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Financial Inclusion in India

Emerging Profitable Models
Dr Debesh Roy Assistant General Manager NABARD

Financial inclusion in India An overview The period of economic reforms has witnessed the key catalytic role played by banks in the achievement of high growth in the Indian economy. While the benefits of growth due to reforms, have concentrated in the hands of those already served by the formal financial system, a large section of the rural poor still does not have access to the formal banking channel. Further, the backward regions of the country, too, lack basic financial infrastructure. An essential pre-requisite for inclusive and sustainable growth is capital formation through credit and financial services. Therefore, access to a well-functioning financial system, by creating equal opportunities, enables economically and socially excluded people to integrate better into the economy, so as to actively contribute to development and protect themselves against economic shocks (RBI, 2008). The Reserve Bank of India (RBI) has, therefore, formulated the policy of financial inclusion with a view to provide banking services at an affordable cost to the disadvantaged and low-income groups. The RBI has observed that out of 600,000 habitations in the country, only about 5 percent have a commercial bank branch. Also only about 57 percent of the population across the country has bank account (savings), and this ratio is much lower in the North-Eastern states. Further, 13 percent of the population has debit cards and 2 percent has credit cards. India has a significantly low level of financial penetration compared with OECD countries (RBI, 2010). Further, while the access to bank branches in India fares better than that of China and Indonesia it is worse off when compared with Malaysia and Thailand. However, in terms of financial access through ATMs, India fares poorly compared to select Asian peer group countries (RBI, 2010). In view of the poor level of financial inclusion in India, RBI has accorded top-most policy priority to financial inclusion, by advising commercial banks, to formulate specific Board approved Financial Inclusion Plans (FIP) and to act on them on a mission mode. Banks were also advised by RBI to provide banking services in every village having a population of over 2000 by 31 March 2012, through bank branches as well as through various ICT-based models including through Business Correspondents (BCs).

Financial inclusion Policy initiatives Branch expansion Nationalisation of commercial banks in India was a pioneering step towards accessibility of banking services to the vast rural population of the country. This was a significant effort towards financial inclusion, which led to the spread of bank branches in unbanked rural and semiurban areas. However, in spite of the enhanced outreach of banks in rural and semi-urban areas and the implementation of directed credit, farmers and rural artisans still did not receive adequate credit from banks during the post-nationalisation period. Moreover accessibility to avenues for savings in the formal banking channel was limited. There has been a consistent increase in the penetration of banking services in India in recent years. However, the rate of increase in the penetration of banking services in the rural and semi-urban areas has been much lower than that in the urban areas. Further, penetration of banking services has been lower in the central, eastern and northeastern regions of the country compared to the more developed northern, southern and western regions. In order to address this issue, the branch authorisation policy was liberalised in December 2009 giving freedom to domestic scheduled commercial banks to open branches at Tier 3 to 6 centres (with population of up to 49,999 as per the Population Census of 2001) without having the need to take permission from RBI in each case, subject to reporting. SHG-Bank linkage programme One of the early attempts at financial inclusion during the period of economic reforms in India has been the launching of the Pilot Project on SHG-Bank Linkage in February 1992 by NABARD. It proved to be a revolutionary programme for alleviating poverty through capacity building and empowerment of the rural poor, especially women. Microcredit extended either directly or through any intermediary is reckoned as part of banks priority sector lending. The SHG-Bank Linkage Programme provides opportunities for the rural poor to participate in the development process. It is cost effective, and ensures that more and more people are brought

