Financial Inclusion : Perspective of Reserve Bank of India

1
Financial Inclusion Perspective of Reserve Bank
of India

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

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Financial Inclusion (FI)

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

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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

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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

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Financial Inclusion (FI)

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

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Financial Inclusion (FI)

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

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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

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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

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Financial Inclusion (FI)

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

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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,
  co-operative societies, NGOs (trusts/societies)
  being used as BCs for branchless banking Agency
  risk reduced thru local organisations IT
  solutions for tracking transactions Door step
  banking at lower cost Viability scalability
  dependent on lower interest rate service charges

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Financial Inclusion (FI)

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

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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 assessing
  progress

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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

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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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• Thank You