FINANCIAL INCLUSION FOR INCLUSIVE GROWTH – A WAY FORWARD

[Mr. M. GOVINDARAJAN]

INTRODUCTION:

Financial inclusion may be defined as the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost. On 29.12.2003, Former UN Secretary-General Kofi Annan said “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 from full participation in the financial sector. Together, we can and must build inclusive financial sectors that help people improve their lives”.  According to the United Nations the main goals of financial inclusion are as follows:

1. Access at a reasonable cost of all households and enterprises to the range of financial services for which they are “bankable,” including savings, short and long-term credit, leasing and factoring, mortgages, insurance, pensions, payments, local money transfers and international remittances
2. Sound institutions, guided by appropriate internal management systems, industry performance standards, and performance monitoring by the market, as well as by sound prudential regulation where required
3. Financial and institutional sustainability as a means of providing access to financial services over time
4. Multiple providers of financial services, wherever feasible, so as to bring cost-effective and a wide variety of alternatives to customers (which could include any number of combinations of sound private, non-profit and public providers.

FINANCIAL EXCLUSION:

Financial exclusion is where the financial services are not available to the people. The rural people are very much excluded from having the financial services due to non availability of financial services in their areas or it may due to high cost for getting the financial services or non awareness about the availability of financial services. The poor people in rural as well as in urban are not able to get financial services still due to above reasons and also the huge formalities in availing the same. Financial exclusion includes-

• No savings;
• No insurance;
• No affordable credit;
• No access to monetary devices;
• No assets;
• No bank account.

Financial exclusion problem also includes the problems of financial discrimination and financial exploitation. The following are financially excluded:

• Poor people;
• Socially under privileged people;
• Disabled persons;
• Old as well as children;
• Women;
• Uneducated persons;
• Ethnic minorities;
• Unemployed people.

FINANCIAL INCLUSION AND BANKS:

Financial inclusion includes meeting the small credit needs of the people, giving them access to the payments systems and providing remittance facilities.  For the purpose of financial inclusion it is highly required to ensure the following by the banking sector:

• No frills accounts –RBI directed banks to offer a basic banking ‘no frills’ account with low or zero minimum balances and minimum charges to expand the outreach of such accounts to the low income groups;
• Easier Credit Facility – Banks were directed to introduce a General Purpose Credit Card (GCC) facility up to Rs.25,000/-;
• Simpler KYC Norms – In order to ensure that the people belonging to the low income groups both in rural and urban areas, do not encounter difficulties in opening  bank accounts ‘Know Your Customer’ (KYC) procedure is simplified for those accounts with balances not exceeding Rs.50,000/- and credits thereto not exceeding Rs.1,00,000/- in a year;
• Use of Information Technology – Banks have been urged to scale up information technology 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;
• Electronic Benefit Transfers (EBT) through banks – To encourage banks to adopt information and Communication Technology (ICT) solutions for enhancing their outreach RBI formulated a scheme to quicken the pace of adoption of the smart card based Electronic Benefit Transfer (EBT) mechanism by banks and rolled out the EBT system in the States that are ready to adopt the scheme.  Banks are advised to work in co-ordination with the respective  government departments at the Central and State levels to ensure that all State benefits  are delivered to individuals only through bank accounts within a specific time frame;
• Business – Correspondent (BC) Model – This model ensures a closure relationship between the poor people and the organized financial system. The RBI permits the banks to use the following as BCs-

-          Non government organizations;

-          Micro Finance Institutions;

-          Retired bank employees;

-          Ex-service men;

-          Retired Government employees;

-          Section 25 companies;

-          Individual kirana/medical/fair shop owners;

-          Individual Public Call Office (PCO) operators;

-          Agents of small savings schemes of Government of India/Insurance companies;

-          Individuals who own petrol pumps;

-          Retired teachers;

-          Authorized functionaries of well run Self Help Groups (SHGs) to linked banks; and

-          Other civil society organizations;

• Bank Branch and ATM Expansion Liberalized – RBI has permitted domestic scheduled Commercial Banks, other than regional rural banks, to open branches in tier 3 to tier 6 centers (with population up to 49,999 as on 2001 census) without having the need to take permission of RBI in each case.  RBI also totally freed the location  of ATMs from prior authorization;
• Project Financial Literacy: RBI has initiated a ‘Project Financial Literacy’ with the objective of disseminating information regarding the Central Bank and general banking concepts to various target groups. RBI’s financial website line offers basics of banking, finance and central banking for Children of all ages.   In a comic book format, RBI simplifies the complexities of banking, finance and central banking with the goal of making the learning fun and interesting;
• Financial Literacy and Credit counseling – RBI has advised the convener-bank of each State Level Banks’ Committee (SLBC) to set up a financial literacy-cum-counseling centre in any one district on pilot basis to provide free financial education to people in rural and urban areas on the various financial products and services while maintaining arm’s length relationship with the parent bank and based on that experience to extend the facility to other districts in due course.

