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    IMPACT OF FINANCIAL

    INCLUSION AND WAYS TO

    MAKE FINANCIAL

    INCLUSION MORE

    EFFECTIVE

    RISHU AGARWAL

    PGDM, JAIPURIA INSTITUTE OF MANAGEMENT,

    LUCKNOW

    A Project Submitted As a Partial Fulfillment ofPost Graduate Diploma in Management

    April 6th, 2009 - June 6th, 2009

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    IMPACT OF FINANCIAL

    INCLUSION AND WAYS TO

    MAKE FINANCIAL

    INCLUSION MORE

    EFFECTIVE

    SUBMITTED TO:

    MR. S. GHATAKDeputy Regional Manager, Bank of Baroda, Regional Office,

    Lucknow

    SUBMITTED BY :

    RISHU AGARWALPGDM, Jaipuria Institute of Management, Lucknow

    A Project Submitted As a Partial Fulfillment ofPost Graduate Diploma in Management

    April 6th, 2009 - June 6th, 2009

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    DECLARATION

    This is to declare that Mr. Rishu Agarwal has done his Summer Project Training in

    Bank of Baroda, Regional Office, Lucknow under kind guidance ofMr.G.M.Dayal, under the overall supervision of Mr.S.Ghatak, Deputy RegionalManager, Bank of Baroda, Regional office, Lucknow. The data obtained and thereport of the project has not been submitted by the investigator for any other degreenor the project work is published in any of the journals. This is an original work.

    Mr.S.Ghatak Mr.G.M.Dayal Mr. Rishu Agarwal

    ACKNOWLEDGEMENT

    No academic endeavor can be single handedly accomplished. This work is no

    exception.

    I Rishu Agarwal, from Jaipuria Institute of Management, Lucknow would like to

    thank my project Supervisor Mr. S.Ghatak, Deputy Regional Manager, Bank of

    Baroda, Regional Ofiice, Lucknow for his support and guidance during my project

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    at Bank of Baroda. Sir, it was a great learning experience working for Bank of

    Baroda under your supervision.

    I would also like to thank Mr. G.M.Dayal for his kind guidance at every level. Sir,

    this project could not be completed without your kind guidance.Last but not the least, I would like to thank L.D.M. of Raebareli, Mr. J.N.Singh and

    L.D.M. of Sultanpur Mr. H.P.Shukla for their kind support as and when I needed. I

    would also like to acknowledge various Branch Heads of Bank of Baroda and

    Business Correspondents of FINO and INTEGRA who facilitated me at every step.

    THANK YOU ALL

    Rishu Agarwal

    CONTENTS

    EXECUTIVE SUMMARY

    About Bank of Baroda

    About Reserve Bank of India

    Measures taken by RBI towards FI

    RBI guidelines on FI by extension of banking services

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    Measurement of FI

    CHAPTER 1 INTRODUCTION

    What is FI

    Committee on FI

    FI in India

    Recent initiatives by RBI

    Indian scenario

    Steps towards FI

    Policy initiatives for FI

    CHAPTER 2 RESEARCH

    METHODOLOGY

    Raebareli

    Sultanpur

    CHAPTER 3 DATA ANALYSIS Changing contour of Indian population

    Focus on FI in India

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    Reasons for Exclusion

    RBI initiative for FI

    CHAPTER 4 INTERPRETATION

    Strategies and Approach

    Use of Intermediaries

    Role of Government

    A). FI through IT

    IT solution for FI

    Role of ICT in FI

    ICT for FI: RBI initiative

    B). FI through SHGs and Micro Finance SHG-Bank Linkage Program

    SHGs and MFI role in FI

    MF delivery model in India

    Recent initiatives by NABARD

    MF initiative by SIDBI

    C). FI through Prominent Organizations

    Branchless banking through Business Correspondents

    D). FI through Women Empowerment

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    FI-Women Empowerment

    CHAPTER 5 DISCUSSION FI-Gateway as perceived

    Points

    CHAPTER 6 FINDINGS

    Interaction with LDM, Raebareli

    Interaction with LDM, Sultanpur

    Interaction with Branch Manager, Salon

    Interaction with Branch Manager, Musafirkhana

    Interaction with Fino agent, Dadra

    Interaction with Integra agent, Visaiya

    Interaction with Gram Pradhaan, Visaiya

    CHAPTER 7 MEASURES TO MAKE FI

    MORE EFFECTIVE

    Mobile Banking Units

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    Extension Counters

    Formalities for No Frill Accounts

    YoY Analysis of each service provided by the Bank

    What are the steps taken for the Micro Credit Planning

    SHGs for loans: Involvement of Village Development

    Officer

    Guidance by Expert Panel to the villagers: For Micro

    Credit Planning

    Banking through Mobile

    Restructuring SGSY

    CHAPTER 8 BIBLIOGRAPHY

    CHAPTER 9 APPENDIX

    FINANCIAL INCLUSION AS PERCIEVED BY

    EMINENT DIGNITARIES

    Speech by Shri V.Leeladhar, Deputy Governor, RBI

    (Taking Banking services to common man-FI)

    Speech by Smt. Usha Thorat, Deputy Governor, RBI (FI

    and IT)

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    Speech by Smt. Usha Thorat, Deputy Governor, RBI (Role

    of Banks in emerging economies)

    Speech by Smt. Usha Thorat, Deputy Governor, RBI(Inclusive Financial system for the Aged)

    Speech by Smt. Usha Thorat, Deputy Governor, RBI (FI-

    Indian Experience)

    Policy Seminar on FI through MF (Held at Udaipur)

    Minutes on National Conference on FI (Held in New Delhi)

    EXECUTIVE SUMMARY

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    ABOUT BANK OF BARODA

    A saga of vision and enterprise

    It has been a long and eventful journey of more than a century across 25 countries. Starting in1908 from a small building in Baroda to its new hi-rise and hi-tech Baroda Corporate Centre in

    Mumbai, is a saga of vision, enterprise, financial prudence and corporate governance.It is a story scripted in corporate wisdom and social pride. It is a story crafted in private capital,princely patronage and state ownership. It is a story of ordinary bankers and their extraordinarycontribution in the ascent of Bank of Baroda to the formidable heights of corporate glory. It is astory that needs to be shared with all those millions of people - customers, stakeholders,employees & the public at large - who in ample measure, have contributed to the making of aninstitution.

    Mission statement

    To be a top ranking National Bank of International Standards committed to augmenting stake

    holders' value through concern, care and competence.

    ABOUT THE RBI

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    The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions oftheReserve Bank of India Act, 1934.

    The Central Office of the Reserve Bank was initially established in Calcutta but was permanentlymoved to Mumbai in 1937. The Central Office is where the Governor sits and where policies are

    formulated.

    Though originally privately owned, since nationalisation in 1949, the Reserve Bank is fullyowned by the Government of India.

    Preamble

    The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as:

    "...to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary

    stability in India and generally to operate the currency and credit system of the country to its

    advantage."

    Measures undertaken by Reserve Bank of India

    towards Financial Inclusion

    In November 2005, banks were advised to make available a basic banking no-frills account

    with low or nil minimum stipulated balances as well as charges to expand the outreach of suchaccounts to vast sections of the population. Several banks have since introduced such 'no-frills'account with and without value-added features. According to the information available with theReserve Bank, about five lakh no-frill accounts have been opened until March 31, 2006, ofwhich about two-third are with the public sector and one-third with the private sector banks.

    In order to ensure that persons belonging to low income group, both in urban and rural areas donot encounter difficulties in opening bank accounts owing to procedural hassles, the know yourcustomer (KYC) procedures for opening accounts has been simplified. The Reserve Bank hasdirected banks to make available all printed material used by retail customers in English, Hindiand the concerned regional language. More recently, in January 2006, banks were permitted toutilise the services of non-governmental organisations (NGOs/SHGs), micro-finance institutionsand other civil society organisations as intermediaries in providing financial and bankingservices through the use of business facilitator and business correspondent models.

