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Financial Inclusion : Perspective of Reserve Bank of India


Common measure : % of adult population having bank a/c By this standard, 59 ... 60% in urban areas Unbanked population highest in NE and Eastern regions ... – PowerPoint PPT presentation

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Title: Financial Inclusion : Perspective of Reserve Bank of India

Financial Inclusion Perspective of Reserve Bank
of India
  • M.K.Samantaray
  • General Manager
  • Reserve Bank of India
  • Guwahati

Financial Inclusion (FI)
  • What is Financial Inclusion
  • 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
  • Indian Focus
  • Economy Growth rate 8.5 - 9 (last 5 years)
    Growth primarily in industry services
    Agriculture at 2 - Growth potential in SME
    sector enormous Limited access to savings,
    loans, remittance insurance in rural/
    unorganized sector major constraint to growth
    Above services enlarge livelihood opportunity
    empowers poor Empowerment aids socio-political
    stability Financial inclusion provides formal
    identity, access to payments system deposit

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

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
  • Sources of credit Non-institutional from 70.8
    (1971) reduced to 42.9 (2002) Post-1991
    increased Share of money-lenders in rural areas
    increased from 17.5 (1991) to 29.6 (2002)
    Reduced from 40 (1981) to 25 (2002)
  • 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

Financial Inclusion (FI)
  • Reasons for Exclusion
  • Remote, hilly sparsely populated areas with
    poor infrastruc-ture and difficult physical
  • Lack of awareness, low income, social exclusion,
  • 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
  • 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

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
  • KYC principles simplified to open accounts for
    customers in rural urban areas Balances not
    to exceed Rs. 50000 credits Rs. 1 lakh in a
    year Introduction by a customer (KYC)
  • 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

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
  • 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
  • District Level DCC/DLRC meetings by District
  • 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

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

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

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

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
  • FMs Budget Speech 2007-08 2 Funds (i)
    Financial Inclusion Fund - developmental/promotion
    al work (ii) Financial Inclusion Technology Fund
    technology adoption/innovation Each Fund of
    125 million

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. Rangarajans (Chairman
    PMs Economic Advisory Council) 10-Member
  • 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

Financial Education
  • Definition Familiarity with/understanding of
    financial market products, rewards, risks make
    informed decisions Personal financial education
    capability to take decisions for ones
    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

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
  • 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

  • Thank You
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