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Financial Inclusion: Need of the hour

Mr.Subhash D,souza ,Assistant Professor,St.Joseph College,Mumbai University Subhash.sof@gmail.com

Inclusive Growth by its very definition implies an equitable allocation of resources with benefits accruing to every section of society. Again in simple words it is nothing but all financial bodies coming together and spreading finance access to each and every corner of India. It does not mean opening bank account or making huge growth in disbursement of loans. Its the process of reaching financial weapons to all Indian across the country. Pranab Mukherjee, Finance Minister of India while presenting the budget for the financial year 2010-2011 said,"For long, the financial sector had ignored the needs of the poor. There is an urgent need to include people from all strata in the mainstream banking system." On 29 December 2003,Former UN Secretary-General Kofi Annan said: The stark reality is that most poor people in the world still lack access to sustainable financial services, whether it is savings, credit or insurance. The great challenge before us is to address the constraints that exclude people from full participation in the financial sector. Together, we can and must build inclusive financial sectors that help people improve their lives. According to the United Nations, three billion people around the world do not have access to formal financial services like savings accounts, credit, insurance and payment services. More than half the population in developing countries and more than 80 percent of households in most of Africa is financially excluded. Financial inclusion aims to provide the timely delivery of various financial services at an affordable price to those financially excluded households and micro, small and medium-sized entrepreneurs. Through increased access to savings accounts and other financial services, the poor can build financial security, manage risks against adverse shocks such as illness or natural disaster, and even invest in new business opportunities. More importantly, recent research shows that improving access to finance plays a crucial role in

promoting economic growth and reducing poverty. Self Help Groups are playing a very important role in the process of financial inclusion. SHGs are usually groups of women who get together and pool money from their savings and lend money among them. Usually they are working with the support of an NGO. The SHG is given loans against the group members guarantee. Peer pressure within the group helps in improving recoveries. Through SHGs nearly 40 million households are linking with the banks. Micro finance is another tool which links low income groups to the banks. Yet banks are fighting to fulfill the Financial Inclusion dream. The main reason is that the products designed by the banks are not satisfying the low income families. The provision of uncomplicated, small, affordable products will help to bring the low income families into the formal financial sector. Banks have limitations to reach directly to the low income consumers. Correspondents can be considered to be an excellent channel which banks can use to distribute their product information. In 1975 Government Of India established Regional Rural Banks (RRBs ) with the same aim. Financial inclusion is a great step to alleviate poverty in India. Financial exclusion the big picture

Effort at financial inclusion is not new; both the Government and the Reserve Bank have been pursuing this goal over the last several decades through building the rural cooperative structure in the 1950s, the social contract with banks in the 1960s and the expansion of bank branch networks in the 1970s and 1980s. These initiatives have paid off in terms of a network of branches across the country. Yet the extent of financial exclusion is staggering. Out of the 600,000 habitations in the country, only about 30,000 have a commercial bank branch. Just about 40 per cent of the population across the country have bank accounts, and this ratio is much lower in the northeast of the country. The proportion of people having any kind of life insurance cover is as low as 10 per cent and proportion having non-life insurance is an abysmally low 0.6 per cent. People having debit cards comprise only 13 per cent and those having credit cards only a marginal 2 per cent. The National Sample Survey data reveals that, in 2003, out of the 89.3 million farmer households in the country, 51 percent did not seek credit from either institutional or noninstitutional sources of any kind. These statistics, staggering as they are, do not convey the true

extent of financial exclusion. Even where bank accounts are claimed to have been opened, verification has shown that these account are dormant. Few conduct any banking transactions and even fewer receive any credit. Millions of people across the country are thereby denied the opportunity to harness their earning capacity and entrepreneurial talent, and are condemned to marginalization and poverty. But there is a brighter side to the story. Remember that illustration they give in business strategy courses. A business executive of a shoe company was sent to a large developing country to assess the market potential there. What he saw was millions of people without shoes. He came back and reported to the management that there was no business potential there because no one wears shoes. A few months later, a strategist of a rival company went and saw the same picture. He came back and reported to his management that there is tremendous business potential in that country because of the number of shoes they can sell. Ultimately, it is a question of mindset. Banks must see the picture like the second business strategist, look at the opportunity at the bottom of the pyramid and move into financial inclusion in a big way.