    To extend hassle-free credit to bank customers in rural areas, the guidelines on general creditcard (GCC) schemes were simplified to enable customers access credit on simplified terms andconditions, without insistence on security, purpose or end-use of credit. With a view of providinghassle free credit to customers, banks were allowed to issue general credit cards akin to Kisan

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    http://www.rbi.org.in/scripts/OccasionalPublications.aspx?head=Reserve%20Bank%20of%20India%20Acthttp://www.rbi.org.in/scripts/OccasionalPublications.aspx?head=Reserve%20Bank%20of%20India%20Acthttp://www.rbi.org.in/scripts/OccasionalPublications.aspx?head=Reserve%20Bank%20of%20India%20Act
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    credit cards. A simplified mechanism for one-time settlement of loans with principal amount upto Rs.25,000 which have become doubtful and loss assets as on September 30, 2005 wassuggested for adoption. In case of loans granted under Government-sponsored schemes, bankswere advised to frame separate guidelines following a state-specific approach to be evolved bythe State-Level Bankers Committee (SLBC). Banks have been specifically advised that

    borrowers with loans settled under the one time settlement scheme will be eligible to re-accessthe formal financial system for fresh credit. Banks were advised to give effect to these measuresat all branches for achieving greater financial inclusion. Initiatives have also been undertakentowards achieving greater financial inclusion in the North-Eastern region, which had perenniallyremained under-banked.

    The Reserve Bank considers that IT-enabled services can meet the challenges which need to beaddressed for increasing the scope and coverage of financial inclusion such as lack of adequateinfrastructure, higher transaction costs and low volumes of transactions. The Reserve Bank hasalready initiated action in the North-Eastern region.

    RBI Guidelines on Financial Inclusion by Extension of

    Banking Services Use of Business Facilitators(BFs)

    and Business Correspondents (BCs)

    Based on queries received from certain banks, we had clarified that there is no objection to banksengaging individuals as Business Facilitators (BFs) depending on the comfort level of banks,subject to their taking adequate precautions and conducting proper due diligence before engagingindividuals as BFs.

    In the light of the announcement made in paragraph 92 of the Budget Speech 2008-2009 by theHonble Finance Minister, Govt. of India, it has been decided to permit banks to engage retiredbank employees, ex-servicemen and retired government employees as Business Correspondents(BCs) with immediate effect, in addition to the entities already permitted, subject to appropriatedue diligence. While appointing such individuals as BCs, banks may ensure that theseindividuals are permanent residents of the area in which they propose to operate as BCs and alsoinstitute additional safeguards as may be considered appropriate to minimise agency risk.

    Further, with a view to ensuring adequate supervision over the operations and activities of theBCs by banks, it has been decided that every BC will be attached to and be under the oversightof a specific bank branch to be designated as the base branch. The distance between the place ofbusiness of a BC and the base branch, ordinarily, should not exceed 15 Kms in rural, semi-urbanand urban areas. In metropolitan centres, the distance could be upto 5 kms. However, in case aneed is felt to relax the distance criterion, the matter can be referred to the District ConsultativeCommittee (DCC) of the district concerned for approval. Where such relaxations cover adjoiningdistricts, the matter may be cleared by the State Level Bankers' Committee (SLBC), which shall

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    also be the concerned forum for metropolitan areas. Such requests may be considered by theDCC/SLBC on merits in respect of under-banked areas or where the population is scattered overlarge area and where the need to provide banking services is imperative but having a branch maynot be viable, keeping in view the ability of the base branch of the bank making the request toexercise sufficient oversight on the BC.

    Where currently BCs are operating beyond the distance limits specified above, DCC/SLBC maybe kept informed and steps may be taken to conform to the stipulated limits within six monthstime, unless specific approval is accorded by the DCC/SLBC on the grounds indicated inparagraph 4 above. Needless to add, in the context of scaling up of BF/BC model which is a hugechallenge given the size of the country, banks should bring to the notice of RBI any importantissues to facilitate taking prompt corrective steps. The implementation of the BF/BC modelshould be monitored closely by controlling authorities of banks, who should specifically lookinto the functioning of BFs/BCs during the course of their periodical visits to the branches.Further, banks should also put in place an institutionalized system for periodically reviewing theimplementation of the BF/BC model at the Board level.

    Measurement of Financial Inclusion /Exclusion

    While the importance of financial inclusion has been widely accepted, much less is known abouthow inclusive the financial systems are and who has access to which financial services. Theliterature on financial inclusion lacks a comprehensive measure that can be used to indicate theextent of financial inclusion across countries. Though indicators of the depth of banking system,capital markets, and insurance sector are widely available, there is less information availableabout the degree of financial inclusiveness. Lack of information is more conspicuous indeveloping countries where there is little systematic information on who is served by the formal

    financial sector, which financial institutions or services are the most effective at supportingaccess by poor households and small enterprises, or what practical and policy barriers may behindering the accessibility. Individual indicators, viz., number of bank accounts and number ofbank branches that are generally used as measures of financial inclusion, can provide only partialinformation on the level of financial inclusion in an economy. Financial services or productsrendered by banks, postal savings banks, credit unions, finance companies, micro-financeinstitutions (MFIs), and other formal and quasi-formal non-bank institutions generally form thebasis for measuring the financial inclusion.

    It is often observed that people may have access to financial services, but may not wish to usethem. Such voluntarily excluded persons, it is argued, should be included in measures of access

    even if they do not use financial services. However, even among the voluntarily excluded, thismay in reality be because such services are unaffordable, unsuited to their needs, or because thepotential users fear that they will be declined upon request. Among the involuntarily excludedfrom services such as credit, some represent high credit risk that lenders are discouraged to prudently serve

    There are various measures of access to finance. For instance, access to finance can be measured

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    in terms of access to certain institutions (such as banks, insurance companies, and MFIs or interms of access to the functions that such institutions perform, or the services that they provide(such as payments services, savings or loans and credits). Yet another approach is to look atdetails on the uses of specific financial products such as debit cards, credit cards, life insuranceand home mortgages, among others. However, these are highly country-specific. The core access

    indicators often used are generally based on institutional distinctions concerning specifically thedegree of formality of the financial institutions.

    CHAPTER 1

    INTRODUCTION

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    INTRODUCTION

    No universally accepted definition of financial inclusion is available. Financial inclusion has

    generally been defined in terms of exclusion from the financial system. Broadly, financial

    exclusion is construed as the inability to access necessary financial services in an appropriate

    form due to problems associated with access, conditions, prices, marketing or self-exclusion.

    The working or operational definitions of financial exclusion generally focus on ownership oraccess to particular financial products and services. There is no single comprehensive measure

    that can be used to indicate the extent of financial inclusion across economies. Specific indicators

    such as number of bank accounts, number of bank branches, that are generally used as measures

    of financial inclusion, can provide only partial information on the level of financial inclusion in

    an economy.

    What is Financial Inclusion?

    Financial inclusion is delivery of banking services at an affordable cost to the vastsections of disadvantaged and low income groups. Unrestrained access to public goodsand services is thesine qua non of an open and efficient society. As banking services arein the nature of public good, it is essential that availability of banking and paymentservices to the entire population without discrimination is the prime objective of thepublic policy.

    Indian economy in general and banking services in particular have made rapid strides in the

    recent past. However, a sizeable section of the population, particularly the vulnerable groups,such as weaker sections and low income groups, continue to remain excluded from even the mostbasic opportunities and services provided by the financial sector. To address the issue of suchfinancial exclusion in a holistic manner, it is essential to ensure that a range of financial servicesis available to every individual. These services are:

    (i) A no-frills banking account for making and receiving payments,(ii) A savings product suited to the pattern of cash flows of a poor household,

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    (iii) Money transfer facilities,(iv) Small loans and overdrafts for productive, personal and other purposes, &(v) Micro-insurance (life and non-life)

    Committee on Financial Inclusion

    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 .

    The major recommendations of the Committee include :

    1). Launching of a National Rural Financial Inclusion Plan (NRFIP) in mission mode with a

    clear target to provide access to comprehensive financial services, including credit, to at least

    50% (say 55.77 million) of the financially excluded rural cultivator/non-cultivator households,

    by 2012 through rural/semi-urban branches of Commercial Banks and Regional Rural Banks .

    The remaining households have to be covered by 2015.For the purpose, a National Mission on

    Financial Inclusion (NaMFI) is proposed to be constituted comprising representatives from all

    stakeholders to aim at achieving universal financial inclusion within a specific time frame.

