Financial Inclusion In India

Uploaded by abhishek.kr.sharma on Mar 26, 2008

Financial Inclusion
Benefits, Issues and Challenges

Contents

Introduction 3
Financial Inclusion 5
What Financial Inclusion Is All About 5
Why is financial inclusion important? 5
What are the reasons behind financial exclusion 5
Main Drivers of Financial Exclusion 6
Financial Exclusion - The resulting problems 6
Banking in India 7
Financial Inclusion - Issues and Challenges 10
Appendix 11
Hon’ble Union Minister of Finance Union budget speech 2007-08 11
June & July Session: June 15-July 30, 2007-The Oberoi Grand, Kolkata 11
References 18

Introduction

The growth trend of the Indian economy over the last few years appears to
indicate the beginning of a new phase of higher growth. From an average growth rate
of around 6.0 per cent for a quarter of a century, the growth rate has accelerated
to 8.1 per cent over the last few years. The per capita income growth is now 6%. On
the savings front, the increasing trend in gross domestic saving as a proportion of
GDP witnessed since the early 2000s has also continued unabated. The gross domestic
savings rate has improved from 23.6 per cent of GDP in 2001-02 to 29.1 per cent in
2004-05. Along with the improvements in savings and investment rates, there has
also been a marked lowering of inflation from 7.8 per cent in the 1990s to 4.7 per
cent in recent years. There has also been a resurgence of manufacturing activity.
The high industrial growth is also corroborated by the record of very healthy
performance of the corporate sector, which has recorded unusually high profit
growth over the past three years: over 40 per cent growth in profit after tax for
11 successive quarters from Q3 2002-03 to Q1 2005-06.

There are certain concerns which can be summarized as follows:

• High growth has not been matched by adequate deposit growth. The growth in
deposits since 2001-02 has been far lower than that required to support overall
credit expansion (Graph 1)
• Banks have been financing much of the incremental credit expansion by
unwinding their surplus investments in government securities.
• Deposit growth concentrated in the larger cities (helped by the high
corporate profitability)
• Trend: banks may have been proactive in credit deployment but their focus on
deposit mobilisation may have been less than adequate.
• Slow deposit growth in non metro areas: possible suffering of financial
inclusion

Table 1: Relative Share of Borrowing of Cultivator Households (per cent)

Sources of Credit 1951 1961 1971 1981 1991 2002$
1 2 3 4 5 6 7
Non-institutional 92.7 81.3 68.3 36.8 30.6 38.9
of which:
Money lenders 69.7 49.2 36.1 16.1 17.5 26.8
Institutional 7.3 18.7 31.7 63.2 66.3 61.1
of which:
Co-operative societies, etc. 3.3 2.6 22.0 29.8 30.0 30.2
Commercial banks 0.9 0.6 2.4 28.8 35.2 26.3
Unspecified - - - - 3.1 -
Total 100.0 100.0 100.0 100.0 100.0 100.0

#: Borrowing refers to outstanding cash dues.

$: AIDIS, NSSO, 59th Round, 2003.
Source: All India Debt and Investment Surveys.

Financial Inclusion
Financial inclusion is delivery of banking services at an affordable cost to
the vast sections of disadvantaged and low income groups. Unrestrained access to
public goods and services is the sine qua non of an open and efficient society. As
banking services are in the nature of public good, it is essential that
availability of banking and payment services to the entire population without
discrimination is the prime objective of the public policy.
What Financial Inclusion Is All About
• Low-income groups do not have access to the formal banking systems, as they
usually do not have the documents needed to open a bank account.
• Therefore, they rely on the informal sector (chit funds, beesi, etc) for
their savings and loan requirements.
• The aim of financial inclusion, which the RBI is promoting, is to get the
vast low-income population into the fold of the basic banking system through no-
frills accounts
• No-frills bank accounts are of a restricted nature and put a limit on the
number of transactions.
• The individual who wants to open a bank account needs to be certified by an
existing account holder on whom all the know-your-customer norms have been
completed.
Why is financial inclusion important?
A vast segment of India's population exists on the margins of India's
financial systems. Whilst the per-capita savings of this class may not be very high
their sheer number means that taken together their savings are of a considerable
amount. If their entry in the formal financial sector is made easier these savings
can be channelized for the formal economy. Also savings cum risk products that are
their primary need can be structured for them once they are part of the formal
banking system.
What are the reasons behind financial exclusion
Financial exclusion is the lack of access by certain consumers to
appropriate, low cost, fair and safe financial products and services from
mainstream providers.
Financial exclusion becomes of more concern in the community when it applies to
lower income consumers and/or those in financial hardship.
There is a large overlap between poverty and permanent financial exclusion.
Both poverty and financial exclusion result in a reduction of choices which affects
social interaction and leads to reduced participation in society
Main Drivers of Financial Exclusion
Most frequent Less frequent
Low income Psychological/disability issues
Nil or low savings Feeling of being excluded
Lack of assets Indigenous/ethnic issues
Unemployment Geographical remoteness
Under employment Lack of time
Use of inappropriate products Lack of PC/Internet Access
Financial illiteracy Availability of alternative products and suppliers
Poor financial habits Youth

