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Financial Inclusion Duvvuri Subbaro

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Financial Inclusion Duvvuri Subbaro

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Financial Inclusion: Challenges and Opportunities1

Duvvuri Subbarao
_______________________________________________________

Being in Kolkata, this city of joy, is always a heart warming experience.

Being here in the pre-Christmas season is a particular delight, and for me personally,

a nostalgic memory. My special thanks to the Bankers’ Club for inviting me to

speak here this evening. I recall our meeting at this Club last year when we were in

the thick of the deepest financial crisis of our time, and all of us were anxious and

uncertain about the immediate future. I believe the worst is behind us. Attention

around the world and here in India too is shifting from managing the crisis to

managing the recovery. As that happens, we are also returning to addressing our

enduring challenges - of lifting nearly half a billion people out of poverty. There are

many things we need to do to accomplish that gigantic task. One of them is financial

inclusion. I would like to focus my comments this evening on the challenges and

opportunities of financial inclusion.

Financial Inclusion - A Thousand Flowers Blooming

2. If you will, let me begin with a couple anecdotes. In rural Maharashtra,

where people, like everywhere else in the country, face the daily challenges of

water, sanitation, electricity and transportation, a number of women have improved

their lives, and the lives of their families, by becoming entrepreneurs, all because

they could take a bank loan.

1 Remarks by Dr. D. Subbarao, Governor, Reserve Bank of India at the Bankers’ Club in Kolkata on

December 9, 2009.
• Take Aruna Gaikwad. Aruna, a farm labourer, began selling excess
produce at the local market. An astute observer of the laws of supply and
demand when it came to pricing fruit and vegetables, she soon saw an
uptick in business. To expand, she needed to borrow money so that she
could build her own vegetable stand. The loan helped her establish a
thriving vegetable vending business, allowing her to shift away from the
back-breaking work tending other people’s fields. Her former hand-to-
mouth existence had given way to a new reality, one which includes
savings and checking accounts at the bank, and the credit needed to keep
her kids in school - a good fortune she herself never had.

• And then there is Lakshmi Shellar. Widowed at 17, Lakshmi helped form
a local self-help group. She spoke up and spoke out at meetings, and
inspired other women in the group to take their future into their own
hands. Meanwhile, she brought banking services to them. And she
provided evening literacy classes. The 177 women of Lakshmi’s self-
help group have all borrowed and repaid their loans.

3. Aruna and Lakshmi are just two of the millions of women across the country

who have demonstrated what is possible if only rural women can have access to

basic financial services. This is what financial inclusion is all about – giving people

an opportunity to build better lives for themselves and their children. That impulse,

if given a chance, can contribute to sustained improvements in the quality of life at

the community level and foster growth and poverty reduction at the national level.

4. But there remain tremendous barriers to unleashing this “fortune at the

bottom of the pyramid.” Chief among them: financial exclusion. This is a

confluence of multiple barriers: lack of access, lack of physical and social

infrastructure, lack of understanding and knowledge, lack of technology; lack of

support, lack of confidence, among others. Overcoming these barriers is, in a

nutshell, the challenge of financial inclusion.

2
Why is Financial Inclusion Important?

5. Why is financial inclusion important? It is important simply because it is a

necessary condition for sustaining equitable growth. There are few, if any, instances

of an economy transiting from an agrarian system to a post-industrial modern

society without broad-based financial inclusion. As people having comfortable

access to financial services, we all know from personal experience that economic

opportunity is strongly intertwined with financial access. Such access is especially

powerful for the poor as it provides them opportunities to build savings, make

investments and avail credit. Importantly, access to financial services also helps the

poor insure themselves against income shocks and equips them to meet emergencies

such as illness, death in the family or loss of employment. Needless to add, financial

inclusion protects the poor from the clutches of the usurious money lenders.

6. There is another benefit of financial inclusion which we have yet to fully

appreciate let alone exploit. Financial inclusion will make it possible for

governments to make payment such as social security transfers, National Rural

Employment Guarantee Programme (NREGA) wages into the bank accounts of

beneficiaries through the ‘Electric Benefit Transfer’ (EBT) method. This will

minimize transaction costs including leakages. In parts of the country where such

EBT has already taken off, the results are impressive and the experience of both

payers and recipients extremely satisfying.