    2). Constitution of two funds with NABARD the Financial Inclusion Promotion &

    Development Fund(FIPF) and the Financial Inclusion Technology Fund(FITF) with an initial

    corpus of Rs. 500 crore each to be contributed by GoI / RBI / NABARD. The FIPF will focus on

    interventions like, Farmers Service Centres, Promoting Rural Entrepreneurship, Self-Help

    Groups and their Federations, Developing Human Resources of Banks, Promotion of

    Resource Centres and Capacity Building of Business Facilitators and Correspondents, while

    the FITF will focus on funding of low-cost technology solutions

    3). Deepening the outreach of microfinance programme through finacing of SHG/JLGs and

    setting up of a risk mitigation mechanism for lending to small marginal farmers/share

    croppers/tenant farmers through JLGs

    4). Use of PACSs as Business Facilitators and Correspondents

    5). Micro finance Non Banking Finance Companies (MF-NBFCs) could be permitted to

    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. Such MF-NBFCs may also be

    recognized as Business Correspondents of banks for providing only savings and remittance

    services and also act as micro insurance agents

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    6). Opening of specialised microfinance branches / cells in potential urban centers for

    exclusively catering to microfinance and SHG - bank linkages requirements of the urban poor.

    An enabling provision be made in the NABARD Act, 1981 permitting NABARD to provide

    micro finance services to the urban poor

    Financial Inclusion in India Key Elements

    (i) Financial inclusion is delivery of banking services at an affordable cost to the vast sections ofdisadvantaged and low income groups. Unrestrained access to public goods and services is the sinequa non of an open and efficient society. As banking services are in the nature of public good, it isessential that availability of banking and payment ser vices to the entire population withoutdiscrimination is the prime objective of the public policy (Leeladhar, 2006).(ii) Financial exclusion signifies lack of access by certain segments of the society to appropriate, low-cost, fair and safe financial products and services from mainstream providers. Financial exclusion is

    thus a key policy concern, because the options for operating a household budget, or a micro/smallenterprise, without mainstream financial services can often be expensive. This process becomes self-reinforcing and can often be an important factor in social exclusion, especially for communities withlimited access to financial products, particularly in rural areas (Mohan, 2006).(iii) Financial inclusion means the provision of affordable financial services, viz., access to paymentsand remittance facilities, savings, loans and insurance services by the formal financial system tothose who tend to be excluded (Thorat, 2006).(iv) The process of financial inclusion consists of seeking each household and offering their inclusionin the banking system (Reddy, 2007).(v) The process of ensuring access to financial services and timely and adequate credit where neededby vulnerable groups such as weaker sections and low income groups at an affordable cost (TheCommittee on Financial Inclusion, Chairman: Dr. C. Rangarajan, 2008).

    The administrative framework for rural lending in India was provided by the Lead Bank Schemeintroduced in 1969, which was an important step towards implementation of the two-fold objectivesof deposit mobilisation on an extensive scale and stepping up of lending to weaker sections of theeconomy. Realising that the flow of credit to employment oriented sectors was inadequate, thepriority sector guidelines were issued to the banks by the Reserve Bank in the late 1960s to step upthe flow of bank credit to agriculture, small-scale industry, self-employed, small business and theweaker sections within these sectors. The target for priority sector lending was gradually increased to40 per cent of advances in the case of domestic banks (32 per cent, inclusive of export credit, in thecase of foreign banks) for specified priority sectors. Sub-targets under the priority sector, along withother guidelines including those relating to Government sponsored programmes, were used to

    encourage the flow of credit to the identified vulnerable sections of the population such as scheduledcastes, religious minorities and scheduled tribes. The Differential Rate of Interest (DRI) Scheme wasinstituted in 1972 to provide credit at concessional rate to low income groups in the country.Since the 1970s, the promotional aspects of banking policy have come into greater prominence. Themajor emphasis of the branch licensing policy during the 1970s and the 1980s was on expansion ofcommercial bank branches in rural areas, resulting in a significant expansion of bank branches anddecline in population per branch. The branch expansion policy was designed, inter alia, as a tool forreducing inter-regional disparities in banking development, deployment of credit and urban-rural

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    pattern of credit distribution. In order to encourage commercial banks and other institutions to grantloans to various categories of small borrowers, the Reserve Bank promoted the establishment of theCredit Guarantee Corporation of India in 1971 for providing guarantees against the risk of default inrepayment. The scheme, however, was subsequently discontinued.The National Bank for Agriculture and Rural Development (NABARD) was set up in 1982 mainly toprovide refinance to the banks extending credit to agriculture. RRBs, which were set up in 1975 tocater, inter alia, to the credit requirements of the rural poor, have recently been restructured.

    Recent initiatives by Reserve Bank of India

    The period 1969 to 1991 saw a huge increase in the branch outreach in India as the averagepopulation covered by a bank branch fell from 64,000 to 13,711. In 1991 along with reforms forliberalising and opening the economy, financial sector reform aimed at deregulation, increasedcompetition and strengthening the banking sector through recapitalisation and adoption ofprudential measures. The Indian banking industry today is quite robust and strong to be able totake on the challenges of achieving greater financial inclusion.

    In the Annual Policy of the Reserve Bank for 2004-05, the Governor, Dr. Reddy observed and Iquote -There has been expansion, greater competition and diversification of ownership of banksleading to both enhanced efficiency and systemic resilience in the banking sector. However,

    there are legitimate concerns in regard to the banking practices that tend to exclude rather than

    attract vast sections of population, in particular pensioners, self-employed and those employedin unorganised sector. While commercial considerations are no doubt important, the banks have

    been bestowed with several privileges, especially of seeking public deposits on a highly

    leveraged basis, and consequently they should be obliged to provide banking services to allsegments of the population, on equitable basis.

    Pursuant to this, the Reserve Bank has undertaken a number of measures with the objective ofattracting the financially excluded population into the structured financial system. In November2005, banks were advised to make available a basic banking no-frills account with low or nilminimum balances as well as charges to expand the outreach of such accounts to vast sections ofthe population. Banks are required to make available all printed material used by retail customersin the concerned regional language.

    In order to ensure that persons belonging to low income group, both in urban and rural areas donot encounter difficulties in opening bank accounts, the know your customer (KYC) proceduresfor opening accounts has been simplified for those persons with balances not exceeding Rs50000/- (about GBP 600) and credits in the accounts not exceeding Rs.100000/- (about GBP1200) in a year. The simplified procedure allows introduction by a customer on whom full KYCdrill has been followed.

    Banks have been asked to consider introduction of a General purpose Credit Card (GCC) facilityup to Rs. 25000/- at their rural and semi urban braches. The credit facility is in the nature ofrevolving credit entitling the holder to withdraw upto the limit sanctioned. Based on assessment

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    of household cash flows, the limits are sanctioned without insistence on security or purpose.Interest rate on the facility is completely deregulated.

    A simplified mechanism for one-time settlement of overdue loans up to Rs.25,000/- has beensuggested for adoption. Banks have been specifically advised that borrowers with loans settled

    under the one time settlement scheme will be eligible to re-access the formal financial system forfresh credit.

    In January 2006, banks were permitted to utilise the services of non-governmental organisations(NGOs/SHGs), micro-finance institutions and other civil society organisations as intermediariesin providing financial and banking services through the use of business facilitator and businesscorrespondent (BC) models. The BC model allows banks to do cash in - cash out transactions atthe location of the BC and allows branchless banking.

    Other measures include setting up pilots for credit counselling and financial education. Amultilingual website in 13 Indian languages on all matters concerning banking and the common

    person has been launched by the Reserve Bank on 18 June 2007.

    Indian Scenario

    In India, growth with equity has been the central objective right from the inception of the

    planning process. Accordingly, over the years, initiatives have been taken continuously by the

    Government and the Reserve Bank to address the issue of inclusive growth. Notwithstanding the

    rapid increase in overall GDP and per capita income in recent years, a significant proportion of

    the population in both rural and urban areas still experiences difficulties in accessing the formal

    financial system. Recent concerns have arisen from an inadequate reduction in poverty levels,

    sectoral divergences in growth and employment opportunities and tardy improvement in othersocial indicators, despite higher economic growth. The Eleventh Five Year Plan, therefore, re-

    emphasised the need for a more inclusive growth in order to ensure that the per capita income

    growth is more broad-based. The farming, micro, small and medium enterprises have immense

    potential to play a critical role in achieving the objective of faster and more inclusive growth as

    these sectors contribute to output and employment generation in a significant way with capacity

    to expand regionally diversified production and generating widely dispersed off-farm

    employment. Bringing the larger population within the structured and organised financial system

    has explicitly been on the agenda of the Reserve Bank since 2005 (Mohan, 2006). While several

    central banks focus solely on inflation, many in developed and emerging economies alike,

    including India, also focus on growth. There is currently a perception that there are a largenumber of people, potential entrepreneurs, small enterprises and others, who may not have

    adequate access to the financial sector, which could lead to their marginalisation and denial of

    opportunity to grow and prosper. The Reserve Bank has, therefore, introduced various new

    measures to encourage the expansion of financial coverage in the country. Financial inclusion is

    considered essential for fostering economic growth in a more inclusive fashion.

