Financial Inclusion : Perspective of Reserve Bank of India

M.K.Samantaray General Manager Reserve Bank of India Guwahati

Financial Inclusion (FI)

What is Financial Inclusion Large segment of population remaining excluded from formal payments system & financial markets when financial market developing & globalizing Obvious market failure Government & financial sector regulators creating enabling conditions for inclusive & affordable market Indian Focus Economy Growth rate = 8.5% - 9% (last 5 years) Growth primarily in industry & services Agriculture at 2% Growth potential in SME sector enormous Limited access to savings, loans, remittance & insurance in rural/ unorganized sector major constraint to growth Above services enlarge livelihood opportunity & empowers poor Empowerment aids socio-political stability Financial inclusion provides formal identity, access to payments system & deposit

Financial Inclusion (FI)

FI essential for inclusive growth which is necessary for sustainable overall economic growth In developed economies, focus is on small population In developing economies (India), focus is on majority excluded Types of Financial Exclusion : (i) exclusion from payment system : not having access to bank accounts (ii) exclusion from formal credit markets leading to approaching informal/ exploitative markets Post-Nationalization (1969) : Expansion of branch network to unbanked areas Increased lending to agriculture, SSI, business Recent trend : access to basic banking services Measures of Financial Inclusion Common measure : % of adult population having bank a/c By this standard, 59% have accounts 41% unbanked In rural areas 39% covered, 60% in urban areas Unbanked population highest in NE and Eastern regions

Financial Inclusion (FI)

Exclusion from credit markets high : Number of loan a/cs 14% of adult population Coverage 9.5% in rural & 14% in urban areas Regional disparity large : 25% in Southern, 7% in NER, 8% in Eastern, 9% in Central region Of 203 million households, 147 million in rural areas 89 million farmer households 51% have no access to formal or informal credit 73% have no access to formal credit No data available for non-farm & urban households Sources of credit Non-institutional from 70.8% (1971) reduced to 42.9% (2002) Post-1991 increased Share of money-lenders in rural areas increased from 17.5% (1991) to 29.6% (2002) Reduced from 40% (1981) to 25% (2002) Who are excluded Marginal farmers landless labour oral lessees self employed unorganized sector urban slum dwellers migrants ethnic minorities socially excluded groups senior citizens women NER, Eastern & Central regions most excluded

Financial Inclusion (FI)

Reasons for Exclusion : Remote, hilly & sparsely populated areas with poor infrastruc-ture and difficult physical access Lack of awareness, low income, social exclusion, illiteracy Distance from bank branch, branch timings, cumbersome documentation/procedures, unsuitable products, language, staff attitude are common reasons Higher transaction cost Ease of availability of informal credit KYC documentary proof of identity/ address Recent RBI Initiatives : 1969-1991 : expansion of branch network average population covered per branch reduced from 64000 to 13711 liberalisation/opening of economy financial sector reforms deregulation increased competition strengthening of banks through recapitalization prudential measures Indian banking now robust & able to achieve global financial

Financial Inclusion (FI)

Annual Policy Statement -2004-05 : ..banks should be obliged to provide banking services to all segments of population on equitable basis. November 2005 : banks advised to provide basic banking no frills accounts with low or minimum balance/ charges expand banking outreach to larger sections of population printed material used by retail customers made available in local language KYC principles simplified to open accounts for customers in rural & urban areas Balances not to exceed Rs. 50000 & credits Rs. 1 lakh in a year Introduction by a customer (KYC) General purpose Credit Card (GCC) facility up to Rs. 25000 at rural & urban branches Revolving credit Withdrawal up to limit sanctioned Based on household cash flows No security or collateral Interest rate deregulated One-Time Settlement (OTS) for overdue loans up to Rs.

Financial Inclusion (FI)

January 2006 : Bank allowed to use services of NGOs, SHGs, micro finance institutions, civil society organisations as business facilitators/ correspondents (BC) for extending banking services BCs allowed to do cash in-cash out transactions at BC locations & branchless banking Credit counselling & financial education Pilots set up June 2007 : Multilingual website in 13 Indian languages launched by RBI providing information on banking services State/Regional Level : SLBC ( group of banks & government officials) since nationalization SLBC Convenor Quarterly review of banking developments District Level : DCC/DLRC meetings by District Commissioner April 2006 : 1 district in each state identified by SLBC for 100% financial inclusion 13 district identified in NER for FI RBI evaluation of progress through an external agency

Financial Inclusion (FI)

