What is financial inclusion?
Financial inclusion is the availability of banking services at an affordable cost to
disadvantaged and low-income groups. In India the basic concept of financial inclusion
is having a saving or current account with any bank. In reality it includes loans,
insurance services and much more.
The first-ever Index of Financial Inclusion to find out the extent of reach of banking
services among 100 countries, India has been ranked 50. Only 34% of Indian
individuals have access to or receive banking services. In order to increase this number
the Reserve Bank of India had the Government of India take innovative steps. One of
the reasons for opening new branches of Regional Rural Banks was to make sure that
the banking service is accessible to the poor. With the directive from RBI, our banks are
now offering “No Frill” Accounts to low income groups. These accounts either have a
low minimum or nil balance with some restriction in transactions. The individual bank
has the authority to decide whether the account should have zero or minimum balance.
With the combined effort of financial institutions, six million new ‘No Frill’ accounts were
opened in the period between March 2006-2007. Banks are now considering FI as a
business opportunity in an overall environment that facilitates growth.
The main reason for financial exclusion is the lack of a regular or substantial income. In
most of the cases people with low income do not qualify for a loan. The proximity of the
financial service is another fact. The loss is not only the transportation cost but also the
loss of daily wages for a low income individual. Most of the excluded consumers are not
aware of the bank’s products, which are beneficial for them. Getting money for their
financial requirements from a local money lender is easier than getting a loan from the
bank. Most of the banks need collateral for their loans. It is very difficult for a low
income individual to find collateral for a bank loan. Moreover, banks give more
importance to meeting their financial targets. So they focus on larger accounts. It is not
profitable for banks to provide small loans and make a profit.
Financial inclusion mainly focuses on the poor who do not have formal financial
institutional support and getting them out of the clutches of local money lenders. As a
first step towards this, some of our banks have now come forward with general purpose
credit cards and artisan credit cards which offer collateral-free small loans. The RBI has
simplified the KYC (Know your customer) norms for opening a ‘No frill’ account. This will
help the low income individual to open a ‘No Frill’ account without identity proof and
address proof.
In such cases banks can take the individual’s introduction from an existing customer
whose full KYC norm procedure has been completed. And the introducer must have a
satisfactory transaction with the bank for at least 6 months. This simplified procedure is
available to those who intend to keep a balance not exceeding Rs.50,000 in all accounts
taken together. With this facility we can channel the untapped, considerable amount of
money from the low income group to the formal economy. Banks are now permitted to
utilize the service of NGOs, SHGs and other civil society organizations as intermediaries
in providing financial and banking services through the use of business facilitator and
business correspondent models.
Self Help Groups are playing a very important role in the process of financial inclusion.
SHGs are usually groups of women who get together and pool money from their
savings and lend money among them. Usually they are working with the support of an
NGO. The SHG is given loans against the group members’ guarantee. Peer pressure
within the group helps in improving recoveries. Through SHGs nearly 40 million
households are linking with the banks. Micro finance is another tool which links low
income groups to the banks.
Yet, banks are fighting to fulfill the Financial Inclusion dream. The main reason is that
the products designed by the banks are not satisfying the low income families. The
provision of uncomplicated, small, affordable products will help to bring the low income
families into the formal financial sector. Banks have limitations to reach directly to the
low income consumers. Correspondents can be considered to be an excellent channel
which banks can use to distribute their product information. Educating the consumers
about the financial benefits and products of banks which are beneficial to low income
groups will be a great step to tap their potential.
Banks are now using new technologies like mobile phones to reach low income
consumers. It is possible that the telephone providers themselves will start basic
banking services like savings and payments. Indian telecom consumers have few links
to financial institutions. So without much difficulty telecom providers can win the battle
with banks. Banks should therefore be proactive about transferring this technology into
an opportunity.
The Indian Government has a long history of working to expand financial inclusion.