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under sustainable developmental activities, within a short span of time. Business correspondent (BC) model It has been widely recognised that it is not feasible to have physical banking facility in every habitation. Hence, the financial inclusion strategy largely focuses on the use of information and communication technology (ICT) to expand access to banking facilities through Business Correspondent (BC), who carries a hand-held device which is networked to the banks systems. RBI issued guidelines in January 2006 for the engagement of BCs by banks for providing banking and financial services in addition to the traditional brick and mortar model. Under the BC Model, banks have been permitted to use the services of various entities like NGOs/SHGs, Farmers Clubs (FC), PACS, Microfinance Institutions (MFIs) and other Civil Society Organisations (CSOs), companies registered under Section 25 of the Companies Act, 1956, for profit companies, retired Government/bank employees/teachers, ex-servicemen, individual owners of kirana/medical/Fair Price shops/individual PCO operators, agents of small savings schemes of GoI/Insurance companies, individuals who own petrol pumps, and Post Offices to act as BCs. Business facilitator (BF) As per extant RBI guidelines, banks are encouraged to use intermediaries, such as NGOs, Farmers' Clubs, cooperatives, community based organisations, IT enabled rural outlets of corporate entities, post offices, insurance agents, well functioning Panchayats, Village Knowledge Centres, Agri Clinics/Agri Business Centres, Krishi Vigyan Kendras and KVIC/KVIB units, as Business Facilitator (BF) for providing facilitation services, viz. identification of borrowers and fitment of activities; collection and preliminary processing of loan applications including verification of primary information/data; creating awareness about savings and other products and education and advice on managing money and debt counseling; processing and submission of applications to banks; promotion and nurturing SHGs/ JLGs; postsanction monitoring; monitoring and handholding of SHGs/JLGs/Credit Groups/others; and follow-up for recovery. Financial literacy Financial literacy is instrumental in expanding financial inclusion, which in turn is helpful in further expanding financial literacy, thus, mutually reinforcing each other in a positive manner (Chakrabarty, 2011). NABARD is working with the Indian School of Microfinance for Women and has identified state level partners on modalities for alliance, monitoring systems and impact

evaluation mechanism, for formulating a National Alliance on Financial Literacy (NABARD, 2011). Financial Inclusion Fund (FIF) and Financial Inclusion Technology Fund (FITF) Two funds, viz. Financial Inclusion Fund (FIF) for meeting the cost of developmental and promotional interventions of financial inclusion, and Financial Inclusion Technology Fund (FITF) for meeting the cost of technology adoption, were set up in NABARD during 2007-08, based on the recommendations of the Committee on Financial Inclusion (Chairman: Dr C Rangarajan) (Government of India, 2008). The corpus of each Fund is `500 crore, to be contributed by the Government of India (GoI), RBI and NABARD in the ratio of 40:40:20 in a phased manner over a period of five years. The following policy initiatives were taken by NABARD (NABARD, 2011) out of FIF and FITF during 2010-11: (a) The capacity building component for authorised functionaries of well-run SHG, to be identified by banks, would be supported under FIF. (b) Support for producing and telecasting financial literacy programmes in Hindi, through Doordarshan, in six states. Similar support is envisaged for programmes in regional languages, as well. (c) Support to Agricultural Finance Corporation Ltd. (AFC) for promoting financial literacy among rural adults in West Bengal through SHGs and FCs. (d) With a view to supporting the financial inclusion process in backward and hardship areas, it has been decided to extend financial support to all the banks from FIF & FITF at 100 percent of the project outlay for eligible activities in the North Eastern Region, Andaman & Nicobar Islands, Chhattisgarh, Himachal Pradesh, Jammu & Kashmir, Jharkhand, Sikkim and Uttarakhand. Ten districts across Andhra Pradesh, Jharkhand and Orissa, which are disturbed but do not figure in the list of 256 critically excluded districts, are to be given the same priority as the critically excluded districts. The existing quantum of support to Commercial Banks, RRBs and Cooperatives has been enhanced to 60, 80 and 90 percent, respectively, of the project outlay. (e) A simplified procedure linking the support to cost of Smart Cards or Point of Sale (PoS) devices was introduced for RRBs and Cooperatives. This was also extended to Commercial Banks in the North Eastern Region, Hilly Regions and those in the 256 excluded and 10 disturbed districts.

