The document discusses financial inclusion in India from the perspective of the Reserve Bank of India. It notes that a large segment of the population remains excluded from the formal financial system. The RBI has taken various initiatives to promote financial inclusion through expanding access to banking services, simplified KYC norms, new credit products, and using business correspondents and information technology. However, regional disparities and exclusion of certain groups like small farmers and women remain challenges. The document advocates for further financial education initiatives to promote informed decision making among financially excluded populations.

1. Financial Inclusion :
Perspective of Reserve Bank of India

2. Financial Inclusion (FI)
Large segment of population remaining excluded from
formal payments system & financial markets
when financial market developing & globalizing –
Obvious market failure –
Government & financial sector regulators creating enabling
conditions for inclusive & affordable market

3. Indian Focus
• Economy Growth rate = 6% - 9%
• Growth primarily in services
• Growth potential in SME sector enormous –
• Limited access to savings, loans, remittance &
• insurance in rural/ unorganized sector
• Above services enlarge livelihood opportunity &
empowers poor –
• Empowerment aids socio-political stability –
• Financial inclusion provides formal identity, access to
payments system & deposit insurance

4. Financial Inclusion (FI) …
• FI essential for inclusive growth which is necessary for
sustainable overall economic growth –
• In developed economies, focus is on small population –
• In developing economies (India), focus is on majority
excluded

5. • Types of Financial Exclusion :
• (i) exclusion from payment system : not
having access to bank accounts
• (ii) exclusion from formal credit markets
leading to approaching informal/
exploitative markets

6. Post-Nationalization (1969) :
Expansion of branch network
to unbanked areas –
Increased lending to agriculture,
SSI, business –
Recent trend : access to basic banking
services

7. Measures of Financial Inclusion
• Common measure :
• % of adult population having bank a/c –
• By this standard,
59% have accounts – 41% unbanked –
In rural areas 39% covered,
60% in urban areas –
• Unbanked population highest in
NE and Eastern regions

8. Financial Inclusion (FI) …
• Exclusion from credit markets high :
– Number of loan a/cs 14% of adult population –
– Coverage 9.5% in rural & 14% in urban areas –
• Regional disparity large :
– 25% in Southern,
– 7% in NER,
– 8% in Eastern,
– 9% in Central region –
• Of 203 million households, 147 million in rural areas
– 89 million farmer households –
– 51% have no access to formal or informal credit –
– 73% have no access to formal credit –
– No data available for non-farm & urban households

9. • Sources of credit –
– Non-institutional from 70.8% (1971)
– reduced to 42.9%
– Post-1991 increased
 Who are excluded
• Marginal farmers
• – landless labour
• – oral lessees
• – self employed
• – unorganized sector
• – urban slum dwellers
• – migrants
• – ethnic minorities
• – socially excluded groups
• – senior citizens
• – women
• – NER,
• Eastern & Central regions most excluded

10. Financial Inclusion (FI) …
 Reasons for Exclusion :
• Remote, hilly & sparsely populated areas with poor
infrastruc-ture and difficult physical access
• Lack of awareness,
– low income, social exclusion, illiteracy
• Distance from bank branch,
– branch timings, cumbersome documentation/procedures,
– unsuitable products, language, staff attitude are common reasons –
Higher transaction cost
• Ease of availability of informal credit
• KYC – documentary proof of identity/ address

11. Recent RBI Initiatives :
• 1969-1991 : expansion of branch network
– average population covered per branch reduced
from 64000 to 13711
– liberalisation/opening of economy
– financial sector reforms
– Deregulation
– increased competition
– strengthening of banks through recapitalization
– prudential measures
– Indian banking now robust & able to achieve
global financial inclusion

12. Financial Inclusion (FI) …
• Annual Policy Statement -2004-05 :
– “..banks should be obliged to provide banking services to all
segments of population on equitable basis.”
• November 2005 : banks advised to provide basic banking
– “no frills” accounts with low or minimum balance/ charges
– expand banking outreach to larger sections of population
– printed material used by retail customers made available in local
language

13. • KYC principles simplified
– to open accounts for customers in rural & urban
areas
• General purpose Credit Card (GCC)
– facility up to Rs. 25000 at rural & urban branches
– Revolving credit
– Withdrawal up to limit sanctioned
– Based on household cash flows
– No security or collateral – Interest rate
deregulated
• One-Time Settlement (OTS)
– for overdue loans up to Rs. 25000
– Borrowers eligible (after OTS) for fresh credit

14. Financial Inclusion (FI) …
• January 2006 :
– Bank allowed to use services of NGOs,
– SHGs, micro finance institutions,
– civil society organisations as business facilitators/ correspondents
(BC) for extending banking services –
– BCs allowed to do “cash in-cash out” transactions at BC locations &
branchless banking
Credit counselling & financial education – Pilots set up
• April 2006 :
– 1 district in each state identified by SLBC for 100% financial
inclusion – 13 district identified in NER for FI – RBI evaluation of
progress through an external agency

15. • June 2007 :
– Multilingual website in 13 Indian languages
launched by RBI providing information on
banking services
• State/Regional Level :
– SLBC ( group of banks & government officials)
since nationalization – SLBC Convenor –
Quarterly review of banking developments
• District Level :
– DCC/DLRC meetings by District Commissioner

