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Financial inclusion

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  • 1. COVER STORY MICROFINANCE SHG RURAL CREDIT KYC NO-FRILLS Rural Financial Inclusion Financial inclusion today is a buzz word for this relatively higher risk segment of the population. One interesting aspect that has been brought out by studies on policy makers. How has banks fared in this micro–lending in India is that microfinance is not the sole area realm? Executive editor N. Mohan features of operations of development institutions. While development two public sector banks, which have taken up is the ultimate aim, banks are in the field and with an eye on several programs to offer banking facilities to profit. This has been mainly because of RBI’s policy stipulations the unbanked population: – that banks are required to lend 40% to priority areas, which in banking lingo is priority sector lending and which includes agriculture, SMEs and government securities and microfinance is ccess to banking for the unbanked populace - largely not that risky as perceived as lending is often made to groups or rural and to some extent semi-urban - has been a through referrals and the experience has been that repayments are dominating issue for policy planners and the Reserve Bank of forthcoming in as much as 95% of the cases. While investments India. The central bank, in line with the importance given to in government securities earn interest rates of 6 to 7%, lending to financial inclusion, especially in the context of enhancing SHGs or MFIs can fetch interest in the range of 9% to 14%. agricultural output, has brought in several policy changes, the Banking Frontiers sought details of microfinance endeavors of major among them being the directive to banks to open as two leading public sector banks – Chennai-based Indian Bank many no-frills accounts as possible, simplication of the KYC and Mumbai-based Bank of India – which have major exposures procedures for the BPL (below poverty line) segment, providing in the segment. the full range of banking services through business facilitators or Rural development and agriculture have been the niche areas business correspondents in inaccessible rural areas and setting for Indian Bank, declares M.S. Sundara Rajan, chairman and up of CIBIL to make available credit histories of individuals and managing director of the bank. “Our total branch network of 1,584 small businesses with a view to lower the risk for banks. These includes 470 rural, 394 semi-urban, 393 urban and 327 metro measures actually increased the access to formal banking services branches across India. Of these, rural and semi-urban branches, through the use of intermediaries like self-help groups (SHGs) which mostly serve the rural masses, constitute 55% of the total and microfinance institutions (MFIs). Today, apart from NABARD number of branches. We have the lead bank responsibility in 14 and public sector banks, several private sector and foreign banks districts of south India. We have also sponsored three regional have accessed the microfinance market either directly or through rural banks (RRBs), having a network of 205 branches to serve SHGs or MFIs providing a spectrum of financial services ranging the rural masses in Andhra Pradesh, Tamil Nadu and the union from small value loans to several complex financial services to territory of Puducherry,” says Sundara Rajan. 12 BANKING FRONTIERS FEBRUARY 2009 Cover Story.indd 1 2/12/2009 6:49:57 PM
  • 2. COVER STORY MICROFINANCE SHG RURAL CREDIT KYC NO-FRILLS He informs that the bank’s an insurance scheme for the strategic plan for agriculture beneficiaries, the premium of lending focuses on direct which is Rs 200 per year. Of this lending to individual farmers, premium, Rs 100 is borne by SHGs and joint liability groups. the bank and Rs 100 by way of Agriculture credit portfolio of subsidy from the government. the bank has enlarged to Rs In the event of death of the 7,326 crore as of December 2008. insured person, the dependent The bank’s approach has been to will receive Rs 30,000 and finance small farmers, marginal in the case of accident, Rs farmers, tenant farmers, 75,000. In addition to these oral lessees, share croppers, benefits, the bank is offering agricultural laborers. The bank, free education for two children he says, offers timely and of a person, the cost of which adequate credit for short term has been pegged at Rs 2,400 A.P. Ghugal Sundara Rajan crop production purposes and per year.” extends loans at concessional The bank also extends credit rate of 7% interest under the interest subvention scheme of to micfo-finance institutions (MFIs). As of December 2008, it the government. The bank also extends financial assistance for has funded some 21 MFIs, which includes the leading MFIs of agri investment activities such as medium/long term loans for India like SKS Microfinance and Bandhan, accounting for a credit plantation and horticulture, land development, minor irrigation of Rs 192 crore. “We make a major distinction between SHGs and agri allied activities, loans for farm mechanization activities, and MFIs,” says Ghugal, adding “as in our experience, most of two-wheeler loans, home loans and loans for land purchase, a the funding advanced to SHGs is productive credit whereas in debt swap scheme called ‘Ryots Punarudharan Yojana’ to relieve the case of MFIs, the funds can be either productive credit or the farmers from the clutches of