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(f) For implementing Core Banking Solutions (CBS) in 28 weak RRBs in the first phase, support from FITF will be to the extent of 40 percent of the total cost, with the balance to be met by the sponsor banks and the RRB in the ratio of 50:10, respectively. RRBs will be extended support for Information and Communications Technology (ICT) solutions in all villages having population of above 2,000 and falling in the command area of the concerned RRB. (g) Support to Lead Banks to establish Financial Literacy and Credit Counselling Centres (FLCC). NABARD-UNDP inclusion collaboration for financial

advised to express willingness to opt for the Application Service Provider (ASP) model of CBS. Emerging profitable models The Rangarajan Committee (Government of India, 2008) defined financial inclusion as delivery of financial services at an affordable cost to the vast sections of the disadvantaged and low-income groups. Further, the Committee on Financial Sector Reforms (Government of India, 2009) had proposed a paradigm shift in the way financial inclusion is viewed. It had observed that instead of seeing the issue primarily as expanding credit, there was a need to refocus to seeing it as expanding access to financial services, such as payments services, savings products, insurance products, and inflation-protected pensions. It is being increasingly realised that financial inclusion is not about social banking without profitability concerns, but that it could well be a profitable business proposition for banks. The delivery models should aim at generating revenue rather than being cost centric such that customers get quality banking services at their doorstep while simultaneously creating business opportunities for the banks (RBI, 2011). As advocated by the late C K Prahalad (2005) what is needed is a better approach to help the poor, an approach that involves partnering with them to innovate and achieve sustainable win-win scenarios where the poor are actively engaged and, at the same time, the companies providing products and services to them are profitable. Banks need to provide a simplified, and at the same time fully loaded banking experience, while reducing costs and achieving increased profit. Further, access to financial services should empower the rural poor to take up income generating activities, which could raise their living standards and in the process develop long term partnership with banks. No frill accounts Basic banking No Frill accounts have nil or very low minimum balances as well as charges that make such accounts accessible to vast sections of the population. With a view to encourage transactions in No Frill accounts RBI has advised banks to provide small overdrafts (ODs) in such accounts. Up to end March 2011, banks have provided 4.2 million ODs amounting to INR 199 crore (RBI, 2011). No Frill accounts make access to savings bank accounts affordable for the poor. They also help banks maintain higher Current Account and Savings Accounts (CASA), which would enable them to improve margins. Upscaling SHG-Bank linkage programme The SHG-Bank Linkage Programme, over the past nineteen years has become the common vehicle in the

UNDP-NABARD Financial Inclusion Fund has been established in NABARD to provide better access to financial products and services for reducing risks and enhancing livelihood for the poor, especially the SC and ST, minorities and the displaced. During 2010-11, INR 173.22 lac had been utilised for activities conducted by NABARD in seven focus states, viz. Bihar, Chhattisgarh, Jharkhand, Madhya Pradesh, Orissa, Rajasthan and Uttar Pradesh. Rural Financial Institutions (a) Regional rural banks Regional Rural Banks (RRBs) are actively involved in promoting financial inclusion by opening No Frill Accounts, issuing Kisan Credit Cards (KCC) and General Credit Cards (GCC) and dispensing micro credit under the SHG-Bank Linkage Programme. Considering the strategic importance of RRBs in the acceleration of financial inclusion RBI has directed sponsor banks to implement CBS in all RRBs by September 30, 2011. Fifteen RRBs were identified from 14 States for R & D project on Financial Inclusion with ICT-based solutions, through use of smart cards, Point of Sale (PoS) devices and mobile technology, in different regions and client groups in the country. (b) Rural cooperative credit institutions The cooperative movement was the first ever experiment with financial inclusion in India. However, the health of the rural cooperative credit institutions has been a major cause of concern for policy makers. Financial assistance has been provided under the Revival Package for the Short-term Cooperative Credit Structure (STCCS) for cleansing of balance sheets and capital infusion to ensure a minimum Capital to Risk-Weighted Assets Ratio (CRAR) of 7 percent, subject to legal and institutional reforms. With a view to furthering the cause of financial inclusion, NABARD has decided to offer support to cooperative banks in CBS. Cooperative Banks have been