Financial Exclusion - The resulting problems

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
• Getting credit from informal sources at exorbitant rates
• Increased unemployment
• Small businesses affected: 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.
• Social exclusion: According to certain researches, financial exclusion can
lead to social exclusion.
Banking in India
Banking sector in India has undertaken several social banking initiatives for
a long time now. RBI and Government of India have made several policy decisions to
increase the scope of banking sector in all parts of the country. These include the
following:
• Initiation of the Lead Bank scheme in 1970
• Establishment of Regional Rural banks in 1975
• Introduction of the Self-Help Group- Bank Linkage scheme in 1992
• Formulation of the Kisan Credit Card Scheme in 2001
• Steps for financial inclusion in the RBI policy from 2005 onwards
The recent guidelines issued by RBI for promoting financial inclusion are as
follows:
• Introduction of a basic banking no-frills account with minimum or nill
balance requirements and charges
• Simplification of Know Your Customer (KYC) procedures for opening accounts
for low income groups
• Simplification of general credit card schemes to provide easy access to
credit for rural customers
• Use of IT-enabled services for increasing the scope and coverage of financial
services
• Inculcation of awareness in masses through financial education and credit
counselling
Also Parliament passed the Credit Information Bureau Act in 2006. This Act has been
provided for the establishment of a credit bureau which will make available credit
histories of individuals and small businesses. This will lower the business risk
for banks and thus they can extend credit to lower income groups more freely.
In the last few years both public and private sector banks have expanded
their microfinance and rural banking initiatives. Indian Bank, a public sector bank
became the first bank in the country to achieve 100% financial inclusion in Union
Territory of Pondicherry by ensuring that every family has a bank account. ICICI
bank, India’s largest private bank had around 3 million microfinance clients in
2006 and it has targeted 25 million in the next three years. Also other private
banks like ABN AMRO, YES Bank, Deutsche Bank have smaller operations in the micro-
credit sector. These private banks operate in partnership with microfinance
institutions (MFIs).
As per RBI guidelines, public sector banks have to provide 40 per cent of net
bank credit to priority sectors, which include agriculture, small industries,
retail trade and the self-employed. Public sector banks have operated by lending to
self-help groups which they disburse the loans to the needy. National Bank for
Agriculture and Rural Development has played a very significant role in supporting
group formation, linking them with banks as also promoting best practices. There
are currently 2.6 million SHGs linked to banks touching nearly 40 million
households through its members. SBI has a target of credit linking 1 million SHGs
up to March 2008. The total credit flow to agriculture up to September 2006 by
PSBs, private sector commercial banks, cooperative banks and regional rural banks
stood at Rs 94,345.54 crore, up from Rs 83,502.05 crore in September 2005.
The banking sector has tried to address the needs of the financially excluded
by providing the following services:
• Small Saving Products
• Insurance schemes
• Credit cards
• Easy and cheap credit facilities

Growth of Aggregrate Deposit and Credit

Financial Inclusion - Issues and Challenges

o In remote, hilly and sparsely populated areas with poor infrastructure,

physical access itself acts as a deterrent.
o From the demand side, lack of awareness, low incomes/assets, social
exclusion, illiteracy act as barriers.
o From the supply side, distance from branch, branch timings, cumbersome
documentation and procedures, unsuitable products, language, staff attitudes are
common reasons for exclusion. All these result in higher transaction cost apart
from procedural hassles.
o On the other hand, the ease of availability of informal credit sources makes
these popular even if costlier.
o Lack of Financial education among the masses.
o Synchronization of financial sector reforms with sectoral and fiscal reforms
– financial inclusion for farmers cannot be sustained by the banking system alone
as there is a need for other measures like public investment in irrigation,
research and extension, infrastructure in rural areas, proper seeds and
fertilisers, a good marketing system for better price, etc
o The requirements of independent documentary proof of identity and address can
be a very important barrier in having a bank account especially for migrants and
slum dwellers

