Financial Inclusion in rural India - an initiative

Presentation on

FINANCIAL INCLUSION

INITIATIVES IN RURAL INDIA

BY:DEVENDRA PUNDIRSAKSHI VASHISHTSHWETA DIXITSURBHI VERMASWATI JAINTARUN CHOPRAApril 11, 2023 Wealth and Investment Management 1

INTRODUCTIONWith a huge rural population, that is economically challenged, Government in India has rolled out many initiatives like

• National Rural Employment Guarantee Scheme (NREGA), • Sarva Shiksha Abhiyan (Education for All),• Bharat Nirman Programme

But to support the growth, a committee on Financial Inclusion (FI) was also formed in June 2006, with Dr. C Rangarajan as Chairman to recommend a strategy to achieve a higher Financial Inclusion in the country.

April 11, 2023 Wealth and Investment Management 2

FINANCIAL EXCLUSION

• Lack of access by certain consumers to appropriate, low cost, fair and safe financial products and services from mainstream providers

• More of concern in the community when it applies to lower income consumers and/or those in financial hardship

• Results in a reduction of choices which affects social interaction and leads to reduced participation in society


WHO ARE EXCLUDED?

• Marginal farmers • Landless labor• Unorganized sector • Urban slum dwellers • Migrants • Ethnic minorities • Socially excluded groups


EXTENT OF FINANCIAL EXCLUSION

• Coverage of (Estimates based on various studies and Market Surveys):

Check in accounts - 40%Life Insurance - 10.0%Non-Life Insurance - 0.6%Credit Card - 2% ATM + Debit Card - 13%

• Geographical coverage5.2% villages are having a bank branch

• Farmers coverage- Out of 119 million farmers, small and marginal farmers are 97.7 million (82.1 %)


WHAT IS FINANCIAL INCLUSION?

• Delivery of banking services • at an affordable cost • to the vast sections of disadvantaged and low income groups • Focuses on the poor who do not have formal financial

institutional support and getting them out of the clutches of local money lenders

Unrestrained access to public goods and services is the sine qua non of an open and efficient society. As banking services are in the nature of public good, it is essential that availability of banking and payment services to the entire population without discrimination is the prime objective of the public policy.


• FI can be thought of in two ways. One is exclusion from the payments system –i.e. not having access to a bank account.

• The second type of exclusion is from formal credit markets, requiring the excluded to approach informal and exploitative markets.


FI Includes

• Financial Inclusion should include access to financial products and services like,– Bank accounts – check in account– Immediate Credit – Savings products– Remittances & Payment services– Insurance – Healthcare– Mortgage– Financial advisory services– Entrepreneurial credit


For Example:

Attributes of the financial life of a street vendor– Daily cash incomes– Frequent purchase of stocks, largely in cash– Seasonality of income– High expenditure on health (as a proportion to

total income)– No income in periods of absence due to ill health– Sending money to family in village– Small, regular fee for child's education


CONTD…• What kind of financial services are needed for this

person– A bank account, where he/she can save small amounts at

regular intervals ideally with savings being collected at their place of work or a specified point of transaction (SPOT) in the locality

– Micro-Credit for working capital to increase stock and business

– Insurance for life– Health Insurance for minor illnesses and hospitalization– Investment plan for child's education– Pension for old age


CONTD…

• Financial Inclusion therefore, is delivery of not only banking, but also other financial services like insurance, pension, remittance, mutual funds, etc. delivered at affordable, through market driven costs

• Financial inclusion equation:NFA + BC+ ICT = FINANCIAL INCLUSION

NFA = No frill saving bank accountBC = Banks + Other Financial Institutions (OFI) + MicroFinance Institutions

+ Information TechnologyOFI = Insurance Companies, Mutual Funds, Pension Companies


Scope of Financial Inclusion2 ways:

• State-driven intervention by way of statutory enactments (for instance the US example, the Community Reinvestment Act and making it a statutory right to have bank account in France).

• Voluntary effort by the banking community itself for evolving various strategies to bring within the ambit of the banking sector the large strata of society.

When bankers do not give the desired attention to certain areas, the regulators have to step in to remedy the situation. This is the reason why the Reserve Bank of India is placing a lot of emphasis on financial inclusion.


Current Scenario: FI India

• The Indian economy growing at a steady rate of 8.5 % to 9% in the last five years or so.

• Most of the growth is from industry and services sector. Agriculture is growing at a little over 2 %.

• Potential for growth in the primary and SME sector is enormous

• Limited access to affordable financial services such as savings, loan, remittance and insurance services by the vast majority of the population in the rural areas and unorganized sector is a constraint to the growth impetus in these sectors


• Access to affordable financial services - especially credit and insurance - enlarges livelihood opportunities and empowers the poor to take charge of their lives

• Such empowerment aids social and political stability

• Apart from these benefits, FI imparts formal identity, provides access to the payments system and to savings safety net like deposit insurance. Hence FI is considered to be critical for achieving inclusive growth; which itself is required for ensuring overall sustainable overall growth in the country.


