“Overcoming poverty is not a gesture of charity. It is an act of justice. It is the protection of a fundamental human right, the right to dignity and a decent life. While poverty persists, there is no true freedom.

Sometimes it falls upon a generation to be great. You can be that great generation. Let your greatness blossom. Of course, the task will not be easy. But not to do this would be a crime against humanity, against which I ask all humanity now to rise up."

- Nelson Mandela

“The test of our progress is not whether we add more to the abundance of those who have much; it is whether we provide enough for those who have too little.”

- Franklin D. Roosevelt

“Poverty is the worst form of violence.”

- Mahatma Gandhi

“If the misery of the poor be caused not by the laws of nature, but by our institutions, great is our sin.”

- Charles Darwin

Introduction

The Government of India and the Reserve Bank of India have been making concerted efforts to promote financial inclusion as one of the important national objectives of the country.  Some of the major efforts made in the last five decades include - nationalization of banks, building up of robust branch network of scheduled commercial banks, co-operatives and regional rural banks, introduction of mandated priority sector lending targets, lead bank scheme, formation of self-help groups, permitting BCs/BFs to be appointed by banks to provide door step delivery of banking services, zero balance BSBD accounts, etc. The fundamental objective of all these initiatives is to reach the large sections of the hitherto financially excluded Indian population.

The speech is organized in five sections:

Section 1 - Definitions
Section 2 - Extent of Financial Exclusion
Section 3 – RBI Policy Initiatives and Progress in Financial Inclusion
Section 4 – Stakeholder-wise Issues in Financial Inclusion
Section 5 – Conclusion and Way forward

Section - 1

Definitions

1.1 Financial inclusion may be defined 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 Committee on Financial Inclusion, Chairman: Dr. C. Rangarajan).

1.2 Financial Inclusion, broadly defined, refers to universal access to a wide range of financial services at a reasonable cost. These include not only banking products but also other financial services such as insurance and equity products (The Committee on Financial Sector Reforms, Chairman: Dr.Raghuram G. Rajan). Household access to financial services is depicted in Figure I.

1.3 The essence of financial inclusion is to ensure delivery of financial services which include - bank accounts for savings and transactional purposes, low cost credit for productive, personal and other purposes, financial advisory services, insurance facilities (life and non-life) etc.

Why Financial Inclusion ?

1.4 Financial inclusion broadens the resource base of the financial system by developing a culture of savings among large segment of rural population and plays its own role in the process of economic development. Further, by bringing low income groups within the perimeter of formal banking sector; financial inclusion protects their financial wealth and other resources in exigent circumstances. Financial inclusion also mitigates the exploitation of vulnerable sections by the usurious money lenders by facilitating easy access to formal credit.

1.5 In rural areas, the Gini’s² coefficient rose to 0.28 in 2011-12 from 0.26 in 2004-05 and during the same period to an all-time high of 0.37 from 0.35 in urban areas.

Section 2
Extent of Financial Exclusion

In this section, the extent of financial exclusion from different perspectives / angularities is presented based on five different data sources viz.:

(a) NSSO 59th Round Survey Results,
(b) Government of India Population Census 2011,
(c) CRISIL-Inclusix
(d) RBI Working Paper Series Study on ‘Financial Inclusion in India: A Case-study of West Bengal’ and
(e) World Bank ‘Financial Access Survey’ Results.

NSSO 59th Round Survey Results³

• 51.4% of farmer households are financially excluded from both formal/ informal sources.

• Of the total farmer households, only 27% access formal sources of credit; one third of this group also borrowed from non-formal sources.

• Overall, 73% of farmer households have no access to formal sources of credit.

• Across regions, financial exclusion is more acute in Central, Eastern and North-Eastern regions. All three regions together accounted for 64% of all financially excluded farmer households in the country. Overall indebtedness to formal sources of finance of these three regions accounted for only 19.66%.

• However, over the period of five decades, there has been overall improvement in access to formal sources⁴ of credit by the rural households (Chart 1).

2.2 Government of India Population Census 2011

• As per census 2011, only 58.7% of households are availing banking services in the country. However, as compared with previous census 2001, availing of banking services increased significantly largely on account of increase in banking services in rural areas (Chart 2).

2.3 CRISIL Financial Inclusion Index (Inclusix)

• In June 2013, CRISIL first time published a comprehensive financial inclusion index (viz.,Inclusix). For constructing the index, CRISIL identified three critical parameters of basic banking services namely branch penetration⁵, deposit penetration⁶ and credit penetration⁷.

• The CRISIL Inclusix indicate that there is an overall improvement in the financial inclusion in India (Chart 3).

