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7/31/2019 Priyank Fino

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IN- COMPANY TRAINING REPORT

ON

FINANCIAL INCLUSION

Completed in Financial Inclusion Network and Operations Ltd

Submitted in partial fulfillment of the requirement of Bachelor of

Business Administration(BBA), Guru Jambheshwar University of

Science and Technology,Hisar

Submitted byASHUTOSH KUMAR TANEJA

08511158041

Training Supervisor

Name & Designation

of the supervisor

Directorate of Distance Education

Guru Jambheshwar University of Science and Technology,Hisar

( Session:2008-11)


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INTRODUCTION

No universally accepted definition of financial inclusion is available. Financial inclusion has

generally been defined in terms of exclusion from the financial system. Broadly, financial

exclusion is construed as the inability to access necessary financial services in an appropriate

form due to problems associated with access, conditions, prices, marketing or self-exclusion.

The working or operational definitions of financial exclusion generally focus on ownership or

access to particular financial products and services. There is no single comprehensive

measure

that can be used to indicate the extent of financial inclusion across economies.

Specific indicators such as number of bank accounts, number of bank branches, that are

generally used as measures of financial inclusion, can provide only partial information on the

What is Financial Inclusion?

Financial inclusion is delivery of banking services at an affordable cost to the vast

sections of disadvantaged and low income groups. Unrestrained access to public goods

and services is the sine qua non of an open and efficient society. As banking services are

in the nature of public good, it is essential that availability of banking and payment

services to the entire population without discrimination is the prime objective of the

public policy.

Indian economy in general and banking services in particular have made rapid strides in the

recent past. However, a sizeable section of the population, particularly the vulnerable groups,

such as weaker sections and low income groups, continue to remain excluded from even the

most

basic opportunities and services provided by the financial sector. To address the issue of such

financial exclusion in a holistic manner, it is essential to ensure that a range of financialservices


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is available to every individual. These services are:

(i) A no-frills banking account for making and receiving payments,

(ii) A savings product suited to the pattern of cash flows of a poor household,

(iii) Money transfer facilities,

(iv) Small loans and overdrafts for productive, personal and other purposes, &

(v) Micro-insurance (life and non-life)

Committee on Financial Inclusion

The Committee has defined Financial Inclusion 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 .

The major recommendations of the Committee include :

1). Launching of a National Rural Financial Inclusion Plan (NRFIP) in mission mode with a

clear target to provide access to comprehensive financial services, including credit, to at least

50% (say 55.77 million) of the financially excluded rural cultivator/non-cultivator

households,

by 2012 through rural/semi-urban branches of Commercial Banks and Regional Rural Banks

.

The remaining households have to be covered by 2015.For the purpose, a National Mission

on

Financial Inclusion (NaMFI) is proposed to be constituted comprising representatives from

all

stakeholders to aim at achieving universal financial inclusion within a specific time frame.

2). Constitution of two funds with NABARDthe Financial Inclusion Promotion &

Development Fund(FIPF) and the Financial Inclusion Technology Fund(FITF) with an initial

corpus of Rs. 500 crore each to be contributed by GoI / RBI / NABARD. The FIPF will focus

on

interventions like, Farmers Service Centres, Promoting Rural Entrepreneurship, Self-

Help

Groups and their Federations, Developing Human Resources of Banks, Promotion of

Resource Centres and Capacity Building of Business Facilitators and Correspondents,

while

the FITF will focus on funding of low-cost technology solutions


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3). Deepening the outreach of microfinance programme through finacing of SHG/JLGs and

setting up of a risk mitigation mechanism for lending to small marginal farmers/share

croppers/tenant farmers through JLGs

4). Use of PACSs as Business Facilitators and Correspondents

5). Micro financeNon Banking Finance Companies (MF-NBFCs) could be permitted to

provide thrift, credit, micro-insurance, remittances and other financial services up to a

specified

amount to the poor in rural, semi-urban and urban areas. Such MF-NBFCs may also be

recognized as Business Correspondents of banks for providing only savings and remittance

services and also act as micro insurance agents

6). Opening of specialised microfinance branches / cells in potential urban centers for

exclusively catering to microfinance and SHG - bank linkages requirements of the urban

poor.

An enabling provision be made in the NABARD Act, 1981 permitting NABARD to provide

micro finance services to the urban poor

Financial Inclusion in India Key Elements

(i) Financial inclusion is delivery of banking services at an affordable cost to the vast sections

of disadvantaged and low income groups. Unrestrained access to public goods and services is

the sinequa non of an open and efficient society. As banking services are in the nature of

public good, it is essential that availability of banking and payment services to the entire

population without discrimination is the prime objective of the public policy (Leeladhar,

2006).

(ii) Financial exclusion signifies lack of access by certain segments of the society to

appropriate, lowcost, fair and safe financial products and services from mainstream providers.

Financial exclusion is thus a key policy concern, because the options for operating a

household budget, or a micro/small enterprise, without mainstream financial services can

often be expensive. This process becomes selfreinforcing and can often be an important


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factor in social exclusion, especially for communities with limited access to financial

products, particularly in rural areas (Mohan, 2006).

(iii) Financial inclusion means the provision of affordable financial services, viz., access to

payments and remittance facilities, savings, loans and insurance services by the formal

financial system to those who tend to be excluded (Thorat, 2006).

(iv) The process of financial inclusion consists of seeking each household and offering their

inclusion in the banking system (Reddy, 2007).

(v) The process of ensuring access to financial services and timely and adequate credit where

needed vulnerable groups such as weaker sections and low income groups at an affordable

cost (The

Committee on Financial Inclusion, Chairman: Dr. C. Rangarajan, 2008).