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    In a fast growing economy, an important issue is how to sustain and diversify growth so that the

    risk to growth process is diversified across sectors. It is in this context that the search for

    potential sources of incremental growth, i.e., sectors that have difficulty in accessing financial

    services, assumes importance. Therefore, including such segments or sectors would, on the one

    hand, unleash their productive capacities, and on the other, would augment domestic demand on

    a sustainable basis driven by income and consumption growth from such sectors. This would also

    have strong inter-sectoral linkages.Bank nationalization in India marked a paradigm shift in the

    focus of banking as it was intended to shift the focus from class banking to mass banking. The

    rationale for creating Regional Rural Banks was also to take the banking services to poor people.

    The branches of commercial banks and the RRBs have increased from 8321 in the year 1969 to

    68,282 branches as at the end of March 2005. The average population per branch office has

    decreased from 64,000 to 16,000 during the same period. However, there are certain under-

    banked states such as Bihar, Orissa, Rajasthan, Uttar Pradesh, Chattisgarh, Jharkhand, West

    Bengal and a large number of North-Eastern states, where the average population per branch

    office continues to be quite high compared to the national average. As you would be aware, thenew branch authorization policy of Reserve Bank encourages banks to open branches in these

    under banked states and the under banked areas in other states. The new policy also places a lot

    of emphasis on the efforts made by the Bank to achieve, inter alia, financial inclusion and other

    policy objectives. One of the benchmarks employed to assess the degree of reach of financial

    services to the population of the country, is the quantum of deposit accounts (current and

    savings) held as a ratio to the adult population. In the Indian context, taking into account the

    Census of 2001 (ignoring the incremental growth of population thereafter), the ratio of deposit

    accounts (data available as on March 31, 2004) to the total adult population was only 59%

    (details furnished in the table). Within the country, there is a wide variation across states. For

    instance, the ratio for the state of Kerala is as high as 89% while Bihar is marked by a lowcoverage of 33%. In the North Eastern States like Nagaland and Manipur, the coverage was a

    meager 21% and 27%, respectively. The Northern Region, comprising the states of Haryana,

    Chandigarh and Delhi, has a high coverage ratio of 84%. Compared to the developed world, the

    coverage of our financial services is quite low. For instance, as per a recent survey commissioned

    by British Bankers' Association, 92 to 94% of the population of UK has either current or savings

    bank account.

    Steps towards financial inclusion

    In the context of initiatives taken for extending banking services to the small man, the mode offinancial sector development until 1980s was characterized by

    a hugely expanded bank branch and cooperative network and new organizational formslike RRBs;

    a greater focus on credit rather than other financial services like savings and insurance,although the banks and cooperatives did provide deposit facilities;

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    lending targets directed at a range of priority sectors such as agriculture, weakersections of the population, etc;

    interest rate ceilings; significant government subsidies channeled through the banks and cooperatives, as well

    as through related government programmes;

    a dominant perspective that finance for rural and poor people was a social obligation andnot a potential business opportunity.

    It is absolutely beyond any doubt that the financial access to masses has significantly improvedin the last three and a half decades. But the basic question is, has that been good enough. As Imentioned earlier, the quantum of deposit accounts (current and savings) held as a ratio to theadult population has not been uniformly encouraging. There is a tremendous scope for financialcoverage if we have to improve the standards of life of those deprived people.

    With a view to enhancing the financial inclusion, as a proactive measure, the RBI in its AnnualPolicy Statement for the year 2005-06, while recognizing the concerns in regard to the banking

    practices that tend to exclude rather than attract vast sections of population, urged banks toreview their existing practices to align them with the objective of financial inclusion. In the MidTerm Review of the Policy (2005-06), RBI exhorted the banks, with a view to achieving greaterfinancial inclusion, to make available a basic bankingno frills account either with nil or veryminimum balances as well as charges that would make such accounts accessible to vast sectionsof the population. The nature and number of transactions in such accounts would be restrictedand made known to customers in advance in a transparent manner. All banks are urged to givewide publicity to the facility of such no frills account so as to ensure greater financial inclusion.

    Further, in order to ensure that persons belonging to low income group both in urban and ruralareas do not face difficulty in opening the bank accounts due to the procedural hassles, the KYC

    procedure for opening accounts has been simplified for those persons who intend to keepbalances not exceeding rupees fifty thousand (Rs. 50,000/-) in all their accounts taken togetherand the total credit in all the accounts taken together is not expected to exceed rupees one lakh(Rs.1,00,000/-) in a year.

    POLICY INITIATIVE FOR FINANCIAL INCLUSION

    Nationalization of banks

    Establishments of Regional Rural Banks

    Prescription of priority sector targets

    Lending to weaker sectors at concession

    Introduction of lead bank scheme

    Branch licensing norms with focus on rural/ semi urban branches

    No frill accounts

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    Know your customer norms

    General credit card facility

    CHAPTER 2

    RESEARCH METHODOLOGY

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    Working / Methodology followed by respective Lead Branches of B.O.B.

    1) RAE BAREILLY (LDM: Mr. J.N.Singh)

    Method:

    In step one, 100% financial inclusion done

    Teams made at village level

    Teams are told about the villages and number of families

    Teams go to every village and enquire about account holding in any institution

    Teams enquire about the family members, their work and income

    Step two will be total financial inclusion

    We will find out the total income

    What are the needs

    Where and how much is the expected expenditure

    If there are savings, then how much

    Tell them and guide them to invest judiciously

    Guide them, as to how improve wellness and savings

    We will conduct counseling

    After all the consideration, they are given the estimate for all the things and then

    they are offered loan

    Women empowerment:

    Women are trained to do the work

    Eg. Handicraft, homemade items, etc.

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    Results of women empowerment:

    Repaid loans of private money lenders (seths and sahukars) from the

    revenue generated

    Liquor banned in many villages

    Problems:

    Village people do not tell about their accounts

    If they work, they do not disclose it

    If they have rented their home or land, they do not tell that

    They just say, no income to deposit into the bank

    2) SULTANPUR(LDM: Mr. H.P.Shukla)

    Method:

    Basic objective is to join every family with the bank

    Involved private agencies to accomplish the task

    To identify the potential and then give loan to families

    Problems:

    Lack of human resource with the bank so that the bank staff cannot go to the field

    to mobilize more customers

    Private company which is contracted is doing the job for its own benefit

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    CHAPTER 3

    DATA ANALYSIS

    Changing Contours of Indian Population

    India, the seventh largest country in size, continues to occupy the second largest populatedcountry after China. The aged population in India (i.e. over 60 years) that stood at 84.7 million(7.5 per cent) in 2005 is expected to rise to 141 million (10.2 per cent) by 2020 and thereafter

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    reach 194 million (13 per cent) in 2030. Even though income levels are going up and povertydeclining, it can be reasonably expected that a significant number among the aged populationwould be in the low income category. The aged population requires additional attention bothfrom the society and from the Government. More funds need to be allocated for pension, healthand other social benefits of the aged people, while declining savings of the aged population could

    pose a threat in meeting such additional expenditure. India is one of the highest savers among theemerging market economies. Gross Domestic Saving, as percentage of GDP at current marketprices, increased from 23.5 per cent in 2001-02 to 34.8 per cent in 2006-07. Household savingsrose from 22.1 per cent in 2001-02 to 23.8 per cent in 2006-07. Financial savings howeverconstituted only 47.5 per cent of total household savings in 2006-07

    Financial inclusion and Financial Protection

    As you are aware RBI and the GOI have been pushing for greater financial inclusion. Thisimplies, first of all, providing an accessible and safe place to the people at large for putting theirsavings which can be withdrawn in case of emergency. What RBI is trying, is to see that the un-

    banked population gets access to bank accounts. Such bank accounts are also critical to ensure asafe and reliable payments system for old age pensions. Pension payment for BPL families andunorganised sector targeted at nearly 300 million workers, can be paid through bank accountsthereby not only saving the cost of making the payments, but also minimising leakages and pre-empting payments in the names of persons who do not actually exist. Bio metric smart cards/mobile technology and use of business correspondents as agents by banks have made no frillsbanking accounts accessible to low income families. A very successful example of using suchaccounts for old age pension payments can be seen in the State of Andhra Pradesh, where a pilotcarried out in the Warangal district is being up-scaled to cover all districts. Building up savingsin such accounts and provision of small overdrafts facilitates creation of track record and givesconfidence to the saver that emergency needs will be met. RBI now treats such overdrafts upto

    Rs.25,000/- against no frills accounts and credit provided under GCC at rural and semi urbanbranches as priority sector under indirect credit to agriculture. Further, RBI has allowed banks touse ex-servicemen, retired bank and government employees to be business correspondents toprovide doorstep banking to the customers in remote areas that are far from a bank branch. Thesemeasures viz. use of intermediaries and IT solutions have now made it possible to provideaccessible banking facilities to the large parts of the population that were hitherto outside theaccess of formal banking. It is easy to see how critical this payments infrastructure will be forproviding old age pensions, besides life, health, weather, asset and livestock insurance especiallyin rural areas - Insurance is very important as it reduces credit risk and allows greater flow ofcredit at lower cost. Thus there is a huge synergy between financial inclusion and financialprotection for achieving a more inclusive financial system.