Nationalization of the major private sector banks in 1969 was a big step. In 1975 GOI
established RRBs with the same aim. It encouraged branch expansion of bank branches
especially in rural areas. The RBI guidelines to banks shows that 40% of their net bank
credit should be lent to the priority sector. This mainly consists of agriculture, small
scale industries, retail trade etc. More than 80% of our population depends directly or
indirectly on agriculture. So 18% of net bank credit should go to agriculture lending.
Recent simplification of KYC norms are another milestone.
Financial inclusion is a great step to alleviate poverty in India. But to achieve this, the
government should provide a less perspective environment in which banks are free to
pursue the innovations necessary to reach low income consumers and still make a
profit. Financial service providers should learn more about the consumers and new
business models to reach them.
In India Financial inclusion will be good business ground in which the majority of her
people will decide the winners and losers.
INCLUSIVE GROWTH is the word which is often heard and understood less by
majority. I will not get into complex explanations of the above word meaning.
In simple words Inclusive Growth by its very definition implies an equitable
allocation of resources with benefits accruing to every section of society. It
should be focused on the indented short and long terms benefits and economic
linkages at large and not just equitable mathematically on some regional and
population criteria. But the one of the major component of achieving this growth
we need a FINANCIAL INCLUSION.
Now again many of my readers are now confused that what is this new concept
of FINANCIAL INCLUSION. Again in simple words it nothing but all financial
bodies coming together and spreading finance access to each and every corner
of India. It does not mean opening bank account or making huge growth in
disbursement of loans. It’s the process of reaching financial weapons to all
Indian across the country.
In order to achieve financial inclusion, there needs to be a collective and timely
action by all players in the financial sector. The players include the Reserve
Bank of India (RBI), National Bank for Agricultural and Rural Development
(NABARD), banks, regional rural banks, cooperatives and micro-finance
institutions. When we talk about economic growth we should keep in mind that
it cannot achieved on the basis of some large or medium types of companies.
We need to change our focus from urban growth to rural India.
Providing access of financial instruments should be one of the key ingredients of
the financial inclusive. We need to use the potentiality of India’s huge untapped
population. If we look into china which have the highest population have been
able to convert its weakness in to advantage.
In most of the cases people with low income do not qualify for a loan the loss of
daily wages for a low income individual. Most of the excluded consumers are not
aware of the bank’s products, which are beneficial for them. Getting money for
their financial requirements from a local money lender is easier than getting a
loan from the bank. Indian financial system needs to change the process to
unleash the rising and controlled demand rising from this segment. Most of the
banks need collateral for their loans. It is very difficult for a low income
individual to find collateral for a bank loan. But now banks are slowly identifying
but still many of them are left out from the race. Till now banks have tried to
do:
• The RBI has simplified the KYC (Know your customer) norms for opening a ‘No
frill’ account. This will help the low income individual to open a ‘No Frill’ account
without identity proof and address proof.
• Banks are now permitted to utilize the service of NGOs, SHGs and other civil
society organizations as intermediaries in providing financial and banking
services through the use of business facilitator and business correspondent
models.
• Banks are now using new technologies like mobile phones to reach low income
consumers.
• Banks needs to design their products for the low income group so as to
influence the untapped demand.
• Banks also needs to develop Information Technology infrastructure to develop
and handle the mass of villages and low income group.
Above all the bank and other financial bodies needs to educate the low income
group or in those places where financial access is new concept. This will also
bring a radical change for the huge low educated group of people residing
among us.Now all these were related to financial products bringing financial
inclusiveness.
But we still have left many parts untouched where financial inclusiveness can be
brought and Indian economy can be strengthened further.
• Indian infrastructure needs to focus on renovation of Indian villages just like
china did in its own villages. In china we find that compared with the wave of
city renovations five years ago, renovations now are taking place mainly in
second-tier or third-tier cities which are political and economically less
important. Villages are being renovated and huge amount is being spent by the
infrastructure companies. Similarly if Indian infrastructure companies go for a
similar process then we will get a huge untapped potentiality of infrastructure
development. FDI investments in these untapped areas will be a very attractive.