The administrative framework for rural lending in India was provided by the Lead Bank

Scheme introduced in 1969, which was an important step towards implementation of the two-

fold objectives

of deposit mobilisation on an extensive scale and stepping up of lending to weaker sections of

the economy. Realising that the flow of credit to employment oriented sectors was

inadequate, the

priority sector guidelines were issued to the banks by the Reserve Bank in the late 1960s to

step up the flow of bank credit to agriculture, small-scale industry, self-employed, small

business and the weaker sections within these sectors.

The target for priority sector lending was gradually increased to

40 per cent of advances in the case of domestic banks (32 per cent, inclusive of export credit,

in the case of foreign banks) for specified priority sectors. Sub-targets under the priority

sector, along with

other guidelines including those relating to Government sponsored programmes, were used to

encourage the flow of credit to the identified vulnerable sections of the population such as

scheduled

castes, religious minorities and scheduled tribes. The Differential Rate of Interest (DRI)

Scheme was instituted in 1972 to provide credit at concessional rate to low income groups in

the country.


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Since the 1970s, the promotional aspects of banking policy have come into greater

prominence.

The major emphasis of the branch licensing policy during the 1970s and the 1980s was on

expansion of commercial bank branches in rural areas, resulting in a significant expansion of

bank branches and

decline in population per branch.

The branch expansion policy was designed, inter alia, as a tool for

reducing inter-regional disparities in banking development, deployment of credit and urban-

rural pattern of credit distribution. In order to encourage commercial banks and other

institutions to grant loans to various categories of small borrowers, the Reserve Bank

promoted the establishment of the Credit Guarantee Corporation of India in 1971 for

providing guarantees against the risk of default in repayment. The scheme, however, was

subsequently discontinued.

The National Bank for Agriculture and Rural Development (NABARD) was set up in 1982

mainly to provide refinance to the banks extending credit to agriculture. RRBs, which were

set up in 1975 to

cater, inter alia, to the credit requirements of the rural poor, have recently been restructured.

Recent initiatives by Reserve Bank of India

The period 1969 to 1991 saw a huge increase in the branch outreach in India as the average

population covered by a bank branch fell from 64,000 to 13,711. In 1991 along with reforms

for

liberalising and opening the economy, financial sector reform aimed at deregulation,

increased competition and strengthening the banking sector through recapitalisation and

adoption of

prudential measures. The Indian banking industry today is quite robust and strong to be able

to take on the challenges of achieving greater financial inclusion.

In the Annual Policy of the Reserve Bank for 2004-05, the Governor, Dr. Reddy observed

and I

quote -

There has been expansion, greater competition and diversification of ownership of banks


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leading to both enhanced efficiency and systemic resilience in the banking sector. However,

there are legitimate concerns in regard to the banking practices that tend to exclude rather

than

attract vast sections of population, in particular pensioners, self-employed and those

employed

in unorganised sector. While commercial considerations are no doubt important, the banks

have

been bestowed with several privileges, especially of seeking public deposits on a highly

leveraged basis, and consequently they should be obliged to provide banking services to all

segments of the population, on equitable basis.

Pursuant to this, the Reserve Bank has undertaken a number of measures with the objective of

attracting the financially excluded population into the structured financial system. In

November

2005, banks were advised to make available a basic banking no-frills account with low or

nil minimum balances as well as charges to expand the outreach of such accounts to vast

sections of

the population. Banks are required to make available all printed material used by retail

customers in the concerned regional language.

In order to ensure that persons belonging to low income group, both in urban and rural areas

do not encounter difficulties in opening bank accounts, the know your customer (KYC)

procedures for opening accounts has been simplified for those persons with balances not

exceeding Rs 50000/- (about GBP 600) and credits in the accounts not exceeding

Rs.100000/- (about GBP

1200) in a year.

The simplified procedure allows introduction by a customer on whom full KYC drill has been

followed.

Banks have been asked to consider introduction of a General purpose Credit Card (GCC)

facility up to Rs. 25000/- at their rural and semi urban braches. The credit facility is in the

nature of revolving credit entitling the holder to withdraw upto 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.


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A simplified mechanism for one-time settlement of overdue loans up to Rs.25,000/- has been

suggested for adoption. Banks have been specifically advised that borrowers with loans

settled under the one time settlement scheme will be eligible to re-access the formal financial

system for fresh credit.

In January 2006, banks were permitted to utilise the services of non-governmental

organisations (NGOs/SHGs), micro-finance institutions 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

the location of the BC and allows branchless banking. Other measures include setting up

pilots for credit counselling and financial education. A multilingual website in 13 Indian

languages on all matters concerning banking and the common person has been launched by

the Reserve Bank on 18 June 2007.

Indian Scenario

In India, growth with equity has been the central objective right from the inception of the

planning process. Accordingly, over the years, initiatives have been taken continuously by

the Government and the Reserve Bank to address the issue of inclusive growth.

Notwithstanding the rapid increase in overall GDP and per capita income in recent years, a

significant proportion of the population in both rural and urban areas still experiences

difficulties in accessing the formal

financial system.

Recent concerns have arisen from an inadequate reduction in poverty levels,

sectoral divergences in growth and employment opportunities and tardy improvement in

other

social indicators, despite higher economic growth. The Eleventh Five Year Plan, therefore,

reemphasised

the need for a more inclusive growth in order to ensure that the per capita income

growth is more broad-based. The farming, micro, small and medium enterprises have

immense


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potential to play a critical role in achieving the objective of faster and more inclusive growth

as

these sectors contribute to output and employment generation in a significant way with

capacity

to expand regionally diversified production and generating widely dispersed off-farm

employment.