Our personal ready made example of financial Inclusion: Saral Dhan

The Concept:
Nearly 60% of India’s 1.1 billion population lives in rural areas and about
50% haven’t even heard of a bank, let alone use it for financial purposes. These
people rarely transfer/receive money in any other format other than personal
delivery.
These people are excluded from the financial system of the country. Some of
them may have transfer requirements but they have very poor financial habits and
more often than not are victims of money lenders. Even money meant to reach these
people by government / NGO schemes don’t reach them for the length of the chain
involved in transfer and unethical laundering.
Mobile phone sharing is a tool that is not just limited to personal use –
with mobile connectivity increasing; we came with the idea of using mobile phones
as mini banks in various village kiosks.
Imagine this, A wants to transfer a small amount of money (About 20 Rupees)
to B, who lives in another village. Now the financial instruments available with B
are very limited and most probably A has to travel to B to transfer the amount.
Even if he has a bank account, A would be reluctant to use its services, for it’s
too small an amount involved.
Now, our Idea is if we can incorporate a system where a mobile phone kiosk
with top ups of various denominations are available, A has to then just top up the
phone of B’s village by the amount involved + (10-15%) commission. Then a message
is sent to B’s village phone kiosk containing the details of payee and recipient.
The transferred amount is then paid to B in cash.
The advantage of the whole system apart from the fact that is elegant,
flexible & making good use of scarce resources is that it is
 simple to govern
 eliminates middlemen ( The fidelity of two kiosk owners is pre-
verified)
 money transfer is almost instant
 The risk factor of carrying cash normal incurred by villagers for
transfer purposes is reduced.
Modalities:
What we need to design such a system and make it functionally viable are
Kiosks in every village with reliable employees appointed (after personnel training
by relevant mobile phone manufacturers/operators) for sending SMSes and making
calls. There is also a necessity to tie up with the mobile operators, who have a
big business opportunity. (Sale of recharge coupons, cut from commissions)
Connectivity in these villages is again a big issue, but solutions (optical fibres,
spectrum rules relaxation) are also evolving. Most importantly, such an initiative
would require the blessings of the union, state governments and TRAI.
Initial investments1 will include:
 Mobile phones
 Selection & training costs of personnel
 Tie ups with banks, credit institutions and mobile operators
 Promotional expenses
Implementation:
The entire system’s success depends on how often the villagers use the
available infrastructure and how quickly we can get them to place their trust in
the system. For this purpose promotion campaigns and awareness building becomes a
major issue. Initially transfers have to be made and then the call the recipient to
let the payee talk to the recipient. This might involve additional calling charges,
but they are marginal (between kiosk operators call rates can be slashed) but this
confirmation system will ensure trust. Also, when a person from Village A wants to
transfer money to a person in another village B, he must be present in the kiosk
some 10 minutes before in order to notify the kiosk operator in village B to get
the receiver of credit. Promotional measures should include
 Street plays
 Panchayat sessions to convey the same
 Radio Advertisements
 Weekly Bazaar promotions

Summary:
There is subtle evidence that for the poorest members of society things like
mobile phone can be a blessing as well as the primary form of identity. For people
who quite literally live where the streets have no name a phone number painted
above the door is a fixed point of contact. The phone-number-as-identity effect is
likely to increase as mobile phones become established at providing banking and
other core services.
Finclusion is a wide gambit of things which can actually pull people up and
generate profits. Nations and governments need to employ it to sustain their
government for all.
“The growth story would be a success only if it benefits every Indian, whoever he
is, whatever he does and wherever he stays” – Dr. Manmohan Singh
Appendix
Hon’ble Union Minister of Finance Union budget speech 2007-08