local money lenders. consumption credit. MFIs again charge higher rates of interest DEVELOPING THE SHG MOVEMENT Outlining the bank’s efforts in micro-lending, Sundara Rajan says the bank has been pioneer in developing SHG movement in the country by forming and credit linking SHGs in Dharmapuri district of Tamil Nadu way back in 1989. “Our micro finance portfolio has developed over years. More than 1.44 lakh women SHGs have been benefited, having a loan outstanding of Rs. 1,230.02 crore,” he added. Bank of India too, which has a substantially high microfinance rural banking portfolio, extends credit to SHGs. While there is no upward limit in funding SHGs, the bank extends funds above Rs 50,000 only to SHGs. “In funding others,” says A.P. Ghugal, general manager, priority sector department of the bank, “we apply the BPL criteria prescribed by the government. While individuals are technically eligible for financial assistance under micro-finance schemes, we would prefer to channel credit through SHGs in order to have a better impact.” The funding is available to mainly all productive activities, including farming and other priority sector and cottage industry. Ghugal says the bank’s interest rate for priority sector lending is the lowest among all the banks active in this sector - 9% per annum. “Even NABARD sanctions credit at the rate of 10.25%,” he says. As part of corporate policy, the bank is actively involved in financing SHGs working in tribal and backward areas. “As of now, we have funded some 1,79,000 SHGs in the country, accounting for credit worth Rs 464 crore,” said Ghugal. “Of these, as many as 1,12,000 are women SHGs, with loans worth of Rs 394 crore. An information Kiosk As part of the micro-credit program, we have also introduced BANKING FRONTIERS FEBRUARY 2009 13 Cover Story.indd 2 2/12/2009 6:50:00 PM
  • 3. COVER STORY MICROFINANCE SHG RURAL CREDIT KYC NO-FRILLS - sometimes as much as 13.5% - as these organizations have a commercial interest and they Low-cost ATM work on a for-profit basis.” Vortex Engineering is a pioneer the total cost of ownership in the country in developing a of an ATM, especially in NO-FRILLS ACCOUNTS low-cost all-purpose ATM, for rural areas. The problem What has been the two rural areas. Vijay Babu, CEO was that not only were ATMs banks’ role in opening no-frills of the Chennai-based firm, in expensive but also consuming accounts? discussion with N. Mohan: a lot of power which was a Ghugal says in the last two problem especially in rural years Bank of India has opened What are the major products areas. They also require an AC some 16 lakh no-frills accounts, and services are offered by to operate. Existing ATMs can of which 7.5 lakh such accounts Vortex Engineering? only dispense fresh, crisp notes. were opened in the last nine Vortex has developed a So, we, along with IIT-Madras, months. “As a lead bank, we completely indigenous low- set out to develop an ATM for have responsibility for 48 cost ATM - Vortex Gramateller rural India with none of the districts in the country. Of these, - in collaboration with IIT-Madras. It has been above constraints. we have achieved total financial done keeping in mind the unique requirements inclusion in two districts - Raigad of the rural and semi-urban markets in India. Research reports suggest that mobiles are in Maharashtra and Keonjhar in It has many features that are not found in the most desired medium for accomplishing Orissa. In these two districts, other ATMs - like low power consumption of financial inclusion. How do you see the role of all the residents have a bank less than 50W, no need for air-conditioning, mobile telephony in micro-finance efforts? account. We are nearing 100% built-in battery backup for up to four hours of Mobiles will further enable low-cost banking financial inclusion in two other operation even under power failure, capability access to customers. With rapid growth of districts and our roadmap is to to run on solar power, ability to accept even mobile users, even among the BOP customers, have 100% financial inclusion soiled notes for dispensing and solutions using mobiles will enable in all the 48 districts where we finger print authentication as a easier banking access to them. are lead bank.” standard feature. I consider the Mobiles can offer various services Sundara Rajan says Indian low-cost POS devices, mobile phone like balance enquiry, bill payment Bank has been instrumental in banking and the low-cost ATMs as and cash less transactions but will the introduction of financial the most important technology still require an ATM for reliable cash inclusion concept in the innovations to offer affordable and dispensing. Cash withdrawal, either country. “Way back in 2005, reliable banking services to the from ones savings account or as loan we launched National Pilot BOP customers. or credit, is the most important Project on Financial Inclusion banking transaction required. We Project (NPPFI) in the union How could you bring in cost saving? have demonstrated a card-less cash territory of Puducherry. It is The idea for the product withdrawal using mobile phone and now implemented by various originated from IIT-Madras, when our ATM in partnership with mChek. banks all over the country. With the noted technology expert, In this model, the bank need not issue the cooperation of all bankers, Dr Ashok Jhunjhunwala, was ATM cards to customers and instead 100% financial inclusion has approached by various leading let