The document discusses how Indian financial markets have fared on social inclusion, environmental sustainability, and achieving the UN Sustainable Development Goals. It finds that while regulators have focused on growth and stability, inclusion remains limited with credit highly skewed to large borrowers. Efforts to expand access through business correspondents and microfinance have had mixed results. Agricultural lending also disproportionately excludes small and marginal farmers. The document also examines how financial markets have largely failed to support environmental sustainability, though priority sector lending for renewable energy is a start. It argues India must adopt standards like the Equator Principles and develop insurance to cope with increasing climate risks.

1. Assessing Indian financial markets on
social inclusion and environmental
sustainability
Shiladitya Chatterjee
National Seminar on Contemporary Issues in Financial Markets
Department of Commerce, Calcutta University
13 May 2016
1

2. Contents
I. Introduction
II. How have Indian financial markets fared on
financial inclusion?
III. How have financial markets served
sustainability?
IV. Conclusions

3. Introduction

4. Financial markets must serve social
objectives and not private profit alone
• Indian regulators have traditionally focused mainly on
the social objective of promoting growth and
macroeconomic stability
• But growth has been increasingly unequal in Asia and
India, calling for “inclusive growth”
• Financial markets constituting a critical segment of the
economy have been required therefore to support
social inclusion
—Genesis of concept of “financial inclusion”
• With climate change and deteriorating environment,
there are calls for financial markets to serve
environmental sustainability too

5. All three – growth and macro-stability; social
inclusion; and environmental sustainability –
are essential
5
• The three are often in conflict if pursued independently
• Pursuing growth alone has increased social inequity
• Social inclusion ignoring environment is unsustainable
• The Sustainable Development Goals recently adopted by
the international community therefore address all three

6. The SDGs - growth, inclusion and sustainability
GOAL 1. End poverty in all its forms everywhere
GOAL 2. End hunger, achieve food security and improved nutrition and promote sustainable agriculture
GOAL 3. Ensure healthy lives and promote well-being for all at all ages
GOAL 4. Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all
GOAL 5. Achieve gender equality and empower all women and girls
GOAL 6. Ensure availability and sustainable management of water and sanitation for all
GOAL 7. Ensure access to affordable, reliable, sustainable and modern energy for all
GOAL 8. Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all
GOAL 9. Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation
GOAL 10. Reduce inequality within and among countries
GOAL 11. Make cities and human settlements inclusive, safe, resilient and sustainable
GOAL 12. Ensure sustainable consumption and production patterns
GOAL 13. Take urgent action to combat climate change and its impacts
GOAL 14. Conserve and sustainably use the oceans, seas and marine resources for sustainable development
GOAL 15. Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably manage forests, combat
desertification, and halt and reverse land degradation and halt biodiversity loss
GOAL 16. Promote peaceful and inclusive societies for sustainable development, provide access to justice for all and build effective,
accountable and inclusive institutions at all levels
GOAL 17. Strengthen the means of implementation and revitalize the global partnership for sustainable development
6

7. How have Indian financial markets
fared on financial inclusion?

8. Financial inclusion – definitions and purpose
• Rangarajan Committee on Financial Inclusion (2008)
―Process of ensuring access to financial services; and
―Providing adequate credit where needed to vulnerable
groups such as weaker sections and low income groups at
affordable cost
• Raghuram Rajan Committee on Financial Sector
Reforms (2014)
—Broadening of financial services to those who do not have
access;
—Deepening of financial services for people who have minimal
financial services; and
—Promoting financial literacy and consumer protection for
clients to enable them make appropriate choices
• Latter definition has no special focus on poor and
vulnerable which is a flaw
8

9. Broadening access to credit - currently highly unequal
• In India, the top 20%
income earners, earn
44% of total GDP
• Access to credit is more
heavily skewed
• Large borrowers
comprise about 20% of
all borrowers but corner
90% of the total credit
• More equal access to
credit will help reduce
inequality in India
9
Source: RBI