Financial Inclusion
93. Financial inclusion is the process of ensuring access to timely and
adequate credit and financial services by vulnerable groups at an affordable cost.
The Committee on Financial Inclusion has given an interim report. While we await
the final report, Government has decided to implement, immediately, two
recommendations. The first is to establish a Financial Inclusion Fund with NABARD
for meeting the cost of developmental and promotional interventions. The second is
to establish a Financial Inclusion Technology Fund to meet the costs of technology
adoption. Each fund will have an overall corpus of Rs.500 crore, with initial
funding to be contributed by the Central Government, RBI and NABARD.
The Committee on Financial Inclusion, chaired by Dr. C. Rangarajan, has also made
certain recommendations concerning RRBs. I, therefore, propose to:
• ask RRBs to undertake an aggressive branch expansion programme and, in 2007-08,
open at least one branch in the 80 uncovered districts of the country;
• extend the Securitisation and Reconstruction of Financial Assets and Enforcement
of Securitisation of Interest (SARFAESI) Act to loans advanced by RRBs;
• permit RRBs to accept NRE/FCNR deposits; and
• recapitalize, in a phased programme, the RRBs which have a negative net worth.
June & July Session: June 15-July 30, 2007-The Oberoi Grand, Kolkata
Banking Conclave is a major flagship programme of FICCI-Eastern Regional
Council which started, at the initiative of Chairman, FICCI-Eastern Regional
Council, since its inception in 2004 where chairmen and managing directors of
leading banks addressed its members in exclusive sessions on the theme
'Globalisation and Financial Inclusion: New Age Indian Banking'.

The objective of the conclave is to deliberate on the prospects of growth of Indian