7. There are enormous benefits at the aggregate level too. The first and more

obvious benefit is that financial inclusion provides an avenue for bringing the

savings of the poor into the formal financial intermediation system and channel them

into investment. Second, the large number of low cost deposits will offer banks an

opportunity to reduce their dependence on bulk deposits and help them to better

3
manage both liquidity risks and asset-liability mismatches.

Financial Exclusion - The Big Picture

8. Effort at financial inclusion is not new; both the Government and the

Reserve Bank have been pursuing this goal over the last several decades through

building the rural cooperative structure in the 1950s, the social contract with banks

in the 1960s and the expansion of bank branch networks in the 1970s and 1980s.

These initiatives have paid off in terms of a network of branches across the country.

9. Yet the extent of financial exclusion is staggering. Out of the 600,000

habitations in the country, only about 30,000 have a commercial bank branch. Just

about 40 per cent of the population across the country have bank accounts, and this

ratio is much lower in the north-east of the country. The proportion of people having

any kind of life insurance cover is as low as 10 per cent and proportion having non-

life insurance is an abysmally low 0.6 per cent. People having debit cards comprise

only 13 per cent and those having credit cards only a marginal 2 per cent.

10. The National Sample Survey data reveals that, in 2003, out of the 89.3

million farmer households in the country, 51 percent did not seek credit from either

institutional or non-institutional sources of any kind.

11. These statistics, staggering as they are, do not convey the true extent of

financial exclusion. Even where bank accounts are claimed to have been opened,

verification has shown that these account are dormant. Few conduct any banking

transactions and even fewer receive any credit. Millions of people across the country

are thereby denied the opportunity to harness their earning capacity and

entrepreneurial talent, and are condemned to marginalization and poverty.

4
12. But there is a brighter side to the story. Remember that illustration they give

in business strategy courses. A business executive of a shoe company was sent to a

large developing country to assess the market potential there. What he saw was

millions of people going without shoes. He came back and reported to the

management that there was no business potential there because no one wears shoes.

A few months later, a strategist of a rival company went and saw the same picture.

He came back and reported to his management that there is tremendous business

potential in that country because of the number of shoes they can sell. Ultimately, it

is a question of mindset.

13. Banks must see the picture like the second business strategist, look at the

opportunity at the bottom of the pyramid and move into financial inclusion in a big

way.

RBI’s Efforts

14. Let me briefly outline the efforts pursued by the Reserve Bank to further

financial inclusion. Our approach to financial inclusion aims at 'connecting people'

with the banking system and not just opening accounts. This includes meeting the

small credit needs of the people, giving them access to the payments system and

providing remittance facilities. This has led to some notable developments:

(i) No Frills Accounts: In November 2005, RBI asked banks to offer a

basic banking ‘no-frills’ account with low or zero minimum balances

and minimum charges to expand the outreach of such accounts to the

low income groups.

(ii) Easier Credit facility: Banks were asked to introduce a General

Purpose Credit Card (GCC) facility up to Rs. 25,000. However, total

5
number of GCCs issued by banks as at end-March, 2009 was only

0.15 million.

(iii) Simpler KYC Norms: In order to ensure that people belonging to

the low income groups, both in urban and rural areas, do not

encounter difficulties in opening bank accounts, the 'Know Your

Customer' (KYC) procedure for opening accounts was simplified for

those accounts with balances not exceeding Rs 50,000 and credits

thereto not exceeding Rs.100,000 in a year.

(iv) Use of Information Technology: Banks have been urged to scale up

IT initiatives for financial inclusion speedily while ensuring that

solutions are highly secure, amenable to audit, and follow widely-

accepted open standards to ensure eventual inter-operability among

the different systems. Two of the important initiatives are:

• Smart cards for opening bank accounts with biometric


identification. These help the customers get banking
services near their doorstep.

• Link to mobile hand held electronic devices for banking


transactions. In October 2008, the RBI advised banks on
issues relating to technology, security standards, and
customer protection.

(v) EBT Through Banks: The Reserve Bank is in consultation with

state governments to encourage them to adopt Electronic Benefit

Transfer (EBT) by banks.

(vi) 100% Financial Inclusion Drive: The Reserve Bank launched a

financial inclusion drive targetting one district in each state for 100%

financial inclusion. In the light of the experience gained, coverage has


6
been extended to other areas/districts. We carried out an external

evaluation of the quality of 100% financial inclusion reported by

banks. On that basis, in January 2009, we advised banks to: (i) ensure

provision of banking services nearer to the location of the no-frills

account holders through a variety of channels; (ii) provide GCC/small

overdrafts along with no-frills accounts to encourage the account

holders to actively operate the accounts; (iii) conduct awareness

drives of the facilities offered to the no-frills account holders; (iv)

review the extent of coverage in districts declared as 100 per cent

financially included; and (v) efficiently leverage on the available

technology enabled financial inclusion solutions.