• CRISIL –Inclusix (on a scale of 100) increased from 35.4 in March 2009 to 37.6 in March 2010 and to 40.1 in March 2011.

2.4 RBI Working Paper Study

• Sadhan Kumar⁸ (2011) worked out an Index on financial inclusion (IFI) based on three variables namely penetration (number of adults having bank account), availability of banking services (number of bank branches per 1000 population) and usage (measured as outstanding credit and deposit). The results indicate that Kerala, Maharashtra and Karnataka has achieved high financial inclusion (IFI >0.5), while Tamil Nadu, Punjab, A.P, H.P, Sikkim, and Haryana identified as a group of medium financial inclusion (0.3

2.5 World Bank ‘Financial Access Survey’ Results

• From the table 1 given below, it would be observed that in our country, financial exclusion measured in terms of bank branch density, ATM density, bank credit to GDP and bank deposits to GDP is quite low as compared with most of developing countries in the world.

Section – 3

3.1. Financial Inclusion – RBI Policy Initiatives

• RBI has adopted a bank-led model for achieving financial inclusion and removed all regulatory bottle necks in achieving greater financial inclusion in the country. Further, for achieving the targeted goals, RBI has created conducive regulatory environment and provided institutional support for banks in accelerating their financial inclusion efforts (Box-I).

Box-I :Financial Inclusion Initiatives

• Advised all banks to open Basic Saving Bank Deposit (BSBD) accounts with minimum common facilities such as no minimum balance, deposit and withdrawal of cash at bank branch and ATMs, receipt/ credit of money through electronic payment channels, facility of providing ATM card.

• Relaxed and simplified KYC norms to facilitate easy opening of bank accounts, especially for small accounts with balances not exceeding Rs. 50,000 and aggregate credits in the accounts not exceeding Rs. one lakh a year. Further, banks are advised not to insist on introduction for opening bank accounts of customers. In addition, banks are allowed to use Aadhar Card as a proof of both identity and address⁹.

• Simplified Branch Authorization Policy, to address the issue of uneven spread bank branches, domestic SCBs are permitted to freely open branches in Tier 2 to Tier 6 centers with population of less than 1 lakh under general permission, subject to reporting. In North-Eastern Sates and Sikkim domestic SCBs can open branches without having any permission from RBI. With the objective of further liberalizing, general permission to domestic scheduled commercial banks (other than RRBs) for opening branches in Tier 1 centres, subject to certain conditions.

• Compulsory Requirement of Opening Branches in Un-banked Villages, banks are directed to allocate at least 25% of the total number of branches to be opened during the year in un-banked (Tier 5 and Tier 6) rural centers.

• Opening of intermediate brick and mortar structure, for effective cash management, documentation, redressal of customer grievances and close supervision of BC operations, banks have been advised to open intermediate structures between the present base branch and BC locations. This branch could be in the form of a low cost simple brick and mortar structure consisting of minimum infrastructure such core banking solution terminal linked to a pass book printer and a safe for cash retention for operating larger customer transactions.

• Public and private sector banks had been advised to submit board approved three year Financial Inclusion Plan (FIP) starting from April 2010. These policies aim at keeping self-set targets in respect of rural brick and mortar branches opened, BCs employed, coverage of un-banked villages with population above 2000 and as well as below 2000, BSBD accounts opened, KCCs, GCCs issued and others. RBI has been monitoring these plans on a monthly basis.

• Banks have been advised that their FIPs should be disaggregated and percolated down up to the branch level. This would ensure the involvement of all stakeholders in the financial inclusion efforts.

• In June 2012, revised guidelines on Financial Literacy Centres (FLCs). Accordingly, it was advised that FLCs and all the rural branches of scheduled commercial banks should scale up financial literacy efforts through conduct of outdoor Financial Literacy Camps at least once a month, to facilitate financial inclusion through provision of two essentials i.e. ‘Financial Literacy’ and easy ‘Financial Access’. Accordingly, 718 FLCs have been set up as at end of March 2013. A total of 2.2 million people have been educated through awareness camps / choupals, seminars and lectures during April 2012 to March 2013.

3.2. Recent Measures –

• Licensing of New Banks: The present round of licensing new banks is essentially aimed at giving further fillip to financial inclusion efforts in our country. Innovative business models aimed at furthering financial inclusion efforts would be looked into closely in processing applications for banking license. Financial inclusion plan would be an important criterion for procuring new bank licenses (Dr. D Subbarao).

