udaipur
Date: May 05, 2007
An INFOS Initiative
(Indian Network of Federations of Microfinance Self Help Groups)

Microfinance in India has emerged as a powerful tool for financial inclusion. The ‘SHG – Bank
Linkage’ programme plays a predominant role in the financial inclusion of poor. The programme
is coming up well and being implemented widely across the country. But there is a need to
strengthen the SHG-Bank Linkage Programme to fully mainstream it with the commercial
banking system. The programme is scaling up at a rapid pace in South India, while the progress

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in other regions is slow. The variations in performance across the regions, both in terms of reach
and quality needs immediate attention.
Lack of knowledge and understanding of services and its attendant policy and processes among
the poor population are important factors impedimenting their financial inclusion. In other
words, financial literacy is critical for financial inclusion. The vulnerable situation faced by the
poor like irregular employment, unemployment, seasonality, illiteracy and growing trend of
globalization also throw challenges for financial inclusion of poor. It is clear from the above that
access to affordable financial services by the poor is a serious issue.
In order to take the process of financial inclusion forward, INFOS, a national network of SHG
federations has been organizing a host of national and regional level seminars on financial
inclusion for SHG federations. The first such seminar was organized at Madurai. Women leaders
across the country participated in the seminar and discussed on various issues, good practices and
challenges, strengths and weaknesses in reaching the poorest of the poor and linking them with
mainstream institutions. The deliberations have resulted in significant declarations that would
guide their future direction.
Against this backdrop, INFOS organised a policy seminar on ‘Financial Inclusion through
microfinance Programs’ with People Education and Development Movement as local host on
May 05, 2007 at Udaipur, Rajasthan to take forward the issue of financial inclusion of poor and
to facilitate the formulation of policies through appropriate recommendations.

Address on Bank Linkages and Micro Finance

(Mr. Dharmendra Singh)
Mr. Dharmendra Singh is the District Development Manager of NABARD. During his address
he drew attention towards strengthening of the Micro Finance program. He wanted the NGOs
to motivate rural poor to join Self Help Groups. He said that Dungarpur and Banswara are
having large concentrations of tribal population with poor socio-economic conditions. He
shared a valuable observation saying that people go to police stations but not to the banks,
why? Because people feel that the banks are not for them, people have poor transport
connectivity with banks and there is a lack of trust on the bank staff and lack of information
about the banking system. As everybody knows that everyone needs loans. Taking loan will
help in further investments in income generating activities and therefore raising the standard

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of living. Mr. Dharmendra also drew attention to increase the number of members in SHG and
increase in number of SHGs, so that maximum number of people can aware about the loan and
banking systems and services. They can also take loan for consumer requirements and factors
affecting their lifestyles. He accepted that the formalities are time consuming and confusing for
the rural illiterate clients. He said that NGOs could play an important role in this situation. He
also stated that NGOs should promote income-generating options for the rural poor.

Problems highlights
(Mrs. Vimla Devi)
Mrs. Vimla Devi is the Federation leader of Dhambola federation and Vice-President of micro
finance federations in INFOS. She started with welcoming to everyone to the seminar and
started of with the problems that she and other villagers are facing in linking themselves with
financial networks of banks. She also drew attentions of bankers that banks not providing loan
up to a limited amount of Rs. 2 lakh, and mortgage is required if they want to take more loans.
She also drew attention towards the complicacy of banking systems and their non-punctuality
and non-cooperativeness. The bank sometime bound the villagers to purchase only the
recommended breed of cattle. She further added that banks should clearly explain the
advantages of banking services to the clients. She thanked INFOS and PEDO for organizing such
events where they can speak about their problems and keep their demands. She also stated that
there should be single framework of guidelines for all the organizations working in the field of
banking for the poor. She also mentioned that such events should be organized frequently.
Mr. M. Kalyansundarm, Chief Executive Officer of INAFI-INDIA during his address, focused
on the need of inclusion of rural poor into the banking and finance system. He stated that

about 35% of country’s total population is living below poverty line. Government and
Nongovernment organizations are implementing poverty eradication programs regularly.

Eradicating hunger, providing access to primary education, women empowerment and

primary health are some of the key issues and focus of development organizations in

developing countries. There is an opinion among the poor that the banks are only for educated,
employed and rich people. On the other hand the banking procedures are very tedious and not
friendly enough to attract poor. The transport connectivity and linkages are other important
aspect. Most of the financial services are also designed to target middle and upper classes of the
economy. Lack of understanding of financial services- loan for various purposes, interest rates,
application procedures, and loan repayment procedure, deposit schemes- among poor is very
important factor for their non participation in financial service. The vulnerable situation faced by
the poor like irregular/ employment, unemployment, seasonality, illiteracy and growing trend of

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globalization also throwing challenges for financial inclusion of poor. When poor people unite
together in the form of Self Help Group, it gives a social identity to them through which they are
able to access the formal financial service. SHG provides a platform for the poor people to
participate as a group in development activities. Since the SHGs are owned and managed by the
members themselves they participate in meaningful discussions and the process of defining their
development policies, which paves way for their overall development. Hence SHG is seen as a
prime and important tool for financial inclusion of poor. Therefore the poorest of the poor, who
may be left out for various reasons should be included into the SHG system and the Micro
finance federations should take the responsibility. The member needs to be trained to handle
finance and educate them about financial services by various agencies. The federations and
related financial institution need to provide appropriate training to the members of SHGs in the
above said aspects. The financial institution should extend their support for promoting SHGs.
Financial procedure should be simplified and user friendly to attract poor.
He explained that the financial products of saving and credit need to be designed based on the
need of poor. Timely credit to the poor people needs to be ensured. Institution should offer
services beyond saving and credit. Especially services related to insurance, health, education,
livelihood promotions are very important in the development of poor. SHG federation should
work with many financial institutions to get cost effective services. The SHG federation should
come out with ways for financial and institutional sustainability.