Bringing the larger population within the structured and organised financial system

has explicitly been on the agenda of the Reserve Bank since 2005 (Mohan, 2006). While

several

central banks focus solely on inflation, many in developed and emerging economies alike,

including India, also focus on growth.

There is currently a perception that there are a large

number of people, potential entrepreneurs, small enterprises and others, who may not have

adequate access to the financial sector, which could lead to their marginalisation and denial

of

opportunity to grow and prosper.

The Reserve Bank has, therefore, introduced various new

measures to encourage the expansion of financial coverage in the country. Financial inclusion

is

considered essential for fostering economic growth in a more inclusive fashion.

In a fast growing economy, an important issue is how to sustain and diversify growth so that

the

risk to growth process is diversified across sectors. It is in this context that the search for

potential sources of incremental growth, i.e., sectors that have difficulty in accessing financial

services, assumes importance. Therefore, including such segments or sectors would, on the

one

hand, unleash their productive capacities, and on the other, would augment domestic demand

on

a sustainable basis driven by income and consumption growth from such sectors. This would

also


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have strong inter-sectoral linkages.

Bank nationalization in India marked a paradigm shift in the

focus of banking as it was intended to shift the focus from class banking to mass banking.

The

rationale for creating Regional Rural Banks was also to take the banking services to poor

people.

The branches of commercial banks and the RRBs have increased from 8321 in the year 1969

to

68,282 branches as at the end of March 2005.

The average population per branch office has

decreased from 64,000 to 16,000 during the same period. However, there are certain

underbanked

states such as Bihar, Orissa, Rajasthan, Uttar Pradesh, Chattisgarh, Jharkhand, West

Bengal and a large number of North-Eastern states, where the average population per branch

office continues to be quite high compared to the national average.

As you would be aware, the

new branch authorization policy of Reserve Bank encourages banks to open branches in these

under banked states and the under banked areas in other states. The new policy also places a

lot

of emphasis on the efforts made by the Bank to achieve, inter alia, financial inclusion and

other

policy objectives. One of the benchmarks employed to assess the degree of reach of financial

services to the population of the country, is the quantum of deposit accounts (current and

savings) held as a ratio to the adult population. In the Indian context, taking into account the

Census of 2001 (ignoring the incremental growth of population thereafter), the ratio of

deposit

accounts (data available as on March 31, 2004) to the total adult population was only 59%

(details furnished in the table). Within the country, there is a wide variation across states. For

instance, the ratio for the state of Kerala is as high as 89% while Bihar is marked by a low

coverage of 33%. In the North Eastern States like Nagaland and Manipur, the coverage was a

meager 21% and 27%, respectively.


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The Northern Region, comprising the states of Haryana,

Chandigarh and Delhi, has a high coverage ratio of 84%. Compared to the developed world,

the

coverage of our financial services is quite low. For instance, as per a recent survey

commissioned

by British Bankers' Association, 92 to 94% of the population of UK has either current or

savings

bank account.

Steps towards financial inclusion

In the context of initiatives taken for extending banking services to the small man, the mode

of

financial sector development until 1980s was characterized by

a hugely expanded bank branch and cooperative network and new organizational forms

like RRBs;

a greater focus on credit rather than other financial services like savings and insurance,

although the banks and cooperatives did provide deposit facilities;

lending targets directed at a range of priority sectors such as agriculture, weaker

sections of the population, etc;

interest rate ceilings;

significant government subsidies channeled through the banks and cooperatives, as well

as through related government programmes;

a dominant perspective that finance for rural and poor people was a social obligation and

not a potential business opportunity.

It is absolutely beyond any doubt that the financial access to masses has significantly

improved

in the last three and a half decades. But the basic question is, has that been good enough. As I

mentioned earlier, the quantum of deposit accounts (current and savings) held as a ratio to the

adult population has not been uniformly encouraging.

There is a tremendous scope for financial

coverage if we have to improve the standards of life of those deprived people.


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With a view to enhancing the financial inclusion, as a proactive measure, the RBI in its

Annual

Policy Statement for the year 2005-06, while recognizing the concerns in regard to the

banking

practices that tend to exclude rather than attract vast sections of population, urged banks to

review their existing practices to align them with the objective of financial inclusion.

In the Mid

Term Review of the Policy (2005-06), RBI exhorted the banks, with a view to achieving

greater

financial inclusion, to make available a basic banking no frills account either with nil or

very

minimum balances as well as charges that would make such accounts accessible to vast

sections

of the population. The nature and number of transactions in such accounts would be restricted

and made known to customers in advance in a transparent manner. All banks are urged to

give

wide publicity to the facility of such no frills account so as to ensure greater financial

inclusion.

Further, in order to ensure that persons belonging to low income group both in urban and

rural

areas do not face difficulty in opening the bank accounts due to the procedural hassles, the

KYC

procedure for opening accounts has been simplified for those persons who intend to keep

balances not exceeding rupees fifty thousand (Rs. 50,000/-) in all their accounts taken

together

and the total credit in all the accounts taken together is not expected to exceed rupees one

lakh

(Rs.1,00,000/-) in a year.

POLICY INITIATIVE FOR FINANCIAL INCLUSION

Nationalization of banks

Establishments of Regional Rural Banks


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Prescription of priority sector targets

Lending to weaker sectors at concession

Introduction of lead bank scheme

Branch licensing norms with focus on rural/ semi urban branches

No frill accounts

Know your customer norms

General credit card facility

RESEARCH METHODOLOGY

Working / Methodology followed by respective Lead Branches of B.O.B.