10. Attempts to broaden access to credit: expansion of
banking through business correspondents (BCs)
• In recent years phenomenal
bank branch expansion has
occurred
• Mainly through BCs
• But 43% of accounts lie dormant
according to World Bank
• Deposits expanded, but remain
low by developing country
standards; and credit availed
even smaller
• Attempts to improve previous
approach being made through
Jan Dhan Yojana
―By combining account opening
with other services such as
Direct Benefit Transfer (DBT),
credit, pensions, insurance
―Through focus on financial
literacy
―Better remuneration for BCs
10
0
50000
100000
150000
200000
250000
300000
350000
400000
450000
1-Jan-10 1-Jan-11 1-Jan-12 1-Jan-13 1-Jan-14
Expansion in number of bank branches, total
and through BCs 2010-2014
BankingOutletsinVillages—Total BankingOutletsinVillages—BranchlessMode
0
50
100
150
200
250
300
350
1-Jan-10 1-Jan-11 1-Jan-12 1-Jan-13 1-Jan-14
Rs.billions
Deposit and credit expansion 2010-2014
Deposits (Rs. billion) OD facility availed in BSBDAs (Rs. billion)
Source: RBI quoted in Nair and Tanka, Inclusive Finance Report, Oxford
University Press, 2014

11. Deepening of access by poor and vulnerable:
the microfinance test
• Self help groups (SHGs) serve 63% of
microfinance clients
― But SHGs account for only 3.4% of total
agricultural credit
― There is wide variation in microfinance
penetration through SHGs in India
― Causes are
― High risk (and NPAs) despite group lending
― High transactions costs
― Poor capacities
― Greater role of SHGs needed with scaling up of
successful models
• Microfinance institutions (MFIs) serve 37% of
microfinance clients
― After Andhra microfinance crisis, MFIs being
blamed although only 11% of Andhra household
debt was from MFIs
— However, MFI model not sustainable as
— Their borrowing rates leave little margins
requiring high volumes and higher on-lending
rates
— Over-regulation may hurt industry even more
— Deposits can solve problem – Bandhan example
11
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
Lending₹billions
Credit to total agriculture and SHGs by SCBs, RRBs
and Cooperatives 2011-12
SHG Lending Total credit to agriculture
0
1
2
3
4
5
6
7
8
AndhraPradesh
Karnataka
Kerala
TamilNadu
Goa
WestBengal
Tripura
Himachal
Uttarakhand
Odisha
Maharashtra
Assam
Haryana
Rajasthan
Punjab
Sikkim
Bihar
Chattisgarh
Meghalaya
Jharkhand
Gujarat
NDelhi
MadhyaPradesh
Nagaland
UttarPradesh
Manipur
Arunachal
J&K
Mizoram
Microfinance Poverty Penetration Index (2014)
(MPPI=share of state in SHG clients/share in poor)
Source: RBI, Nair and Tankha (2014)

12. Expanding agricultural credit as a measure of
financial inclusion
• Share of agriculture in SCB lending
low (13%) and stagnating
• Share of marginal farmers in SCB
lending is low (30%) compared to
share in holdings (67%)
• Problem is of risk and high
transactions costs
• Risks can be tackled better by
specialized institutions (such as
RRBs and cooperatives)
— But lending by RRBs and
cooperatives to agriculture still
minor (33%)
— Vaidyanathan Committee
recommendations on cooperatives
not fully implemented
— Loan waiver has also affected health
• Costs can be lowered by
technology e.g. mobile banking –
but currently only 1% by volume
12
0
10000
20000
30000
40000
50000
60000
70000
2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15
₹Billion)
Non-food credit outstanding by scheduled
commercial banks total, and to agriculture
Total non-food credit
outstanding
Total credit outstanding
to agriculture
Source: RBI, Agricultural Census 2010-11

13. Financial inclusion through SME lending
• SME lending is small
compared to need
―Getting just 18% of total
lending to industry
—Although its share in industry
employments is about 75%
—Challenges of lending to the
“Bottom of the pyramid”
―Financiers not convinced of
viability
―Need capacity support to
develop viable business
models
―Infrastructure, policy and
institutional support needed
to expand SME sector
13
Source: RBI
Allocation of outstanding non-food credit
(March 2015)

14. Other important areas of financial
inclusion have had limited success too
• Credit limited for expanding opportunities for poor
—Education loans with state guarantees for poor students is minimal
• Insurance for poor inadequate
—No life insurance for poor
— In 2015 about 10% of population covered by life insurance, mainly non-
poor
—Health insurance for poor (RSBY) ineffective and insignificant
• Equity markets not inclusive
• Do not protect small investors
— Retail investors have significant share in capital market: 21% for NSE and
16% for BSE
— But mutual funds remain unimportant - 5% of BSE - although these
provide better protection
• Play only small role in inclusive financing
— Equity finance for SMEs needs to grow
—SME Exchanges (inaugurated in 2012) still insignificant