I think my readers can judge that if renovation of infrastructure in Indian
villages is being made then the type of growth and ROI that will be generated
from here will last for at least for the next 2 decades, may be beyond that.
Electricity is one of the rising hot sector which will be of great help once it
comes into play. Power industry will get the next decade of growth from this
segment.
• Apart from bank, insurance companies will find the next huge untapped
growth. Since the demand for insurance particularly for this segment is highly
required. The problem of low wage income followed with insurance can be
designed in such a way that a labor who is earning Rs.3000 per month can
afford to have a insurance of Rs. 100 per month. The most important part to
bring forward the untapped growth of insurance in this segment is designing of
products. If the insurance products are designed in such a way, which will
become easy to accept for this segment of people.
• We all know that when finance becomes easy access demand start picking up
for mass of people. FMCG product will find the next untapped growth in this
segment. We already find that Indian FMCG companies are focused towards this
segment. But what we need to find is that expansion in these areas followed
with product designing. Cost competitiveness should be another aspect to be
maintained in order to make the product presence in every home or village.
• Private equity and venture capitalist needs to identify all these areas to exploit
the untapped growth of entrepreneurship of Small and Medium Enterprise.
Talent and the desire to do something is life is higher in this segment. If some
one exploits them with proper education and technical knowledge we will find a
large number of future industrialist and business ventures taking control of the
future of Indian economic growth. The private equity and venture capitalist
invest in schools and colleges and the Indian corporate law is being designed in
such a way that such investments rules are also designed for schools and
colleges then we will find the first nation to develop such an policy and
simultaneously we will get a radical new age of education for this segment.
• Hospitality sector also find and the growth in this sector but again we need to
design products and costs. High cost often makes the growth in this sector
stagnant or not to the expected ROI.
• Indian Information technology sector also finds a huge pool of ROI. When
demand and access of finance will be made and in the process too will require
IT involvements. Information Technology policies should be designed with the
growth of the industry as India looks to move up the value chain from business
processing to knowledge processing in this segment. Introduction of computers
in Indian villages have already being introduced but the growth is yet to be
achieved. The main draw back is focus from the private end and more on the
public end. We should bring both in to the party to feel the music.
Financial Inclusion does not mean financial support. It means a all the sectors of
Indian economy coming together to bring the radical change and growth in the
untapped areas. Slowly India will witness stagnant growth since we are all
focusing on urban growth and development. We should not forget that as per
the Indian Census of 2001, state that 74% of Indians live in 6,38,365 different
villages. India has about 500,000 villages that are scattered throughout the
country, where the population varies accordingly. Some villages have a
population less than 500, while 3,976 villages have a population of more than
10,000 people.
We are having one of the strongest economies in world provided if we identify
and unleash the pool of demand lying idle in these. No winds of recession can
blow off the burning fire of Indian villages’ untapped economic growth.
In order to attract private equity and venture capitalist in this segment Indian
bank and other financial bodies needs to develop the easy access of finance. We
are suffering with the problem of declining exports. We even don’t know when
the demand in west will pick up but we need to change our focus from that to
our own untapped potentiality.
Just imagine that if 50% of the Indian villages’ population opens bank accounts
then what type of growth Indian banks will find. Rest I will leave on my readers
to think and imagine the growth form other sectors can achieve.
In my next article I will bring forth the cost and designing process of each
sector which will help Indian economy to achieve FINANCIAL INCLUSIVENESS.
Financial inclusion is an idea whose time has finally come in India. It will enable
hundreds of millions of low-income people to improve their economic and social status by
participating in the financial system.
Not only have the government and the Reserve Bank of India become very keen to
promote inclusion, successful business models have at last emerged to serve the poor in
a profitable manner. Capital, both debt and equity, is now available for this sector at
reasonable cost even as better technology and Internet connectivity are making it easier
and less expensive to reach the poor.