    Housing, Health and Life Style

    As is found in surveys, savings in India is mainly for owning a house, meeting emergency needs,education of children and social events such as marriages. Compared to the earlier period of highinterest rates, owning a house in India has became quite affordable with lower interest rates andtax breaks. There has been a steady increase in housing loans from 3.4 per cent of GDP in 2001to 8.5 per cent of GDP in 2006. As share of credit, it moved up to 12 per cent of NBC in March

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    2007. The average interest rate on housing loans has consistently declined from around 16 percent in 1995-96 to around 8 per cent in 2004-05, though it hardened moderately thereafter (NHB,2006). Reflecting these developments, housing stock in the country had also increased from 148million units in 1991 to 187 million units in 2001 and is expected to further gone up to 218million units in 2007 (NHB, 2006). While on the one hand, there is an improvement in longevity,

    on the other hand, cost of good health care facilities is spiraling and there is little social security.The availability of affordable health insurance services to senior citizens is limited. TheGovernment, on December 6, 2006, launched an exclusive health insurance scheme, VaristhaMediclaim for Senior Citizens, offered by National Insurance Company. The Union Budget2007-08 announced that the other three public sector insurance companies would also offer asimilar product to senior citizens..There is, however, still a large gap between the supply ofhealth insurance facilities available to older people and demand/requirement for the same. TheIRDA constituted a committee in April 2007 to look into, among others, issues relating to healthinsurance schemes for senior citizens, streamlining procedures and suggest possible incentives tothe senior citizens for adopting healthier lifestyles. The Committee made variousrecommendations including on proper product designing according to the needs of senior citizens

    and their capacity to pay, drafting of insurance policies in simple language, uniform definition ofterminology and standard terms and conditions for the Industry, portability of covers, sharing ofinformation etc. Recently with the persuasion of GOI Jan Shree Bima Yojna has been launchedwhere in women beneficiaries of SHG get a protection up to Rs. 50000/= on a mere premium ofRs.200/= p.a.

    Focus of financial inclusion in India

    The Indian economy is growing at a steady rate of 8.5 % to 9% in the last five years or so. Mostof the growth is from industry and services sector. Agriculture is growing at a little over 2 %.

    The potential for growth in the primary and SME sector is enormous. Limited access toaffordable financial services such as savings, loan, remittance and insurance services by the vastmajority of the population in the rural areas and unorganised sector is believed to be acting as aconstraint to the growth impetus in these sectors. Access to affordable financial services -especially credit and insurance - enlarges livelihood opportunities and empowers the poor to takecharge of their lives. Such empowerment aids social and political stability. Apart from thesebenefits, FI imparts formal identity, provides access to the payments system and to savings safetynet 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.

    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 nothaving access to banks or the formal payments system whereas in India, we are looking at themajority who are excluded.

    FI can be thought of in two ways. One is exclusion from the payments system i.e. not havingaccess to a bank account. The second type of exclusion is from formal credit markets, requiringthe excluded to approach informal and exploitative markets. After nationalisation of major banksin India in 1969, there was a significant expansion of branch network to unbanked areas and

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    stepping up of lending to agriculture, small industry and business. More recently, the focus is onestablishing the basic right of every person to have access to affordable basic banking services.

    Measures of financial exclusion

    One common measure of FI is the percentage of adult population having bank accounts (Chart-1). Going by the available data on the number of savings bank accounts and assuming that oneperson has only one account, (which assumption may not be correct as many persons could havemore than one bank account) we find that on an all India basis 59 per cent of adult population inthe country have bank accounts in other words 41 per cent of the population is unbanked. In

    rural areas the coverage is 39 per cent against 60 per cent in urban areas. The unbankedpopulation is higher in the North Eastern and Eastern regions.

    The extent of exclusion from credit markets is much more, as number of loan accounts

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    constituted only 14 per cent of adult population (Chart-2). In rural areas, the coverage is 9.5 percent against 14 per cent in urban areas. Regional differences are significant with the creditcoverage at 25 per cent for the Southern Region and as low as 7, 8 and 9 per cent respectively inNorth Eastern, Eastern and Central Regions.

    The extent of exclusion from credit markets can be observed from a different view point. Out of203 million households in the country, 147 million are in rural areas 89 million are farmerhouseholds. 51.4 per cent of farm households have no access to formal or informal sources ofcredit while 73 per cent have no access to formal sources of credit. Similar data are notavailable for non farm and urban households.

    Looking at the different sources of credit, it is observed that the share of non institutional sourcesreduced from 70.8% in 1971 to 42.9% in 2002. However after 1991, the share of noninstitutional sources has increased; specifically, the share of moneylenders in the debt of ruralhouseholds increased from 17.5 % in 1991 to 29.6% in 2002. In urban areas the share of noninstitutional sources has come down significantly from 40% in 1981 to around 25 % in 2002.

    Who are the excluded?

    The financially excluded sections largely comprise marginal farmers, landless labourers, orallessees, self employed and unorganised sector enterprises, urban slum dwellers, migrants, ethnicminorities and socially excluded groups, senior citizens and women. While there are pockets oflarge excluded population in all parts of the country, the North East, Eastern and Central regionscontain most of the financially excluded population.

    Reasons for financial exclusion

    There are a variety of reasons for financial exclusion. In remote, hilly and sparsely populatedareas with poor infrastructure, physical access itself acts as a deterrent. From the demand side,lack of awareness, low incomes/assets, social exclusion, illiteracy act as barriers. From thesupply side, distance from branch, branch timings, cumbersome documentation and procedures,unsuitable products, language, staff attitudes are common reasons for exclusion. All these resultin higher transaction cost apart from procedural hassles. On the other hand, the ease ofavailability of informal credit sources makes these popular even if costlier. The requirements ofindependent documentary proof of identity and address can be a very important barrier in having

    a bank account especially for migrants and slum dwellers. It is becoming increasingly apparentthat addressing financial exclusion will require a holistic approach on the part of the banks increating awareness about financial products, education, and advice on money management, debtcounseling, savings and affordable credit. The banks would have to evolve specific strategies toexpand the outreach of their services in order to promote financial inclusion. One of the ways inwhich this can be achieved in a cost-effective manner is through forging linkages withmicrofinance institutions and local communities. Banks should give wide publicity to the facilityof no frills account. Technology can be a very valuable tool in providing access to banking

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    products in remote areas. ATMs cash dispensing machines can be modified suitably to makethem user friendly for people who are illiterate, less educated or do not know English. To sumup, banks need to redesign their business strategies to incorporate specific plans to promotefinancial inclusion of low income group treating it both a business opportunity as well as acorporate social responsibility. They have to make use of all available resources including

    technology and expertise available with them as well as the MFIs and NGOs. It may appear inthe first instance that taking banking to the sections constituting "the bottom of the pyramid",may not be profitable but it should always be remembered that even the relatively low marginson high volumes can be a very profitable proposition. Financial inclusion can emerge ascommercial profitable business. Only the banks should be prepared to think outside the box!

