Banking on Inclusive Growth

Gross Domestic Savings (GDS) play a vital role in the economic growth of a country as it
facilitates to provide requisite financial resources to undertake various developmental and
welfare programs. A high level of savings helps the economy to progress on a continuous growth
path as the savings are the source for investment. GDS is one of the important economic
indicators to measure financial regulation and soundness of the country.Absence of required
savings rate may lead to external dependence, which may jeopardize the interests of the Nation.

Household Savings

Savings habit is an in-built culture of the Indian system and it has been growing consistently
from 10% in 1950 to 33.70% in 2010, which is one of the highest globally. It is interesting to
note that while saving rate is on increase, marginal decline is observed under household sector
i.e. 72% to 70% during 1950 to 2010. Corporate sector witnessed increase from 10% to 24%
while the share of public sector has come down to 6% from 18% during the said period. The
evolution of Household savings and its flow to Physical and Financial sectors over the years is as
under:

Deployment of Household Savings (%)
Category 1950 1960 1970 1980 1990 2000 2010
I. Financial
26.39 32.14 37.70 46.58 54.05 48.11 50.21
II. Physical
72.21 67.86 62.30 53.42 45.95 51.89 49.79
Total
100.00 100.00 100.00 100.00 100.00 100.00 100.00

Despite the fact that the household savings have been gradually moving from physical assets to
financial assets over the years, still 49.79% of household savings are wrapped in physical assets
thereby desired capital formation has not been taking place, is a matter of serious
concern. Unlocking physical assets is the need of the hour as substantial scarce financial
resources are blocked in unproductive assets (Gold and Real Estate) at a time when the country is
in dire need of funds to channelise into productive sectors to achieve desired GDP and economic
growth. The deployment of Household Financial Savings across various major financial assets is
as under:

Major components of Household Savings (%)
Category
1970 1980 1990 2011
1. Currency
13.9 11.9 10.6 13.3
2. Deposits with Banks/NBCs
45.6 40.3 31.9 47.3
3. LIC/PF/Pension Funds
28.6 25.0 28.4 32.9
4. Small Savings (Govt.)
4.2 11.1 13.4 6.5
5. Shares & Debentures
1.5 3.9 8.4 -0.4
6. Others
6.2 7.8 7.3 0.4
Total 100.0 100.0 100.0 100.0
Source: Handbook of Statistics on the Indian Economy, RBI
Normally, public keep a portion of their savings in the form of currency to meet their day-to-day
emergency requirements and the balance of savings will be held in the forms of investments. The
last decade has witnessed increased adoption of Debit & Credit cards and electronic payments,
expected significant shift in currency holdings. Contrary to the expectations, the currency
holding with public has increased from 10.60% in 1990 to 13.30% in 2011 which calls for a
detailed debate. The major reasons for high currency holdings may be on account of increased
economic activity with limited access to banking (5.66 lakh unbanked villages) coupled with
hoarding of unaccounted money in the form of cash to circumvent tax laws.
Historically, Bank deposits seemed to be the preferred choice as it has inbuilt Safety, Security
and Liquidity features. The ownership of bank deposits data reveals interesting trends which are
as under:
Ownership of Bank Deposits (%)
No Category 1990 2001 2010
Var. over
1990
1 Government 6.80 10.00 13.5 +6.70
2 Corporate (Private) 6.20 4.60 14.80 +8.60
3 Financial sector 6.20 7.30 10.00 +3.80
4
Household (Ind./Trusts/Prop.)
71.60 67.20 58.00 -13.60
5 Foreign sector 9.20 10.90 3.70 -5.50
Source: RBI Reports

Traditionally, the Household sector has been playing a leading role in the landscape of bank
deposits followed by Corporate and Government sectors. However, Household sector lost a share
of 13.60% while Corporate and Government sectors gained by 8.60% and 6.70% respectively
during the last two decades. This calls for indepth analysis as it is an indication for skewed
distribution of income across various segments.


The positive impact of Indias thrust on economic growth has so far been largely limited to the
urban population and is yet to widely percolate to the rural population. It was stated in Human
Development Report released by Planning Commission that The impressive economic growth
of our country has brought smiles on the faces of the rich and the powerful even as the rest suffer
in distress and drudgery. The plight of the agricultural sector and inefficacy of the rural social
safety net programs are the chief factors responsible for widening of the urban-rural
divide. Despite augmented thrust by the government and RBI on Branch expansion over the
years, the fruits of the banking have not reached to substantial population, which is evident from

Out of six lakh villages, around 34000 villages only have the presence of Bank
Branch.Around 26% of countrys population (320 million) spread in 145 million house-
holds have completely excluded from banking services.

