ANALYSIS OF RAGHURAM RAJAN COMMITTEE REPORT

Gaurav Gupta (27)Paridhi Khemka (28)

Priyanka Kanther (29)

Rural Households 70%

Rural Bank< 10000 People

Rural Branches 45%

Earners having a Bank AccountAnn. Income (Rs.) Urban Rural Total

<50000 43.1 26.8 28.3

50000- 100000 75.5 71.2 73100000 - 200000 91.8 87.4 89.9200000 - 400000 95.5 93.6 94.9

> 400000 98 96.3 97.6

All 61.7 38 44.9

% Farm households not having access to credit

Region % Households

Northern 74.95

North-Eastern 95.91

Eastern 81.26

Central 77.59

Western 56.02

Southern 57.25

Union Territories  89.86

North Eastern, Eastern & Central regions are financially excluded to the extent of 90% and needs immediate attention

As the income grows the difference of financially excluded households between urban & rural population is decreasing.

Financial Inclusion - Statistics

Source : IISS

LINK BETWEEN INCOME AND BANK ACCOUNT BY OCCUPATION GROUP

Just 27% Households are financially Included with income <50000

Source : NSSO

SOURCES OF LOAN

Lowest Income Group have access to credit mainly through moneylenders which might lead them to debt trap

With increase in Income, credit taken from formal credit institutions increases

Source : NSSO

STRATEGY FOR FINANCIAL INCLUSION

Improvements in existing formal credit delivery mechanisms New models for effective outreach Technology based solutions

National Rural Financial Inclusion Plan (NRFIP)- To reach 50% excluded households by 2012

State Level Rural Financial Inclusion Plan (SLRFIP)- Jointly prepared by State Level Bankers Committee (SLBC) & NABARD

National Mission on Financial Inclusion (NaMFI)

STRATEGY FOR FINANCIAL INCLUSION Commercial banks

- Targets for rural & semi urban branches

- Branch Expansion in identified districts- Product Innovation- Incentivizing Human Resource- Funding

Financial Inclusion Funds

- Financial Inclusion Promotion & Development Fund- Farmers Service Centre- Promoting Rural Entrepreneurship- Self Help Groups- Capacity building BCs/BFs

- Financial Inclusion Technology Fund

STRATEGY FOR FINANCIAL INCLUSION Procedural Changes

- Simplifying Mortgage Requirements

- Exemption from Stamp Duty for Loans to Small and Marginal Farmers- Saral Documentation for Agricultural Loans- Nodal Branches

Business Facilitators- Insurance Agents, Retired Govt. officials, Postmaster

Business correspondents- MF-NBFC to act as BC- Incentive mechanism- Govt. payments through SLBC- Customer Service Points e.g. Kudumbashree in Kerela

STRATEGY FOR FINANCIAL INCLUSION Regional Rural Banks(RRBs)

- 14494 branches

- 37% of total offices of SCB in rural areas- 91% of workforce posted in rural & semi urban areas- 31% of deposit accounts, 19 % of deposit amount 37% Loan Accounts- out of29.25 lakh SHG credit linked by banking system, 31% linkage is done by RRB

RECOMMENDATIONS

Exclusive targets for Microfinance & Financial Inclusion

Provide funding support

Provide technology support

Widening Network & Expanding coverage• 535 districts covered, 87 are yet to be covered

Microfinance plan with NABARD support in terms training promotion & development

NRFIP for RRBs

Pilot testing of BCs/BFs model by RRB

Computerization by support from Financial Inclusion Fund

Tax Incentives

NABARD to support HR development

IMPLEMENTATION OF RBI INITIATIVES FOR FINANCIAL INCLUSION

Financial inclusion, viz., no frills accounts,GCC,One Time Settlement (OTS) for loans up to Rs. 25,000, use of intermediaries,etc., should be implemented by RRBs.

New Local Area Banks (LABs) ,especially in districts /regions manifesting high levels of exclusion to integrate well with local financial markets and offer a host of financial services including savings, credit, remittances, insurance, etc.

Cooperative Credit Institutions

• Cooperatives in SHG-Bank Linkage – Need for enabling legislation for admitting SHGs as members of PACS

• Use of PACS and other Primary Cooperatives as Business Correspondents:

Cooperatives Adopting Group Approach for Financing Excluded Groups

• Develop / test a new form of community based organisation other than SHGs like JLGs

• Mutual trust and support tend to be weaker in a JLG New forms of collateral or guarantee may have to be worked out.

• Use of the BF model could be thought of to organize vulnerable segments of the population into JLGs.

Setting up of Credit Guarantee Fund

• For Risk Mitigation• Providing comfort to the banks for lending to such JLGs

COOPERATIVE CREDIT INSTITUTIONS

SELF HELP GROUP – BANK LINKAGE MODEL

As of Mar 2007, 29.25 lakh SHGs have been credit-linked with banks, benefiting more than 400 lakh poor families.