1) RAE BAREILLY (LDM: Mr. J.N.Singh)

Method:

In step one, 100% financial inclusion done

Teams made at village level

Teams are told about the villages and number of families

Teams go to every village and enquire about account holding in any institution

Teams enquire about the family members, their work and income

Step two will be total financial inclusion

We will find out the total income

What are the needs

Where and how much is the expected expenditure

If there are savings, then how much

Tell them and guide them to invest judiciously

Guide them, as to how improve wellness and savings

We will conduct counseling

After all the consideration, they are given the estimate for all the things and then

they are offered loan

Women empowerment:


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Women are trained to do the work

Eg. Handicraft, homemade items, etc.

Results of women empowerment:

Repaid loans of private money lenders (seths and sahukars) from the

revenue generated

Liquor banned in many villages

Problems:

Village people do not tell about their accounts

If they work, they do not disclose it

If they have rented their home or land, they do not tell that

They just say, no income to deposit into the bank

2) SULTANPUR (LDM: Mr. H.P.Shukla)

Method:

Basic objective is to join every family with the bank

Involved private agencies to accomplish the task

To identify the potential and then give loan to families

Problems:

Lack of human resource with the bank so that the bank staff cannot go to the field

to mobilize more customers

Private company which is contracted is doing the job for its own benefit

International Experiences in Financial

Inclusion

While India has followed a multi-pronged strategy to promote financial inclusion, the global

experience also suggests that countries that allow diversity in approaches are more likely to

achieve better results. Diversity in approaches not only serves better the diverse demand for

financial services, but also reduces systemic risks, increases competition, and improves

efficiency. Many other countries have also followed more or less a similar


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approach.

An interesting feature which emerges from the international practice is that the more

developed a society is, the greater is the thrust on empowerment of the common person and

low-income groups. The problem of financial exclusion is found even in several advanced

countries. These countries have also initiated specific measures to bring financially excluded

people within the fold of the banking system. The measures initiated by governments of

developed as well as developing/less developed countries have been

discussed below.

United Kingdom

The Government of UK has been tackling financial exclusion since 1997. For example, in

1999, the Social Exclusion Units Policy Action Team 14 (PAT 14) recommended the

creation of basic bank accounts. The Government worked successfully with the banks to

bring these products to the market, and there are now basic bank accounts available from 17

providers. Since 2006, the Financial Inclusion Fund (FIF) has provided Growth Funding of

42 million

for third sector lenders. The Fund provides capital for lending to financially excluded

customers, with revenue support to meet costs.

A Post Office Card Account (POCA) has been created for those who are unable or unwilling

to access a basic bank account. This enables cash withdrawals at post offices but does not

offer an overdraft facility. The Government is also piloting Savings Gateways schemes in

which those on low-income employment will receive 1 from the state for every 1 they

invested, up to a maximum of 25 per annum.

The forthcoming Child Trust Fund (CTF), which will offer all households a fixed sum for

long-term investment at the birth of their children, is hoped to be most beneficial in lower

income households.

Initiatives to promote financial inclusion have not been restricted to just the urban centres. As

part of the Commission for Rural Communities (CRC) workto tackle disadvantage in rural


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areas, some good and enterprising practices in rural financial inclusion includes the

NatWests mobile bank, Cumbrian Debt Rescue and Financial Advice, Ely Citizens Advice

Bureau, Farm Crisis Network

and many others.

United States of America

A civil rights law, namely Community Reinvestment Act (CRA) in the United States

prohibits discrimination by banks against low and moderate income neighbourhoods. The

CRA imposes an affirmative and continuing obligation on banks to serve the needs for credit

and banking services of all the communities in which they are chartered.

The US Community Development Financial Institution (CDFI) Fund usesFederal resources to

invest in and build the capacity of CDFIs to provide capital and financial services to under-

served people and communities. The Federal Reserve Systems recently redesigned financial

education website, FederalReserveEducation.org, is dovetailed to increase the use of Federal

Reserve educational materials and promote financial education in the classroom. It provides

easy access to free educational materials, a resource

search engine for teachers, and games for various ages and knowledge levels.

Brazil

In 1997, banks and regulators in Brazil created a network of "correspondents bancarios" or

"banking correspondents", small outlets with extended working hours that offered basic

banking services. At that time, 40 out of the 68 million economically active Brazilians had no

access to formal financial services. Today, an additional 4 million have begun using banks for

the first

time through 27,000 banking correspondents. Under this arrangement, banks are permitted to

appoint a wide variety of institutions/entities as correspondents/ agents, which are easily

accessible to people, e.g., drug stores, petrol pumps, super markets, small stores in

neighbourhood, post offices and even lottery shops. The Brazilian model is largely

technology driven. The agents use kiosks or automated teller machines to accept payment,

open accounts, without a cheque book facility, take small deposits,

provide micro credits, and sell savings bonds and insurance.


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South Africa

The Financial Sector Charter in South Africa led to the establishment of the Mzansi

account; a National no frills Bank Account (NBA). In its first year of operation itself, it

garnered nearly 2 million accounts. Access to the affordable card based product is provided

through a combination of existing service point outlets and physical branch outlets including

own and shared ATMs, Post Offices, and merchant PoS devices. There is a money transfer

service associated with the Mzansi account which makes it possible to transfer money

between un-banked/banked customers from any participating bank

or South Africa Post Office

. All banks in South Africa are participants in this

unique venture. As it is a technology intensive product, the transaction costs are very low and

thus, what was thought to be as too costly to serve areasand people has become an

attractive proposition.