Challenges to Financial Inclusion

• Coverage • Cost of small value transactions• Infrastructure• Suitable products• Flexibility• Weak delivery model for community

enterprise• Financial management supportApril 11, 2023 Wealth and Investment Management 15

• Reaching out to the mass customers in remote locations such as villages

• Infrastructure cost, operating expenses, security, understanding of customer behaviour and risk associated with it


Approach Towards FI

• Focus of the financial inclusion at present was confined to ensuring a bare minimum access to a savings bank account without frills, to all

• Having a current account / savings account on its own, is not regarded as an accurate indicator of financial inclusion.


Cont’d...

• The approach to FI in developing countries such as India is thus somewhat different from the developed countries

• In the latter, the focus is on the relatively small share of population not having access to banks or the formal payments system whereas in India, we are looking at the majority who are excluded.


Recent Developments• In Budget speech 2010-11, the Finance Minister said that despite the

expansion of banking network in the country, there are still some areas that remain under-banked or unbanked. "A sub-committee of State Level Bankers Committee ( SLBC) will identify such areas and formulate an action plan for providing banking facilities to all these areas in the next three years,“

• Financial services secretary R Gopalan said the government has identified 60,000 areas with population of more than 2000 which do not have banking facilities

• Rs 100 crore for 2010-11 as one-time grant-in-aid to ensure provision of at least one centre or point of sales for banking services in each of the unbanked blocks in the country. To increase the access of banking facilities, banks have in place "no frill accounts" system, which do not require any balance or very less minimum balance


• In order to bring all people residing in remote villages upfront with banking operations, the RBI has started a special drive. RBI, in collaboration of the main bank in the area has decided to expand banking operations by using wireless technology and banking correspondents as tools. A business correspondent model is one model wherein NBFCs which do not accept public deposits, Non Governmental Organizations (NGOs), Micro Finance Institutions (MFIs) and other organizations of the kind can act as business correspondents and thereby finance the rural community.

• Standalone and Mobile ATMs - To further increase the banking facilities, the Reserve Bank has also allowed banks to set up standalone ATMs without prior approval. Deploying mobile ATMs which will visit every village in the area once a week. It will act as a mobile branch of the bank. It is expected that by 2011 every village having a population of 2000 will at least be connected once a week through mobile branch.

• Correspondents can be considered to be an excellent channel which banks can use to distribute their product information. Educating the consumers about the financial benefits and products of banks which are beneficial to low income groups will be a great step to tap their potential.


• Setting up of financial literacy centres and credit Counselling on a pilot basis,

• Launching a national financial literacy campaign, forging linkages with informal sources

• Evolving industry wide standards for IT Solutions

• Low cost products are some of the initiatives currently under way for furthering FI


Present Situation In India• Number of No-Frill Accounts – 28.23 million (as on

Dec. 31, 2008)• Number of rural bank branches – 31,727 constituting

39.7% of total bank branches (as on June. 31, 2009)

• Number of ATMs – 44,857 (as on May 31, 2009)

• Number of POS – 4,70,237 (as on May 31, 2009)

• Number of Cards – 167.09 million (as on May 31, 2009)

• Number of Kisan Credit cards – 76 million(Source: CMIE publication 2007-08)

• Number of Mobile phones–403 million (as on Apr.30, 2009)

-out of which 187 million (46%) do not have a bank account

(Source: Cellular Operators Association of India)


POPULATION PER BANK BRANCH (SCBs)

• Number of people per branch still very high Source: Report on Currency and Finance 2006-08 (BSR of SCBs)


http://images.google.com/imgres?imgurl=http://www.rediff.com/business/1999/oct/29rbi2.jpg&imgrefurl=http://www.rediff.com/business/1999/oct/29cred7.htm&h=82&w=83&sz=7&hl=en&start=13&um=1&tbnid=BMjcBo8lw8WVLM:&tbnh=74&tbnw=75&prev=/images?q=Reserve+Bank+of+India+emblem&um=1&hl=en&rlz=1T4GGIG_enIN236IN236&sa=N

NUMBER OF SAVING ACCOUNT(Million)

• Total Accounts per 100 persons still too less!

Source: Report on Currency and Finance 2006-08 April 11, 2023 Wealth and Investment Management 24

EARNER HAVING A BANK ACCOUNT 2007 (Per cent of Total Earners)

• Very low percentage in people having bank accounts in Annual Income less than Rs.50,000 bracket in urban and rural area

• Even in higher income bracket exclusion exists Source: Report on Currency and Finance 2006-08 (IIMS, 2007)


SOURCES OF LOAN(Per cent of Indebted Earners)

• People having Annual Income less than Rs.50,000 bracket still heavily dependent on money lenders

Source: Report on Currency and Finance 2006-08 (IIMS Survey, 2007)April 11, 2023 Wealth and Investment Management 26

Report Of The FI In India

(CHAIRMAN: DR. C RANGARAJAN 2008)