• Discussion Paper on Banking Structure in India – The Way Forward: The RBI has put out a discussion paper in August 2013 on Banking Structure for public comments. One of the main issues relates to “Differentiated Banking Licenses”. The subject of licensing ‘small banks and financial inclusion’ has been discussed therein. A view will be taken by RBI after factoring in the comments/suggestions received from the general public.

• In this context, it needs to be mentioned that Urban Co-operative Banks (UCBs), Regional Rural Banks (RRBs) and Local Area Banks (LABs) numbering 1606, 64, and 4 respectively are, in fact, Small Finance Banks operating in this country. These apart, there is a 3- Tier rural co-operative structure with State Co-operative Central Banks (SCCBs) at the apex, District Central Co-operative Banks(DCCBs) at the intermediary level and Primary Agricultural Credit Societies (PACs) at the grass root level, which number 31, 371 and 92,432 respectively. Furthermore, we have around 12,225 NBFCs as on March 2013, which could be conceptually construed as semi-banks undertaking predominantly credit/investment activities.

3.3. Progress in Financial Inclusion

• Progress of financial inclusion since the launch of financial inclusion plans clearly indicates that banks are progressing in areas like opening of banking outlets, deploying BCs, opening of BSBD accounts, grant of credit through KCCs and GCCs. Detailed trends are furnished in the following charts.

3.3.1. Number of Branches Opened (including RRBs)

• Due to RBI’s concerted efforts since 2005, the number of branches of Scheduled Commercial Banks increased manifold from 68,681 in March 2006 to 1,02,343 in March 2013, spread across length and breadth of the country (Chart 4).

• In rural areas, the number of branches increased from 30,572 to 37,953 during March 2006 to March 2013. As compared with rural areas, number of branches in semi-urban areas increased more rapidly.

3.3.2 Villages Covered:

• The number of banking outlets in villages with population more than 2000 as well as less than 2000 increased consistently since March 2010 (Chart 5).

Chart 5: Villages Covered

3.3.3 Total Bank Outlets (including RRBs)

• Total number of banking outlets in villages increased from 67,694 in March 2010 to 2,68,454 in March 2013 (increased around 4 times during the period of three years). Of total branches, banking outlets through BCs increased from 34,174 to 2,21,341 during the same period (increased around 6.5 times).

3.3.4 BSBD Accounts Opened

• The number of BSBD accounts opened increased from 73.45 million in March 2010 to 182.06 million in March 2013 (Chart 6).

• RBI advised banks to provide small overdrafts in BSBD accounts. Accordingly up to March 2013, 3.95 million BSBD accounts availed OD facility of Rs. 1.55 billion (These figures respectively, were 0.18 million and 0.10 billion in March 2010).

3.3.5 Kisan Credit Cards (KCC) Issued:

• Banks have been advised to issue KCCs to small farmers for meeting their credit requirements. Up to March 2013, the total number of KCCs issued to farmers remained at 33.79 million with a total outstanding credit of Rs.2622.98 billion (Chart 7).

3.3.6 General Credit Cards (GCC) Issued:

• Banks have been advised to introduce General Credit Card facility up to Rs. 25,000/- at their rural and semi-urban branches. Up to March 2013, banks had provided credit aggregating to Rs.76.34 billion in 3.63 million GCC accounts (Chart 8).

3.3.7 ICT Based Accounts - through BCs

• In order to provide efficient and cost-effective banking services in the un-banked and remote corners of the country, RBI directed commercial banks to provide ICT based banking services – through BCs. These ICT enabled banking services have CBS connectivity to provide all banking services including deposit and withdrawal of money in the financially excluded regions.

• The number of ICT-based transactions through BCs increased from 26.52 million in March 2010 to 250.46 million in March 2013, while transactions amount increased steadily from Rs.6.92 billion to Rs.233.88billion during the same period (Chart 9).

3.3.8 Expansion of ATM Network:

• The total number of ATMs in rural India witnessed a CAGR of 30.6% during March 2010 to March 2013. The number of rural ATMs increased from 5,196 in March 2010 to 11,564 in March 2013 (Chart 10).

3.3.9 Financial Literacy Initiatives

• Financial education, financial inclusion and financial stability are three elements of an integral strategy, as shown in the diagram below. While financial inclusion works from supply side of providing access to various financial services, financial education feeds the demand side by promoting awareness among the people regarding the needs and benefits of financial services offered by banks and other institutions. Going forward, these two strategies promote greater financial stability.

• Financial Stability Development Council (FSDC) has explicit mandate to focus on financial inclusion and financial literacy simultaneously.

• RBI has issued revised guidelines on the Financial literacy Centres (FLC) on June 6, 2012, for setting up FLCs, as detailed in Box 1 above.