FINANCIAL INCLUSION FOR INCLUSIVE GROWTH:

Financial inclusion is necessary for inclusive growth.  Growth is inclusive when there is equality of economic opportunities. The seeds of financial inclusion were sown over 35 years ago when rural banks were established throughout the country. The branch network which was just 8000 in 1969 when banks were nationalized now has increased to more than 87000 because of the banking industry coming forward to take up social responsibilities.  Still numerous villages do not have any access to the banking facilities.

Financial inclusion is integral to the inclusive growth process and sustainable development of the country. However, the financial inclusion models that banks come up with should be replicable and viable across the country. The Finance Minister said that although the banking network has rapidly expanded over the years, the key challenge would be to extend the banking coverage to include the large population living in 6 lakh villages in the country. Expressing his immense confidence in the Indian banking system to deliver on the plan for financial inclusion, Mr. Mukherjee said the system, which demonstrated its resilience in the face of the recent global financial crisis, should adopt strong and urgent measures to reach the unbanked segment of society and unlock their savings and investment potentials. To tap the fortune at the bottom of the pyramid, he recommended robust electronic transfers between bank branches located in the rural hinterland. This will facilitate the rural customers to transfer their income and conduct financial transactions seamlessly.  He urged the private sector to support the designing of physical products including devices, software and financial services, training and capacity building so as to create a large manpower pool including business correspondents, and develop a business plan to tap the local talent that exists in the rural areas, on the lines of the e-choupal model.

Dr Janmejaya Sinha, Chairman, CII Taskforce on Financial Inclusion & Chairman (Asia Pacific), The Boston Consulting Group, said that 135 million of the 204 million households in the country face financial inclusion. Now, with 570 million people in the country being in the 0-25 age group, a very large segment would be entering the workforce in the coming years. Their financial inclusion at this stage would be of critical importance in the context of inclusive growth process and sustainable development.  He further said that financial illiteracy is a key stumbling block in furthering financial inclusion. This has led to the financial illiterate segment making negative savings in many cases. He added that banks need to view the situation as not an obligation to be met but an opportunity that is to be weaved into their business strategies. He felt that a pro-active approach will see the banking network expanding in an all-inclusive manner like the telecom sector did.   He also set a five point agenda for financial inclusion, which called for-

(i) increasing overall consciousness of the need for financial inclusion;

(ii) increase in wireless and broadband connectivity in the rural areas to support rural banking;

(iii) spread of financial literacy programmes;

(iv) greater experimentation for financial inclusion through business correspondents, self-help groups, etc.

(v) greater collaboration between the key stakeholders in the banking system

Ms Chanda Kochhar, Chairperson, CII National Committee on Banking and Managing Director & CEO, ICICI Bank said with a low ratio of 1 bank branch for 16,000 people, financial inclusion is far-fetched today. But, the idea of financial inclusion should be broad-based, such that people are able to not only access credit, but also fetch various financial services and products through the banking access point.  She also said that at the micro-level, the financial services providers should aim for a holistic approach that meets the different financial needs of the target customers, address not just rural but also large urban excluded segments, reduce cost of transactions with proper technology adoption, and support the development of support infrastructure.

In his Budget Speech for the year 2011-12 the Finance Minister stated that the Government has decided to provide appropriate banking facilities to the habitants having population in excess of 2000, as per 2001 census, by March 2012. For this purpose 73000 such habitants all over country have been identified and allocated to public sector banks, regional rural banks, private sector banks and co-operative banks for extending banking services by using the services of business correspondents and other models, with appropriate technology back up by March 2012.

The banks have already covered 29000 villages by March 2011 and it is hoped that the remaining 44000 villages would be covered by March 2012.

Self help groups are one of the few channels through which financial inclusion can be accelerated. The banks in general can do more bringing the banking services to the door steps of the under privileged through Financial Inclusion Plan.

OPERATIONAL GUIDELINES:

The Reserve Bank of India formulated ‘Operational Guidelines on implementation of Electronic Benefit Transfer and its convergence with Financial Inclusion Plan’ vide RBI/2011-12/153 & RPCD.CO.BC.FID No.16/12.01.019/2011-12, dated 12.08.2011 and issued to all scheduled commercial banks. These guidelines are expected to give a fillip to financial inclusion efforts and lead to a scalable and sustainable financial inclusion model.

The operational guidelines consist of five parts as below:

1. Financial Inclusion;
2. Electronic Benefit Transfer (EBT) Scheme using the “One District – One Bank Model”;
3. Need for Convergence of Electronic Benefit Transfer and Financial Inclusion Plan;
4. Way forward for EBT implementation;
5. “One District-Many Banks-One Leader Bank” – model workflow.

Financial Inclusion:

The key driver of our country’s vision of inclusive growth is financial inclusion. RBI has adopted a ‘Blank-led’ model for ensuring financial inclusion to provide low cost, efficient, ICT based banking services utilizing multiple delivery channels including intermediary low cost brick & mortar structures, branchless banking through Business Correspondents (BCs) and other modes like mobile vans, rural ATMs etc., so as to cover all the villages in due course. RBI, as a part of financial inclusion, initiates Governments to disburse social security payments through the banking channel leveraging Electronic Benefit Transfers for financial intermediation.