Substantial portion of governments subsidies and social spending is not being reached to
the target group and majority of rural/urban poor are under the clutches of Money
Lenders and deprived of financial independence.

As per the reports, the distribution of assets is extremely skewed with the top 5% of the
households possessing 38% of the total assets and the bottom 60% of households owning a mere
13% assets. Predictably, asset accumulation is minimal among the rural households.

Financial Exclusion Triggers

The major contributing reasons, on demand side, for exclusion of vast majority population from
formal banking system are low literacy rate coupled with scant financial literacy, low income
levels, absence of collateral/assets and social exclusion. At the same time, the supply side factors
are distance, costs, timings, complicated procedures, sub-optimal attitude of staff and offering of
inappropriate products etc.

Financial Exclusion - Impact

Financial exclusion is the cause to flourish informal financial markets which suffer from several
imperfections such as high cost of credit at exploitative
terms, loss of precious savings on account of fly-by-night operators, inordinate delays in
effecting transfer of funds and settlement of accounts.

The savings of financial excluded segment is largely in the form of cash, jewellery or livestock,
which offers little return and vulnerable to theft or loss. Further, they have little awareness and
practically no access to insurance products that could protect their financial resources in
unexpected circumstances such as illness, property damage or untimely death of bread-winner.
The prevailing scenario is believed to be acting as one of the major constraints to the growth
impetus of the country.

Financial Inclusion & Progress

Growth is inclusive only when it creates economic opportunities along with ensuring equal
opportunities to all. Hence,Financial Inclusion is considered to be critical for accomplishment
of Inclusive Growth. It envisages the accomplishment of three essential dimensions
viz., outreach, availability and usage of basic banking services. However, operating a full-
fledged branch in unbanked area is proved to be unviable considering the huge operational costs
and limited business volumes.

The Business Correspondents model is one of the viable alternate models to ensure greater
coverage in far-flung areas at reduced costs. The other initiatives in this direction are -
introduction of new products, simplified account opening procedure and offering No-frill
accounts with low minimum balance and charges.

The Financial Inclusion Plan (FIP) initiatives are well received by the banks which are evident
from coverage of around 74200 unbanked villages with above 2000 population during the year
2011-12. The number of No-frills accounts crossed 99 million with an outstanding balance of
above `87 billion. RBI directed the banks to provide basic banking services to the remaining
villages in a time-bound manner. RBI made it mandatory for the banks to open at least 25% of
new branches in un-banked rural centers. In this direction banks are advised to open Ultra Small
Branches in all villages where Business Correspondent Agents is in operation. Bank staff visits
these villages regularly at least once in a week which creates confidence among the masses in
functioning of the new business model.

Financial Inclusion Opportunities

Today, the banking has become imperative to all house-holds across the country irrespective of
their social and financial status and expects minimum financial services from the banking
system. As per PWC report, around 3 lakh crore government subsidies/welfare amounts will be
routed through banks once UID project is in place. The FI initiatives may likely to add another
20 crore accounts to the banking system which definitely pave the way for increased flow of
stable retail business both under deposits and advances.

The gradual phase-out of Joint Family system coupled with increasing life expectancy and
insignificant presence of social security schemes is forcing the bread-earners to look for
insurance/pension products. It is an opportunity for the banks to improve other income which is
the need of the hour.

According Telecom Regulatory Authority of India (TRAI), April 2012 report, the rural
subscriptions crossed 330 million as against total subscriber base of 950 million. Mobile is an
ideal vehicle to extend banking services to rural and unbanked areas in a simple and most cost
effective way. The IBA-FICCI-BCG report predicts that mobile banking would become the
second largest channel of banking after ATMs. Mobile banking will drive the growth of banking
industry exponentially in the future by increasing productivity and acquiring new customers.