3.3.10 Growth in SHG-Bank Linkage

• This model helps in bringing more people under sustainable development in a cost effective manner within a short span of time. As on March 2011, there are around 7.46 million saving linked SHGs with aggregate savings of Rs.70.16 billion and 1.19 million credit linked SHGs with credit of Rs. 145.57 billion (Source: NABARD, Status of Microfinance in India).

3.3.11 Growth of MFIs:

• Though RBI has adopted the bank-led model for achieving financial inclusion, certain NBFCs which were supplementing financial inclusion efforts at the ground level, specializing in micro credit have been recognized as a separate category of NBFCs as NBFC-MFIs.

• At present, around 30 MFIs have been approved by RBI. Their asset size has progressively increased to reach Rs. 19,000 crore as at end Sept 2013.

3.3.12 Bank Credit to MSME¹⁰

• MSME sector which has large employment potential of 59.7 million persons over 26.1 million enterprises, is considered as an engine for economic growth and promoting financial inclusion in rural areas.  MSMEs primarily depend on bank credit for their operations.

• Bank credit to MSME sector witnessed a CAGR of 31.4% during the period March 2006 to March 2012. Of total credit to MSME, public sector banks contributed the major share of 76%, while private sector banks accounted for 20.2% and foreign banks accounted for only 3.8% as on March 31, 2012¹¹ (Chart 11).

3.3.13. Insurance Penetration in the Country

• The total insurance (life and non-life) penetration, in terms of the ratio of insurance premium as a percentage of GDP increased from 2.32 in 2000-01 to 5.10 in 2010-11. The life insurance penetration as a percentage of GDP stood at 4.40 in 2010-11 while the non-life insurance penetration remained at 0.71 during the same period¹². In other words, there is vast untapped potential as regards insurance penetration.

3.3.14. Equity Penetration in the Country

• The number of investor accounts accounted for a meagre 1.71% of total population of the country¹³.

3.3.15. Financial Inclusion Initiatives – Private Corporates:

• A few large private corporate have undertaken projects such as E-Choupal/ E- Sagar(ITC), Haryali Kisan Bazaar (DCM), Project Shakti (HUL), etc. Reportedly, these pioneering projects have brought about vast improvement in the lives of the participants and set the tone for economic development in their command areas; which is a pre-requisite for Financial Inclusion efforts to be undertaken by the banking system.

Section - 4

4.1 Stakeholder-wise Issues in Financial Inclusion

• Taking into account the achievements stated in the previous section and based on our interactions with the stakeholders during our various outreach programmes, as also the feedback received from our meetings with the frontline managers, the more important issues which need to be attended; stakeholder-wise are listed in the table below,

Table 2: Stakeholder-wise Issues

Section 5

Conclusion & Way Forward

Let me conclude by repeating what I have endeavoured to convey about assessment of Financial Inclusion efforts in our country. I began with a brief introduction of the subject and provided two major definitions of Financial Inclusion. Thereafter, the important policy initiatives of RBI and progress achieved / identified trends in Financial Inclusion have been explained to assess where we stand at the present juncture. I tried to identify stakeholder-wise issues in Financial Inclusion, based on such an assessment as also on the basis of feedback received by us during our financial outreach programmes and the conferences of front line managers which we have been conducting for the past few years. It is one’s earnest hope and desire that the issues raised herein would trigger an informed debate and discussion, which could provide an invaluable feedback in the run up to the Report of Nachiket Mor Committee, which at present is examining the entire gamut of issues surrounding Financial Inclusion. Further on, the research community may like to go into such aspects of Financial Inclusion, which would provide valuable leads to the regulators and all the stakeholders concerned in achieving meaningful and holistic Financial Inclusion at the earliest in our country.

Thank You,

References

Anand Sinha (2012), “Financial Inclusion and Urban Cooperative Banks”, edited transcript at the launch of the financial inclusion program of COSMOS Bank at Pune.

Chakrabarty K.C (2011), “Financial Inclusion and Banks: Issues and Perspectives”, RBI Bulletin, November, 2011.

Chakrabarty K.C (2011), “Financial Inclusion: A Road India Needs to Travel”, RBI Bulletin, November, 2011.

Chakrabarty K.C (2012), “Empowering MSMEs for Financial Inclusion and Growth – Role of Banks and Industry Associations”, address at SME Banking Conclave 2012.

Chakrabarty K.C (2013), “Financial Inclusion in India: Journey So Far And the Way Forward”, Key note address at Finance Inclusion Conclave Organised by CNBC TV 18 at New Delhi.

