Financial Inclusion Duvvuri Subbaro
Financial Inclusion Duvvuri Subbaro
Duvvuri Subbarao
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Being here in the pre-Christmas season is a particular delight, and for me personally,
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
where people, like everywhere else in the country, face the daily challenges of
their lives, and the lives of their families, by becoming entrepreneurs, all because
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,
the community level and foster growth and poverty reduction at the national level.
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Why is Financial Inclusion Important?
necessary condition for sustaining equitable growth. There are few, if any, instances
access to financial services, we all know from personal experience that economic
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.
appreciate let alone exploit. Financial inclusion will make it possible for
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
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
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manage both liquidity risks and asset-liability mismatches.
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.
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
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
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12. But there is a brighter side to the story. Remember that illustration they give
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
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
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number of GCCs issued by banks as at end-March, 2009 was only
0.15 million.
the low income groups, both in urban and rural areas, do not
financial inclusion drive targetting one district in each state for 100%
banks. On that basis, in January 2009, we advised banks to: (i) ensure
15. Possibly the most important initiative of the Reserve Bank has been the
between poor people and the organized financial system. Recognizing this, in 2006,
16. Even as the BC model has taken off, it needs to be fine tuned and monitored
have further enlarged the scope of the BC model by permitting banks to appoint
individuals who own petrol pumps, retired teachers and self-help groups linked to
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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
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.
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
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
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Reserve Bank is working with other states in the north-east to institute similar
arrangements.
19. Let me say a few words on the Reserve Bank’s drive for financial literacy.
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
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
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,
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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
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
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
with burdensome terms and conditions attached to the financial products, also
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
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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
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
institutions and some NGOs. The chairmen of some large public sector and private
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
Reserve Bank and the commercial banks put their minds, and more importantly their
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
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cost Business Correspondent model and leverage technology to deliver financial
services.
30. The Reserve Bank has encouraged banks to use IT-enabled financial
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.
connect the systems of various banks which are presently involved in Electronic
switch similar to the National Financial Switch (NFS) located for the purpose in the
system for the country. This will make the remittance system more efficient, and
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
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first mover advantage in exploiting this potentially huge opportunity. Second, there
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
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
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
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
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
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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
36. A word also to microfinance institutions (MFIs). Many banks have partnered
with microfinance institutions that provide financial services to relatively high risk
sector of people left behind by the formal financial sector – and micro finance has
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
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
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
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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
innovative and responsive. One of our initiatives in our Platinum Jubilee year is
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
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
39. Last week, I visited Jalanga village in Orissa as part of the outreach
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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
financial inclusion.
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