    RBI initiatives for FI

    In the Annual Policy for 2005-06 , for the first time the word financial inclusion was used andbanks were asked to open no frills or a basic banking account to all those desirous of opening abank account. Several other aspects such as simplified KYC, OTS for loans upto Rs 25000,offering a GCC/simplified overdrafts etc were also covered. A decentralized approach wasadvocated through targeting 100% financial inclusion district by district involving the DCC andbank and government officials to facilitate enrolment and identification. Another very importantpolicy measure in January 2006 was to allow banks to adopt the agency model or what is knownas the Business facilitator /Business Correspondent model for achieving greater outreach throughintermediaries /agents. The results have been extremely impressive. In just two years the numberof no frills accounts opened by banks has increased from around half a million accounts in

    March 2006 to 15 million in 2008. Going by the data from service providers offering smart cardsolutions , it may be assumed that smart card accounts probably account for 2 to 3 million ofthese no frills accounts. Evaluation by external agencies appointed by RBI has shown that whilethe first stage of opening no frills accounts has been quite impressive, due to inadequate f followup, cost of transaction and access constraints, in many cases the accounts have not been operatedupon at all after having been opened. In order to improve access and use of these accounts ,banks will have to offer the services much closer to the customer either through mobile branches,

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    satellite offices, extension counters or using intermediaries like SHGs/MFIs or through businesscorrespondents using IT to increase scale , access and reduce cost. Also as is obvious from theresults of these recent studies and surveys, the credit product that has to be offered, if the lowincome borrowers have to be brought into the formal system, has to be simple covering all theneeds of small borrowers. I have absolutely no doubt that the simple overdraft or GCC based on

    cash flow/ track record is the way forward to meet the challenges of providing access to the largenumbers currently excluded.

    Way Forward

    On the way forward the challenges are going to be banks using multiple channels for delivery of varietyof financial services, developing synergies with MFIs and SHGs by introducing seamless ICT basedmodels linked to such intermediaries, availability of skilled manpower to facilitate the adoption of IT onsuch large scale, use of IT for credit information and efficient credit delivery and risk management in amuch bigger way, moving away from the use of cash and emergence of enough leaders in the bankingsystem especially in the public sector banks/RRBs and cooperative banks to recognize the opportunitiesand take advantage of their specific strengths including location.

    RBI to evaluate progress of financial inclusion

    The Reserve Bank of India (RBI) proposes to evaluate the progress of districts under financial

    inclusion through an independent external agency. The State Level Bankers Committee (SLBC)

    will identify one district in each state for 100 per cent financial inclusion. To bring more such

    districts under financial inclusion, RBI has asked banks to introduce more no-frill accounts and

    general purpose credit cards (GPCCs) with limits of up to Rs 25,000 in rural and semi-urban

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    branches. The credit facility will be in the nature of revolving credit entitling the holder to

    withdraw up to the limit sanctioned. About 50 per cent of general credit card (GCC) loans could

    also be treated by banks as part of priority sector lending Till June 2007 around 70 lakh no-frill

    accounts have been opened by commercial banks. Of these, around 67 lakh accounts have been

    opened by public sector banks and around 11 lakh accounts by private sector banks, besides

    around 12,000 by foreign banks. so far, 68 districts have been fully financially included 14 in

    Kerala, 11 in Haryana, nine in Punjab, Pondicherry, 12 in Himachal Pradesh, 7 in Karnataka, 1 in

    Tamil Nadu, 1 in Gujarat, 1 in Andhra Pradesh, 1 in West Bengal, 1 in Rajasthan, Diu, Dadar

    and Nagar Haveli, 3 in Uttar Pradesh, 1 in Orissa, Daman, 1 in Maharashtra and 1 in Assam. In

    certain less developed areas like the North East, Bihar, Chhattisgarh and Uttarakhand, working

    groups headed by RBI representatives have been set up. The recommendations of these working

    groups for financial inclusion, strengthening of financial institutions and improving currency and

    payment systems are being implemented and monitored by Reserve Bank regional offices.

    CHAPTER 5

    INTERPRETATION

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    Strategies and Approach

    At the regional level, a forum called the State Level Bankers Committee (SLBC) has been inoperation since nationalisation. SLBC is a group of bankers and government officials and isconvened by a bank having major presence in the State called the SLBC convenor bank. It meets

    quarterly and reviews the banking developments in the State. At the district level, the districtlevel committee functions; it is headed by the District Magistrare and is convened by adesignated lead bank for the district. In early 2006, one district in each State was identified bythe SLBC for 100 per cent financial inclusion. So far, SLBCs have reported having achieved100 per cent financial inclusion in the Union Territory of Puducherry and in some districts inHaryana, Himachal Pradesh, Karnataka, Kerala and Punjab & Uttar Pradesh. Reserve Bankproposes to undertake an evaluation of the progress made in these districts by an independentexternal agency to draw lessons for further action in this regard.

    In the districts taken up for 100% financial inclusion, surveys were conducted using various database such as electoral rolls, public distribution system, or other household data, to identify

    households without bank account and responsibility given to the banks in the area for ensuringthat all those who wanted to have a bank account were provided with one by allocating thevillages to the different banks. Mass media was deployed for creating awareness and publicity.The banks used different approaches to communicate the advantages of having a bank account.Bank staff or their agents who are usually local NGOs or village volunteers would contact thepeople at their households. Ration card / Electoral ID cards of the families were taken forfulfilling the simplified KYC norms. Photographs of all the persons who opened bank accountswere taken on the spot by a photographer accompanying the bank team. In most States, theproduct used for launching the program for financial inclusion is the No frills accounts. In oneState the farmers credit card or KCC is being used ensuring first to credit rather than savings. Inother States no frills account was followed by small overdraft facility or a general purpose

    revolving credit upto pre-specified limit. Recognizing the need for providing social security tovulnerable groups, in some cases in association with insurance companies, banks have providedinnovative insurance policies at affordable cost covering life, disability and health cover.

    Cooperative banks and regional rural banks being local level institutions are well suited forachieving financial inclusion. These banks are being revived and strengthened with incentives forbetter governance. Being local institutions they are ideally suited for achieving FI.

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    The role of an efficient payments system for FI cannot be overstressed and we efforts are beingmade to bring about Improvements in the payments system especially in the relatively lessdeveloped parts of the country.

    Huge increase in No Frills Accounts

    The outcome of the efforts made is reflected in the increase of 6 million new no frills bankaccounts opened between March 2006 and 2007. In view of their vast branch network (45000rural and semi urban branches) public sector banks and the regional rural banks have been able toscale up their efforts by merely leveraging on the existing capacity. FI is being viewed by thesebanks as a huge business opportunity in an overall environment that facilitates enterprise andgrowth. It provides them a competitive advantage and defines a clear niche for their growth.

    Use of intermediaries

    One of the ways in which access to formal banking services has been provided very successfullysince the early 90s is through the linkage of Self Help Groups (SHGs) with banks. SHGs aregroups of usually women who get together and pool their savings and give loans to members.Usually there is a NGO that promotes and nurture these groups. National Bank for Agricultureand Rural Development has played a very significant role in supporting group formation, linking

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    them with banks as also promoting best practices. The SHG is given loan against guarantee ofgroup members. The recovery experience has been very good and there are currently 2.6 millionSHGs linked to banks touching nearly 40 million households through its members. Banksprovide credit to such groups at reasonable rates of interest. However the size of loans is quitesmall and used mostly for consumption smoothening or very small businesses. In some SHGs,

    credit is provided for agricultural activities and other livelihoods and could be several times thedeposits made by the SHG. Most of the SHGs have been linked to public sector banks in view ofthe latters dominant presence in the rural areas.

    The foreign banks and private sector banks have approached the access issue through eithersetting up relatively lower cost non bank companies for providing small value retail loans orhave partnered with micro finance institutions that provide financial services to the relativelyhigher risk segments of the population. Microfinance has drawn attention to an entire sector ofborrowers who had been previously poorly served by the formal financial sector - and MF hasdemonstrated how to make lending to this sector a viable proposition. However the rates ofinterest charged are quite high, typically 24 to 30 per cent, mainly on account of the high

    transaction cost for the average loan size that can be quite small. Compared to the informalsector, perhaps the rates are lower, but issues are raised whether these rates are affordable - in thesense whether they would leave any surplus in the hands of the borrowers and lead to higherlevels of living.

    For commercial banks, the lower cost of funding, advantages of size and scale gives scope forcross subsidization and their interest rates are more competitive compared to the MFIs, but theyhave not been as successful in dealing with the last mile issue. The partnering with SHGs andMFIs with reasonable cost of funding by the banks has been seen as a more optimal approach tillnow.As indicated earlier, a recent important regulatory measure is the permission given to banks touse post offices, cooperative societies, non government organisations set up as trusts or societies,as business correspondents (agents) for doing branchless banking after conducting due diligenceon such intermediaries. Agency risk is sought to be minimised by using well respected localorganisations and use of IT solutions for tracking transactions in the bank accounts. Many banksare exploring the use of this model to increase their outreach and deliver doorstep bankingservices at lower cost. The viability and scalability of the model would require some flexibility incharging of interest rates or services charges to cover costs.

