Financial Inclusion - a few important points

Even after 60 years of independence, a large section of Indian population still remain unbanked. This malaise has led generation of financial instability and pauperism among the lower income group who do not have access to financial products and services. However, in the recent years the government and Reserve Bank of India has been pushing the concept and idea of financial inclusion.

What is Financial Inclusion in banking ? What is meaning of Financial Inclusion in Indian context ? :

Financial inclusion is the delivery of financial services at affordable costs to vast sections of disadvantaged and low income groups (for example “no frill accounts”).

Why Financial Inclusion in India  is Important ?

The policy makers have been focusing on financial inclusion of Indian rural and semi-rural areas primarily for three most important pressing needs:

1. Creating a platform for inculcating the habit to save money – The lower income category has been living under the constant shadow of financial duress mainly because of the absence of savings. The absence of savings makes them a vulnerable lot. Presence of banking services and products aims to provide a critical tool to inculcate the habit to save. Capital formation in the country is also expected to be boosted once financial inclusion measures materialize, as people move away from traditional modes of parking their savings in land, buildings, bullion, etc.

2. Providing formal credit avenues – So far the unbanked population has been vulnerably dependent of informal channels of credit like family, friends and moneylenders. Availability of adequate and transparent credit from formal banking channels shall allow the entrepreneurial spirit of the masses to increase outputs and prosperity in the countryside. A classic example of what easy and affordable availability of credit can do for the poor is the micro-finance sector.

3. Plug gaps and leaks in public subsidies and welfare programmes – A considerable sum of money that is meant for the poorest of poor does not actually reach them. While this money lenders through large system of government bureaucracy much of it is widely believed to leak and is unable to reach the intended parties. Government is therefore, pushing for direct cash transfers to beneficiaries through their bank accounts rather than subsidizing products and making cash payments. This laudable effort is expected to reduce government’s subsidy bill (as it shall save that part of the subsidy that is leaked) and provide relief only to the real beneficiaries. All these efforts require an efficient and affordable banking system that can reach out to all. Therefore, there has been a push for financial inclusion.

What are the steps taken by RBI to support financial inclusion?

RBI set up the Khan Commission in 2004 to look into financial inclusion and the recommendations of the commission were incorporated into the mid-term review of the policy (2005–06)  and urged banks to review their existing practices to align them with the objective of financial inclusion.    RBI  also exhorted the banks and stressed the need  to make available a basic banking ‘no frills’ account either with ‘NIL’ or very minimum balances as well as charges that would make such accounts accessible to vast sections of the population

Of the many schemes and programmes pushed forward by RBI the following need special mention.

A. Initiation of no-frills account – These accounts provide basic facilities of deposit and withdrawal to accountholders makes banking affordable by cutting down on extra frills that are no use for the lower section of the society. These accounts are expected to provide a low-cost mode to access bank accounts.  RBI also eased KYC (Know Your customer) norms for opening of such accounts.

B. Banking service reaches homes through business correspondents – The banking systems have started to adopt the business correspondent mechanism to facilitate banking services in those areas where banks are unable to open brick and mortar branches for cost considerations. Business Correspondents provide affordability and easy accessibility to this unbanked population. Armed with suitable technology, the business correspondents help in taking the banks to the doorsteps of rural households.

C. EBT – Electronic Benefits Transfer – To plug the leakages that are present in transfer of payments through the various levels of bureaucracy, government has begun the procedure of transferring payment directly to accounts of the beneficiaries. This “human-less” transfer of payment is expected to provide better benefits and relief to the beneficiaries while reducing government’s cost of transfer and monitoring. Once the benefits starts to accrue to the masses, those who remain unbanked shall start looking to enter the formal financial sector.

D. Non BC model: Mobile Payments forums of India (MPFI)

The RBI has appointed the ‘Working Group on Mobile Banking’ to study the feasibility of Mobile banking in India focusing on parameters like technology, regulation, supervision, security etc. This model simply removes the BC from the system and the role is implemented by the customer himself with the aid of the mobile phone. In January 2011 the number of mobile phone users in India was nearly 771.18 million. Also, nearly 9 million mobile users are added annually. (source: Telecom Regulatory Authority of India (TRAI) ). Leveraging this data, the Near Field Communication (NFC) technology enabled mobile phones can enable its users to carry out banking transactions. These include:

1. Transferring of the funds
2. Money transfer
3. Ticketing (IRCTC, bus, taxi, air etc)
4. Payments like insurance premiums, credit cards or utility bills
5. Other transactions like mobile top ups, merchant payments, DTC recharge etc. 

The mode of transaction is similar to that of recharging the mobile phone. The mobile technology can help in m-banking and m-payment. The performance and challenges so far can be enumerated as:

• According to RBI reports, in January 2011, there were 724,682 m-banking transactions amounting to Rs.62.77 crore.
• In February 2011, it reduced to 707,496 transactions amounting to Rs. 61.61 crore, of which SBI alone accounted 74.81% transactions. 
• The biggest challenge is the confidentiality, authenticity and integrity of the data. Thus, Information Security would have to be ensured for the success of this model.