Electronic Benefit Transfers:

In this model a designated bank has the mandate to disburse government payments at the doorstep of the beneficiary, electronically, through hand held devices using biometric smart cards at the locations of BCs of the bank. The following difficulties are expressed in scaling up ‘one district – one bank model of EBT:

• No designated bank by  itself may have the adequate branch/BC network to reach the entire District;
• Even if it is able undertake EBT, it may not be able to provide all financial services like deposits,  OD, remittances and GCCs/KCCs to the customers;
• The designated bank may deploy BCs only 2 to 3 notified days in a month for disbursing the amount of social security payments in cash to EBT beneficiaries;
• It will take the freedom of people to bank with the bank of their choice keeping in view of better services etc.,

Need for convergence of financial inclusion and EBT:

The operational guidelines insist the necessity for convergence of financial inclusion and EBT.  Under ‘One District – One bank Model’ the leader bank is expected to extend all types of banking services to the residents of the area which is felt much difficult in attaining the object.  Banks will not earn required amount of income unless they offer credit products.  Since banks have invested in creating BC infrastructure for making EBT payments at the door steps of the beneficiaries they can provide banking services to non beneficiaries in those villages without any additional cost. At this stage of financial inclusion the intention of allocation of the unbanked villages, with population more than 2000, amongst various banks is to ensure that these villages are provided with at least one banking outlet for extending banking facilities comprising four products i.e., savings, credit, remittance and insurance.  For the financial inclusion model to be a success it is necessary that there is a convergence between the EBT and the Financial Inclusion Plan model.

Way forward for EBT implementation:

• One district – many banks – one leader bank model may be adopted henceforth for EBT implementation;
• There is no prohibition for adoption of ‘one district –one bank’ model approach where the model exists and is already working provided one bank is in a position to provide whole range of minimum banking services under this dispensation;
• The State Governments should not stipulate any condition that prevents EBT accounts from being used for other banking transactions;
• The State Government shall designate a nodal department for administration of each social benefit schemes. The provisions of MOU signed between Government Agency and the banks should be consistent with the extant guidelines and notifications of RBI.
• Achieving full financial inclusion is crucial for implementation of EBT and direct transfer of subsidies. SLBC should prepare plans to cover all unbanked villages including population less than 1000, the allocation of these villages may be done on the basis of geographical proximity;
• Once banking services are extended to all villages under the financial inclusion plan, convergence between the EBT scheme and FIP would automatically realized;
• Once UID is issued to all the villagers, a ‘model’ will emerge where the customer will have the option to transact with the bank of their choice in any village by using UID enabled Micro ATMs. This will reduce their dependence on cash and lower costs for transactions.

“One District-Many Banks-One Leader Bank” – model workflow:

The model workflow framed by the operational guidelines for ‘One district-Many banks-One leader bank’ is as follows:

• The State Government is to select  a Leader Bank for EBT for a district and designate a nodal department for coordination at the district level;
• State Government is to make MOU with the leader bank for the particular district;
• Leader bank is to make arrangements with other participating banks in the District on revenue sharing contract;
• Nodal department is to give the list of beneficiaries to the leader bank;
• Leader bank is to distribute the list of beneficiaries among all participating banks;
• Participating banks are to appoint to select the technology provider and deploy BC/CSPs in all villages;
• BC/CSPs are to enroll all beneficiaries, participating banks to open accounts and issue smart cards;
• Nodal Department is to open a savings account with the leader bank;
• Nodal Department is  to provide files electronically containing the details of beneficiaries each month and arrange for crediting the required amount into the SB Account with the leader bank;
• Leader bank is to arrange for crediting the amount electronically to other participating banks;
• Participating banks are to credit the beneficiary accounts on the same day and send confirmation to the leader bank;
• Leader bank will confirm credit to the nodal department;
• The funds are now at the disposal of the beneficiaries for use as per their requirements;
• MIS reports are to be provided by the participating banks to leader bank and in turn the leader bank is to submit report to the nodal department;
• Reconciliation with the nodal department is to be done by the leader bank preferably on daily basis, but at least on weekly basis;
• Developments in the implementation of EBT are to be mailed to DCC/BLBC level every month by the leader bank. Any policy or structural issues in the implementation is to be discussed at SLBC (State Level Banker’s Committee) level.

‘One District-Many Banks-One Leader Bank’ model, if implemented will able to achieve the 100% of the financial inclusion in the country though it will take some time.

CONCLUSION:

The discussion made above clearly shows that financial inclusion if highly required for inclusive growth of the country to enable the people to get equality of economic opportunities.  Awareness in this regard is to be created.   Ministry of Corporate Affairs is conducting various awareness programs through professional institutes and other bodies in capital market all over the country especially in rural areas and the people are much benefited. In the same way the awareness program in this program may be conducted in all over the country so that the financially excluded people may get the benefit of economic opportunities. The ICWAI institute may initiate the same with RBI.

References:

1.www.rbi.org

2. www.pib.nic.in

3. Operational Guidelines for implementation of Electronic Benefit Transfer and its convergence with financial inclusion plan issued by Rural Planning & Credit Department, Central Office, RBI;

4.http://en.wikipedia.org