2. 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
3. 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
4. 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
5. 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
6. 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.
7. 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
8. 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
9. 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
10. 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
11. 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
• FM’s 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
12. 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. Rangarajan’s (Chairman :
PM’s 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
13. Financial Education …
Definition : Familiarity with/understanding of financial
market products, rewards, risks & make informed decisions
– Personal financial education & capability to take decisions
for one’s 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
14. 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