Banking Sector through financial inclusion in this globalization era.
Highlighted below are the views expressed by the Speakers on the theme:
Mr. C.K. Dhanuka stated that an important challenge facing the banking system in
this globalization era was to extend financial services to all sections of the
society. Financial Inclusion was essential not only because of its implications for
the welfare of citizens, but it had to be an explicit strategy for fostering faster
economic growth in a more inclusive fashion.
Mr. P.K. Gupta, CMD, United Bank of India - (June 15, 2007), suggested that in
order to achieve financial inclusion, a holistic approach was required by the banks
which would include creating awareness about financial products, education and
advice on money management and debt counselling.
Mr. S. Sridhar , CMD, National Housing Bank - (June 26, 2007) - stated that in
order to provide 'affordable housing for all' National Housing Bank (NHB) was
aiming to develop a market based housing finance system focusing on unserved and
underserved segments.
Dr. Nalchik Mor, Deputy MD, ICICI Bank Ltd - (July 4, 2007) - in his address
stressed on the need of franchisee arrangements with micro credit institutions for
providing banking solution for the urban poor and rural masses, which in turn would
deliver growth.
Mr. M.D. Mallya, CMD, Bank of Maharashtra - (July 6, 2007) - said that
Globalisation through its direct impact on growth had played an instrumental role
to reduce the levels of poverty in developing countries which acted as a direct
indicator of financial inclusion. However, the extent to which the benefits of
growth had percolated down to the masses was a debatable issue.
Dr. K.C. Chakrabarty, CMD, Punjab National Bank - (July 6, 2007) mentioned that
Globalisation and Financial Inclusion were interdependent. Globalisation had
necessitated financial inclusion and it couldn't be sustained unless a movement was
made towards inclusive growth. In order to reap the benefits of globalization, the
poor needed to be empowered to break out of the vicious circle of poverty and live
with dignity.
Mr. B. Sambamurthy, CMD, Corporation Bank - (July 10, 2007) in his address
delineated the key drivers of new age Indian banking. The evolving demographic
profile of the country and the paradigm shift in the lifestyle of Indian citizens
were among the key determinants of the future course of Indian banking pointed out
by Dr. Sambamurthy.
Mr. P.L. Gairola, CMD, Dena Bank - (July 13, 2007) - outlined the distinct roles of
three pillars viz, State, Financial System and CBOs (Community Based
Organisations)/NGOs in achieving social transformation towards financial inclusion.
He also stressed that financial inclusion which would eventually lead to financial
deepening which was the survival strategy of the banks.
Dr. Y.S.P. Thorat, Chairman, NABARD - (July 18, 2007) - laid down an Eight Point
Agenda and also underscored the role of three pillars, viz, State, Financial System
and CBOs (Community Based Organisations) /NGOs in the move towards financial
inclusion.
Mr. T.C. Venkat Subramanian, CMD, Exim Bank of India - (July 30, 2007) - while
outlining the various instruments through which Exim Bank of India is helping the
country enhance its exports of products, projects and services, also highlighted
the role that the Bank is playing in partnering India Inc's internationalization
efforts.
Financial Inclusion in other countries
Australia
Overview of the main characteristics of banking exclusion in Australia
The Australian social security system relies heavily on direct deposit of
benefits into a bank account – those without an account make special arrangements
with their local Centrelink provider for the payment of benefit. A survey (of adult
financial literacy) conducted in 2002-2003 found that just three per cent of adults
in
Australia lacked an ‘everyday’ banking account (ANZ Banking Group 2003).
There is, however, growing concern about people being ‘under-banked’ – that is
people who hold an account but make little use of it and operate a cash budget.
Despite the wide access to banking there are clusters of excluded people – most
particularly in the indigenous communities.
Policy responses to banking exclusion
Following the Prices and Surveillance Authority’s 1995 banking inquiry the
banks provided the Treasurer with undertakings to provide basic accounts.
Unfortunately they did not honor this commitment when the government changed after
the 1996 election.
The incoming government took no steps to ensure that banks implemented their
undertakings as they believed that technological advancements and competition would
be sufficient to ensure that banks reached out to more of the population (Connolly
and Hajaj, 2001).
At first it was argued that it was not viable to provide fee-free banking
services in Australia (Connolly and Hajaj, 2001). Despite this, there are
indications that competition and the growing emphasis on corporate social
responsibility have led a number of banks to look at ways of providing low-cost
banking services to people on low incomes. This has, however, been constrained by
Competition law.
In 2002, the Australian Bankers’ Association made an application for a
generic basic account to the Australian Competition and Consumer Commission on
behalf of ten member retail banks (Australian Competition and Consumer Commission,
2002). This proposed a set of minimum standards for a basic bank account that would
be offered by the ten banks. These included the following features: no account
keeping fees; no minimum balance to open the account; no minimum monthly balance
requirements; unlimited deposits free of charge; and six non-deposit transactions
(including three over-the-counter cash withdrawals) free of charge each month. The
ACCC rejected the proposal, which they considered anti-competitive as the four
largest banks already offered basic accounts with better features than those being
proposed for the generic account. There was a fear that the generic account would
become the industry norm.
The ABA was invited to propose an improved generic account, but members have
decided not to pursue this but to continue to develop their own accounts.
All four major banks now offer basic bank accounts. ANZ and National
Australia Bank both provide very generous basic bank accounts at no cost to people
who qualify for Government benefits. The ANZ account offers an unlimited number of
free transactions each month, although it does not allow the use of other bank’s
ATMs. There is no minimum monthly balance and no account servicing fee. The
National Australia Bank offers a National Concession Card Account which has no
monthly service fees. With this account customers are entitled to a monthly rebate
of $40 (transactions are priced according to channel and then totaled at the end of
the month). Commonwealth Bank and Westpac also provide basic accounts.
Moreover, the revised ABA Code of Practice now includes a clause requiring
bank staff to give information about suitable accounts to low-income customers, if
they tell the bank about their circumstances or it becomes apparent that they are
in receipt of social security payments. It also commits the industry to providing
rural and remote areas with face to face banking services even after a branch is
closed, through alternative means such as franchising or in store provision.
The ABA is considering ways of improving access to banking for the elderly.
They have implemented a programme called Self Service Banking and Older Australians
in which a bank representative demonstrates how to use ATMs, EFTPOS, telephone and
internet banking. For communities faced with the loss of their bank branch, the
banking industry has also undertaken to adopt a minimum uniform standard for rural
and remote branch closures (except in unusual circumstances, banks will give three
months written notice to customers before closing any rural or remote branch) and
to consult with local communities on the trends in the delivery of banking services
so that they may consider developments that may affect the way they will be able to
access banking services in their area (Australian Bankers’ Association, 2003b).
The Australian Government has committed $70 million, funded by a partial sale
of Telstra (a communications provider), to provide banking and other transaction
services to communities without banking facilities. The provision, known as the
Rural Transaction Centre programme (RTC), is aimed at smaller rural communities and
towns. Facilities can be set up in existing stores and post offices or in stand–
alone centers, and run by communities or local councils. In addition, rural
communities that might not be eligible for the RTC programme can apply for funding
to install EPOS equipment in post offices as a result of a cooperative venture
between the federal government and Australia Post.
The EPOS equipment offers deposit and withdrawal facilities as well as other
options such as bill payment through 70 financial institutions.
The Rural Transaction Centre programme was integrated into the Australian
Government's new Regional Partnerships programme in July 2003. It is intended that
this will allow a straight forward, single application process for communities to
apply for all Australian Government funding support for regional development
projects.
Communities will also be offered support throughout the application,
development and establishment of an RTC through the Regional Partnership programme
(Department of Transport and Regional Services).
It is not intended that RTCs will duplicate existing services, nor will they
provide new services already planned by other organizations. Despite this the
programme has been criticized for causing banks to pull out of some communities. It
has also been suggested that some rural communities see the RTC as no more than a
way of replacing old (Telstra) services and with new ones (Connolly and Hajaj,
2001). Notwithstanding these criticisms, to date over 100 communities have RTC
facilities, and many more have successfully applied for funding to be provided in
the near future (Department of Transport and Regional Services).
Access to banking has also been improved by other providers. The CBA operates
an in-store banking service within Woolworths which claims to offer competitive
interest rates, no account keeping fees and unlimited free electronic withdrawals
per month in all Woolworths/Safeway stores. Other banks have a presence in other
chains across Australia (see Argent, 2002). Community banking is also flourishing
in parts of Australia, supported by Bendigo Bank. Bendigo Bank offers to conduct
viability studies and then provides infrastructure, training and support if a
community can show that a viable Community Bank can be established. There are over
100 Community Bank branches open, including two in Tasmania. Last year Community
Banks opened their 250,000th account.