Business Correspondent Model

15. Possibly the most important initiative of the Reserve Bank has been the

Business Correspondent (BC) model. The BC model ensures a closer relationship

between poor people and the organized financial system. Recognizing this, in 2006,

we permitted banks to use the services of non-governmental organizations, micro-

finance institutions, retired bank employees, ex-servicemen, retired government

employees, Section 25 companies, and other civil society organisations as Business

Correspondents in providing financial and banking services.

16. Even as the BC model has taken off, it needs to be fine tuned and monitored

appropriately to improve its efficacy, including by better training BCs. Recently, we

have further enlarged the scope of the BC model by permitting banks to appoint

individual kirana/medical/fair price shop owners, individual Public Call Office

(PCO) operators, agents of Small Savings schemes and insurance companies,

individuals who own petrol pumps, retired teachers and self-help groups linked to

7
banks as BCs. With a view to ensuring the viability of the BC model, banks have

also been permitted to collect reasonable service charges from the customer in a

transparent manner. Going forward, the Reserve Bank will endeavour to give

complete flexibility to banks to appoint BCs with only a negative list of entities that

would not be eligible.

Bank Branch and ATM Expansion Liberalized

17. Last year, the Reserve Bank totally freed location of ATMs from prior

authorization. In the October 2009 Policy Review, the RBI took a further big step by

freeing branch opening in towns and villages with population below 50,000.

Domestic scheduled commercial banks (other than RRBs) are now free to open

branches in towns and villages with less than 50,000 population and are enjoined to

ensure that at least one-third of such branch expansion happens in the underbanked

districts of underbanked states. This will be one of the criteria in the Reserve Bank’s

consideration of proposals by banks to open branches in major city (tier 1 and tier 2)

centres.

Expansion of Banks in the North-East

18. To improve banking penetration in the North-East, the Reserve Bank asked

the State Governments and banks to identify centres where there is a need for setting

up either full fledged branches or those offering forex facilities, handling

government business or for meeting currency requirements. We have also offered to

fund the capital and running costs for five years provided the State Government

concerned is willing to make available the premises and put in place appropriate

security arrangements. Meghalaya has been the first off the block, and eight centres

have been allotted to three public sector banks, following a bidding process. The

8
Reserve Bank is working with other states in the north-east to institute similar

arrangements.

Project Financial Literacy

19. Let me say a few words on the Reserve Bank’s drive for financial literacy.

Financial literacy is a stepping-stone toward financial inclusion. Moreover, as

financial markets are becoming increasingly complex with serious problems of

information asymmetry, the need for financial literacy has become even more acute.

The Reserve Bank has initiated a "Project Financial Literacy" with the objective of

disseminating information regarding the central bank and general banking concepts

to various target groups. Our website is also available in 13 languages.

20. Our ‘Financial Education’ web site link offers basics of banking, finance and

central banking for children of all ages. In a comic book format, we simplify the

complexities of banking, finance and central banking, with the goal of making the

learning fun and interesting.

Financial Literacy and Credit Counselling

21. We have advised the convenor-bank of each State Level Bankers’

Committee to set up a financial literacy-cum-counselling centre in any one district

on a pilot basis, and based on that experience, to extend the facility to other districts

in due course. So far, 154 credit counselling centres have been set up in various

states of the country. These centres are expected to provide free financial education

to people in rural and urban areas on the various financial products and services,

while maintaining an arm's-length relationship with the parent bank.

9
Financial Curriculum in Schools and Colleges

22. The Reserve Bank is furthering the financial literacy drive by collaborating

with state governments across the country to include financial literacy curriculum in

the school syllabus. We have launched a pilot in Karnataka. We gave material on

banking, personal finance as well as on the Reserve Bank to the State Government.

The Karnataka Government has adapted, translated and included much of this

material in the curriculum for high school classes and this is slated to go on stream

next academic year starting June 2010. Based on this experience, we want to

mainstream this initiative across the country.

Financial Inclusion - Challenges and Opportunities

23. Let me now turn to challenges to financial inclusion and the potential

opportunities. The question we should ask ourselves is this: despite the rural policy-

push, why are so many bankable people unbanked? There are barriers to access

financial services emanating from both demand side and supply side factors.