Need for further deepening and upscaling of microfinance interventions

Encouraging SHGs in Excluded Regions – Funding support

• Active involvement of Department of Women and Child Development at State-level in promoting SHGs.

• The State Govts. and NABARD may set aside specific funds out of budgetary support and the Micro Finance Development and Equity Fund (MFDEF)

• Need to evolve SHG models suited to the local context in hilly regions.

Capacity building of Government functionaries By NABARD from grass root level upwards within the SHG framework.

Legal Status for SHGs : As of now, SHGs are operating as thrift and credit groups.

SHG movement retains its participatory and self-help character and they should not be politicized.

NABARD to open ‘Project Offices’ in identified 13 Priority States for upscaling it by strategizing interventions such as stronger involvement of State Governments, capacity building of NGOs, broadening the range of SHPI, etc.

Incentive package for NGOs : It could be in the form of expeditious and hassle-free grant support.

RBI/NABARD to study the issue of ‘evergreening’

Transparency in maintenance of records of SHGs : Banks, with the help of NABARD, should evolve a checklist for concurrent monitoring of SHGs.

SHGs to evolve norms for distribution of surplus

Need to restructure design & direction of SGSY subsidy:

There is a Need to formulate a single programme synergising the positive features of SGSY such as specific targeting of Below Poverty Line (BPL) families, etc. and those of the SHG –Bank Linkage Programme such as group cohesiveness, discipline, etc.

Need for technology adoption for effective disbursal of Govt. subsidy should be recognized

Interest rate subsidy

• Being charged by banks to the SHGs.• Margin available to SHGs is sufficient to take care of operational

costs• Subsidy on interest rates cuts at the very root of the self help

character of SHGs.• The subsidy could be re-directed towards capacity building efforts

or in providing input supplies and marketing support to the SHGs.

RESOURCE CENTRES

Aims

• To help organise SHGs into federations and other higher level structures effectively

• For ensuring the long term sustainability of SHGs and for helping the members of mature SHGs to graduate from microfinance to micro-enterprisesSet up by various stakeholders such as NGOs, banks,Government

departments, NABARD at the State/ district level

The specific role of Resource Centres would be :

• To work towards a comprehensive capacity building of SHGs,• Share innovative ideas and models that can be replicated

elsewhere,• Enhance functional literacy among SHG members,• Support livelihood interventions among SHG members,• Facilitate availability of all services to SHG members under one

roof.Setting Up Cost – Financial Inclusion Fund and/ or the MFDEF.

RESOURCE CENTRES

To provide SHGs alternative savings products to capture the huge potential of savings that remains untapped.

From Microcredit to Microenterprise – Challenges

• Present challenge :To induce SHGs and their members to graduate into matured levels of enterprise, factor in livelihood diversification, increase their access to the supply chain, linkages to the capital market and appropriate production and processing technologies.

• Spin off :How to address the investment capital requirements of matured SHGs

GREATER ROLE FOR NABARDFederations

• if they emerge voluntarily from amongst SHGs, can be encouraged

• However ,The Committee feels that they cannot be entrusted with the financial intermediation function

• Supported out of the Financial Inclusion Fund and the MFDEF.• Example : Andhra Pradesh ; SHG members federation Societies

under the MACS ActUrban Microfinance

• Urban branches of banks, even though having manpower and technology support, are not attuned to SHG lending or microfinance.

• Opening of specialised microfinance branches / cells• BFs / BCs could be the mechanism to reach the target clientele in

these areas.• Banks can also consider associating with MFIs undertaking urban

microlending as a viable optionAmendment : Permitting NABARD to provide micro finance services to the urban poor.

MICRO FINANCE INSTITUTIONS

About 1,000 NGO-MFIs and more than 20 Company MFI

MFIs are major players accounting for over 80% of the micro finance loan portfolio.

Recognising MF-NBFCs

• without any relaxation on start-up capital and subject to the regulatory prescriptions applicable for NBFCs. S

• Provide thrift, credit, micro-insurance, remittances and other financial services up to a specified amount to the poor in rural, semi-urban and urban areas.

• At least 80% of the assets of MF-NBFCs should be in the form of microcredit of upto Rs.50,000 for agriculture, allied and non farm activities

• In case of housing, loans upto Rs. 1,50,000/- per individual borrower, whether given through a group mechanism or directly.

MF-NBFCs as BCs of banks for only providing savings and remittance services.

Relaxation in Foreign Investment Promotion Board (FIPB) guidelines

• Minimum amount of foreign equity for MF-NBFCs may be reduced to a level of US$ 100,000/- istead of US$ 500,000/-

• NABARD may extend equity support out of its MFDEF to such MF-NBFCs based on objective rating / criteria.