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Nearly half of all Indians don’t have access to bank accounts.
Financial inclusion is the delivery of financial services at an affordable cost to low-income
households. It is estimated that nearly 500 millions Indians are not served well (or even
at all) by the current financial system. There is a close connection between poverty and
financial exclusion, which can lead to estrangement, disaffection and reduced
participation in society by low-income families.
The government of India and the Reserve Bank of India have been very concerned about
financial exclusion and the great harm it causes to the society. The RBI has taken many
initiatives to spread banking services such as expanding the number of rural bank
branches as well as allowing the banking correspondent model.
The scale of the problem of financial exclusion can be daunting. Nearly half of the
population and a majority in rural Indians do not have bank accounts. Less than 10% of
India’s 600,000 villages have a bank branch. Nearly 80% of the Indian population is
without life or health insurance. Penetration of mortgages, mutual funds and pension
products is also very low.
Financial literacy levels are extremely low. Even though microfinance institutions have
expanded very fast in the last five years, they still only cover about one fifth of low-
income households and they to meet only one tenth of the credit needs of the poor.
While it is a daunting challenge in size and scope, financial inclusion is also a great
social and business opportunity.
Among the potential businesses that will benefit from more inclusion are business
correspondents who can bring simple banking services as wells insurance and even
pension schemes to the poor.
Microfinance is another booming business that has grown out of inclusion. The total
microfinance portfolio has grown more than fourfold in the last five years to more than
200 billion rupees ($4.3 billion), thanks in part to banks lending more to microlenders.
Non-Banking Finance Companies, or NBFCs, are also doing well.
Companies that lend using people’s gold as collateral like Mannapuram and vehicle
financing companies like Shriram Transport Finance, which generally finances
commercial vehicles for drivers, have seen their portfolios soar.
New Delhi and the Reserve Bank can certainly play a major role in promoting financial
inclusion, but there are significant opportunities for the private sector as well. Private
firms can get involved not just for Corporate Social Responsibility purposes, but also to
create a profitable business that is focused on the bottom of the economic pyramid.
Some of the areas for further examination and consideration are:
1. Branch Expansion: India needs to develop a low-cost bank branch model, possibly
attached to village post offices.
2. Bank Financing: The RBI should mandate that commercial banks have a certain
percent of their portfolio in small loans. In addition, important social considerations
should be factored into loan decisions. For example at Grameen Bank, borrowers’
children have to be attending a school before they are eligible for a loan. Similar
conditions should be imposed for eligibility of loans in India. The government could also
add extra incentives to lend in troubled areas like Jammu and Kashmir.
3. Business Correspondents: India needs to expand the current business
correspondents model to allow microfinance institutions, NBFCs and other profit-powered
companies to use correspondents.
4. Financial Literacy: The government of India should help develop financial literacy
among the population, particularly in low-income families. That can be done by teaching
it in primary schools, high schools and colleges.
5. Telecom Companies: Telecom companies should be allowed to provide payments
and money transfer services. The highly successful money transfer service M-Pesa in
Kenya launched by Vodafone is an example of how well this can work for remitting
money.
6. Chit Funds: Indigenous, community-based financial systems like the chit funds need
to be revived and strengthened. They serve as a very useful savings and credit function
and result in local growth and employment.
7. Post Office: Post office employees should be trained and given incentives to market
savings, investment and pension products. Some of these products have already been
developed by the post office but have not been marketed effectively.
8. Village Money Lender: In popular novels and films the village money lender is
portrayed as a villain. But the fact is that for hundreds of years, he has been providing
credit to the community. He knows his customers well, is available day and night,
provides flexible products to suit customers’ needs and is there when the customer
needs him. Some of them could be trained to become business correspondents for
banks and provide other financial products to their customers.