24. From the demand side, the big barriers are the lack of awareness about

financial services and products, limited literacy, especially financial literacy of the

populace, and social exclusion. Many of the generic financial products are

unsuitable for the poor and there is not much of an effort to design products suitable

to their needs. The unfriendly and unempathetic attitude of the banks to the

customers also plays an important role in undermining the demand for financial

services. On top of that, exorbitant and oftentimes non-transparent fees, combined

with burdensome terms and conditions attached to the financial products, also

dampens the demand.

25. From the supply side, the main barrier is the transaction costs that the

bankers perceive. Because of current low volumes, banks find that extending

10
financial services is not cost effective. Furthermore, lack of communication, lack of

infrastructure, language barriers and low literacy levels all raise the cost of

providing services and inhibit bankers from taking initiative from the supply side.

26. A couple of weeks ago, the Reserve Bank, in collaboration with the Boston

Consulting Group, organized a workshop on financial inclusion in our College of

Agricultural Banking in Pune. The express purpose of the workshop was to listen to

frontline managers operating in the field about the opportunities and challenges to

financial inclusion. Accordingly, we invited to the workshop, bank branch

managers, including from rural areas, and representatives of microfinance

institutions and some NGOs. The chairmen of some large public sector and private

banks were also present.

27. I must say that listening to the participants at the workshop was an

enormously rich learning experience. The big take away from that workshop, for the

Reserve Bank as an institution and for me personally, was that even as there are

problems to extending financial inclusion, these are not insurmountable. If the

Reserve Bank and the commercial banks put their minds, and more importantly their

hearts, together these problems can be resolved.

28. According to what we heard at the workshop, the three big challenges are: (i)

cost; (ii) lack of robust technology; and (iii) lack of awareness. Some of these

challenges are clearly being exaggerated and others can be easily redressed.

29. Cost, of course, is the main consideration. It is nobody’s case that each of the

over 500,000 villages in the country can each be covered through a brick and mortar

branch. That is clearly not a ‘bankable’ proposition. We need to go through the low

11
cost Business Correspondent model and leverage technology to deliver financial

services.

30. The Reserve Bank has encouraged banks to use IT-enabled financial

inclusion by leveraging on the smart cards/mobile technology. Business

Correspondents of banks are making extensive use of hand held devices/mobile

phones to reach banking services to remote villages, and especially for Electronic

Benefits Transfer of NREGA wages and social security payments. This has been

very successful in Andhra Pradesh, and a state-wide project has recently been

kicked-off in Orissa. In addition, pilot projects are underway in most states of the

country.

31. As a village-to-village robust electronic remittance system is presently not

available in the country, it can be enabled by building suitable infrastructure to

connect the systems of various banks which are presently involved in Electronic

Benefit Transfer (EBT) through the medium of Business Correspondents. A robust

switch similar to the National Financial Switch (NFS) located for the purpose in the

National payments Corporation of India / Institute for Development Research in

Banking Technology may fulfil a long felt requirement of a nationwide remittance

system for the country. This will make the remittance system more efficient, and

therefore, more attractive.

32. I also want to emphasize that there is tremendous opportunity on the way

forward for reducing costs by increasing volumes. Let me elaborate a bit. First, there

is the demographic profile – the labour force in the 15-64 age group is going to

increase. As job opportunities grow and these people start earning, their incomes

provide a large and growing source of deposits for banks. Banks that are ahead of

the curve in establishing a presence in the vast hinterland of the country will have a

12
first mover advantage in exploiting this potentially huge opportunity. Second, there

is the opportunity of capturing remittances. Although there are no firm figures, I

have been told that thousands of crores of rupees of remittances take place across the

country today, predominantly from migrant labour, and over ninety per cent of this

happens through non-formal channels. If banks can capture even half of this into

their fold, they will not only reduce costs for the labour making remittances but they

will also have the advantage of an enormous, permanent float.

33. Third, EBT, the electronic benefit transfer, is another big opportunity. I

believe banks are inhibited about pushing this forward because of the fear of the

unknown: they are not certain that the business can be cost-effective. Banks are

clearly underestimating the potential. If indeed, all or even most government

payments to rural people are captured through the EBT mode, this again can give

banks a large float and make it an attractive business proposition. So far there has

been a sharing of the costs between banks and state governments with regard to

EBT. As EBT mode expands and becomes universal, banks will find that this is a

viable business model even without any service charges.

