Financial inclusion


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Financial inclusion

  1. 1. Financial Inclusion :Perspective of Reserve Bank of India
  2. 2. Financial Inclusion (FI)Large segment of population remaining excluded fromformal payments system & financial marketswhen financial market developing & globalizing –Obvious market failure –Government & financial sector regulators creating enablingconditions for inclusive & affordable market
  3. 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 topayments system & deposit insurance
  4. 4. Financial Inclusion (FI) …• FI essential for inclusive growth which is necessary forsustainable overall economic growth –• In developed economies, focus is on small population –• In developing economies (India), focus is on majorityexcluded
  5. 5. • Types of Financial Exclusion :• (i) exclusion from payment system : nothaving access to bank accounts• (ii) exclusion from formal credit marketsleading to approaching informal/exploitative markets
  6. 6. Post-Nationalization (1969) :Expansion of branch networkto unbanked areas –Increased lending to agriculture,SSI, business –Recent trend : access to basic bankingservices
  7. 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 inNE and Eastern regions
  8. 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. 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. 10. Financial Inclusion (FI) … Reasons for Exclusion :• Remote, hilly & sparsely populated areas with poorinfrastruc-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. 11. Recent RBI Initiatives :• 1969-1991 : expansion of branch network– average population covered per branch reducedfrom 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 achieveglobal financial inclusion
  12. 12. Financial Inclusion (FI) …• Annual Policy Statement -2004-05 :– “..banks should be obliged to provide banking services to allsegments 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 locallanguage
  13. 13. • KYC principles simplified– to open accounts for customers in rural & urbanareas• 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 ratederegulated• One-Time Settlement (OTS)– for overdue loans up to Rs. 25000– Borrowers eligible (after OTS) for fresh credit
  14. 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 bankingCredit counselling & financial education – Pilots set up• April 2006 :– 1 district in each state identified by SLBC for 100% financialinclusion – 13 district identified in NER for FI – RBI evaluation ofprogress through an external agency
  15. 15. • June 2007 :– Multilingual website in 13 Indian languageslaunched by RBI providing information onbanking 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. 16. Financial Inclusion (FI) …• In identified districts : Survey conducted based on electoralrolls, public distribution system etc., to identify householdswith no bank accounts – Banks to open at least one accountper 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 smalloverdraft facility or GCCs with revolving credit up to aspecified limit• In association with insurance companies, banks providinginsurance cover for life, disability & health cover• SCBs & RRBs being revived/strengthened with incentives forbetter governance• Payments system being improved to cater to less developedparts of the country
  17. 17. Financial Inclusion (FI) … Result of RBI Initiatives• “No frills” accounts : 6 million new accounts added betweenMarch 2006 & 2007 – 45000 rural & semi-urban branches of RRBs& PSBs shown highest performance – FI now a big businessopportunity – Gives competitive advantage & growth• SHG-Bank linkage – Access to banking system provided thruSHGs (groups pooling savings & providing loans to members, aNGO nurturing) – NABARD supporting group formation, linkingwith banks, promoting best practices – Recovery excellent – 2.6million SHGs linked to banks touching 40 million households –SHGs given loans by banks against group guarantees – Rate ofinterest reasonable – Loan size small, mostly used forconsumption purposes/ small business, for agricultural activities –SHGs mostly linked to PSBs
  18. 18. Financial Inclusion (FI) …• Foreign & private banks : Access thru non bankcompanies providing small value retail loans or bypartnership with MFIs, now an excellent substitute offormal sector – Rate of interest charged very high (24% -30%) – Reasons being high transaction cost, small sizedloans – Better than usurious informal sector loans – Ratesaffordable ? Any surplus would be left for borrowers & scaleup 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 withreasonable cost of funding – Current approach now• Business Correspondents (BCs) : Post offices, co-operative societies, NGOs (trusts/societies) being used asBCs for branchless banking – Agency risk reduced thru localorganisations & IT solutions for tracking transactions – Doorstep banking at lower cost – Viability & scalabilitydependent on lower interest rate & service charges
  19. 19. Financial Inclusion (FI) …• IT Solutions : Essential for doorstep banking – Pilotprojects by SBI using smart cards for opening a/c with bio-metric identification – Link to mobile/ hand held connectivitydevices ensures transactions getting recorded in banks’books on real time basis – State governments makingpension & other payments under NREGS thru smart cards –Other financial services (low cost remittances, insurance)provided thru cards – IT solutions enable large transactionslike processing, credit scoring, credit record & follow up etc.• Role of Government : Proactive role by issuing identitycards for a/c opening, thru awareness campaigns by district/block level officials, meeting cost of cards, financial literacydrives – India Post being used as BCs• FM’s Budget Speech 2007-08 : 2 Funds : (i) FinancialInclusion Fund - developmental/promotional work (ii)Financial Inclusion Technology Fund – technologyadoption/innovation – Each Fund of $ 125 million
  20. 20. Financial Inclusion (FI) …• Recent Initiatives : Setting up of financial literacycenters – Credit counselling centers – National financialliteracy drive – Linkage with informal sources withsafeguards – IT solutions – Low cost remittance productsetc.• Committee for FI : Dr. C. Rangarajan’s (Chairman : PM’sEconomic Advisory Council) 10-Member CommitteeTOR : Pattern of exclusion from access to financial services– Region, gender & occupational variation – Constraints forvulnerable groups – Institutional constraints – Internationalexperience/ practices – Relevance/ applicability to India –Strategy to extend financial services to small/ marginalfarmers – Streamlining/ simplifying procedures – Reducetransaction costs – Transparent operations – Institutionalchanges to be introduced (FIs) – Monitoring mechanism toassess quality/ quantity of financial inclusion – Indicatorsfor assessing progress
  21. 21. Financial Education … Definition : Familiarity with/understanding of financialmarket products, rewards, risks & make informed decisions– Personal financial education & capability to take decisionsfor one’s well-being & avoid financial distress – Ability togrow, monitor, effectively use financial resources foreconomic security of self, family & business – Financialmarkets now very complex, asymmetry of information –Informed decision making very difficult Financial Education & RBI : Poverty, illiteracy & largesection of population out of formal financial set-up –Economic/ financial sector reforms have created higherdisposable income – New financial products in credit &investment side provided by financial intermediaries –Informed decision difficult – Those excluded form formalfinancial system need to be educated about banking & needfor relationship with banks
  22. 22. Financial Education … Project Financial Literacy : Disseminate informationabout central bank, general banking concepts to targetgroups (school/college children, women, rural/ urban poor,defence personnel, senior citizens) – 2 Modules : (1) Focuson 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 financialcounselling to avoid informal sector & debt trap – A fewbanks have started in rural/ semi-urban centers – Provideinformation about banks, financial management, repaymentobligations, avoiding indebtedness, rehabilitation ofdistressed – Knowledge Centers : Train farmers/ women –In May’ 06, SLBC convener banks advised to set up at leastone center in each district – Lead bank to set up more
  23. 23. Thank You