Financial Inclusion - Challenges

The major challenges associated in implementation of Financial Inclusion are scalability and cost
structures. It calls for greater involvement and cooperation between the public, private and social
sectors. Many players are uncertain about the market size for their customer specific products
and probably that may be the reason for subdued interest to enter the financial inclusion space.
There is an imperative need remove the information roadblocks with the use of innovative
products andalternative channels. Government should continue to look for ways to encourage
innovations that spur growth while avoiding direct subsidies that might prevent commercial
players from developing financially sustainable solutions.

i) Infrastructure &Technology issues

Absence of desired infrastructure facilities such as transportation, communication and power
supply is causing hindrance for speedy implementation of FIP. Connectivity is another major
challenge. Today, most of the banks have opted for the smart card platform where the
Technology Service Provider (TSP) and the banks CBS vendors are different entities, resulting
in to interface issues. There is an imperative need to move towards Universal FI Solutions,
standardizing the interface with Core Banking platform to address technology issues. FI
solutions are expected to be interoperable across three technology platforms viz., Smart Cards,
Mobile Phones and Micro ATMs where as mostly the existing solutions are confined to Smart
Cards. In the present system, the residents are required to have two accounts viz., FI Bank &
EBT implementing agency. There is an urgent need address this issue by setting up a repository
of accounts for all EBT beneficiaries to route payments to single account.

ii) Operational issues

The beneficiaries of BC services are mostly illiterate/semi literate and are susceptible to
misguidance. The success of the model crucially depend on the trust levels among customers,
banks and BCs, which is possible through spread of financial awareness by conducting financial
literacy programs on an ongoing basis. BC transactions are cash-based, which is one of the
biggest issue and it is more so with North Eastern regions due to higher security risks, vast and
difficult terrain and poor connectivity. There is a need to have uniform code of conduct for
Grievance redressal mechanism. Periodical reconciliation process to tally balances is a must.

iii) BC Viability issues

It is becoming difficult for BCs to continue operations due to mismatch of revenues earned and
costs incurred on account of low business volumes. It warrants the attention of the government,
regulator and the bankers to re-look into compensation policy of BCs or initiate steps to augment
their income level by entrusting them to market insurance products of LIC/GIC in rural
unbanked areas. It improves the viability of BC model besides enhancing access to wide range of
insurance products to rural population.

iv) Manpower issues

Trained manpower is very important for the last mile delivery of financial products to the
excluded. The concept of Ultra Small branches is going to stay to achieve desired financial
inclusion and these branches are to be manned by bank staff only. Banking industry need to
deploy additional manpower around 1.50 lakh to cover 5.66 lakh unbanked villages for the said
purpose. Whether banks to go for a separate recruitment to handle this segment or make use of
the existing staff with specialized training invites broader debate. Achieving full scale financial
inclusion invites many challenges as the number of Business Correspondent Agents will increase
manifolds and they need to be adequately trained both on technology platform and banking
domain knowledge. Banks, NGOs and other organizations are to be roped in to strengthen the
training infrastructure.

v) Regulatory issues

It is mandatory for BCs to settle cash with bank branches on the same day or next working day.
Due to erratic power supply and connectivity issues, it becomes difficult to complete settlements
within the prescribed timeframe especially in the North Eastern Region. There should be a
separate institutional set up to have pool of Technology Service Providers (TSP). Price
restrictions, whether in the form of interest rate caps or limits on fees, often impede the scaling
of financial inclusion. Regulators should allow players to cover their costs of funding and
operations.

Financial Inclusion Way forward

Though, Branchless Banking models are gaining momentum on account of cost effective
solutions, banks may have to continue to adopt multi-pronged approach focusing attention on all
delivery channels viz., Physical Branch Network including Ultra Small Branches and Satellite
Branches, Micro and Mobile ATMs, Business Correspondents and Mobile Banking, to
accomplish financial inclusion. In the present scenario, no single channel is to be treated
as substitute to other channel; rather they are to be viewed as supplementary
to each other. The products and services should be in sync with the characteristics and needs of
the target audience.

Financial inclusion needs a holistic approach to make it more effective and sustainable. The
Public, Private and Social sectors have to all come together to create an entire ecosystem. It casts
higher responsibility on the banking industry in creating awareness about financial products,
education, advice on money management, credit counseling, savings and affordable credit.

Capacity building of the target group (financially excluded) is the need of the hour. Rural Self
Employment Training Institutes (RSETIs) need to be further strengthened to promote micro
entrepreneurs across the country.

The envisaged countrys 8% GDP growth target requires harnessing resources and fortune at the
bottom of the pyramid. In this context, Prof. C K Prahalad view on small customers is worth
noting The future lies with those companies who see the poor as their customers. Financial
Inclusion is to be treated as Business Opportunity instead a regulatory prescription. Banks need
to revisit their approach towards low value accounts of vast neglected population and
adopt High Volume & Low Margin business model.

Banks, Government, Regulators, Technology Service Providers, other agencies and the
community at large need to work together in tandem to accomplish the task of total financial
inclusion as it strengthens financial deepening and paves the way for economic development
and Inclusive Growth.