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development process, converging important development programmes. From the viewpoint of bankers the SHGBank Linkage Programme has proved to be a cost effective business proposition. Further, the average recovery of loans disbursed to SHGs has been found to be around 90-95 percent. The programme had resulted in 69.5 lac saving-linked SHGs and 48.5 lac credit-linked SHGs as on March 31, 2010. Thus, about 9.7 crore households are covered under the programme, envisaging synthesis of formal financial system and informal sector. There is, therefore, a need for a massive upscaling of SHG-Bank Linkage Programme, as it would not only spread the benefits of financial inclusion to a vast majority of the poor and the financially excluded, but would also provide banks with a cost effective business model. Financing joint liability groups (JLG) The Rangarajan Committee (Government of India, 2008) had recommended that adoption of the Joint Liability Group (JLG) concept could be another effective method for purveying credit to mid-segment clients such as small farmers, marginal farmers, tenant farmers, etc and thereby reduce their dependence on informal sources of credit. Studies conducted by NABARD, have shown that financing of JLGs is a good business proposition. It needs simplified documentation, group dynamics, timely repayment culture and prospects of credit enhancement to quality clients. Keeping in view the need and findings of the studies, NABARD has issued comprehensive guidelines on JLGs to Banks focusing on small and marginal farmers, oral lessees, tenant farmers engaged in farm sector and other clients under non-farm activities. NABARD supports banks for nurturing and financing of JLGs for the initial three years. Banks can also use the services of JLG-promoting agencies. MFI-bank linkage This model focuses on financing of Microfinance Institutions (MFIs) by banking agencies for on-lending to SHGs and other small borrowers. MFIs have been playing a significant role in facilitating financial inclusion, as they are uniquely positioned in reaching out to the rural poor. Many of them operate in a limited geographical area, have a greater understanding of the issues specific to the rural poor, enjoy greater acceptability amongst the rural poor and have flexibility in operations providing a level of comfort to their clientele. The Committee on Financial Inclusion (Government of India, 2008) has, therefore, recommended that greater legitimacy, accountability and transparency will not only enable MFIs to source adequate debt and equity funds, but also eventually enable them to take and use savings as a low cost source for onlending.

Mainstreaming BC model The BC model has the potential to speed up the process of financial inclusion in India and bring the vast majority of population within the banking fold. An RBI Working Group (RBI, 2009) recognised the fact that the process of financial inclusion involves the three critical aspects of (a) access to banking markets, (b) access to credit markets and (c) financial education. The BC model should, therefore, encompass each of the above three aspects in order to be able to address the issue of financial inclusion in a holistic manner. Banks need to appreciate the benefits arising out of adopting the branchless BC model and implement the same with missionary zeal so as to achieve the ultimate goal of financial inclusion (RBI, 2009). There is a need to mainstream the BC Model by banks, by utilising the services of SHGs, NGOs, Farmers Clubs, Post Offices, PACS, retired school teachers, and other suitable persons and agencies. There are 1,39,182 Post Offices in rural India, and they are in closest proximity (2 km on an average) to rural clients compared to branches of commercial banks, RRBs and cooperatives (5 km on an average) (Priyadarshee, 2010). Thus Post Offices functioning as BCs, could lead to a massive expansion in the outreach of banks. Technological innovations (a) CBS, Smart Cards, Biometric Cards Financial inclusion could be a cost-effective business proposition if appropriate low-cost technology is adopted by commercial banks and rural financial institutions. Such technology should be able to reduce transaction costs of providing banking services in the rural, unbanked and backward areas of the country. In this context, there is a need for banking service providers to enter into passive infrastructure sharing arrangements. Technology-enabled projects, viz. the Unique Identification Number (UID) project, CBS in RRBs and cooperative credit institutions, mobile banking, hand-held devices, smart cards, biometric cards, tech-savvy BCs (trained out of FITF), routing of payment under government social schemes through banks and microfinance have the ability to catapult financial inclusion into mainstream banking business. There is a greater concentration of ATMs in urban areas than in rural areas. However, the number and percentage of ATMs in rural areas has been on a steady rise in recent years. The percentage of ATMs located in rural areas accounted for 28.4 percent of the total ATMs in the country at end-March 2009, which increased to 32.7 percent at end-March 2010 (RBI, 2010). Thus, there is an urgent need to expand ATM network in the financially excluded regions of the country.