    Role of Government

    State Governments can play a pro active role in facilitating FI. Issuing official identitydocuments for opening accounts , creating awareness and involving district and block levelfunctionaries in the entire process, meeting cost of cards and other devices for pilots, undertakingfinancial literacy drives are some of the ways in which the State and district administration haveinvolved themselves.

    India Post is also looking to diversify its activities and leverage on its huge network of post

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    offices, the postmans intimate knowledge of the local population and the enormous trust reposedin him. Banks are entering into agreements with India Post for using post offices as agents for branchless

    FINANCIAL INCLUSION THROUGH IT

    IT solutions for FinancialInclusion

    The use of IT solutions for providing banking facilities at doorstep holds the potential forscalability of the FI initiatives. Pilot projects have been initiated using smart cards for openingbank accounts with bio metric identification. Link to mobile or hand held connectivity devicesensure that the transactions are recorded in the banks books on real time basis. Some StateGovernments are routing social security payments as also payments under the National RuralEmployment Guarantee Scheme through such smart cards (see pictures below). The samedelivery channel can be used to provide other financial services like low cost remittances andinsurance. The use of IT also enables banks to handle the enormous increase in the volume oftransactions for millions of households for processing, credit scoring, credit record and followup.

    Initiative of a State Government - pictures of technology at work

    INTEGRA agent giving payment to the NREGA employees

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

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    Biometric validation of Smart Card

    Role of ICT in FI

    To be able to ensure that the challenges of banking the unbanked are met effectively and convertedinto growing and sustainable business for banks, there is no alternative to adoption of ICT solutions

    on a very large scale and range. ICT solutions are required to capture customer details, facilitateunique identification, ensure reliable and uninterrupted connectivity to remote areas and acrossmultiple channels of delivery, offer multiple financial products (banking, insurance, capital market)through same delivery channel while ensuring consumer protection, develop comprehensive andreliable credit information system so essential for efficient credit delivery and credit pricing, developappropriate products tailored to local needs and segments, provide customer education andcounseling , enable use of multi media and multi -language for dissemination of information andadvice.

    ICT for FI - RBI initiatives

    I now turn to the specific initiatives of RBI in regard to ICT for Financial Inclusion. The very firstinitiative was emphasizing the use of IT solutions while adopting the agency or BC model forfinancial inclusion. A paper placed on the RBI website has envisaged a scheme with RBI support forproviding satellite connectivity for remote area branches. The reports of three working groups set upby RBI to consider support to RRBs and UCBs in computerizing their operations and adopt ITsolutions for financial inclusion have been placed in public domain for comments. These groups haverecommended that the IDRBT could offer interest free loans to UCBs and RRBs for adoption of IT.Based on comments and response RBI will be firming up these schemes. Recognizing the

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    penetration of mobile phones (including amongst the low income population) and the enormousopportunities they offer in extending the banking outreach. RBI had placed a paper on mobilebanking in the public domain and the guidelines are now being finalized. The NFS is able to offernationwide networking of ATMs and can facilitate banking transactions including remittancesthrough ATMs linked to the NFS. Effective from April 1, 2009 a customer will be able to use anyATM (including other bank ATMs) to operate his /her account at no cost. Other initiatives includethose aimed at ensuring quicker, safer currency and funds transfer. In fact RBI has put on its web-siteyesterday an approach paper on rationalisation of service charges for usage of electronic products,which would facilitate easier movement of funds at lower costs

    Electronic Benefit Payments

    Recognising the several advantages of using bank accounts for disbursal of government benefits,many State Governments have decided to disburse NREGA payments social security benefitselectronically through no frills bank accounts and in some States with such accounts operatedthrough smart cards with biometric identification. A Committee set up by RBI examined the variousmodels through which such payments can be made and has recommended a bank led model with

    sharing of costs between Government and banks. Appropriate support from the RBI or the FinancialInclusion Technology Fund could also be thought of in the initial stages. Such accounts that havebeen opened to receive government benefits/payments can become the base for a host of otherfinancial services and facilitate the objective of financial inclusion.

    Regulatory framework

    The regulations relating to IT solutions for banking services in general and financial inclusion inparticular relate to ensuring integrity of banking system and ensuring customer protection. These

    cover customer identification/authentication , customer confidentiality/ privacy, KYC/AMLissues, outsourcing, banks responsibility for their agents, ensuring interoperability and openstandards, imaging standards and adherence to payments system regulations.

    Role of Technology

    Technology can play an important role in reducing operating cost of providing banking services, particularly in the rural and low income groups segments. The technology, if blendedappropriately with the right business model and policy, holds the key to extending affordable,viable and sustainable access to finance for the population at large. There are three broad types oftechnologies that have been identified to drive the growth of financial services. These are (i) pro-poor new information and communication technology, primarily low-cost cell phones; (ii) ATMsand other point of sales devices; and (iii) smart plastic card.

    The centralised data processing system and the non-conventional methods based on computer

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    systems, which do not require uninterrupted electric supply and radio frequency network, cansignificantly reduce the cost of extending financial services. There are a number of cases wherebanks have expanded the coverage of banking services to remote and un-banked areas withaffordable infrastructure, while keeping operating costs low with the use of appropriatetechnology. Technology has the potential to lead to new delivery mechanisms and business

    models. For instance, technology will allow branchless banking and establishment of newpartnerships between financial service providers and a range of other service providers that wasnot feasible before to provide services to clients in remote areas and low-population densityareas.

    Mobile phone-based services are revolutionising micro-finance services in a number of countries(Asian Development Bank, 2007). Mobile banking (or mobile payment) is a term used forperforming balance checks, account transactions, payments, etc. via a mobile device such as amobile phone, PDA or other such device. Most of the mobile payment platforms fall into fourcategories: (i) mobile banking enabling users to perform banking transactions using mobilephone like, balance checks, fund transfers, bill payments;(ii) remote purchase; (iii) person to

    person transfers; and (iv) point of sale, i.e., using phones to pay for goods at merchant location.These services can be provided using various available connectivity technologies, each one ofwhich has its own pros and cons (Table 7.37). However, the extent to which technology will beintegrated into the financial service industry at the low end will depend on supportivegovernment policies and the quality of the infrastructure, particularly in rural areas.

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    Different technologies have been successfully adopted in many countries to promote financialinclusion .Banks in India have initiated pilot projects utilising smart cards/mobile technology toincrease their outreach. Biometric methods for uniquely identifying customers are also beingincreasingly adopted. Banks are also increasingly adopting technological solutions for deliveryof credit at affordable price and to a wider section of the population. State Bank of India (SBI)initiated a project called the SBI Tiny Card Accounts (SBITCAs) recently in Aizwal. The projectis a combination of no-frills account and BCs/BFs model. The SBITCAs are operated throughnew generation mobile phones based on near-field communication (NFC) technology, enhancedwith fingerprint recognition software and attached to receipt printer. The card allows activationof transaction of funds for the purpose of micro-savings (SBI-tiny no-frills pre-paid account),

    cash deposits and withdrawal, micro-credit (including KCCs, GCCs), money transfer (account-to-account within the system), micro-insurance, cashless payments to merchants, SHG savings-cum-credit accounts and attendance systems, disbursements of Government benefits like thenational rural employment guarantee scheme, for equated monthly instalments (EMIs), utility payments, coupons, vouchers and tickets, loyalty points, automatic fare collection systems,portable and fixed positions for front-end devices (fully inter-operable).

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    Technology and Financial Inclusion

    In the Philippines, two cell phone companies Smart and Globe Telecoms offer innovative cellphone based facilities, also called electronic wallet, to transfer money, pay bills, and makepayments for purchases from stores, among other things, called Smart Money and G-Cash,

    respectively. In February 2005, the Rural Bankers Association of the Philippines MicroenterpriseAccess to Banking Services (RBAP-MABS) launched a project called Text-A-Payment (TAP).TAP is an innovative mobile technology product that uses the SMS technology of GlobeTelecom (powered by G-Cash) to pay for micro finance loan payments of borrowers. TAP seeksto bring in new and low cost technology tools to improve efficiency and outreach. Small borrowers can utilise the service for payments of their micro-finance loans. The otherapplications of TAP are remote deposit taking, cash withdrawal, international and domesticremittances, purchases and bills payment.

    In South Africa, banking institutions, together with mobile phone companies, have begun toexpand access to financial services targeting low-income customers with an interest-bearing bank

    account accessible through mobile phones, and debit card with which they can make purchases atretail outlets and deposit or withdraw money at ATMs. Customers can use their mobile phones tomake person-to-person payments and transfer money.