Conclusion

Thus, challenges pervasive at every level of the chain have led to the system getting evolved on the principle of compliance and not transaction, hitting it at the very foundation level. This is further aggravated by the low quality infrastructure provided by these BCs and the absence of financial literacy to the rural population. Thus, It has to be realized by the RBI and other bodies working for this cause that unless the issue is addressed at the grass root level, the performance of these initiatives cannot be optimized.  So, the need of the hour is to ponder on these basic issues before building the edifice.

What more is to be done for financial inclusion?

Financial inclusion of the unbanked masses is a critical step that requires political will, bureaucratic support and dogged persuasion by RBI. It is expected to unleash the hugely untapped potential of the bottom of pyramid section of Indian economy. Perhaps, financial inclusion can begin the next revolution of growth and prosperity.

Why Financial Inclusion?

• It mobilizes savings that promote economic growth through productive investment.
• It promotes financial literacy of the rural population and hence guides them to avoid the expensive and unreliable financial services.
• This helps the weaker sections to channelize their incomes into buying productive resources or assets.
• In the situations of economic crisis, the rural economy can be a support system to stabilize the financial system. Hence, it helps in ensuring a sustainable financial system.

Retrospection and the outcomes so far

• In 2009, the RBI pushed the commercial and public banks including RRBs and LABs to extend the Banking services. It suggested the Business Correspondent(BC) model wherein it permitted the banks to include the following as the BCs:

1. The medical shops, Kirana stores or fair price shops
2. PCO (Public Call Office) owners
3. Agents of Insurance schemes
4. Owners of petrol pumps
5. SHGs (Self Help Groups)
6. Retired persons like teachers

This was a substitute to banks for having “Branchless access” to the rural customers. As a part of the BC model, the RBI recommended that banks should own the BCs as agents providing services like micro-credit, small value savings, micro-insurance etc. Also, the BCs were permitted to charge pre-defined service cess from the customers. These BCs or Bank-saathis were provided with electronic hand devices that identified the customers through the bio mark. This facilitated the deposit or withdrawal of money, without the need of a brick and mortar bank in the village. It was estimated that the number of potential customers at that time was estimated at around 480 million. It was targeted that by March 2012, the banking services would cover 72,800 villages, with around 2,000 villagers being provided by one or multiple financial products. 

Outcomes

The RBI survey showed that the BC model had helped to achieve results in 6 years that could not have been achieved in the past 50 years. The RBI results showed that the between 2010 and 2011, 73,000 villages had been covered and the number of bank accounts stood at 80 million, after a growth of 60%. But, was that an achievement? Not really.  A study conducted by Microsave and Skoch revealed a startling result. Nearly 90% of these accounts had not been used by the villagers and hence were presently inactive.

• The Swabhinman project was launched in 2011, under which it was targeted to improve financial inclusion by opening 5 crore NPA (No-Frill Accounts) by 2012. This was primarily an extension of the BCs model by achieving “economies of scale”. It was also decided to popularize the concept, EBT (Electronic Benefit transfer) would be implemented. The union budget 2011-12 targeted to penetrate 20,000 villages during this FY. It has been integrated with the other welfare programs like NREGA, Direct Cash Transfer Scheme and Pension Scheme. By incorporating this, it has been extrapolated that there would be nearly 2 lakh beneficiaries enrolled by March, 2012.

Outcomes

In 2011, Haryana was the pioneer in implementing this project, in the area of the pension scheme. But the project failed due to reports of absence of BCs, delays of payments etc. Consequentially, the Government reverted to the village Panchayats, for payments to the villagers. This acted as the deterrent for banks like SBI to extend the project further. 

Socio-economic welfare and Financial Inclusion

The socio-welfare programmes like the NREGA, Direct Cash transfer, National Old Age pension Scheme are focused on implementing financial inclusion. This is primarily because it helps to ensure electronic cash transfers. The advantages involve:

1. The payment process gets more simplified and convenient.
2. It reduces the cost of making the payments to the beneficiaries.
3. The process gets more transparent by checking the occurrence of fraud in the money or duplicate and fictitious beneficiaries.
4. It is because of this reason that Nandan Nilekani, head of the Unique Identification Authority (UIDAI) recently advised that the government make electronic payments for amount exceeding Rs. 1000.

The overall profiles of the customers of the financial services can be studied as:

Conclusion

Thus, challenges pervasive at every level of the chain have led to the system getting evolved on the principle of compliance and not transaction, hitting it at the very foundation level. This is further aggravated by the low quality infrastructure provided by these BCs and the absence of financial literacy to the rural population. Thus, It has to be realized by the RBI and other bodies working for this cause that unless the issue is addressed at the grass root level, the performance of these initiatives cannot be optimized. So, the need of the hour is to ponder on these basic issues before building the edifice.