Chakrabarty K.C (2013), “Revving up the Growth Engine through Financial Inclusion”, address at the 32th SKOCH Summit held at Mumbai.

Leeladhar V (2005), “Taking Banking Services to the Common Man – Financial Inclusion”, Commemorative Lecture at the FedbankHormis Memorial Foundation at Ernakulam.

Mira Mendoza (2009), “Addressing Financial Exclusion through Microfinance: Lessons from the State of Madhya Pradesh, India”, The journal of International Policy Solutions, Vol 11, pp 25-35.

Narayan Chandra Pradhan (2013), “Persistence of Informal Credit in Rural India: Evidence from All-India Debt and Investment Survey and Beyond”, RBI Working Paper Series, WPS (DEPR): 5/2013

Radhika Dixit and M. Ghosh (2013) “Financial Inclusion For Inclusive Growth of India – A Study”, International Journal of Business Management & Research, Vol.3, Issue 1, pp. 147-156.

Rangarajan C (2008), “Report of the Committee on Financial Inclusion”

Raghuram G. Rajan (2009), “A Hundred Small Steps - Report of the Committee on Financial Sector Reforms”.

Reserve Bank of India - “Annual Reports and ‘Report on Trend and Progress of Banking in India”, various issues.

Sadhan Kumar Chattopadhyay (2011), “Financial Inclusion in India: A Case-study of West Bengal”. RBI Working Paper Series, WPS (DEPR): 8/2011.

Sarkar A.N (2013), “Financial Inclusion: Fostering Sustainable Economic Growth in India”, The Banker, Vol. VIII, No.4, pp.44-53.

Sarkar A.N (2013), “Financial Inclusion Part-II: Fostering Sustainable Economic Growth in India”, The Banker, Vol. VIII, No.5, pp.32-40.

Status of Microfinance in India: 2010-11, NABARD

¹ The assistance provided by Shri M. Sreeramulu, AGM, DNBS, RBI, CO is heartily acknowledged.

² Source: National Sample Survey on household consumption expenditure. The coefficient ranges from zero to one, with zero representing perfect equality and one showing perfect inequality.

³ All India Debt and Investment Survey, NSSO 59th Round

⁴ Formal sources include credit from SCBs (including RRBs) and credit from Co-op society/bank and informal sources include credit from agricultural and professional money lenders.

⁵ Bank branch penetration is measured as number of bank branches per one lakh population

⁶ Measured as number of saving deposit accounts per one lakh population

⁷ Average of three measures (namely number of loan accounts per one lakh population, number of small borrower loan accounts per one lakh population and number of agriculture advances per one lakh population) used for credit penetration.

⁸ RBI Working Paper Series (WPS (DEPR):8/2011), Sadhan Kumar Chattopadhyay

⁹ Although RBI has relaxed KYC norms by considering Aadhar Card as a proof of both identity and address, large number of people still are not having Aadhaar Cards and incidentally, Supreme Court ruled that the centre and states should not insist on Aadhaar cards for providing essential services.

¹⁰ Micro small and medium enterprises have been considered as engine for economic growth and promoting equitable development of the country because of its employment and export potential  and economic empowerment of a vast section of the population. MSME sector employs 59.7 million persons spread over 26.1 million enterprises. This sector accounts for around 45 per cent of the manufacturing output and around 40 per cent of total export of the country (based on the 4th census of MSME sector, Ministry of MSME, Government of India)

¹¹ MSME Annual Report, 2012-13, pg. 267

¹² Insurance Regulatory and Development Authority

¹³ Based on NSDL/CDSL data

¹⁴ Source: Department of Financial Services, Government of India

¹⁵ There are some 85,000 PoS terminals existing where RuPay cards are already accepted. So far, 25 Commercial Banks, 25 RRBs and 30 Urban Co-op Banks have issued over 2 million Rupay cards.

¹⁶ Number mobile subscribers in rural India increased more than 9 times from just 33.14 million in March 2007 to 323.27 million in March 2012 (Source: TRAI Annual Report 2011-12)

¹⁷ Source: Hand Book of Statistics on Indian Economy

¹⁸ RPCD CO.RRB.No.BL.BC/08/03.05.90/13-14

¹⁹ An online company working towards consumer complaints redressal

²⁰ Related to problem in ATM transactions (18.02% of total complaints) and mis-selling of insurance products (16.30%), credit cards (13.83%), loan(10.88%), saving bank account (11.78%), medical insurance (8.34%), debit card (6.65%), general insurance (4.15%), motor insurance (3.55%) and others (6.5%).