15. How have financial markets
served sustainability?

16. Short answer – not well at all
• Idea that financial markets have a role in promoting
environmental sustainability still to gain ground in
India
• Regulator – RBI has made only a beginning
• In 2015 it placed renewable energy under priority sector
lending
• Globally large strides are being made, however
• For example, the adoption of the Equator Principles

17. The “Equator Principles (EPs)”
• These principles are environment and social safeguard
standards established by the World Bank Group and the
Asian Development Bank
• In October 2002, ABNAmro, Barclays, Citibank and
WestLB voluntarily agreed to adopt them
• The EPs were launched formally in 2003 in Washington
• Currently 82 EP financial institutions in 36 countries
have adopted them, covering over 70% of international
project finance debt in emerging markets
• They have established a benchmark for responsible
lending by financial institutions worldwide

18. India must make credit markets work for
sustainability
• Indian banks must integrate sustainability considerations
into operations
―By employing environmental audits in their own interest to
avoid risk of lending to entities violating environmental laws
―By voluntarily adopting the standards like equator principles
―Only one Indian bank (IDFC) has adopted the EPs so far
• The process can be aided by incentives
―In 2015 RBI placed renewable energy under priority sector
lending
―But other “green” sectors such as clean technology or pollution
reduction measures do not yet qualify
―Lending for CDM businesses that generate carbon credits could
also can provide powerful incentives

19. India must develop insurance
products to combat climate change
• Climate change will raise Indian economy’s vulnerability
―Droughts, floods and climatic hazards are likely to increase
• Indian agriculture likely to face increasing risks
• Crop insurance essential to cope with climate change
—Pradhan Mantri Fasal Bima Yojana (PMFBY) 2016
—Previous schemes failed as compensation inadequate and high
premiums
—Low premiums under PMFBY and actual losses compensated
—Huge premium subsidy cost to Government although with wider
coverage the cost will fall which is likely with climate change
—Needs to be in parallel with R&D on drought resistant crops and
dry-land farming techniques (such as Israel)

20. India’s equity markets must support environmental
sustainability and social inclusion
• Both NSE and BSE require listed companies to comply
with social responsibility guidelines
―These guidelines were established in 2011 (National Voluntary
Guidelines on Social, Environmental and Economic
Responsibilities of Business)
—However compliance is voluntary and no real “teeth” to this
requirement
• The concept of “Social Stock Exchange” needs
consideration
—SSEs connect social minded investors to companies promoting
social and environmental objectives
—CSR funds of companies can be used to support this
—Under consideration at present.
20

21. Conclusions
• India’s financial market regulators have become
increasingly concerned with both social inclusion
and environmental sustainability
• But various efforts at financial inclusion are yet to
be effective and financial markets continue to be
narrow, serving mainly larger businesses and high
income households
• The idea of promoting environmental sustainability
through financial markets is still to gain ground
although the needs are becoming urgent and
critical

22. Bibliography
Abhijit Banerjee, Pranab Bardhan, Esther Duflo, Erica Field, Dean Karlan, Asim Khwaja, Dilip
Mookherjee, Rohini Pande, Raghuram Rajan. Help Microfinance Don’t Kill It. The Indian
Express Posted online: Fri Nov 26 2010
Bandini Chhichhia. The Rise of Social Stock Exchanges. A new, innovative platform is helping
more investors support social enterprises. Stanford Social Innovation Review. January 2015.
Equator Principles Association website: http://www.equator-principles.com
Mandira Sarma, Rajiv Kumar. Rural Short-term Cooperative Credit Structure. EPW March 1,
2008
Ministry of Corporate Affairs. National Voluntary Guidelines on Social, Environmental and
Economic Responsibilities of Business. New Delhi 2011
Rajaram Dasgupta. Microfinance in India - Empirical Evidence, Alternative Models and Policy
Imperatives. EPW March 19, 2005
S. Malu, R. Agarwal, D. Jajoo. Sustainable Banking in India. Available at
http://tmu.ac.in/gallery/viewpointsdcip2013/pdf/track3/T-323.pdf
Shailender Kumar Hooda. Health Insurance, Health Access and Financial Risk Protection.
EPW December 12, 2015.
Tara S Nair. Microfinance: Lessons from a Crisis. EPW February 5, 2011.
Tara S. Nair and Ajay Tankha. Inclusive Finance India Report 2014. Oxford University Press
2014.
22

23. Thank You
shilochatterjee@gmail.com