In identified districts : Survey conducted based on electoral rolls, public distribution system etc., to identify households with no bank accounts Banks to open at least one account per house Mass media deployed for awareness/ publicity Bank staff/ NGOs/ volunteers take ration cards/ Electoral ID/ photos for fulfilling KYC norms & opening accounts KCCs used for credit first, then savings with small overdraft facility or GCCs with revolving credit up to a specified limit In association with insurance companies, banks providing insurance cover for life, disability & health cover SCBs & RRBs being revived/strengthened with incentives for better governance Payments system being improved to cater to less developed parts of the country

Financial Inclusion (FI)

Result of RBI Initiatives No frills accounts : 6 million new accounts added between March 2006 & 2007 45000 rural & semi-urban branches of RRBs & PSBs shown highest performance FI now a big business opportunity Gives competitive advantage & growth SHG-Bank linkage Access to banking system provided thru SHGs (groups pooling savings & providing loans to members, a NGO nurturing) NABARD supporting group formation, linking with banks, promoting best practices Recovery excellent 2.6 million SHGs linked to banks touching 40 million households SHGs given loans by banks against group guarantees Rate of interest reasonable Loan size small, mostly used for consumption purposes/ small business, for agricultural activities SHGs mostly linked

Financial Inclusion (FI)

Foreign & private banks : Access thru non bank companies providing small value retail loans or by partnership with MFIs, now an excellent substitute of formal sector Rate of interest charged very high (24% - 30%) Reasons being high transaction cost, small sized loans Better than usurious informal sector loans Rates affordable ? Any surplus would be left for borrowers & scale up their living standards ? PSBs advantaged with lower cost of funds, size, scale Cross subsidization of loans & lower rate of interest Solution = Partnering of banks with SHGs & MFIs with reasonable cost of funding Current approach now Business Correspondents (BCs) : Post offices, cooperative societies, NGOs (trusts/societies) being used as BCs for branchless banking Agency risk reduced thru local organisations & IT solutions for tracking transactions Door step banking at lower cost Viability & scalability dependent

Financial Inclusion (FI)

IT Solutions : Essential for doorstep banking Pilot projects by SBI using smart cards for opening a/c with biometric identification Link to mobile/ hand held connectivity devices ensures transactions getting recorded in banks books on real time basis State governments making pension & other payments under NREGS thru smart cards Other financial services (low cost remittances, insurance) provided thru cards IT solutions enable large transactions like processing, credit scoring, credit record & follow up etc. Role of Government : Proactive role by issuing identity cards for a/c opening, thru awareness campaigns by district/ block level officials, meeting cost of cards, financial literacy drives India Post being used as BCs FMs Budget Speech 2007-08 : 2 Funds : (i) Financial Inclusion Fund - developmental/promotional work (ii) Financial Inclusion Technology Fund technology adoption/innovation Each Fund of $ 125 million

Financial Inclusion (FI)

Recent Initiatives : Setting up of financial literacy centers Credit counselling centers National financial literacy drive Linkage with informal sources with safeguards IT solutions Low cost remittance products etc. Committee for FI : Dr. C. Rangarajans (Chairman : PMs Economic Advisory Council) 10-Member Committee TOR : Pattern of exclusion from access to financial services Region, gender & occupational variation Constraints for vulnerable groups Institutional constraints International experience/ practices Relevance/ applicability to India Strategy to extend financial services to small/ marginal farmers Streamlining/ simplifying procedures Reduce transaction costs Transparent operations Institutional changes to be introduced (FIs) Monitoring mechanism to assess quality/ quantity of financial inclusion Indicators for

Financial Education
Definition : Familiarity with/understanding of financial market products, rewards, risks & make informed decisions Personal financial education & capability to take decisions for ones well-being & avoid financial distress Ability to grow, monitor, effectively use financial resources for economic security of self, family & business Financial markets now very complex, asymmetry of information Informed decision making very difficult Financial Education & RBI : Poverty, illiteracy & large section of population out of formal financial set-up Economic/ financial sector reforms have created higher disposable income New financial products in credit & investment side provided by financial intermediaries Informed decision difficult Those excluded form formal financial system need to be educated about banking & need for relationship with banks

Financial Education
Project Financial Literacy : Disseminate information about central bank, general banking concepts to target groups (school/college children, women, rural/ urban poor, defence personnel, senior citizens) 2 Modules : (1) Focus on economy, RBI (2) General banking Material in Hindi, English, Regional language Dissemination thru banks, local govt. depts., schools, colleges, pamphlets, posters, films, RBI Website (link for accessing in 13 Indian languages Credit Counselling Centers : Need for financial counselling to avoid informal sector & debt trap A few banks have started in rural/ semi-urban centers Provide information about banks, financial management, repayment obligations, avoiding indebtedness, rehabilitation of distressed Knowledge Centers : Train farmers/ women In May 06, SLBC convener banks advised to set up at least one center in each district Lead bank to set up more

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