HOW GOVERNMENT AND RBI CAN BUILD ON EXISTING BANKING

STRUCTURE TO PROVIDE FINANCIAL SERVICES TO ALL

Banking system is like a team, which constitutes from various entities which are different in

nature, form, structure and its working but together they makes system in which they

efficiently work for a common motive.

SHG BANK LINKAGE PROGRAM

The SHG-Bank Linkage program can be regarded as the most powerful initiative since

independence for providing financial services to the poor in a sustainable manner. The

program has been growing rapidly YOY basis. Currently, 10 million SHGs are working

across the country with a credit base of Rs. 100000 Crore. But this is not enough to reach the

entire mass. This number needs to be increased substantially.


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However, the spread of the SHG- Bank linkage program in different regions has been uneven

with southern states accounting for the major chunk of credit linkage. Many states with high

incidence of poverty have shown poor performance under the program. NABARD has

identified 13 states with large population of the poor, but exhibiting low performance in

implementation of the programme. The ongoing efforts of NABARD to upscale the

programme need to be given a fresh impetus. NGOs have played a commendable role in

promoting SHGs and linking them with banks.

As of now, SHGs are operating as thrift and credit groups. They may evolve to a higher level

of commercial enterprise in future. Hence, it becomes critical to examine the prospect of

providing a simplified legal status to the SHG

MICRO FINANCE INSTITUTIONS (MFIs)

From the late 1980s, the emergence of the Grameen Bank in Bangladesh drew attention to the

role of microcredit as a source of finance for micro-entrepreneurs. Lack of access to credit

was seen as a binding constraint on the economic activities of the poor.


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Microfinance Institutions (MFIs) are those, which provide thrift, credit, and other financial

services and products of very small amounts mainly to the poor in rural, semi-urban or urban

areas for enabling them to raise their income level and improve living standards. Lately, the

potential of MFIs as promising institutions to meet the demands of the poor has been realized.


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The closer proximity with the people at grassroots level and the mix of offering right

products at right price based on the actual needs of the masses makes their role very

important in deepening financial inclusion.

However, there is exigency to upscale their outreach. In India, out of some 400 million poor

workers, less than 20 per cent have been linked with financial services provided by MFIs.

Steps needed to promote MFIs

One of the ways of expanding the successful operation of microfinance institutions in the

informal sector is through strengthened linkages with their formal sector counterparts.

to bring down

the rates of interest on microcredit to ensure the micro finance movement gets further impetus

on comparative strength of each sector. For example, informal sector microfinance

institutions have comparative advantage in terms of small transaction cost achieved through

adaptability and flexibility of operations.

COOPERATIVE CREDIT INSTITUTIONS

Rural credit cooperatives in India were originally envisaged as a mechanism for pooling the

resources of people with small means and providing them with access to different financial

services. It has served as an effective institution for increasing productivity, providing food

security, generating employment opportunities in rural areas and ensuring social and

economic justice to the poor and vulnerable sections.

Despite the phenomenal outreach and volume of operations, the health of a very large

proportion of these credit cooperatives has deteriorated significantly. Various problems faced

by these institutions are:


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F i n a n c i a l I n c l u s i o n P a g e | 32RURAL PLANNING AND CREDIT

DEPARTMENT, RESERVE BANK OF INDIA, NEW DELHI


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Taking all these facts in mind, there is an urgent need to address the structural deficiencies of

these institutions in order to make them play an effective role in meeting the financial

inclusion goal.

RRBs

RRBs, post-merger, represent a powerful instrument for financial inclusion. RRBs account

for 37% of total rural offices of all scheduled commercial banks and 91% of their workforce

is posted in rural and semi-urban areas. They account for 31% of deposit accounts and 37%

of loan accounts in rural areas. RRBs have a large presence in regions marked by financial

exclusion of high order.

RRBs are, thus, the best suited vehicles to widen and deepen the process of financial

inclusion. However, they need to be oriented suitably to serve the rural population with a

specific mandate to achieve financial inclusion. It is hoped that recent regulatory changes and

fresh impetus provided by the regulator will help in making RRBs front institution in

achieving the target of reaching out to financially excluded people.

THE BUSINESS CORRESPONDENT MODEL

In January 2006, the Reserve bank permitted banks to utilize the services of non-government

organizations (NGOs/SHGs), micro-finance institutions and other rural organizations as

intermediaries in providing financial and banking services through the use of business

facilitator (BF) and business correspondent models(BC). 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.

Banks are also entering into agreement with Indian Postal Authority for using the enormous

network of post offices as business correspondents for increasing their outreach and

leveraging the postmans intimate knowledge of the local population and trust reposed in

him. The intention behind the model is to promote the business of banking with low capital

cost by enabling outsourcing of rural business to agents on a commission basis.

Recent guidelines issued by RBI to ensure adequate supervision over operations of BCs:

distance between the area of operation of a BC and the base branch should not exceed

30 km in rural, semi-urban and urban areas.

F i n a n c i a l I n c l u s i o n P a g e | 33RURAL PLANNING AND CREDIT

DEPARTMENT, RESERVE BANK OF INDIA, NEW DELHI


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Initiatives needed to be undertaken to promote BC model

knowledge to financial products that are needed locally.

phone kiosks or kirana shops as businesscorrespondents to deliver products of large financial institutions.

serve to extend financial services.

ROLE OF TECHNOLOGY IN FINANCIAL INCLUSION

According to recent Boston Consulting Group report, with cost of funds today at 9%,

provision for bad debts at 10% and cost of operation and transaction at 13% for poorcustomers in far flung areas, banking for the poor by formal sector becomes unviable. The

key role the technology is expected to play is to reduce the last two components drastically.

