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Measures for achieving financial inclusion in India

Thought Paper


Thought Paper02 Thought Paper 03

Measures for achieving financial inclusion in India“The stark reality is that most poor people in the world still lack access to sustainable financial services, whether it is savings, credit or insurance. The great challenge before us is to address the constraints that exclude people

India is said to live in its villages, a valid statement, considering that nearly 72% of our population lives there. However, a significant proportion of our 6,50,000 odd villages does not have a single bank branch to boast of, leaving swathes of the rural populace in financial exclusion. To a large extent, India’s development hinges on this segment’s economic growth; therefore, it is imperative to bring the unbanked population within the ambit of banking.

Invariably, financially excluded people depend on money lenders even for their day to day

The concept of financial inclusion is not a new one. Nationalization of banks, priority sector lending stipulations, the lead bank scheme, establishment of Regional Rural Banks, launch of Self Help Groups –bank linkage programs were all part of the Reserve Bank of India’s (RBI) initiative to provide financial access to the unbanked and underbanked masses. However, the movement gathered momentum after 2005, when the regulator highlighted the need for financial inclusion in its Annual Policy Statement, and a symbolic beginning was made when in the same year, Indian Bank brought all 800 households in Mangalam village in Pondicherry within its fold.

That being said, progress has been rather slow. Although there are more than 89,000 branches

from full participation in the financial sector. Together, we can and must build inclusive financial sectors that help people improve their lives.”

- Former UN Secretary-General Kofi Annan

Financial exclusion

Towards financial inclusion

needs, borrowing at exorbitant rates to finally get caught in a debt trap. On top, people in far-flung villages are completely ignorant of financial products like insurance, which could protect them in adverse circumstances. Moreover, the rural poor suffer from financial impediments, thanks to their seasonal income, irregularity of work and job-related migration. In the light of such issues, the need of the hour is a financial ecosystem built to meet their requirements and better their living standards.

in India today, 40% of Indians continue to languish without access to any kind of banking service. This can be attributed to the poverty, illiteracy and lack of regular income of the unbanked, as well as banks’ limited reach, high transaction costs and unsuitable product portfolios. Also, as the normal banking model is found wanting in terms of scalability, convenience, reliability, flexibility and continuity, banks hesitate to set up shop in rural areas. For financial organizations to give inclusion their best shot, it must evolve from being a social or regulatory obligation into a viable business proposition. The need therefore, is to shift from a cost centric model to a win-win revenue generating model that provides quality banking services at the customers’ doorstep.


The Reserve Bank is navigating the path to financial inclusion by means of regulations and guidance. It has initiated several measures to help bank the unbanked:

No-frills accounts

People in the financially excluded zone find it quite difficult to meet the requirements of normal savings accounts. Recognizing this problem, the RBI has made it mandatory for banks to provide no-frills savings accounts without a minimum balance requirement. The transaction charges are reasonable and small overdrafts are also allowed.

Overcoming language barrier

Large sections of the Indian population are not conversant with English and Hindi, the languages mostly used in bank forms. Banks are therefore required to provide forms pertaining to account opening, disclosure etc. in the regional language as well.

Simplification of KYC norms

Most rural inhabitants don’t have any of the identity documents that are required for account opening and compliance with Know Your Customer (KYC) norms. For that reason, the account opening process has been simplified for people who intend to keep balances not exceeding Rs.50,000 and whose total credit in all the accounts taken together is not expected to exceed Rs. 100,000 in a year. Small accounts can now be opened on the basis of an introduction from another account holder who has satisfied all the KYC norms.

Rural intermediaries

In January 2006, the RBI permitted banks to appoint the following organizations as business intermediaries:

• NonGovernmentalOrganizations(NGOs/SHGs),

• MicroFinanceInstitutions(MFI),and

• Othercivilsocietyorganizations

RBI initiativesThey can be employed as business facilitators or correspondents, the difference between the two being that the former provide education regarding financial products and collect documents on the bank’s behalf whereas the latter provide restricted financial and banking services such as deposit collection and money lending, again on behalf of the bank.

However, there is a general opinion that rural outreach programs depend excessively on business correspondents (BCs) and that bank branches should play a greater role.