• The SEBI Venture Capital Guidelines may permit Venture Capital Funds to invest in MF-NBFCs

Tax Concessions to the extent of 40% of their profits

MF-NBFCs as microinsurance agents as agents of regulated life and non-life insurance companies.

MICRO FINANCE INSTITUTIONS

Code of Conduct covering aspects including mission, governance, transparency, interest rates, handling of customer grievances, staff conduct, recovery practices, etc., may be made mandatory for MFIs

Accounting and Disclosure Norms

• ICAI may be involved in formulating appropriate norms • Banks exercise a lender’s discipline in enforcing reasonable rates

of interest and acceptable modes of recovery.

Unifying regulatory oversight : supervision of MF-NBFCs could be delegated toNABARD by RBI.

MICRO FINANCE INSTITUTIONS

Technology Applications Driving Force for Low-cost Inclusion Initiatives Essence of most models: issue of smart card (or mobile phone) to the

farmer Shared infrastructure FITF (Financial Inclusion Technology Fund): provide necessary

support for defraying part of costs

MICRO FINANCE INSTITUTIONS

Optimisation of Existing Infrastructure Optimal usage of existing banking infrastructure State Governments should make payments under National Rural

Employment Guarantee Scheme and Social Security Payments through BF/BC technology based solutions

Building database National data-base, sectoral, geographic and demographic reports, and also

a payment system Remittance needs of poor

Ahmednagar DCCB low value card linked to a bank account e-kiosks

MICRO FINANCE INSTITUTIONS

OTHER RECOMMENDATIONS

Feasibility of integrating postal network: A committee may be set up with representatives from RBI, Department of Posts, NABARD and commercial banks

Remittance product similar to InstaCash

One BC point and one micro-bank in each of the six lakh villages

Card-based remittance products: card to card transfer, or simply a scratch card type remittance card

MICRO-INSURANCE

Issues (given by Consultative Group on Micro-Insurance: not viable as a standalone insurance product not penetrated rural markets Partnership between an insurer and a social organisation micro-insurance products must have the features of simplicity,

availability, affordability, accessibility and flexibility

MICRO-INSURANCE

Leveraging the Existing Network for Micro-Insurance: Partner-agent model

Linking micro credit with micro insurance Implementation Strategy for Micro-Insurance

Human Resources Requirement and Training Operations and Systems Development of Adequate Feedback Mechanism Development of Data Base Consumer Education, Marketing and Grievance Handling

Product Development / Process Re-engineering Using Existing Infrastructure & Technology Review of existing schemes

MICRO-INSURANCE

Life Insurance Micro Insurance Guidelines (MIG) 2005 issued by IRDA has provided for equal

commission throughout the life of a policy

Health Insurance capital requirements for stand-alone health insurance companies be

reduced to Rs.50 crore Crop Insurance

policies be evolved to make crop insurance universal, viz., applicable to all crops/regions and pricing actuarial

Livestock Insurance involvement of local organisations like SHGs, dairy co-operatives, NGOs and MFIs

improves the quality of service, reduces false claims and expedites claims settlement

Asset Insurance (residential buildings, farm and nonfarm equipments and vehicles)

lack of distribution channels appropriate for lower income groups

DEMAND SIDE CAUSES & SOLUTIONS FOR FINANCIAL INCLUSION

Primary health, nutrition, primary education and vocational training Access to Land and Titling:

The Forest Dwellers and Tribal Land Rights Act, 2006 Recording of tenancy and ownership rights on land land cultivation certificate by the Village Panchayats Computerisation of land records

Access to Work – NREGA Infrastructure support – rural connectivity through Pradhan Mantri Gram

Sadak Yojana and electric power support through Rajiv Gandhi Gram Vidyutikaran Yojana

DEMAND SIDE CAUSES & SOLUTIONS FOR FINANCIAL INCLUSION

Equitable distribution of RIDF resources Enhancing productivity and incomes Value Addition – Primary processing of all agriculture produce Reducing Vulnerability

Risk Mitigation through Non-financial Channels Calamity Relief Fund Managing Price Risks through Warehouse Receipts and Commodity

Derivatives Organising the Unorganised producers

OUR VIEWS – IN FAVOR

Combined use of RRBs,BF/BC model,cooperatives ,SHGs will lead to increase in efficiency, reducing operational cost ,providing greater benefits to poor.

Concept of Resource Center Technology based models like farmers smart card should be encouraged Incentive packages for NGO For funding , Govt can have other donation funds/schemes too ,other than the

MFDEF and Investors fund . Linking Micro-credit with Micro Insurance will not only create awareness and

reach as well as reduce the operational cost with high efficiency.

OUR VIEWS - CRITICS

× SHGs should not be regulated to the limit that political interference is minimal else it would have the same fate as of RRBs ( Old Rigid Bureaucratic Inefficient Structure)

× Nothing was recommended with respect to the evergreening issue

× Local area banks concept was a failure. Inspite of creating a new system like this , we should expolit the existing resources.