Declaration
After the group discussion and presentations all the participants come to know about the
problems, which are going to face by the rural poor in their related areas.
• The most important declaration of Policy seminar is about the identification of poorest of
the poor and establishing their linkages with the banking networks. All the NGOs must be
responsible for the identification of poor and linking them in continuous relation with the
banks.
• The other important aspect of financial inclusion is the transparency and accountability in
services and records. Trust is the significant and plays an important role in building up
financial inclusion. Right to information can be and should be practiced here also.
• Measures to include all the poorest and poor in SHG network and measures to keep them in
the network.
• Timely release of loans at an affordable rate of interest.

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• Leaders to play a key role in identifying and organizing the poorest of the poor into SHGs.
• SHG members shall place their demands & requirements before all the stakeholders, in
order to get integrated development programs according to their needs.
• NGOs should ensure financial literacy & counseling to all the members of SHGs.
• NGOs should facilitate the process of linking SHGs & federations with mainstream
financial institutions.
• NGO shall ensure that insurance services are provided to all the SHG members.
• NGOs should invest in leaders in building capacities and increasing efficiency in reaching
out and facilitating poor through SHGs.
• Banks & other financial institutions should design certain financial services, which best suit
and which helps for overall development of the poor.
• INFOS shall play the role of educating leaders on financial literacy and discipline.
• INFOS shall involve actively in building the capacity of NGOs & their federations in order
to influence pro – poor policies related to financial inclusion.
• INFOS on behalf of NGOs & their federations shall place their demands to the key policy
makers to meet the needs of the members

Minutes of the National Conference on Financial Inclusion

Held on November 14th , 2008
PUSA, New Delhi
A National Conference on Financial Inclusion was held under the
Chairmanship of Hon’ble Minister of Rural Development on 14th November,
2008 at PUSA in New Delhi.
The agenda for discussion was as follows:
a) Familiarizing the participants with the various components of the NREGA
b) Identifying/highlighting areas of mutual interest
c) Exploring the possibility of selected financial institutions being part of the
concurrent process of financial inclusion of NREGA workers.
At the outset, Secretary (RD) welcomed the participants and highlighted the
distinctive features of NREGA.
NREGA is a path breaking legislation and a flagship programme for

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promoting inclusive growth by ensuring a legal guarantee of 100 days of
employment to rural poor. Its Rights based framework creates a paradigm
shift from earlier wage employment programmes. The Acts’ objective is to
generate employment opportunities, and regenerate the natural resource
basic of rural livelihood through an implementation process that strengthens
grass root democratic processes. She said that the objective of the workshop
is to deliberate upon the most important dimension of financial inclusion of
rural poor due to various schemes of Ministry of Rural Development like
National Rural Employment Guarantee Act, Swaranjyanti Grameen
Swarozgar Yojana (SGSY), Indira Gandhi National Indira Gandhi National
Indira Gandhi National Old Age Pension Scheme Scheme Scheme. She said
that financial institutes like banks/s are partners with Ministry of Rural
Development in implementation of these schemes and financial inclusion of
rural poor through these schemes. The outcome of the deliberations of the
conference will impact poorest of poor in taking control of their lives and
destiny by themselves.

The Secretary highlighted the following aspects of NREGA as:

_ The scale of operation of NREGA has increased from coverage of 330 districts to 614 districts
in 2008-09. NREGA is likely to provide employment to 5 crore households this year with an
estimated expenditure of Rs. 30,000 crore out of which 70% shall be spent as wage payment to
NREGA workers. This has also been the basis of a major momentum towards financial inclusion
by opening workers’ accounts in s and Banks.
_ 4.70 crore institutional accounts of NREGA workers have been opened in bank/s. 2.6 crore
accounts of NREGA workers are withbanks and the remaining are with the s. About 40% of total
disbursement of wages is being made through banks/ accounts.
_ The opening of accounts in banks/s has rejuvenated s and increased volume of business of
banks/s in rural areas.
_ NREGA workers have been notified under rural poor category making them beneficiary of
Janashree Bima Yojana of LIC.
_ Ministry has taken Initiative to cover NREGA workers under Rashtriya Sawasthya Bima
Yojana of Ministry of Labour.
_ The Minimum wages across the country has increased from Rs 65 to Rs 80 and expected
earning per household in 2008-09 under NREGA shall be around Rs 4,400 per annum.

Rishu Agarwal
Decisions taken
The following decisions were taken:
1. Promotion of “no frill accounts” for NREGA and Pensions.
2. Optimization of Business Correspondent model and its cost implications would be examined
in a way that the poor do not have to pay for it.
3. Technology enabled financial services would be expanded, such as the
− Smart cards
− ATM Kiosks
− Hand held devices including mobile telephones with voice recognition software.
4. Encourage linking SHGs to manage wage payment, electronic transactions for Business
Service Correspondent or ATMs and insurance call centers.
5. An expert group will be set up for examining the innovations under implementation in the
States so that the standardized models can be developed and their costs and policy implications
will also be delineated.

Rishu Agarwal