Information and Communications Technology (ICT)

The Reserve Bank has also encouraged banks to harness the power of technology for maximizing reach and enhancing viability. ICT has thus enabled even illiterate customers to operate bank accounts using biometrics, rendering the signature redundant. Bank correspondents carry handheld ICT devices so that customers may transact at their doorstep. By ensuring security, technology-based banking infuses confidence in the minds of the customers.

Electronic bank transfers

ICT banking also facilitates electronic transfer of social security benefits directly to the beneficiaries. This reduces dependence on cash, thereby lowering transaction cost and minimizing chances of fraud by unscrupulous middlemen.

Easier credit

Banks have been advised to introduce a general purpose credit card facility, General Credit Cards (GCCs), to be precise, with a Rs. 25,000 limit in their rural and semi-urban branches. For customers, this translates to easy access to revolving credit sans the need to furnish security or statement of purpose.

Financial education

Financial literacy will go a long way in achieving financial inclusion. Accordingly, the RBI has


initiated several financial education measures. For example, it publishes comic strips to explain the concept of savings.

Simplified branch authorization

With the objective of facilitating uniform branch growth, the RBI has permitted banks to freely open branches in tier III to tier VI centers with population less than 50,000, subject to reporting. On the other hand, banks can open branches in any center – rural, semi-urban or urban – in the Northeast without applying for permission each time, again subject to reporting.

It was felt that the use of BCs should be supplemented by establishing branches in rural areas to improve banking access. A bank is therefore obliged to locate one in four branches opened during a year, in an unbanked region.

Although substantive measures are already in place, certain additional policy tweaks and initiatives by individual banks will succeed in pulling out more people from financial oblivion.

Behavioral economics

Time and again, it has been seen that when given a choice in the matter, most people do not subscribe to a beneficial plan or product. A case in point is the pension plan. When it was initially introduced as an option, 90% of employees did not enroll.

For the success of its financial inclusion program, the government should make subscription to financial services mandatory. At the same time, it should also realize that simplification of procedures will encourage more people to use banking services.

Addressing social issues

Financial inclusion initiatives might come a cropper if associated social issues are not addressed simultaneously. Take for instance the marginalization of women in rural society. Although women are known to be more savings savvy than men, a large percentage are not

Roadmap

By March 2012, banks were required to chart out a roadmap for providing banking services (branch or ICT enabled), to every unbanked village with a population of over 2,000.

Three year plan for financial inclusion

Banks were also advised to submit a three year Financial Inclusion Plan (FIP) beginning April 2010. These board-approved plans had to set their own targets in terms of rural branches to be opened, BCs to be employed, banking services to be provided in unbanked villages, number of Kisan and General Credit Cards to be issued and products to be exclusively designed for the financially excluded segments.

More can be done…permitted to own a savings account. Community education will sensitize the menfolk and enable women to understand and fight for their rights. Banks can do their bit by making banking products and services more attractive to women, by offering higher fixed deposit rates and creating products suited to their needs.

Moving beyond traditional products

Banks should move beyond deposit and credit products and introduce insurance, mutual funds and pension plans to people living in financial seclusion, enabling them to earn higher returns, manage risk better and provide for their retirement.

Infrastructure

Establishment of rural infrastructure is a prerequisite for financial inclusion and all stakeholders, banks included, have to contribute towards setting up connectivity and ensuring power supply among other things. Banks should also endeavor to bond with the rural community by initiating programs to adopt schools, conduct vocational courses for the rural youth and so on. An improved rural economy will surely result in better business for banks.


A word of caution…

References

Although financial inclusion is a must for the country’s progress, banks need to exercise caution. Overzealousness on their part might give rise to a subprime crisis-like situation. They ought to draw a clear line between sound and

1. www.hindu.com/2010/08/10/stories/2010081050780300.htm

unsound practices and chalk out a financial inclusion strategy, which while enabling the poor to get out of their impoverished condition will also enhance their own profitability.

Rajesh Jeganathan Senior Associate Consultant, Infosys

Finacle from Infosys partners with banks to transform process, product and customer experience, arming them with ‘accelerated innovation’ that is key to building tomorrow’s bank.

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