Financial Inclusion – Definition, Services offered, Implementation
Financial Inclusion (The committee on FI, 2008): Process of ensuring access to financial services & timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost (including households, enterprises, SMEs & traders, physically challenged, old people, agricultural & Industrial labourers, people engaged in un-organised sectors)
The strategies to ensure financial inclusion can truly lift the living standards of the deprived class & provide them an opportunity to make their life worthwhile
Services offered: Savings / Check-in account (40%), Credit card (2%), ATM & Debit cards (13%), mortgage (immediate credit), Remittances & payment services, life-insurance (10%), micro-insurance (health – 0.6%), mutual funds (annuity products), financial advisory services, entrepreneurial credit & pension products
Effect(s) on society in absence of FI: It creates extreme imbalance in the society, which leads to higher incidence of crime, general decline in investment, difficulties in gaining access to credit or getting credit at an exorbitant rates & sufferings of small business due to loss of access to middle class & higher income consumers
Effective implementation of FI internationally:
v Community Reinvestment Act (CRA) in United States (a civil right law) prohibits discrimination by banks against low and moderate income groups
v Financial Inclusion Task Force has been set up in UK for the purpose of financial inclusion, viz., access to banking, access to affordable credit and access to free face to face money advice
Reasons for financial exclusion in India:
v Lack of a regular income in low income groups does not let them qualify for a loan
v Lack of proximity financial services
v Difficulty for low income groups to find a collateral for loans
v Unprofitable for banks to give smaller loans
Objective in the Indian Context:
v Helping poorer sections of the society to get out of the clutches of local money lenders
v Providing the disadvantaged groups the access to Financial Services
v Enable government to make payments like social security transfers through Electric mode
v Bring savings of the poor into the financial intermediation system and channel them into investment
v Increasing the number of low cost deposits, thus reducing dependency of banks on bulk deposits
Overview of Financial Inclusion
v Growth of Indian economy at 8.5% - 9% in last 5 years (2005-10), mainly in Industry & Service sector (Growth in Agriculture - 2%).
v High opportunity is available for empowering the vast rural majority of India due to their limited access for affordable financial services (Savings, loans, credit, insurance, remittances). FI reaps the following benefits:
Ø High contribution towards overall sustainable growth of the country
Ø A Social and political stability in the country
Ø Access of vast majority to payment systems and safety savings net (like deposit insurance) – AN AFFORDABLE BANKING SYSTEM
Ø Statistics regarding banking penetration
§ 31% Indian population accessing banking services, rest 69% dependent on private money lenders
§ People having annual income less than INR 50,000 bracket still heavily dependent on money lenders (35% approximate, Source: Report on Currency & Finance, 06-08)
v What has been done so far
Ø Bank nationalization – 1st step towards Financial Inclusion in India
Ø Creation of Regional Rural Banks (RRB) – reaching rural population
Ø RRBs / co-operative banks to sell insurance & financial products
Ø Liberalized branch and ATM expansion
Ø Use of NGOs / SHGs / microfinance institutions as intermediaries (Business correspondent / facilitator) by commercial / Public Sector banks
§ Setting up of RSETI (Rural Self Employment Training institute) by State level bankers by 31.03.2008, to ensure training of 1 youth in a family below poverty line (BPL)
§ Debt waiver and relief scheme for above finances
§ 344 districts identified for 100% FI, 175 district achieved the target (2008)
Ø SHG (Self Help Group) linkage program – Main microfinance program program implemented by RRBs, CBs & Co-operative Banks
§ Total SHG finance during 2007-08 is INR 8,849 crore for 1.2 million SHG
§ Outstanding bank loan at Mar 31, 2008 is INR 17,000 crore (25% increase)
§ Savings a/c with banks at Mar 31, 2008 is 5 million (count); INR 3,785 crore
Ø Other Statistics relating to FI
§ Count of No frill accounts – 28.23 million (as on Dec 31, 2008)
§ Count of RRBs branches – 31,727, 39.7% of total bank branches (June 31, 2009)
§ Count of ATMs – 44,857; Count of POS – 4,70,237; Count of cards – 167.09 million (as on May 31, 2009)
§ Count of Kisan Credit Card (KCC) – 76 million (CMIE publication, 07-08)
§ Count of mobile – 403 million (as on Apr 30, 2009) – out of which 187 million (46%) do not have a bank a/c (Source: Cellular operator association of India)
§ Total account per 100 person is still very less (2002 – 46 & 2007 – 54)
v Problems / difficulties in implementation
