4. The scope of financial inclusion
The scope of financial inclusion
can be expanded in two ways.
a. through state-driven intervention
by way of statutory enactments ( for instance the US example, the Community
Reinvestment Act and making it a statutory right to have bank account in
France).
b. through voluntary effort
by the banking community itself for evolving various strategies to bring
within the ambit of the banking sector the large strata of society.
When bankers do not give the desired
attention to certain areas, the regulators have to step in to remedy the situation.
This is the reason why the Reserve Bank of India is placing a lot of emphasis
on financial inclusion.
In India the focus of the financial
inclusion at present is confined to ensuring a bare minimum access to a savings
bank account without frills, to all. Internationally, the financial exclusion
has been viewed in a much wider perspective. Having a current account / savings
account on its own, is not regarded as an accurate indicator of financial inclusion.
There could be multiple levels of financial inclusion and exclusion. At one
extreme, it is possible to identify the ‘super-included’, i.e., those customers
who are actively and persistently courted by the financial services industry,
and who have at their disposal a wide range of financial services and products.
At the other extreme, we may have the financially excluded, who are denied access
to even the most basic of financial products. In between are those who use the
banking services only for deposits and withdrawals of money. But these persons
may have only restricted access to the financial system, and may not enjoy the
flexibility of access offered to more affluent customers.
5. Consequences of Financial Exclusion
Consequences of financial exclusion
will vary depending on the nature and extent of services denied. It may lead
to increased travel requirements, higher incidence of crime, general decline
in investment, difficulties in gaining access to credit or getting credit from
informal sources at exorbitant rates, and increased unemployment, etc. The small
business may suffer due to loss of access to middle class and higher-income
consumers, higher cash handling costs, delays in remittances of money. According
to certain researches, financial exclusion can lead to social exclusion.
6. International experience in
promoting financial inclusion
An interesting feature which emerges
from the international practice is that the more developed the society is, the
greater the thrust on empowerment of the common person and low income groups.
It may be worthwhile to have a look at the international experience in tackling
the problem of financial exclusion so that we can learn from the international
experience.
The Financial Inclusion Task Force
in UK has identified three priority areas for the purpose of financial inclusion,
viz., access to banking, access to affordable credit and access to free face-to-face
money advice. UK has established a Financial Inclusion Fund to promote financial
inclusion and assigned responsibility to banks and credit unions in removing
financial exclusion. Basic bank no frills accounts have been introduced. An
enhanced legislative environment for credit unions has been established,
accompanied by tighter regulations to ensure greater protection for investors.
A Post Office Card Account (POCA) has been created for those who are
unable or unwilling to access a basic bank account. The concept of a Savings
Gateway has been piloted. This offers those on low-income employment £1
from the state for every £1 they invest, up to a maximum of £25 per month. In
addition the Community Finance Learning Initiatives (CFLIs) were also
introduced with a view to promoting basic financial literacy among housing association
tenants.
A civil rights law, namely Community
Reinvestment Act (CRA) in the United States prohibits discrimination by banks
against low and moderate income neighborhoods. The CRA imposes an affirmative
and continuing obligations on banks to serve the needs for credit and banking
services of all the communities in which they are chartered. In fact, numerous
studies conducted by Federal Reserve and Harvard University demonstrated that
CRA lending is a win-win proposition and profitable to banks. In this context,
it is also interesting to know the other initiative taken by a state in the
United States. Apart from the CRA experiment, armed with the sanction of Banking
Law, the State of New York Banking Department, with the objective of making
available the low cost banking services to consumers, made mandatory that each
banking institution shall offer basic banking account and in case of
credit unions the basic share draft account, which is in the nature of
low cost account with minimum facilities. Some key features of the basic banking
account are worth-mentioning here.