Unfortunately, public sector banks (PSBs), which account for 70% of assets, have been slow

in making use of modern technology to bring down transaction costs.

How technology can lower operating costs as well as lending rates?

Consequently, communication technology could play an important role in bridging the last

miles between the customer and the provider thus facilitating faster transactions.

entering in the telecom sector. Banks could leverage the network for expanding operations,

reducing costs and increase reliability of their operations.

Banking can become the most promising front end technology for facilitating financial

inclusion in India. As mobile phones have reached out to segments and geographies but notyet penetrated by banking sector, this may be one of the most preferred choices for banks for

spreading their network in unbanked areas.

However, banks need to consider certain facts before leveraging technology to bring

more and more population under the net of financial inclusion


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of potential beneficiaries to use the technology


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13.00%0.00%10.00%20.00%

30.00%40.00%50.00%

Check in accountsLife InsuranceNon-Life InsuranceCredit CardATM + Debit

CardPRESENT LEVEL OF ACCESS TO VARIOUS FIANANCIAL SERVICES

PRESENT STATUS OF FINANCIAL INCLUSION IN THE COUNTRY

A GLIMPSE OF EXTENT OF FINANCIAL INCLUSION IN THE COUNTRY

-Frill Accounts28.23 million (as on Dec. 31, 2008)

31,727 constituting 39.7% of total bank branches (as

of June. 31, 2009)

44,857 (as on May 31, 2009)

4,70,237 (as on May 31, 2009)

167.09 million (as on May 31, 2009)

76 million (Source: CMIE publication 2007-08)

403 million (as on Apr.30, 2009) out of which 187 million

(46%) do not have a bank account (Source: Cellular Operators Association of India)


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POPULATION PER BANK BRANCH (SCHEDULED COMMERCIAL BANKS)

POPULATION (IN THOUSAND)

YEARS

(ENDING

MARCH) End

March

Rural Urban Total

1969 82 33 63

1981 20 17 19

1991 14 16 14

2001 16 15 16

2007 17 13 16

INTERPRETATION

Rishu Agarwal

Strategies and Approach

At the regional level, a forum called the State Level Bankers Committee (SLBC) has been in

operation since nationalisation. SLBC is a group of bankers and government officials and is

convened by a bank having major presence in the State called the SLBC convenor bank. It

meets

quarterly and reviews the banking developments in the State. At the district level, the district

level committee functions; it is headed by the District Magistrare and is convened by a

designated lead bank for the district. In early 2006, one district in each State was identified by

the SLBC for 100 per cent financial inclusion. So far, SLBCs have reported having achieved

100 per cent financial inclusion in the Union Territory of Puducherry and in some districts in

Haryana, Himachal Pradesh, Karnataka, Kerala and Punjab & Uttar Pradesh. Reserve Bank

proposes to undertake an evaluation of the progress made in these districts by an independent

external agency to draw lessons for further action in this regard.

In the districts taken up for 100% financial inclusion, surveys were conducted using various

data

base such as electoral rolls, public distribution system, or other household data, to identify

households without bank account and responsibility given to the banks in the area for

ensuring

that all those who wanted to have a bank account were provided with one by allocating the


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villages to the different banks. Mass media was deployed for creating awareness and

publicity.

The banks used different approaches to communicate the advantages of having a bank

account.

Bank staff or their agents who are usually local NGOs or village volunteers would contact the

people at their households. Ration card / Electoral ID cards of the families were taken for

fulfilling the simplified KYC norms. Photographs of all the persons who opened bank

accounts

were taken on the spot by a photographer accompanying the bank team. In most States, the

product used for launching the program for financial inclusion is the No frills accounts. In

one

State the farmers credit card or KCC is being used ensuring first to credit rather than

savings. In

other States no frills account was followed by small overdraft facility or a general purpose

revolving credit upto pre-specified limit. Recognizing the need for providing social security

to

vulnerable groups, in some cases in association with insurance companies, banks have

provided

innovative insurance policies at affordable cost covering life, disability and health cover.

Cooperative banks and regional rural banks being local level institutions are well suited for

achieving financial inclusion. These banks are being revived and strengthened with incentives

for

better governance. Being local institutions they are ideally suited for achieving FI.

Rishu Agarwal

The role of an efficient payments system for FI cannot be overstressed and we efforts are

being

made to bring about Improvements in the payments system especially in the relatively less

developed parts of the country.

Huge increase in No Frills Accounts

The outcome of the efforts made is reflected in the increase of 6 million new no frills bank

accounts opened between March 2006 and 2007. In view of their vast branch network (45000

rural and semi urban branches) public sector banks and the regional rural banks have been

able to


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scale up their efforts by merely leveraging on the existing capacity. FI is being viewed by

these

banks as a huge business opportunity in an overall environment that facilitates enterprise and

growth. It provides them a competitive advantage and defines a clear niche for their growth.

Use of intermediaries

One of the ways in which access to formal banking services has been provided very

successfully

since the early 90s is through the linkage of Self Help Groups (SHGs) with banks. SHGs are

groups of usually women who get together and pool their savings and give loans to members.

Usually there is a NGO that promotes and nurture these groups. National Bank for

Agriculture

and Rural Development has played a very significant role in supporting group formation,

linking

Rishu Agarwal

them with banks as also promoting best practices. The SHG is given loan against guarantee of

group members. The recovery experience has been very good and there are currently 2.6

million

SHGs linked to banks touching nearly 40 million households through its members. Banks

provide credit to such groups at reasonable rates of interest. However the size of loans is

quite

small and used mostly for consumption smoothening or very small businesses. In some

SHGs,

credit is provided for agricultural activities and other livelihoods and could be several times

the

deposits made by the SHG. Most of the SHGs have been linked to public sector banks in

view of

the latters dominant presence in the rural areas.