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(b) IT-enabled Kisan credit card/General credit card Kisan Credit Card (KCC) aims at providing adequate and timely support from the banking system to the farmers for their short term credit needs. Banks need to convert KCC and General Credit Cards (GCC) to electronic credit cards, which could enable farmers to withdraw cash from ATMs anywhere in the country. Banks may consider issuing multipurpose cards which could function as Debit Cards, KCC, and GCC, as per customers needs. Any other financial services/products could also be embedded in the multipurpose card. The RBI has advised banks to consider introduction of a GCC facility up to INR 25,000 at their rural and semi-urban braches. The objective of the scheme is to provide hassle free credit to banks customers based on the assessment of cash flow without insistence on security, purpose or end-use of the credit. (c) Mobile banking There were 273.54 million mobile subscribers in Rural India, as on March 31, 2011 (TRAI, 2011). Thus, mobile phones could be a major instrument for rapid upscaling of financial inclusion. RBIs operative guidelines on Mobile Banking issued in October 2008 were reviewed and relaxed in December 2009 by enhancing the limits for mobile banking transactions up to INR 50,000 for both ecommerce and money transfer transactions, and permitting the money transfer facility up to INR 5,000 from a bank account to beneficiaries not having a bank account (RBI, 2010). Mobile banking presents banks with the lowest per-transaction cost. Further, value added services like fund transfer, payment of telephone/electricity bills and pre-paid mobile recharge could be enabled. (d) ICT-enabled mobile banking vans As directed by the RBI scheduled commercial banks have prepared ICT- based roadmap for providing banking services to all villages with population above 2,000 falling under the lead district programme by March 2012. In this context ICT-enabled Mobile Banking Vans (MBV) could provide efficient and cost-effective banking services in the unbanked and remotest corners of the country. Bank of Baroda and Indian Bank have introduced MBVs to provide banking services in the financially excluded regions. The MBVs units have CBS connectivity to provide all banking services, including deposit and withdrawal of money. The model has already been successfully tested by Bank of Baroda in Gujarat and Bihar. Demand-side interventions for financial inclusion The Rangarajan Committee (Government of India, 2008) expressed the view that In order to improve the level of inclusion among people and regions with limited or weak

demand for financial services, demand side efforts need to be undertaken including improving human and physical resource endowments, enhancing productivity, mitigating risk and strengthening market linkages. Technological innovations, infrastructure development, farm sector development and capacity building of SHGs, farmers and rural youth, are efforts on the demand side, which could make financial inclusion more widespread and sustainable. Technological innovations Infrastructure of village level kiosks is being promoted across the country by internet service providers, publicprivate partnerships and agri-business corporates. ITCs e-Choupal is by far the most successful model that has unlocked value for all the stakeholders. Under the Information Village Research Project implemented by the M S Swaminathan Research Foundation for Pondicherry fishermen, computers with internet connections are placed in the village centre, through which regular weather reports of the Indian Meteorology office can be accessed. Village level internet kiosks, by creating awareness and demand for financial services, can be an effective channel to deliver cost effective financial services to the rural poor right at their doorstep. Rural infrastructure development It is widely acknowledged that lack of infrastructure is a major constraint for growth and poverty alleviation. Improvement in rural infrastructure is, therefore, crucial for broad-based inclusive growth. Under Rural Infrastructure Development Fund (RIDF), NABARD provides loans to State Governments for the creation of rural infrastructure, broadly under agriculture and related sectors, rural connectivity and social sector. Completed projects under RIDF have led to the realisation of economic and social benefits in terms of creation of additional irrigation potential; generation of additional employment for the rural people; contribution to the economic wealth of the country; all weather connectivity/ improved connectivity to villages and marketing centres; and improvements in quality of life through better facilities in education, health and drinking water supply. Such infrastructure facilities promise to improve the accessibility of the rural poor to banks, and also improve their savings habit and credit absorption capacity. Farm sector partnership development Public private