• Setting up of a National Rural Financial Inclusion Plan with a target of providing access to financial services to at least 50 per cent (50.77 mn) of excluded rural households by 2012 and the remaining by 2015

• Encouraging SHGs in excluded regions, measures for urban micro-finance and separate category of MFIs

• RRBs to extend banking services to unbanked areas• Use of PACS and other co-operatives as BCs and co-

operatives to adopt group approach for financing excluded groups


Measures Taken By RBI• No Frill account• Easier credit facility• Simpler KYC norms• Use of Information Technology

– Smart Card• EBT through banks• OTS Scheme for Small Borrowers and Eligibility for Fresh Loans• 100% financial inclusion drive

– Ensure provision of banking services nearer to the location of the no-frills account holders through a variety of channels

– Provide GCC/small overdrafts along with no-frills accounts to encourage the account holders to actively operate the accounts

– Conduct awareness drives of the facilities offered to the no-frills account holders

– Review the extent of coverage in districts declared as 100 per cent financially included

– Efficiently leverage on the available technology enabled financial inclusion solutions


CONTD…

• Bank Branch and ATM Expansion Liberalized • Expansion of Banks in the North-East • Project Financial Literacy

– Financial Literacy and Credit Counselling – Financial Curriculum in Schools and Colleges

• Business Correspondent Model


SOME FINANCIAL INSTITUTIONS ENABLING FI

• to enable financial institutions (FIs) to serve the under-served and the unbanked sector and also to service the technology requirements of entities engaged in servicing the bottom of pyramid customers


Biometric validation of Smart Card & Transaction Confirmation Receipt


SBI with KDFS• State Bank of India has joined hands at the national level with

Kalanjiam Development Financial Services (KDFS) promoted by DHAN Foundation, a non-governmental organisation, 3i Infotec Foundation and India Post, to carry banking facilities to rural population in a big way. They will handle kiosk banking and biometric smart cards in the villages.

• SBI also hiring tens of thousands of BCs, who use smart cards, mobile phones and handheld devices to reach the poor and illiterate with little knowledge of financial services

• It is a "powerful model" that helped Brazil go from numbers similar to India's to more than 80 percent financial inclusion in five years


Initiative of a State Government - pictures of technology at work

Pensioners with Bio-metric cards line-up to receive payments


PNB in Tineri - Bihar

• Punjab National Bank made a model way of financial inclusion that is not only to open the bank accounts but also free them from the clutches of the money lender

• http://corporate.skoch.in/index.php?option=com_content&view=article&id=645


Branchless Banking - Corporation Bank

• Corporation Bank developed a business model for each of the beneficiary, whereby these villagers don’t commute to the bank for any kind of transaction

• http://corporate.skoch.in/index.php?option=com_content&view=article&id=671


http://corporate.skoch.in/index.php?option=com_content&view=article&id=671

http://corporate.skoch.in/index.php?option=com_content&view=article&id=671

Jeevan Madhur - LIC

• A micro-insurance policy that is providing social security to under-privileged people at a minimum premium of 25 rupees payable on a weekly basis for a life cover ranging from 5,000 rupees up to 30,000 rupees


Barriers

• From the demand side, the big barriers are the lack of awareness about financial services and products, limited literacy, especially financial literacy of the populace, and social exclusion.

• Many of the generic financial products are unsuitable for the poor and there is not much of an effort to design products suitable to their needs

• The unfriendly and unempathetic attitude of the banks to the customers also plays an important role in undermining the demand for financial services

• On top of that, exorbitant and often times non-transparent fees, combined with burdensome terms and conditions attached to the financial products, also dampens the demand


Cont’d..

• From the supply side, the main barrier is the transaction costs that the bankers perceive. Because of current low volumes, banks find that extending financial services is not cost effective

• Furthermore, lack of communication, lack of infrastructure, language barriers and low literacy levels all raise the cost of providing services and inhibit bankers from taking initiative from the supply side


Opportunities

• Demographic profile – young labor force of age group 15-64 on a rise job opportunities grow and people start earning banks ahead of the curve get first movers advantage in exploiting this huge opportunity

• Capturing remittances – 1000s of crores of rupees of remittances across the country from migrant labor over 90% through non-formal channels

• EBT – Electronic Benefit Transfer banks fear if business would be cost effective if all or even most govt. payments are captured through EBT it can give banks large float making it an attractive business proposition


Conclusion

Financial inclusion is a great step to alleviate poverty in India. But to achieve this, the government should provide a less perspective environment in which banks are free to pursue the innovations necessary to reach low income consumers and still make a profit. Financial service providers should learn more about the consumers and new business models to reach them.


• Only 5.2% of the 650,000 villages nationwide have a bank branch. This goes on showing the amount of business opportunity out there

• “Across the globe, financial institutions are realizing that poor are bankable assets. Yet, we fail to realize that.”


THANK YOU


Financial Inclusion in rural India - an initiative

Documents

Transcript of Financial Inclusion in rural India - an initiative