- the initial deposit amount required to open
the account shall not exceed US $ 25
- the minimum balance, including any average balance,
required to maintain such account shall not exceed US $ 0.10
- the charge for periodic cycle for the maintenance
of such accounts to be declared up front
- the minimum number of withdrawal transactions
which may be made during any periodic cycle at no charge to the account
holder must at least be eight
- a withdrawal shall be deemed to be made when
recorded on the books of the account holder’s banking institution
- except, as provided below, an account holder
shall not be restricted as to the number of deposits which may be made
to the account without incurring any additional charge
- the banking institution may charge account holders
for transactions at electronic facilities which are not operated by the
account holder’s banking institution as well as other fees and charges
for specific banking services which are not covered under the basic banking
account scheme
- every periodic statement issued for the basic
banking account should invariably cover on it or by way of separate communiqué
maximum number of withdrawals permitted during each periodic cycle without
additional charge and the consequences of exceeding such maximum and the
fee if any, for the use of electronic facilities which are not operated
by the account holder’s banking institution.
An interesting feature of basic
banking account scheme is the element of transparency i.e. the banking institution
should, prior to opening the account, furnish a written disclosure to the account
holder describing the main features of the scheme i.e. the initial deposit amount
required to open the account, minimum balance to be maintained, charge per periodic
cycle for use of such account, maximum number of withdrawal transactions without
any additional charge and other charges imposed on transactions for availing
electronic facility not operated by the account holder’s banking institution,
etc.
7. Indian Scenario
Bank nationalization in India marked
a paradigm shift in the focus of banking as it was intended to shift the focus
from class banking to mass banking. The rationale for creating Regional Rural
Banks was also to take the banking services to poor people. The branches of
commercial banks and the RRBs have increased from 8321 in the year 1969 to 68,282
branches as at the end of March 2005. The average population per branch office
has decreased from 64,000 to 16,000 during the same period. However, there are
certain under-banked states such as Bihar, Orissa, Rajasthan, Uttar Pradesh,
Chattisgarh, Jharkhand, West Bengal and a large number of North-Eastern states,
where the average population per branch office continues to be quite high compared
to the national average. As you would be aware, the new branch authorization
policy of Reserve Bank encourages banks to open branches in these under banked
states and the under banked areas in other states. The new policy also places
a lot of emphasis on the efforts made by the Bank to achieve, inter alia, financial
inclusion and other policy objectives.
One of the benchmarks employed
to assess the degree of reach of financial services to the population of the
country, is the quantum of deposit accounts (current and savings) held as a
ratio to the adult population. In the Indian context, taking into account the
Census of 2001 (ignoring the incremental growth of population thereafter), the
ratio of deposit accounts (data available as on March 31, 2004) to the total
adult population was only 59% (details furnished in the table). Within the country,
there is a wide variation across states. For instance, the ratio for the state
of Kerala is as high as 89% while Bihar is marked by a low coverage of 33%.
In the North Eastern States like Nagaland and Manipur, the coverage was a meager
21% and 27%, respectively. The Northern Region, comprising the states of Haryana,
Chandigarh and Delhi, has a high coverage ratio of 84%. Compared to the developed
world, the coverage of our financial services is quite low. For instance, as
per a recent survey commissioned by British Bankers' Association, 92 to 94%
of the population of UK has either current or savings bank account.
8. Steps towards financial inclusion
In the context of initiatives taken
for extending banking services to the small man, the mode of financial sector
development until 1980’s was characterized by
- a hugely expanded bank branch and cooperative
network and new organizational forms like RRBs;
- a greater focus on credit rather than other
financial services like savings and insurance, although the banks and cooperatives
did provide deposit facilities;
- lending targets directed at a range of ‘priority
sectors’ such as agriculture, weaker sections of the population, etc;
- interest rate ceilings;
- significant government subsidies channeled
through the banks and cooperatives, as well as through related government
programmes;
- a dominant perspective that finance for rural
and poor people was a social obligation and not a potential business opportunity.
It is absolutely beyond any doubt
that the financial access to masses has significantly improved in the last three
and a half decades. But the basic question is, has that been good enough. As
I mentioned earlier, the quantum of deposit accounts (current and savings) held
as a ratio to the adult population has not been uniformly encouraging. There
is a tremendous scope for financial coverage if we have to improve the standards
of life of those deprived people.
