(Study Material for IPS LCE) Socio Economic Development in India: Financial Inclusion, Financial Deepening And Economic Growth

We are justifiably proud of our robust and resilient financial system that has over the years, grown in size and complexity. The financial system today encompasses a host of institutions including 75,170 branches of commercial, mainly public sector banks across the country; 15,612 branches of 82 Regional Rural Banks; 14,000 or so cooperative bank branches; 95, 626 outlets of Primary Agricultural Credit Cooperative societies, NBFCs mutual fund companies et al,yet the problem of exclusion from access to formal financial services is so acute that despite the penetrative outreach of the financial system 50% of the country is unbanked. (Source: Report on Trend and Progress of Banking in India, 2010.) With the access of banking services being limited in rural areas, the reliance on informal sources of finance is considerably high. Further, the divide across various geographical regions too is significant in terms of access to banking services. The western, southern and northern regions have been far ahead of the north-eastern, eastern and central regions not only in terms of branch intensity but also in terms of per capita deposit/credit. Thus moving towards universal financial inclusion is our national commitment and RBI’s policy priority. Financial access is necessary as it enables access to financial services like savings, credit, remittance, insurance, pensions from formal financial institutions at cheaper cost. Taken together this enables movement from the margin to the mainstream. It allows a paper trail of transactions effected through the banking system and thus curbs illegal transactions. The inhibitors to this process are the small ticket character of loans. Low value, high volume nature of transactions in the penny economy make administration of loans and recoveries costly .Once appropriate technological solutions are in place technology can be leveraged effectively to leapfrog the barriers of geography.RBI emphasises a bank led model of financial inclusion relying on ICT solutions.

Table: Percentage share of debt of households from various sources

Table:  Indicators of banking outreach across geographical regions

It is axiomatic that well diversified broad-based and inclusive financial systems significantly raise growth, alleviate poverty, and expand economic opportunity. This is secured through the process of building robust sustainable and scalable solutions through greater financial deepening. Access is inversely proportional to income. In the absence of financial deepening it is not easy to access the full range of goods and services from mainstream institutional providers. Poorer households and smaller enterprises face difficulties in obtaining basic banking services, inhibitions arise on account of the transaction costs, risk perceptions, inadequate infrastructure, information barriers, and other factors.

Financial inclusion is the delivery of financial services, at affordable cost, to vast sections of disadvantaged/low-income groups excluded from the formal financial system. The Reserve Bank provides overall macropolicy direction and supports new products and services such as the No Frills Accounts ,GCC and KCC,relaxed regulatory dispensation on branch authorisation& KYC norms, besides providing financial support through the two funds operationalized through NABARD namely Financial Inclusion Technology Fund and the Financial Inclusion Fund.

Opening of No-frills Accounts

Basic banking ‘no-frills’ account with ‘nil’ or very low minimum balances as well as charges that make such accounts accessible to vast sections of the population were introduced as per RBI directive in 2005. As on March 2011, 7.44 crore ‘no frills accounts’ have been opened by banks with outstanding balance of Rs.6565.68 crore.

Small Overdrafts in No-frills Accounts

Banks have also been advised to provide small ODs in no frill accounts. Up to March 2011, banks had provided 41.77lakh ODs amounting to Rs.198.73 crore.

General Credit Cards

Banks have been asked to consider introduction of a General Purpose Credit Card (GCC) facility up to Rs. 25,000/- at their rural and semi-urban braches. The credit facility is in the nature of revolving credit entitling the holder to withdraw up to the limit sanctioned. Based on assessment of household cash flows, the limits are sanctioned without insistence on security or purpose. Interest rate on the facility is completely deregulated. As on March 2011, banks had provided credit aggregating Rs.1287.66 crore in 8.83 lakh General Credit Card (GCC) accounts.

Relaxed Regulatory Dispensation on KYC Norms

Know Your Customer (KYC) requirements for opening bank accounts have been relaxed since August 2005 and simplified for accounts with balances not exceeding Rs. 50,000/- and aggregate credits in the accounts not exceeding Rs. one lakh a year. Introduction by an account holder who has been subjected to full KYC drill would suffice for opening such accounts or the bank can take any evidence as to the identity and address of the customer to the satisfaction of the bank.

Simplified Branch Authorisation

To address the issue of uneven spread of Bank branches, since December 2009, domestic scheduled commercial banks are permitted to freely open branches in Tier 3 to Tier 6 centres with population of less than 50,000 under general permission, subject to reporting. In the North Eastern States and Sikkim, domestic scheduled commercial banks can now open branches in rural, semi urban and urban centres without the need to take permission from Reserve Bank in each case, subject to reporting.

Business Correspondent/ Business Facilitator Model

In January 2006, the Reserve Bank permitted banks to utilise the services of non-governmental organizations (NGOs), micro-finance institutions (other than Non-Banking Financial Companies) and other civil society organisations as intermediaries in providing financial and banking services through the use of business facilitator and business correspondent (BC) models. The BC model allows banks to do ‘cash in - cash out’ transactions at a location much closer to the rural population, thus addressing the last mile problem. From September 2010 banks have been permitted to engage the following individuals/entities as BC.
(i) Retired bank employees, retired teachers, retired government employees and ex-servicemen, individual owners of kirana/ medical /Fair Price shops, individual Public Call Office (PCO) operators, agents of Small Savings schemes of Government of India/Insurance Companies, individuals who own Petrol Pumps, authorized functionaries of well run Self Help Groups (SHGs) which are linked to banks, any other individual including those operating Common Service Centres (CSCs);
(ii) NGOs/ MFIs set up under Societies/ Trust Acts and Section 25 Companies ;
(iii) Cooperative Societies registered under Mutually Aided Cooperative Societies Acts/ Cooperative Societies Acts of States/Multi State Cooperative Societies Act;
(iv) Post Offices; and
(v) Companies registered under the Indian Companies Act, 1956 with large and widespread retail outlets, excludingNon Banking Financial Companies (NBFCs). Banks have reported employing 40942 BCs which covered 78078 villages.
As on March 2011, 281.33 lakh smart cards have been issued by banks as part of their efforts to drive Information and Communication Technology (ICT) - based financial inclusion.