34. It is also relevant here to acknowledge the potential of the Unique

Identification Number (UID) that Nandan Nilekani and his team are working on.

The UID will be a powerful instrumentality for helping poor people establish their

identity to meet the banks’ KYC norms. I believe, this is going to reduce cash and

non-cash transaction costs both to the banks and to the potential customers. The UID

is another powerful illustration of harnessing technology to the benefit of the poor.

35. The Reserve Bank has made a commitment to bank-led model of financial

inclusion and will support banks in their financial inclusion initiatives by way of

information dissemination, sharing of best practices and also through regulatory

13
incentives. However, I want to add that our commitment to a bank led model is not

irrevocable. There are other models of financial inclusion that are being

experimented elsewhere in the world. Should banks fail to come forward and exploit

this opportunity of financial inclusion, the Reserve Bank will not hesitate to explore

other models of furthering financial inclusion.

36. A word also to microfinance institutions (MFIs). Many banks have partnered

with microfinance institutions that provide financial services to relatively high risk

segments of the population. Microfinance has provided access to finance to an entire

sector of people left behind by the formal financial sector – and micro finance has

demonstrated how these low-income categories are indeed a ‘bankable’ proposition.

But cost remains an issue. Interest rate charges – at 24-30 percent – seem too high.

Compared to the informal sector, perhaps the rates are lower, but there are questions

about whether these rates are affordable. Ideally, the rate of interest charged should

not be out of alignment with the cost of funds, transaction costs, risk costs and a

certain margin, and in any case, there is a need for transparency in its determination

and fairness in its application.

Way Forward

37. On the way forward, the Reserve Bank will push three targets. First, the lead

bank in each district has been asked to draw a roadmap by March 2010 for ensuring

that all villages with a population of over 2,000 will have access to financial services

through a banking outlet, not necessarily a bank branch, by March 2011. As an

aside, let me also tell you that many consumer goods companies have unveiled

specific strategies that target villages with a population of less than 5,000 as micro-

markets. It seems to me that as bankers, you can also follow your clients to their

markets. Second, all commercial banks – public sector banks, private banks and

14
foreign banks – are going to be asked to come up with their specific Board approved

plans for financial inclusion by March 2010. These plans are intended to be rolled

out over the next three years. We, in the Reserve Bank, have refrained from

deliberately imposing a uniform model on the banks because we wanted each bank

to build its own strategy in line with its business model and comparative advantage.

This will hopefully ensure better ownership. The Reserve Bank is consulting the

Indian Banks Association in this regard. Third, we learnt from the frontline

managers in the Pune workshop that top managements of banks do not sufficiently

emphasize, much less reward, efforts at financial inclusion. To remedy this, we are

going to ask all banks to include criteria on financial inclusion in the performance

evaluation of their field staff.

38. The Reserve Bank values two-way communication. By listening, we learn to

appreciate people’s needs and aspirations. This pushes us to be more sensitive,

innovative and responsive. One of our initiatives in our Platinum Jubilee year is

reaching out to remote villages – with a focus on financial education – spreading

awareness about the economy, emphasizing the role the Reserve Bank plays in

everyday life and making the general public aware of the financial services that the

banks offer and the benefits of using the banking services. The outreach programme

is a simultaneous effort to educate low income groups to demand financial services

and to encourage banks to supply financial services needed by the poor. I must say

that experience to date from the outreach programme has been immensely rewarding

and fulfilling. I want to thank the commercial banks which are actively cooperating

with us in this outreach programme.

39. Last week, I visited Jalanga village in Orissa as part of the outreach

programme. I was very impressed by the self-help groups – groups of usually

15
women who get together, pool their savings and give loans to members – and how

these groups have empowered the women by giving them financial independence

and thereby confidence. More than just hope, these women have the vision to

imagine how they can take advantage of the slightest opportunities and to work hard

to make it happen.

Conclusion

40. Let me conclude by reiterating, even at the cost of being clichéd, that

banking on the poor can actually be a rich banking proposition. Financial inclusion

is a win-win opportunity for the poor, for the banks and for the nation. Because of

growing incomes, and improving awareness levels, aspirations of the poor are on the

rise. We will not be forgiven if we do not rise up to meet these aspirations if only

because of poverty of imagination. It is for the banks to convert what they see as a

dead-weight obligation into an exciting opportunity and move on aggressively on

financial inclusion.

16

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