The foreign banks and private sector banks have approached the access issue through either

setting up relatively lower cost non bank companies for providing small value retail loans or

have partnered with micro finance institutions that provide financial services to the relatively

higher risk segments of the population. Microfinance has drawn attention to an entire sector

of

borrowers who had been previously poorly served by the formal financial sector - and MF

has


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demonstrated how to make lending to this sector a viable proposition. However the rates of

interest charged are quite high, typically 24 to 30 per cent, mainly on account of the high

transaction cost for the average loan size that can be quite small. Compared to the informal

sector, perhaps the rates are lower, but issues are raised whether these rates are affordable - in

the

sense whether they would leave any surplus in the hands of the borrowers and lead to higher

levels of living.

For commercial banks, the lower cost of funding, advantages of size and scale gives scope for

cross subsidization and their interest rates are more competitive compared to the MFIs, but

they

have not been as successful in dealing with the last mile issue. The partnering with SHGs and

MFIs with reasonable cost of funding by the banks has been seen as a more optimal approach

till

now.

As indicated earlier, a recent important regulatory measure is the permission given to banks

to

use post offices, cooperative societies, non government organisations set up as trusts or

societies,

as business correspondents (agents) for doing branchless banking after conducting due

diligence

on such intermediaries. Agency risk is sought to be minimised by using well respected local

organisations and use of IT solutions for tracking transactions in the bank accounts. Many

banks

are exploring the use of this model to increase their outreach and deliver doorstep banking

services at lower cost. The viability and scalability of the model would require some

flexibility in

charging of interest rates or services charges to cover costs.

Role of Government

State Governments can play a proactive role in facilitating FI. Issuing official identity

documents for opening accounts , creating awareness and involving district and block level

functionaries in the entire process, meeting cost of cards and other devices for pilots,

undertaking

financial literacy drives are some of the ways in which the State and district administration

have


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involved themselves.

India Post is also looking to diversify its activities and leverage on its huge network of post

Rishu Agarwal

offices, the postmans intimate knowledge of the local population and the enormous trust

reposed

in him. Banks are entering into agreements with India Post for using post offices as agents for

branchless banking.

FINANCIAL INCLUSION THROUGH IT

IT solutions forFinancial Inclusion

The use of IT solutions for providing banking facilities at doorstep holds the potential for

scalability of the FI initiatives. Pilot projects have been initiated using smart cards for

opening

bank accounts with bio metric identification. Link to mobile or hand held connectivity

devices

ensure that the transactions are recorded in the banks books on real time basis. Some State

Governments are routing social security payments as also payments under the National Rural

Employment Guarantee Scheme through such smart cards (see pictures below). The same

delivery channel can be used to provide other financial services like low cost remittances and

insurance. The use of IT also enables banks to handle the enormous increase in the volume of

transactions for millions of households for processing, credit scoring, credit record and follow

up.

Initiative of a State Government - pictures of technology at work

INTEGRA agent giving payment to the NREGA employees

Rishu Agarwal

Pensioners with Bio-metric cards line-up to receive payments

Rishu Agarwal

Biometric validation of Smart Card

Role of ICT in FI

To be able to ensure that the challenges of banking the unbanked are met effectively and

converted

into growing and sustainable business for banks, there is no alternative to adoption of ICT

solutions

on a very large scale and range. ICT solutions are required to capture customer details,

facilitate


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unique identification, ensure reliable and uninterrupted connectivity to remote areas and

across

multiple channels of delivery, offer multiple financial products (banking, insurance, capital

market)

through same delivery channel while ensuring consumer protection, develop comprehensive

and

reliable credit information system so essential for efficient credit delivery and credit pricing,

develop

appropriate products tailored to local needs and segments, provide customer education and

counseling , enable use of multi media and multi -language for dissemination of information

and

advice.

ICT for FI - RBI initiatives

I now turn to the specific initiatives of RBI in regard to ICT for Financial Inclusion. The very

first

initiative was emphasizing the use of IT solutions while adopting the agency or BC model for

financial inclusion. A paper placed on the RBI website has envisaged a scheme with RBI

support for

providing satellite connectivity for remote area branches. The reports of three working groups

set up

by RBI to consider support to RRBs and UCBs in computerizing their operations and adopt

IT

solutions for financial inclusion have been placed in public domain for comments. These

groups have

recommended that the IDRBT could offer interest free loans to UCBs and RRBs for adoption

of IT.

Based on comments and response RBI will be firming up these schemes. Recognizing the

Rishu Agarwal

penetration of mobile phones (including amongst the low income population) and the

enormous

opportunities they offer in extending the banking outreach. RBI had placed a paper on mobile

banking in the public domain and the guidelines are now being finalized. The NFS is able to

offer


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nationwide networking of ATMs and can facilitate banking transactions including

remittances

through ATMs linked to the NFS. Effective from April 1, 2009 a customer will be able to use

any

ATM (including other bank ATMs) to operate his /her account at no cost. Other initiatives

include

those aimed at ensuring quicker, safer currency and funds transfer. In fact RBI has put on its

web-site

yesterday an approach paper on rationalisation of service charges for usage of electronic

products,

which would facilitate easier movement of funds at lower costs

Electronic Benefit Payments

Recognising the several advantages of using bank accounts for disbursal of government

benefits,

many State Governments have decided to disburse NREGA payments social security benefits

electronically through no frills bank accounts and in some States with such accounts operated

through smart cards with biometric identification. A Committee set up by RBI examined the

various

models through which such payments can be made and has recommended a bank led model

with

sharing of costs between Government and banks. Appropriate support from the RBI or the

Financial

Inclusion Technology Fund could also be thought of in the initial stages. Such accounts that

have

been opened to receive government benefits/payments can become the base for a host of

other

financial services and facilitate the objective of financial inclusion.