them use their mobile phones to been achieved in the union banks in India to find a way to reduce withdraw money from ATM. territory. Subsequently, we repeated this in Cuddalore district of Tamil Nadu and Kollam district of Kerala. We have completed 100% coverage in MANAGING KYC 12 of our lead districts,” says Sundara Rajan. How do the banks overcome the complex KYC issue? The bank has opened nearly 15 lakh no frills accounts so far, Sundara Rajan says KYC norms have been relaxed by the Reserve of which 4 lakh accounts were opened in the last financial year Bank of India for low income group members. The customer alone. For these account holders, ATM cards are issued at the identification and proof of their location are the key components discretion of the branch managers. No-frills account holders are of the simplified KYC norms. “For establishing a person’s identity also entitled to SB-overdraft of up to Rs 50,000 for consumption and proof of his location, we can accept ration card, voter’s ID needs and general credit cards of up to Rs 25,000 to self-employed card, driving license, PAN card and other specified documents. In persons. More than 50,000 persons have been benefited under Dharavi slums in Mumbai, which is concentrated with migrant these schemes. population, which has no documentary evidences, certification 14 BANKING FRONTIERS FEBRUARY 2009 Cover Story.indd 3 2/12/2009 6:50:01 PM
  • 4. COVER STORY MICROFINANCE SHG RURAL CREDIT KYC NO-FRILLS Members of an SHG participating in a discussion sense. First is cost of transportation for an account holder to come to the branch and carry out transactions. Second is loss of a day’s wages in case he or she has to travel to the bank branch. Third is possible incidental but avoidable expenses. In our efforts to make our financial inclusion program a success, we decided to eliminate these and make banking available at the doorsteps of the customers in the far-fetched rural areas. We are leveraging technology for this purpose.” The bank adopted a smartcard-based system developed by Integra Microsystems for the purpose. These smartcards are biometrics-enabled, have 16–digit numbers and are capable of 10 functions. The bank has already issued nearly 41,000 smartcards in Raigad district alone, where it has accomplished 100% financial inclusion. The bank’s business correspondents go to from local administration is accepted.” the villages with handheld devices and carry out transactions. Ghugal says KYC is a major process in opening no-frills accounts, Through this, an account holder can withdraw cash, deposit cash especially in rural areas of the country. “We largely rely on business or cheque, receive pension or other remittances under the various facilitators or business correspondents for this. But, we ensure that government schemes, buy insurance or mutual fund – in short proper KYC is carried out as per norms prescribed by the RBI and practically all the banking transactions that hitherto required we take full responsibility in verifying the credentials and proof of his or her visiting a bank branch. What is more, he or she gets residence of the customers,” says he. a confirmation through an SMS about the transaction he had Do the two bankers think the concept of no-frills accounts completed, gets latest statement, etc. The device is also voice- performed as per expectations In terms of attracting customers enabled as the account holder can opt to get a voice message and them doing the transaction? immediately after completion of a transaction. Sundara Rajan says it has, at least partly. He admits: “However, Indian Bank too has adopted information technology in a the number of accounts in which the transactions taking place big way in its financial inclusion programs. Sundara Rajan says is low. People need to be educated and encouraged to operate the bank is planning several information and communication their accounts and save whatever little is possible. Similarly, SB- technology initiatives as alternative delivery channels for overdraft and general credit card facilities need to be extended to inclusive banking and for increasing outreach under financial more number of no-frills account holders. To increase the outreach inclusion and microfinance. There are 20 banking service centers with our financial products and services, various alternative functioning across India to extend financial / non-financial delivery channels are deployed by leveraging technology like services under financial inclusion, utilizing the internet facility, banking service centers, business facilitators, smart card banking, 12 rural internet kiosks serving sugarcane farmers for their credit biometric ATMs, etc.” and non-credit requirements and biometric smartcard banking (offline) in Cuddalore (Tamil Nadu), Dharavi (Mumbai) and IT AS ENABLER Kaligram (Kolkata). Bankers in general believe financial inclusion can be achieved by leveraging IT. The government is responsive as the 2007-2008 BRANCH BANKING budget had provided for the setting up of two funds for financial Indian Bank has also been into urban financial inclusion in inclusion – the Financial Inclusion Fund for Developmental a big way. Sundara Rajan says the bank’s exclusive Microsate and Promotional Interventions and the Financial Inclusion branch in Chetput, Chennai, which was opened in 2005, has Technology Fund to meet cost of technology adoption of about been able to cover poor families in 1,400-odd slums in the city, $125 million each. touching the lives of more than one lakh poor households. “The Ghugal narrated constraints that the bank confronted while phenomenal outreach through the branch paved the way for extending banking facilities in rural and semi-urban areas: the bank to establish 13 more Microsate branches during 2007- “During our efforts to provide banking facilities in rural and 08 in major cities in India. So far, Rs 136.14 crores has been semi-urban areas, we have come to realize that there are three disbursed to more than 13,459 women SHGs / JLGs through major impediments that inhibit financial inclusion in the true these branches,” added Sundara Rajan. BANKING FRONTIERS FEBRUARY 2009 15 Cover Story.indd 4 2/12/2009 6:50:01 PM