ITCs e-Choupal infrastructure enables even small and marginal farmers, who have no access to the formal market, to receive relevant knowledge and agricultural extension services. This enables real-time price discovery and improvement in farm productivity and quality,

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making them more competitive in the national and global markets (ITC, 2010). Presently, ITC has 6,500 e-Choupals covering 40,000 villages and over 4 million farmers. By 2012, the e-Choupal network is expected to cover over 100,000 villages, representing one-sixth of rural India, and create more than 10 million e-farmers. On the other hand, the Farmers Club programme promoted by NABARD and implemented by banks, aims to organise farmers to facilitate accessing of credit, extension services, farm technology and markets. While ITC is planning to upscale the e-Choupal initiative, the possibility of collaborating with ITC to provide such infrastructure to about 77,000 Farmers Clubs, could be explored. The synergy from such collaboration could result in sustainable financial inclusion. Conclusion Financial inclusion envisages low-cost banking services to the financially excluded population and regions of the country. At the same time it has proved to be a cost effective business proposition for banks. This is possible by harnessing low cost technology, and provision of technical, financial and policy support from Government of India, RBI and NABARD. Profitable models for financial inclusion need to be adopted by banks in the form of No Frill accounts, BCs, BFs, SHG-Bank Linkage Programme, Joint Liability Group financing, Financial Literacy, CBS and ICT-enabled KCC/GCC, multipurpose smart cards, mobile banking, and mobile banking vans in the supply side. Demand side factors like IT innovations, development of rural infrastructure and development initiatives in the farm sector in the form of a synergy between e-Choupal of ITC and Farmers Club Programme could lead to widespread and sustainable financial inclusion.
Reference Chakrabarty, Dr K C (2011), Banking and Beyond: New Challenges before Indian Financial System. RBI Monthly Bulletin April 2011.

Government of India (2008), Report of the Committee on Financial Inclusion, Chairman: Dr C.Rangarajan, January 2008 ______________________ (2009), A Hundred Small Steps: Report of the Committee on Financial Sector Reforms (Chairman: Raghuram Rajan), Planning Commission, SAGE Publications India Pvt Ltd, New Delhi ITC (2010), Sustainability Report 2010 NABARD (2010), Status of Microfinance in India 2009-10, NABARD, Mumbai ______________________ (2011), Annual Report 2010-11, NABARD, Mumbai Prahalad, C.K.(2005), The Fortune at the Bottom of the Pyramid: Eradicating Poverty through Profits, Wharton School Publishing/ Pearson Education (Singapore) Pte Ltd. Priyadarshee, A (2010), Rural Development and India Post, India Post Reserve Bank of India (2008), Report on Currency and Finance 2006-08, Volume II, RBI, Mumbai _______________________ (2009), Report of the Working Group to Review the Business Correspondent Model ____________________ (2010), Report on Trend and Progress of Banking in India, 2009-10 ____________________ (2010a), Basic Statistical Returns, March 2010 ______________________ (2011), Reserve Bank of India Annual Report 2010-11 Society for Eradication of Rural Poverty (SERP) (2010), Indira Kranthi Patham Progress Report March 2010 Telecom Regulatory Authority of India (TRAI) (2011), The Indian Telecom Services Performance Indicators, January - March 2011, New Delhi

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