Regulatory framework

The regulations relating to IT solutions for banking services in general and financial inclusion

in

particular relate to ensuring integrity of banking system and ensuring customer protection.

These

cover customer identification/authentication , customer confidentiality/ privacy, KYC/AML

issues, outsourcing, banks responsibility for their agents, ensuring interoperability and open


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standards, imaging standards and adherence to payments system regulations.

Role of Technology

Technology can play an important role in reducing operating cost of providing banking

services,

particularly in the rural and low income groups segments. The technology, if blended

appropriately with the right business model and policy, holds the key to extending affordable,

viable and sustainable access to finance for the population at large. There are three broad

types of

technologies that have been identified to drive the growth of financial services. These are (i)

propoor

new information and communication technology, primarily low-cost cell phones; (ii) ATMs

and other point of sales devices; and (iii) smart plastic card.

The centralised data processing system and the non-conventional methods based on computer

Rishu Agarwal

systems, which do not require uninterrupted electric supply and radio frequency network, can

significantly reduce the cost of extending financial services. There are a number of cases

where

banks have expanded the coverage of banking services to remote and un-banked areas with

affordable infrastructure, while keeping operating costs low with the use of appropriate

technology. Technology has the potential to lead to new delivery mechanisms and business

models. For instance, technology will allow branchless banking and establishment of new

partnerships between financial service providers and a range of other service providers that

was

not feasible before to provide services to clients in remote areas and low-population density

areas.

Mobile phone-based services are revolutionising micro-finance services in a number of

countries

(Asian Development Bank, 2007). Mobile banking (or mobile payment) is a term used for

performing balance checks, account transactions, payments, etc. via a mobile device such as a

mobile phone, PDA or other such device. Most of the mobile payment platforms fall into four

categories: (i) mobile banking enabling users to perform banking transactions using mobile

phone like, balance checks, fund transfers, bill payments;(ii) remote purchase; (iii) person to

person transfers; and (iv) point of sale, i.e., using phones to pay for goods at merchant

location.


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These services can be provided using various available connectivity technologies, each one of

which has its own pros and cons (Table 7.37). However, the extent to which technology will

be

integrated into the financial service industry at the low end will depend on supportive

government policies and the quality of the infrastructure, particularly in rural areas.

Rishu Agarwal

Different technologies have been successfully adopted in many countries to promote financial

inclusion .Banks in India have initiated pilot projects utilising smart cards/mobile technology

to

increase their outreach. Biometric methods for uniquely identifying customers are also being

increasingly adopted. Banks are also increasingly adopting technological solutions for

delivery

of credit at affordable price and to a wider section of the population. State Bank of India

(SBI)

initiated a project called the SBI Tiny Card Accounts (SBITCAs) recently in Aizwal. The

project

is a combination of no-frills account and BCs/BFs model. The SBITCAs are operated

through

new generation mobile phones based on near-field communication (NFC) technology,

enhanced

with fingerprint recognition software and attached to receipt printer. The card allows

activation

of transaction of funds for the purpose of micro-savings (SBI-tiny no-frills pre-paid account),

cash deposits and withdrawal, micro-credit (including KCCs, GCCs), money transfer

(accountto-

account within the system), micro-insurance, cashless payments to merchants, SHG

savingscum-

credit accounts and attendance systems, disbursements of Government benefits like the

national rural employment guarantee scheme, for equated monthly instalments (EMIs), utility

payments, coupons, vouchers and tickets, loyalty points, automatic fare collection systems,

portable and fixed positions for front-end devices (fully inter-operable).

Rishu Agarwal

Technology and Financial Inclusion


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In the Philippines, two cell phone companiesSmart and Globe Telecomsoffer innovative

cell

phone based facilities, also called electronic wallet, to transfer money, pay bills, and make

payments for purchases from stores, among other things, called Smart Money and G-Cash,

respectively. In February 2005, the Rural Bankers Association of the Philippines

Microenterprise

Access to Banking Services (RBAP-MABS) launched a project called Text-A-Payment

(TAP).

TAP is an innovative mobile technology product that uses the SMS technology of Globe

Telecom (powered by G-Cash) to pay for micro finance loan payments of borrowers. TAP

seeks

to bring in new and low cost technology tools to improve efficiency and outreach. Small

borrowers can utilise the service for payments of their micro-finance loans. The other

applications of TAP are remote deposit taking, cash withdrawal, international and domestic

remittances, purchases and bills payment.

In South Africa, banking institutions, together with mobile phone companies, have begun to

expand access to financial services targeting low-income customers with an interest-bearing

bank

account accessible through mobile phones, and debit card with which they can make

purchases at

retail outlets and deposit or withdraw money at ATMs. Customers can use their mobile

phones to

make person-to-person payments and transfer money.

Prodem, the first micro-finance organisation to create a chartered bank,BancoSol, in Bolivia

started Prodem Smart ATM, a smart card cum ATM recently. The smart card stores

customers

account balance every time the transaction is made using the card. This enables Prodem

Smart

ATM to operate even in the absence of internet connectivity, thereby, making it an ideal

instrument to extend financial services in many rural parts of Bolivia that lack the

technological

infrastructure for a wide-reaching, online network.

priyank fino

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