  • 5. COVER STORY MICROFINANCE SHG RURAL CREDIT KYC NO-FRILLS The bank is planning to establish 13 more Microsate branches in tier II cities / towns in South India. SBI for a Cardless System Sundara Rajan cites the instance of Dharavi, the so-called largest slum in Asia. State Bank of India has been very swiped at the POS machine before “There was no banking facility in these innovative in the use of technology any transaction. All the accounts sprawling slums till February 2007. This for financial inclusion. The bank the bank opened across the slum is inhabited by thousands of migrant has now decided country following labourers from southern districts of Tamil to do away with the decision to Nadu who did not have bank accounts as smart cards and introduce the many of them could not produce proof instead rely on cardless system did of identity to banks. They were finding POS machines, not involve issue it difficult to send remittances from their which will have of smart cards. savings to their families residing in Tamil biometric details This has brought in Nadu. We came to their rescue by opening of account tremendous cost a branch with CBS facility and online ATM holders stored in savings for the in Dharavi in February 2007 to facilitate them, and which bank. According urban financial inclusion. So far, 14,726 will travel to to the bank, only persons have opened bank accounts at our villages where a miniscule of its Dharavi branch.” the customers no-frills account As a complementary link, Indian Bank can carry out holders left their has also opened a branch at Valliyur in transactions, villages at any Tirunelveli district of Tamil Nadu, from including receipt given point of where a large chunk of migrant labourers of payment of cash under social time. Most of the account holders has moved to Dharavi, to render necessary security schemes of the government accessed the bank to receive the financial services especially remittance by just recording their fingerprint. pension or the NREGS payment and facilities. In view of the good response, The bank feels this will drastically as such they do not require inter- one more offsite ATM centre has also been reduce cost of transactions and operability. In such a scenario, a opened in Dharavi. it is implementing the project business correspondent of the bank Dharavi also has some 114 across the country. The prevailing could go with the POS machine at SHGs formed in association system involved smart cards with periodic intervals to help them with reputed NGOs. Microfinance to the a magnetic strip that need to be draw the money. tune of Rs 10 lakhs has been granted during the current year. The SHGs, majority of them formed by women have taken up the business activities such as garment making, leather products, to distress sales. eatables, etc. In addition to Dharavi, the bank has implemented Adds he: “In addition, we also offer credit for such novel financial inclusion projects in Chennai and in Guntur district causes as improving health and sanitation in rural areas. Under of Andhra Pradesh. The bank has won the Skoch Challenger our Nirmal Gram Yojana scheme, rural inhabitants are offered award for its outstanding initiatives under financial inclusion loans for the construction of toilets. We undertake educational in Dharavi and Puducherry. programs in the villages highlighting how clean environment and Ghugal says Bank of India has not been into urban financial sanitation helps cut down suffering and expenses on account of inclusion. “We are not into this area as our focus is on rural and diseases. Some 35,000 toilet units have already been constructed semi-urban areas. Personally, I feel that urban financial inclusion under the scheme. Each family gets a loan of Rs 6,000, which has not taken off in the manner it is publicised about by can be repaid in easy installments over five years.” some banks.” Indian Bank’s agriculture credit portfolio has grown to Rs 7,326 crore as of December 2008. It is one of the few banks in RURAL FINANCE the country, which has consistently overreached the 40% and about agri-finance, Ghugal says Bank of India offers agri- 18% norm prescribed by RBI for priority sector and agriculture finance for various agriculture-related activities - farming, farm sector respectively. As of December 2008, the percentage products, purchase of cattle, purchase of tractors, horticulture, of priority sector and agriculture credit stood at 46.33% and poultry, plantation, dairying, etc. The finance is available for 19.18% respectively. traditional farming as well as high-tech. Some of the finance schemes have been helpful to farmers as they need not resort mohan@bankingfrontiers.com 16 BANKING FRONTIERS FEBRUARY 2009 Cover Story.indd 5 2/12/2009 6:50:02 PM