16. Financial Inclusion (FI) …
• In identified districts : Survey conducted based on electoral
rolls, public distribution system etc., to identify households
with no bank accounts – Banks to open at least one account
per house – Mass media deployed for awareness/ publicity –
Bank staff/ NGOs/ volunteers take ration cards/ Electoral ID/
photos for fulfilling KYC norms & opening accounts
• KCCs used for credit first, then savings – with small
overdraft facility or GCCs with revolving credit up to a
specified limit
• In association with insurance companies, banks providing
insurance cover for life, disability & health cover
• SCBs & RRBs being revived/strengthened with incentives for
better governance
• Payments system being improved to cater to less developed
parts of the country

17. Financial Inclusion (FI) …
 Result of RBI Initiatives
• “No frills” accounts : 6 million new accounts added between
March 2006 & 2007 – 45000 rural & semi-urban branches of RRBs
& PSBs shown highest performance – FI now a big business
opportunity – Gives competitive advantage & growth
• SHG-Bank linkage – Access to banking system provided thru
SHGs (groups pooling savings & providing loans to members, a
NGO nurturing) – NABARD supporting group formation, linking
with banks, promoting best practices – Recovery excellent – 2.6
million SHGs linked to banks touching 40 million households –
SHGs given loans by banks against group guarantees – Rate of
interest reasonable – Loan size small, mostly used for
consumption purposes/ small business, for agricultural activities –
SHGs mostly linked to PSBs

18. Financial Inclusion (FI) …
• Foreign & private banks : Access thru non bank
companies providing small value retail loans or by
partnership with MFIs, now an excellent substitute of
formal sector – Rate of interest charged very high (24% -
30%) – Reasons being high transaction cost, small sized
loans – Better than usurious informal sector loans – Rates
affordable ? Any surplus would be left for borrowers & scale
up their living standards ?
• PSBs advantaged with lower cost of funds, size, scale –
Cross subsidization of loans & lower rate of interest
• Solution = Partnering of banks with SHGs & MFIs with
reasonable cost of funding – Current approach now
• Business Correspondents (BCs) : Post offices, co-
operative societies, NGOs (trusts/societies) being used as
BCs for branchless banking – Agency risk reduced thru local
organisations & IT solutions for tracking transactions – Door
step banking at lower cost – Viability & scalability
dependent on lower interest rate & service charges

19. Financial Inclusion (FI) …
• IT Solutions : Essential for doorstep banking – Pilot
projects by SBI using smart cards for opening a/c with bio-
metric identification – Link to mobile/ hand held connectivity
devices ensures transactions getting recorded in banks’
books on real time basis – State governments making
pension & other payments under NREGS thru smart cards –
Other financial services (low cost remittances, insurance)
provided thru cards – IT solutions enable large transactions
like processing, credit scoring, credit record & follow up etc.
• Role of Government : Proactive role by issuing identity
cards for a/c opening, thru awareness campaigns by district/
block level officials, meeting cost of cards, financial literacy
drives – India Post being used as BCs
• FM’s Budget Speech 2007-08 : 2 Funds : (i) Financial
Inclusion Fund - developmental/promotional work (ii)
Financial Inclusion Technology Fund – technology
adoption/innovation – Each Fund of $ 125 million

20. Financial Inclusion (FI) …
• Recent Initiatives : Setting up of financial literacy
centers – Credit counselling centers – National financial
literacy drive – Linkage with informal sources with
safeguards – IT solutions – Low cost remittance products
etc.
• Committee for FI : Dr. C. Rangarajan’s (Chairman : PM’s
Economic Advisory Council) 10-Member Committee
TOR : Pattern of exclusion from access to financial services
– Region, gender & occupational variation – Constraints for
vulnerable groups – Institutional constraints – International
experience/ practices – Relevance/ applicability to India –
Strategy to extend financial services to small/ marginal
farmers – Streamlining/ simplifying procedures – Reduce
transaction costs – Transparent operations – Institutional
changes to be introduced (FIs) – Monitoring mechanism to
assess quality/ quantity of financial inclusion – Indicators
for assessing progress

21. Financial Education …
 Definition : Familiarity with/understanding of financial
market products, rewards, risks & make informed decisions
– Personal financial education & capability to take decisions
for one’s well-being & avoid financial distress – Ability to
grow, monitor, effectively use financial resources for
economic security of self, family & business – Financial
markets now very complex, asymmetry of information –
Informed decision making very difficult
 Financial Education & RBI : Poverty, illiteracy & large
section of population out of formal financial set-up –
Economic/ financial sector reforms have created higher
disposable income – New financial products in credit &
investment side provided by financial intermediaries –
Informed decision difficult – Those excluded form formal
financial system need to be educated about banking & need
for relationship with banks

22. Financial Education …
 Project Financial Literacy : Disseminate information
about central bank, general banking concepts to target
groups (school/college children, women, rural/ urban poor,
defence personnel, senior citizens) – 2 Modules : (1) Focus
on economy, RBI (2) General banking – Material in Hindi,
English, Regional language – Dissemination thru banks,
local govt. depts., schools, colleges, pamphlets, posters,
films, RBI Website (link for accessing in 13 Indian languages
 Credit Counselling Centers : Need for financial
counselling to avoid informal sector & debt trap – A few
banks have started in rural/ semi-urban centers – Provide
information about banks, financial management, repayment
obligations, avoiding indebtedness, rehabilitation of
distressed – Knowledge Centers : Train farmers/ women –
In May’ 06, SLBC convener banks advised to set up at least
one center in each district – Lead bank to set up more

23. Thank You