    Prodem, the first micro-finance organisation to create a chartered bank, BancoSol, in BoliviastartedProdem Smart ATM, a smart card cum ATM recently. The smart card stores customersaccount balance every time the transaction is made using the card. This enables Prodem SmartATM to operate even in the absence of internet connectivity, thereby, making it an idealinstrument to extend financial services in many rural parts of Bolivia that lack the technologicalinfrastructure for a wide-reaching, online network.

    FINANCIAL INCLUSION THROUGH SHGS ANDMICRO FINANCE

    Self-Help Group Bank Linkage Program

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    An SHG is a group of about 15 to 20 people from a homogenous class who join together toaddress common issues. They involve voluntary thrift activities on a regular basis, and use of thepooled resource to make interest-bearing loans to the members of the group. In the course of this

    process, they imbibe the essentials of financial intermediation and also the basics of accountkeeping. The members also learn to handle resources of size, much beyond their individualcapacities. They begin to appreciate the fact that the resources are limited and have a cost. Oncethe group is stabilised, and shows mature financial behaviour, which generally takes up to sixmonths, it is considered for linking to banks. Banks are encouraged to provide loans to SHGs incer tain multiples of the accumulated savings of the SHGs. Loans are given without anycollateral and at interest rates as decided by banks. Banks find it comfortable to lend money tothe groups as the members have already achieved some financial discipline through their thriftand internal lending activities. The groups decide the terms and conditions of loan to their ownmembers. The peer pressure in the group ensures timely repayment and becomes social collateralfor the bank loans.

    Generally, the SHGs need self-help promoting institutions (SHPIs) to promote and nurture them.These SHPIs include various NGOs, banks, farmers clubs, government agencies, self-employedindividuals and federations of SHGs. However, some SHGs have also been formed without anyassistance from such SHPIs.

    There are three different models that have emerged under the linkage programme: Model I: This involves lending by banks directly to SHGs without intervention/facilitation byany NGO. Model II: This envisages lending by banks directly to SHGs with facilitation by NGOs andother agencies.

    Model III: This involves lending, with an NGO acting as a facilitator and financing agency.Model II accounted for around 74 per cent of the total linkage at end-March 2007, while ModelsI and III accounted for around 20 per cent and 6 per cent, respectively.

    SHGs and MFIs role in FI

    The need for informality in credit delivery and easy access is demonstrated by the fact that SHGs

    and MFIs constitute the fastest growing segment in recent years in reaching out to smallborrowers. These institutions are able to effectively address the small ticket and last mile issues.

    In the four years between 2003 and 2007, small borrower bank accounts (credit) i.e upto Rs

    25000 increased marginally from 36.9 million to 38.6 million, while SHGs borrowing members

    grew from 10 million to 40.5 million and MFIs borrowers grew from 1.1 million to 8 million.

    In 2007-08, MFIs have added 6 million clients increasing their outreach to 14 million as per data

    brought out by Sa Daan.

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    Micro finance is the provision of thrift, credit and other financial services and products of verysmall amounts to the poor for enabling them to raise their income levels and improve their livingstandards. It has been recognised that micro finance helps the poor people meet their needs forsmall credit and other financial services. The informal and flexible services offered to low-income borrowers for meeting their modest consumption and livelihood needs have not only

    made micro finance movement grow at a rapid pace across the world, but in turn has alsoimpacted the lives of millions of poor positively.

    In the case of India, the banking sector witnessed large scale branch expansion after thenationalisation of banks in 1969, which facilitated a shift in focus of banking from class bankingto mass banking. It was, however, realised that, notwithstanding the wide spread of formalfinancial institutions, these institutions were not able to cater completely to the small andfrequent credit needs of most of the poor. This led to a search for alternative policies and reformsfor reaching out to the poor to satisfy their credit needs.

    The beginning of the micro finance movement in India could be traced to the self-help group

    (SHG) - bank linkage programme (SBLP) started as a pilot project in 1992 by National Bank forAgricultural and Rural Development (NABARD). This programme not only proved to be verysuccessful, but has also emerged as the most popular model of micro finance in India. Otherapproaches like micro finance institutions (MFIs) also emerged subsequently in the country.

    Recognising the potential of micro finance to positively influence the development of the poor,the Reserve Bank, NABARD and Small Industries Development Bank of India (SIDBI) havetaken several initiatives over the years to give a further fillip to the micro finance movement inIndia.

    Micro Finance Delivery Models in India

    The non-availability of credit and banking facilities to the poor and underprivileged segments of

    the society has always been a major concern in India. Accordingly, both the Government and the

    Reserve Bank have taken several initiatives, from time to time, such as nationalisation of banks,

    prescription of priority sector lending norms and concessional interest rate for the weakersections. It was, however, realised that further direct efforts were required to address the credit

    needs of poor. In response to this requirement, the micro finance movement started in India with

    the introduction of SHG-bank linkage programme (SBLP) in the early 1990s. At present, there

    are two models of micro finance delivery in India: the SBLPmodel and the MFI model. The

    SBLP model has emerged as the dominant model in terms of number of borrowers and loans

    outstanding. In terms of coverage, this model is considered to be the largest micro finance

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    programme in the world. The Reserve Bank, NABARD and SIDBI have also taken a range of

    initiatives to provide a momentum to the micro finance movement in India.

    Recent Initiatives by NABARD

    NABARD has been playing a crucial developmental role for the micro finance sector in India.NABARD has been organising/ sponsoring training programmes and exposure visits for thebenefit of bank officials, NGOs, SHGs and Government agencies to enhance their effectivenessin the field of micro finance. The best practices and innovations with respect to the sector arewidely circulated among Government agencies, banks and NGOs. NABARD also providessupport for capacity building, exposure and awareness building of the SHGs and NGOs.

    NABARD launched the Micro-Enterprise Development Programme (MEDP) for skill

    development in March 2006. The basic objective was to enhance the capacities of matured SHGsto take up micro enterprises through appropriate skill upgradation. The programme envisageddevelopment of enterprise management skills in existing or new livelihood activities, both infarm and non-farm sectors. The duration of training can vary between 3 to 13 days dependingupon the objective and the nature of training. During the year 2007-08, 394 MEDPs wereconducted covering 9,182 SHG members on activities like bee-keeping, mushroom cultivation,horticulture and floriculture, vermi-compost/ organic manure preparation and dairy. As on March31, 2008, 674 MEDPs had been conducted covering 16,761 participants.

    In 2005-06, a pilot project for promotion of micro-enterprises was launched among members ofmatured SHGs. This is being implemented by 14 NGOs acting as micro-enterprise promotion

    agency (MEPA) in nine districts, viz., Ajmer (Rajasthan), Chandrapur (Maharashtra), Kangra(Himachal Pradesh), Madurai (Tamil Nadu), Mysore (Karnataka), Panchmahal (Gujarat), 24north Pargana (West Bengal), Puri (Orissa) and Rae Bareli (Uttar Pradesh). The project is beingimplemented by each NGO in two blocks in each of the selected district. As on March 31, 2008,2,759 micro-enterprises were established under the project involving bank credit of Rs.238 lakh.

    NABARD also provides marketing support to the SHGs for exhibiting their products. During theyear 2007-08, NABARD supported three exhibitions of products prepared by various SHGs atBhopal, Chennai and Navi Mumbai involving grant of Rs.3.8 lakh. In addition, NABARD alsoprovides promotional grant support to NGOs, RRBs, DCCBs, farmers clubs and individualvolunteers and assists in developing capacity building of various partner agencies. NABARD has

    been making efforts to increase the number of partner institutions as self-help promotinginstitutions (SHPIs).

    NABARD launched a pilot project in December 2003 to link post-offices with the SHGs with theobjective of examining the feasibility of utilising the vast network of post offices in rural areasfor disbursement of credit to rural poor on an agency basis .

    The SHG Federations are emerging as important players in nurturing SHG, increasing the

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    bargaining power of group members and livelihood promotion. The features and functions ofSHG federation models promoted in the country vary, depending on the promoting agencies.Recognising the growing role of the SHG Federations and their value addition to SHGfunctioning, NABARD, during the year 2007-08 decided to support the Federations on a modelneutral basis. Support is extended to the Federation by way of grant assistance for training,

    capacity building and exposure visits of SHG members. NABARD has also formulated the broadnorms for deciding the grant of financial assistance to SHG Federations. Duri