In order to address the issues of financial inclusion, the Government of India constituted a Committee on Financial Inclusion under the Chairmanship of Dr. C. Rangarajan. The Committee submitted its final report to Hon'ble Union Finance Minister on 04 January 2008. The Committee has defined Financial Inclusion as "the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost . Our Finance Minister Pranab Mukherjee at the time of presenting budget has mentioned in his speech,In my last budget speech I had advised Banks to provide banking facilities to habitations having a population of over 2000 by March, 2012. The Banks have identified about 73,000 such habitations for providing banking facilities using appropriate technologies. A multi-media campaign, Swabhimaan, has been launched to inform, educate and motivate people to open bank accounts. During this year, banks will cover 20,000 villages. Remaining will be covered during 2011-12.( Budget Speech of Finance Minister, Feb 28, 2011) RBIs efforts- (Remarks by Dr. Duvvuri Subbarao, Governor of the Reserve Bank of India, at the Bankers Club, Kolkata, 9 December 2009.)

Let me briefly outline the efforts pursued by the Reserve Bank to further financial inclusion. Our approach to financial inclusion aims at connecting people with the banking system and not just opening accounts. This includes meeting the small credit needs of the people, giving them access to the payments system and providing remittance facilities. This has led to some notable developments: (i) No frills accounts: In November 2005, RBI asked banks to offer a basic banking no-frills account with low or zero minimum balances and minimum charges to expand the outreach of such accounts to the low income groups. (ii) Easier credit facility: Banks were asked to introduce a General Purpose Credit Card (GCC) facility up to Rs. 25,000. However, total number of GCCs issued by banks as at end-March, 2009 was only 0.15 million. (iii) Simpler KYC norms: In order to ensure that people belonging to the low income groups, both in urban and rural areas, do not encounter difficulties in opening bank accounts, the Know Your Customer (KYC) procedure for opening accounts was simplified for those accounts with balances not exceeding Rs 50,000 and credits thereto not exceeding Rs 100,000 in a year. (iv) Use of information technology: Banks have been urged to scale up IT initiatives for financial inclusion speedily while ensuring that solutions are highly secure, amenable to audit, and follow widely-accepted open standards to ensure eventual inter-operability among the different systems. Two of the important initiatives are: Smart cards for opening bank accounts with biometric identification. These help the customers get banking services near their doorstep. Link to mobile hand held electronic devices for banking transactions. In October 2008, the RBI advised banks on issues relating to technology, security standards, and customer protection. (v) EBT through banks: The Reserve Bank is in consultation with state governments to encourage them to adopt Electronic Benefit Transfer (EBT) by banks. (vi) 100% financial inclusion drive: The Reserve Bank launched a financial inclusion drive targeting one district in each state for 100% financial inclusion. In the light of the experience gained, coverage has been extended to other areas/districts. We carried out an external evaluation of the quality of 100% financial inclusion reported by banks. On that basis, in January 2009, we advised banks to: (i) ensure provision of banking services nearer to the location of the no-frills

account holders through a variety of channels; (ii) provide GCC/small overdrafts along with nofrills accounts toencourage the account holders to actively operate the accounts; (iii) conduct awareness drives of the facilities offered to the no-frills account holders; (iv) review the extent of coverage in districts declared as 100 per cent financially included; and (v) efficiently leverage on the available technology enabled financial inclusion solutions.