Ø Transaction cost too high & delay in money remittances
Ø BC (Business Correspondent) model is too restrictive
Ø Lack of interest / involvement of big technology player in FI
Milestones achieved
Reserve Bank of India has implemented various strategies for the inclusive growth, livelihood improvements and financial inclusions in India. The history of such steps taken from early 1900’s is briefly summarized as below:
v Phase I (1900 – 1970)
Ø Cooperative Society Act – (1904)
Ø Rural Credit Survey Committee – (1954)
Ø State Bank of India created for rural penetration – (1955)
Ø Social control of Banks – (1960)
Ø Nationalisation of Banks – (1969)
Ø Lead Bank scheme: States/Districts – (1969)
Ø All India Rural Credit Review Committee – (1969)
v Phase II (1970 – 2005)
Ø Priority sector lending stipulation by RBI - (1972)
Ø Setting up of Regional Rural Banks – (1975)
Ø Integrated Rural Development programme – (1980)
Ø Microfinance programme– Self Help Group – (1992)
Ø Bank linkage facilitated by NABARD – (1992)
Ø Swarn-jayanti Gram Swarozgar Yojana promoted by Govt. Of India – (1999)
Ø Kisan Credit Card/Swarojgar Credit Card/Gramin Tatkal Card – (2001)
v Phase III (2005 onwards)
Ø Development of Micro Finance Institutions
Ø Financial Inclusion in a “MISSION” mode – NaMFI
Ø Committee on Financial Inclusion set up – (2005)
One of the most important milestones by Reserve Bank in 2005 was setting up of Khan Commission to look into financial inclusion and the recommendations of the commission were incorporated into the mid-term review of the policy in 2005–06. In the report RBI exhorted the banks with a view of achieving greater financial inclusion to make available a basic "no-frills" banking account.
List of important recommendations of Khan Commission & steps taken by RBI accordingly are:
v Commercial banks to make use of the services of NGOSs, micro-finance institutions & other civil society organizations as intermediaries for providing financial and banking services.
v Business Facilitator/Correspondents by Commercial Banks.
v Relaxation on KYC – annual deposit less than INR 50,000.
v General Credit Cards to access easy credit.
Way Forward
Targets fixed (for each Branch of Commercial Bank/Regional Rural Bank to):
v Open 250 accounts every year
v Issue 100 Farmers’ Credit Card
v Issue 100 General Credit Card
v Distribute 100 micro insurance policies
Micro Finance Sector (Development and Regulation) Bill, 2007:
v Setting up of Rural Credit Information Bureau.
v Ensuring effectiveness of Business Facilitator (BF) /Business Correspondent (BC).
v Micro finance Development and Equity Fund
v Micro finance Ombudsman
v Regulatory and developmental power to NABARD
Commercial banks act as spokes in the wheels for drive to achieve 100 % financial inclusion in India. Financial inclusion through Commercial banks shall wipe out the last tear from the face of most deprived person on the Indian soil.
Global Meltdown - An Opportunity for FI
· Focus on Inclusive Growth
· Focus on Domestic Consumption and Investment
· Focus on increased Social Sector Spending
· Emphasis on giving benefits to poor clients
· Global (bigger) players looking Inward
· Reduction of Cost
Conclusion
Financial Sector Development: People, who have not been integrated into the formal financial sector because of low incomes, gender or remote locations, often represent a large and potentially profitable market if somehow the costs and risks of serving them are controlled
Poverty Reduction: Access to reliable saving facilities can improve the economic security of misfortunate. Once economic security is attained they could opt for credit facilities provided by the banking sector, thus eventually helping them to move out of the vicious circle of poverty
Removing Barriers to accomplish FI: Barriers created by remoteness, poor infrastructure, a stagnant economy, illiteracy or social factors like caste and gender bias needs to be strictly dealt with and removed. Furthermore, formal financial markets may invest in developing the human resource among the clients and in establishing local structures that help them link with financial institutions.
Defining target segment: Proper target groups that define the invisible line between the poor and the poorest needs to be recognized in order to properly identify the features of poverty alleviation programmes. Adequately defining the target clientele can help in setting correct standards of performance for programmes and in selecting appropriate mechanisms in poverty alleviation and income enhancement efforts
Sources:
1. What is Financial Inclusion November 2010, ChilliBreeze http://www.chillibreeze.com/articles_various/Indian-Finance.asp
2. Financial Inclusion, Wikipedia, http://en.wikipedia.org/wiki/Financial_inclusion
3. Financial Inclusion, Challenges and Opportunities, Jan 11, 2010 http://www.rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=10852
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