Role of Deposit Insurance in Promoting Economic Inclusion

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(No Transcript)
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Role of Deposit Insurance in Promoting Economic
Inclusion
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Economic Inclusion

• It refers to the process of overcoming barriers
  that prevent people from participating in the
  economic growth of the society to which they
  belong.
• covers a whole range of areas encompassing
  health, income, employment, education, community,
  environment and equity.
• The trickle down effect of economic growth no
  doubt works, but it takes too long
• Hence a need to focus on inclusive growth.
• Inclusive Growth is a little more than just the
  benefits of growth being distributed equitably
  and evenly

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Inclusive growth

• It is the participation of all sections and
  regions of society in the growth story and their
  reaping the benefits of growth.
• It helps prosperity of the underprivileged
  increases demand for the goods and services
  produced by the expanding corporate sector - much
  faster growth of the economy.
• '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
  up.
• - Prof. C. K. Prahalad

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Linkages between Economic Inclusion and
Financial Inclusion

• Financial Inclusion can be defined as the process
  of ensuring timely access to financial services,
  especially adequate credit by vulnerable groups
  such as weaker sections and low income groups at
  an affordable cost
• Economic inclusion is a broader concept
  addressed through various fiscal measures
  Financial Inclusion one of the ways to support
  Economic Inclusion
• Theoretical and empirical research highlight the
  role of financial development in facilitating
  economic development

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Economic Inclusion, Financial Stability and
Deposit Insurance

• Financial Inclusion promotes financial stability
  by facilitating efficient and equitable
  intermediation between savings and investments
• Excluded households often tend to access informal
  financial agents/entities at higher cost and
  greater risk the need for protected savings is
  not often recognised
• With greater FI, greater relevance of deposit
  insurance people with smaller means need
  greater assurance for protection of their savings
• Thus, economic inclusion, financial stability and
  deposit insurance are mutually supportive

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Role of Deposit Insurance (DI) in Financial
Inclusion (FI) the Indian Experience

• In India, the DICGC insures deposits up to INR
  100,000 (2.4 times per capita GDP) per
  depositor.
• As on March 31, 2008, 92.6 per cent of the number
  of deposit accounts and 60.5 per cent of the
  assessable deposits was covered by DICGC
  insurance.
• DICGC cover promotes confidence in the banking
  system and facilitates financial inclusion
• The challenge is how to extend the benefits of
  deposit insurance to those outside its purview

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Role of DI in FI the Indian Experience (2)

• In India, Micro Finance has played an important
  role in promoting Financial Inclusion
• Self Help Group (SHG) Bank linkage program
  2.9 million SHG linked to banks serving 41
  million people- Low transaction cost, good
  recovery deposit insurance protection to
  accounts maintained by SHGs
• BC/BF model Banks allowed to employ agents for
  branchless banking has enabled greater
  penetration and provision of doorstep banking
  services and extended protected (insured) savings
  to those hitherto excluded ICT solutions enable
  bank oversight to minimize agency risk
• Urban Cooperative Banks (UCBs) are community
  banks catering to those that tend to be excluded
  by com. banks - 1,170 UCBs with 50 million
  deposit accounts for which DI cover available
  this sector had many weak elements - because of
  DI cover, it has been possible to close down
  nearly 40 banks in last two years

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Role of DI in FI the Indian Experience(3)

• Role of Primary Agricultural Co-operative Credit
  Society (PACs), numbering 97,000, in financial
  inclusion deposits raised by them from members
  not insured need for the same joint study by
  NABARD and DICGC
• NBFCs - there are 337 NBFCs which hold deposits
  aggregating INR 244 billion no deposit
  insurance available to such deposits however
  from point of view of financial stability
  increasingly clear that these need to be
  regulated and supervised as closely as banks

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Role of DI in FI the Indian Experience(4)

• Many micro finance companies in India registered
  as NBFCs. Deposits mobilized by them not covered
  by DI - these companies together with not for
  profit companies / trusts / societies as a group
  called MFIs - covers 14 million borrowers. Bill
  under consideration to allow MFIs in the nature
  of trusts, societies and cooperatives to accept
  thrifts - raises issues of depositor protection
• Need to extend deposit insurance to the thrift
  mobilised through non-bank entities is
  compelling, but imply huge challenges involving
  their effective supervision and regulation and
  the availability of supervisory resource for the
  purpose .

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Role of DI in FI the Indian Experience(5)

• Importance of timely settlement of claims for
  promoting confidence of depositors in the banking
  sector
• Though problems do crop up due to dual control
  over co-operative banks and a host of
  litigations, forums for resolution of such
  problems have been set up (MOU with State
  Governments, Co-ordination Committee of RBI
  DICGC etc)
• Efforts are on to ensure payment to depositors in
  a few days after liquidation of any bank through
  a system of on-line availability of depositors
  data on an on going basis

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Role of DI in FI the Indian Experience(6)

• IADIs Core Principles (No. 16) emphasize the
  need for a trigger mechanism for Prompt
  Corrective Action (PCA), which is essential for
  preventing bank failures and promoting
  depositors confidence
• In India the supervision and regulation of banks
  is the responsibility of the Central Bank (RBI)
• Enormous duplication of supervisory cost if DICGC
  is also engaged in this exercise. However, DICGC
  collaborates with the regulators to supplement
  their efforts towards prompt corrective action.

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Role of DI in FI the Indian Experience(7)

• Deposit insurance can promote public confidence
  in banking system and thereby support financial
  inclusion only if the public is informed about
  the benefits and limitations of the deposit
  insurance system
• DICGC does it through booklets, posters, FAQs
  etc., distributed through huge network of bank
  branches
• In addition, DICGC website (www.dicgci.org.in)
  hosts detailed information on deposit insurance

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Financial Inclusion and Financial Stability A
Clarification

• A view has been expressed in certain quarters
  that lending to sub prime borrowers, which could
  be considered as financial inclusion, has been a
  threat to financial stability
• There is a big difference between lending to the
  poor and excessive leveraging through structured
  products - it is the latter that creates bubbles
  and busts
• The Indian experience with SHG bank credit
  linkage as also MFIs shows that the recovery
  rates are better than in direct lending.
• Let us not forget the comments of noble laureate
  Yunus that the poor are bankable though the
  importance of prudence in such lending and
  borrowing cannot be ignored

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• Thank You