Business correspondent model Possibly the most important initiative of the Reserve Bank has been the Business Correspondent (BC) model. The BC model ensures a closer relationship between poor people and the organized financial system. Recognizing this, in 2006, we permitted banks to use the services of nongovernmental organizations, micro-finance institutions, retired bank employees, ex-servicemen, retired government employees, Section 25 companies, and other civil society organisations as Business Correspondents in providing financial and banking services. Even as the BC model has taken off, it needs to be fine tuned and monitored appropriately to improve its efficacy, including by better training BCs. Recently, we have further enlarged the scope of the BC model by permitting banks to appoint individual kirana/medical/fair price shop owners, individual Public Call Office (PCO) operators, agents of Small Savings schemes and insurance companies, individuals who own petrol pumps, retired teachers and self-help groups linked to banks as BCs. With a view to ensuring the viability of the BC model, banks have also been permitted to collect reasonable service charges from the customer in a transparent manner. Going forward, the Reserve Bank will endeavor to give complete flexibility to banks to appoint BCs with only a negative list of entities that would not be eligible. Recently government has announced that banks would be opened where population is at least 5000.Such banks could be handled by two employees. In this process we can not forget the role played by cooperatives. The largest numbers of co-operatives are there in India. Development corporation reported that there are almost 5,00,000 co-operatives with a membership of 207 million people ,with 43.7 percent share of agriculture credit, 60.5 percent of sugar production capacity, 20 percent of the spinning mills capacity and 30 percent of the fertilizer market in our country. Co-operatives have been functioning in various economic activities like marketing, credit, industry, consumer, housing, agriculture and other allied areas. Co-operatives are now

functioning in every nook and corner of the country and one can say that the infrastructure or networking of co-operatives is the widest in a big country like India. It is very handy to make use of its organizational setup in achieving the objective of financial inclusion.Cooperatives could be one of the best platform for Government to reach to the last person of the society. Co-operation has failed but co-operation must succeed: Rural credit survey made 45 years ago still seems valid. Co-operation has failed but co-operation must succeed. Although co-operative sector has gone through many ups and downs all these years, still we can say that there is no option for cooperative societies in Country like India where majority of the people are from rural areas and they have been struggling to come out of poverty. Co-operative sector has many limitation and defects due to which many places it could not succeed. But wherever it succeeded, it has done wonderful job its members and local community. Before some months Kapil Sybal had announced that post offices would be used as platform for banking activities. It is very good idea because in present situation it has become difficult for post offices to survive because of the effects of latest technology. Another reason is that country like India is facing the problem of financial exclusion. Post offices are there in every village. It will be very easy to reach to the weaker section of the society easily. Financial Inclusion mainly focuses on the poor who do not have formal financial institutional support and getting them out of the clutches of local money lenders. As a first step towards this, some of our banks have now come forward with general purpose credit cards and artisan credit cards which offer collateral-free small loans. The RBI has simplified the KYC (Know your customer) norms for opening a No frill account. This will help the low income individual to open a No Frill account without identity proof and address proof. . The Reserve Bank of India setup a commission (Khan Commission) in 2004 to look into Financial Inclusion and the recommendations of the commission were incorporated into the Midterm review of the policy (200506). In the report RBI exhorted the banks with a view of achieving greater Financial Inclusion to make available a basic "no-frills" banking account.In

India, Financial Inclusion first featured in 2005, when it was introduced, that, too, from a pilot project in UT of Pondicherry, by K C Chakraborthy, the chairman of Indian Bank. Mangalam Village became the first village in India where all households were provided banking facilities. Union Territory of Puducherry for the first time in the country had registered cent per cent success. Reserve Bank of Indias vision for 2020 is to open nearly 600 million new customers' accounts and service them through a variety of channels by leveraging on IT. However, illiteracy and the low income savings and lack of bank branches in rural areas continue to be a road block to financial inclusion in many states. Internationally also efforts are being made to study the causes of financial exclusion and designing strategies to ensure financial inclusion of the poor and disadvantaged. Banks are now using new technologies like mobile phones to reach low income consumers. Banks also needs to develop Information Technology infrastructure to develop and handle the mass of villages and low income group. Financial Inclusion does not mean financial support. It means all the sectors of Indian economy coming together to bring the radical change and growth in the untapped areas. The conference will be focusing on the issues related to Financial Inclusion. I am sure this conference will definitely enlighten the minds of all the participants regarding the financial inclusion. Sources: Alliance for Financial Inclusion (2009). http://www.afi-global.org/. Measuring Access to Financial Services www.cgap.org/gm/document Financial Sector Policy and the Poor, Working Paper . World Bank. Financial Inclusion, Poverty Reduction and the Millennium Development Goals. The European Journal of Development Research Access to Financial Services: Measurement, Impact, and Policies, World Bank Research Observer