FIF and FITF

Based on the recommendations of the “Committee on Financial Inclusion” set up by the Government of India under Dr. C. Rangarajan, two Funds, the “Financial Inclusion Fund (FIF)” for meeting the cost of developmental and promotional interventions for ensuring financial inclusion, and the “Financial Inclusion Technology Fund (FITF)”, to meet the cost of technology adoption has been set up at NABARD with an overall corpus of Rs. 500 crore each Special package for North Eastern States
To improve banking penetration in the North-East, the Reserve Bank asked the State Governments and banks to identify centres where there is a need for setting up either full-fledged branches or those offering forex facilities, handling government business or for meeting currency requirements. It has also offered to fund the capital and running costs for five years provided the State Government concerned is willing to make available the premises and put in place appropriate security arrangements. Meghalaya has been the first off the block, and eight centres have been allotted to three public sector banks, following a bidding process. Branches at two of the agreed centres in Meghalaya have been opened in Januaryat Gamberge and in Nongshillong in February 2011 and the third such branch is expected to be openedshortly. A lot of Stress is also being laid on spreading financial literacy and financial education.

Policy Interventions to Strengthen Financial Inclusion

CBS in RRBs: Given the strategic positioning of Regional Rural Banks (RRBs), the Reserve Bank has directed all RRBs to be CBS- compliant and by September 2011, this is expected to give a further fillip to financial Inclusion efforts given the penetrative outreach of the RRBs in the rural areas.
Scaling up IT: Banks had been urged in May 2007 to scale up IT initiatives for financial inclusion speedily while ensuring that solutions are highly secure, amenable to audit, and follow widely-accepted open standards to ensure eventual inter-operability among the different systems.
Mobile Banking: Mobile banking guidelines for banks were issued in October 2008. Since December 2009, banks have been permitted to offer this service to their customers subject to a daily cap of Rs 50,000/- per customer for both funds transfer and transactions involving purchase of goods/services.
Roadmap for Banking Services:In November 2009, banks were advised to draw up a roadmap to provide banking services through a banking outlet in every village with population over 2,000, extending financial inclusion to more than one lakh villages. Banking services may not necessarily be extended through a brick and mortar branch but provided through any of the ICT- based models, including through Business Correspondents (BCs). A total of 72,814 such unbanked villages were identified and as on March 2011, 24,710 banking outlets have been opened in various villages across the country.
Financial Inclusion Plan for Banks: All domestic commercial banks- public and private sector were advised in January 2010 to draw up specific Board approved Financial Inclusion Plans (FIP) by March 2010 incorporating some basic minimum qualitative features, and quantitative indicators with a view to rolling them out over the next three years. Such Board-approved FIPs are an integral part of their business plans and include criteria on financial inclusion in the performance evaluation of their field staff.
Can ICT and government macro policies support the expansion of financial access so as to build an inclusive Financial Sector?

UID Project and Financial Inclusion

The Unique Identification Authority proposes to furnish an identity card that will satisfy the Know Your Customer (KYC) norms of banks, thereby giving a fillip to financial inclusion. Aadhaar aims to provide a Unique Identification in the form of 12-digit unique number with some basic demographic and biometrics information to every Indian citizen. As the UID numbers would be acceptable for KYC compliance, UIDAI can act as a major facilitator for financial inclusion through opening of bank accounts. While UID would provide a strict check on customer’s identity through biometric authentication, the costs and time required by the customer for opening accounts would be reduced substantially. Further, online authentication system will save the cost of issuing smart cards for the banking sector while increasing security.It would also help new generation service providers, such as BCs and other technology service providers (UIDAI, 2010).Banks can be registrars to the UID and through this collaborative process are inclusion in the hitherto unserved and under-served geographies.
The issuance of a unique identification number that can be verified and authenticated online,in a cost effective manner and is robust enough to eliminate duplicate and fake identities is expected to provide a further fillip to financial inclusion efforts. NREGA payments and payments under other government benefit programmes as also all state benefit transfers are expected to be routed through UID cards to eliminate all leakages and malpractices and ensure that the right beneficiary receives timely and adequate recompense.
UID would also help in widening the scope of financial inclusion by bringing those employed in the unorganised segments into the ambit of formal finance. This would be possible by linking pension, provident fund and medical insurance plans provided to employees to their accounts through the UID. It would thus open up a whole new vista.
The scale and magnitude of this programme is unprecedented and requires effective coordination between different tiers of the Government and between regulators. It also seeks effective support from various public and private sector agencies. Public policy and technology changes, can now fundamentally alter banking . Banks need to mobilize resources from a wide deposit base and extend credit to the unbanked and unreached ,hitherto not financed by banks. Amartya emphasizes that capability and freedom enhancing social policies generate stable civil societies. Thus financial inclusion which enables attainment of equity with growth is a a global public good. Universal financial inclusion by 2012 is our policy commitment. We have promises to keep and miles to go before we slee.

Courtesy: Ministry of Information and Broadcasting publication division