Financial Inclusion: Indias new mission

Written by The Financial Express | Updated: Mar 30 2011, 08:01am hrs
Innovation in delivery and design of financial services targeting the poor and the excluded, presents challenging policy and regulatory issues. Even the G-20 has set up the Financial Inclusion Experts Group to address these issues of ensuring financial inclusion and global safety nets.

When we talk of reaching to the people, we must understand what types of problems are faced by customers and what is the solution. Any policy and regulatory responses will therefore need to focus on articulating flexible approaches that can take account of multiple and competing objectives and that can accommodate further innovation. A key source of innovation is the capacity of technology to reduce costs and overcome other barriers to the provision of sustainable financial services to the excluded.

Till a few years ago, there was a dearth of appropriate technology. But, now that technology has arrived, we have taken several initiatives to bring about financial inclusion. What we require is a business model and a delivery model.

With this in view, Reserve Bank of India (RBI) advised banks to formulate a board approved financial inclusion plan for the next three years. All banks have drawn up their financial inclusion plans and we are engaged in active discussions with banks on their plans.

Through this approach, we are putting the financial inclusion campaign into mission mode. Based on our assessment and learning, we have advised them to review and revise their plans. Our broad approach on achieving planned, sustained and structured financial inclusion is as under:

First, the transformational role of technology needs to emphasised. Financial deepening is taking banking to people. We are speaking of this for the last four decades post nationalisation; we have failed if we see that the current coverage is of barely 32,000 rural commercial bank branches. Scalable financial inclusion cannot happen without stable and reliable Information and Communications Technology (ICT).

Not only the bank branches but also the branches of Regional Rural Banks must also be on Core Banking Solution (CBS), without which it would not be possible to scale up the financial inclusion efforts. The transactions through the hand held front end-devices should be seamlessly integrated with banks main server.

These devices must be capable of transacting the four minimum products as mentioned in a subsequent paragraph. There should be a provision in the smart card for integration with the UID number under the Aadhaar Project. Second, it is not enough to open a No Frills Accounts (NFA) and maintain that banking services are available. De minimus, four banking products need to be provided for it to qualify as availability of banking services. These are:

* A savings-cum-overdraft account

* A pure savings product, ideally a recurring or variable recurring deposit

* A remittance product for Electronic Benefits Transfer (EBT) and other remittances

* Entrepreneurial credit such as General Credit Card, Kissan

Credit Card

The number of NFAs opened present a very rosy picture, however, evaluation studies show that accounts once opened lie dormant as the poor do not have enough money to put in the deposit accounts. Hence, the need to transact is not there. If the banks want customer acquisition and that poor customers transact with them, they must permit overdrafts in the accounts. To begin with, very small amounts such as Rs 200, Rs 500 etc. could be sanctioned. Third, the issue of coverage.

So far, even when a customer from a remote village comes and opens an account with a bank branch in a city, that city branch includes that remote village as covered by banking services.

We are clarifying that for a village to be considered covered by banking services, either a bank branch has to be present or a Business Correspondent (BC) is visiting/present in that village.

There must be a bifurcation between villages with more than 2000 population and those with less than 2000 population. The plan needs to cover in an integrated manner both categories of villages. The names of the BC/branch covering a particular village need to be indicated on the banks website.

Fourth, the banks need to examine the operational issues related to the BC model such as cash handling. They need to evaluate whether an intermediate brick and mortar structure is required between the base bank branch and BCs for more effective supervision of the BCs.

Fifth, RBI would be closely monitoring the progress made by the banks as per their financial inclusion plans. A structured reporting format has been made available for meaningful compilation and analysis of data. The banks need to do similar structured data compilation exercise at the state/district level which will facilitate monitoring at the district / state /bank level.

A structured approach will ensure that this time the outcome of our financial inclusion efforts will be different and will not meet the same fate as previous ones.

Finally, let me stress that currently we are marketing the paradigm of financial inclusion through the bank-led model. It is thus for the banks to rise up to the challenge and meet it in full measure.