With a view to enhancing the financial
inclusion, as a proactive measure, the RBI in its Annual Policy Statement for
the year 2005-06, while recognizing the concerns in regard to the banking practices
that tend to exclude rather than attract vast sections of population, urged
banks to review their existing practices to align them with the objective of
financial inclusion. In the Mid Term Review of the Policy (2005-06), RBI exhorted
the banks, with a view to achieving greater financial inclusion, 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. The nature and number of transactions in such accounts would
be restricted and made known to customers in advance in a transparent manner.
All banks are urged to give wide publicity to the facility of such no frills
account so as to ensure greater financial inclusion.
Further, in order to ensure that
persons belonging to low income group both in urban and rural areas do not face
difficulty in opening the bank accounts due to the procedural hassles, the KYC
procedure for opening accounts has been simplified for those persons who intend
to keep balances not exceeding rupees fifty thousand (Rs. 50,000/-) in all their
accounts taken together and the total credit in all the accounts taken together
is not expected to exceed rupees one lakh (Rs.1,00,000/-) in a year.
9. The Way Forward
The banks should come out of
inhibited feeling that very aggressive competition policy and social inclusion
are mutually exclusive. As demonstrated elsewhere, the mass banking with no-frills
etc. can become a win-win situation for both. Basically banking services need
to be "marketed" to connect with large population segments and these
may be justifiable promotional costs. The opportunities are plenty.
- In the context of India becoming one of the
largest micro finance markets in the world especially in the growth of women’s
savings and credit groups (SHGs) and the sustaining success of such institutions
which has been demonstrated by the success of SEWA bank in Gujarat, low cost
banking is not necessarily an unviable venture/proposition.
- The IBA may explore the possibility of a survey
about the coverage in respect of financial inclusion keeping in view the geographical
spread of the banks and extent of financial services available to the population
so as to assess the constraints in extension of financial services to hitherto
unbanked sections and for initiating appropriate policy measures.
- It may be useful for banks to consider franchising
with other segments of financial sector such as cooperatives, RRBs etc. so
as to extend the scope of financial inclusion with minimal intermediation
cost.
- Since large sections of low income groups transactions
are related to deposits and withdrawals, with a view to containing transaction
costs, 'simple to use' cash dispensing and collecting machines akin to ATMs,
with operating instructions and commands in vernacular would greatly facilitate
financial inclusion of the semi urban and rural populace. In this regard,
it is worthwhile to emulate the example of ‘e-Choupal’ project brought forth
through private sector initiative.
Conclusion
It is becoming increasingly apparent
that addressing financial exclusion will require a holistic approach on the
part of the banks in creating awareness about financial products, education,
and advice on money management, debt counseling, savings and affordable credit.
The banks would have to evolve specific strategies to expand the outreach of
their services in order to promote financial inclusion. One of the ways in which
this can be achieved in a cost-effective manner is through forging linkages
with microfinance institutions and local communities. Banks should give wide
publicity to the facility of no frills account. Technology can be a very valuable
tool in providing access to banking products in remote areas. ATMs cash dispensing
machines can be modified suitably to make them user friendly for people who
are illiterate, less educated or do not know English.
To sum up, banks need to redesign
their business strategies to incorporate specific plans to promote financial
inclusion of low income group treating it both a business opportunity as well
as a corporate social responsibility. They have to make use of all available
resources including technology and expertise available with them as well as
the MFIs and NGOs. It may appear in the first instance that taking banking to
the sections constituting "the bottom of the pyramid", may not be
profitable but it should always be remembered that even the relatively low margins
on high volumes can be a very profitable proposition. Financial inclusion can
emerge as commercial profitable business. Only the banks should be prepared
to think outside the box!
Coverage of Banking Services
(Ratio of Demand Deposit Accounts to the adult population)