Canada
Overview of the main characteristics of banking exclusion in Canada
The most recent figures show that between three and four per cent of Canadian
adults over the age of 18 do not have a bank account of any kind (ACEF-Centre,
1996; Ekos, 1998). This figure is much higher among low earners (less than
$25,000CAD a year) at eight to ten per cent (Ekos, 1998; Morris and Phillips, 1999;
Environics 2000). It also appears that many of the un-banked are Native Canadians
(Buckland et al, 2003).
Policy responses to banking exclusion
In 1998 the Task Force on the Future of the Canadian Financial Services
Sector published its report ‘Change, Challenge, Opportunity’. The following year
the Federal Government responded with a report4 setting out 57 reform measures
including providing banking services to all adults and ensuring that these services
are well promoted. Bill C-8 was enacted in June 20015. The Access to Basic Banking
Services Regulations took effect on September 30th 2003.
The Financial Consumer Agency of Canada (FCAC) is responsible for enforcing
the above regulations, which attempt to widen access by making the rules for
obtaining a basic personal bank account clear and straightforward. For example, a
bank now can not refuse to open a basic personal account just because the applicant
has no job, is or has been bankrupt or is not depositing money into the account.
Importantly, a bank must also cash most Government of Canada cheques for non-
customers at no charge. The issue of rural banking has also been addressed in the
regulations. Banks must give four months notice of branch closures, and six months
notice where they are the only branch for 10 kilometers, in order for communities
to be consulted and make alternative arrangements.
Banks were given the opportunity to address the issue of the un-banked
voluntarily before the introduction of regulations. Eight banks signed a Memorandum
of Understanding (76) (MOU76) with the Government pledging to offer low-cost
accounts to their customers. These accounts charge fees ranging from a monthly
charge of $2.95CAD to $4.00CAD (the maximum allowed) with between 8 and 15 free
transactions. The banks have recently renewed their commitment to this approach in
an attempt to “ensure that all Canadians have access to affordable banking
services” (FCAC, 2003a). A 2003 nationwide mystery shopping exercise has provided
evidence about the compliance with these voluntary codes. The research indicated
that information about low fee accounts was available in almost 85 per cent of the
1642 bank branches visited across Canada that had signed up to MOU76. Almost all
banks visited (95 per cent) agreed to cash a cheque for free (FCAC, 2003b).
There have also been local attempts to provide banking facilities for
disenfranchised communities, but as the following example indicates, success is far
from guaranteed. In response to the closing of unprofitable branches in downtown
East Vancouver the provincial government of British Columbia set up Four Corners
Community Savings bank in 1994. It served 3500 customers, 95 per cent of whom were
income assisted (Times Colonist, 2003). This provision was, however, controversial
because the financial support required to run Four Corners was not offered to other
providers and the plan was not discussed fully with the local community, many of
whom wanted to establish a credit union (Canadian Community Reinvestment Coalition,
1997). In December 2003 the Competition Minister in British Columbia announced that
Four Corners would be closed as the $600,000CAD annual contribution required from
the province was “not sustainable.”
Great Britain
Policy responses to banking exclusion
T he main initiative to bring people into banking has been the development of
‘basic bank accounts’. These are card-based accounts, with no cheque book, where
all transactions are checked before acceptance so that the account cannot be
overdrawn. Such accounts were designed following research to explore the reasons
why people were un-banked (Kempson and Whyley 1998; Kempson and Whyley 1999) and
promoted by the HM Treasury Policy Action Team 14 on Access to Financial Services
(HM Treasury 1999).
For the most part, banks developed these new accounts voluntarily, although
theChancellor of the Exchequer imposed a deadline of October 2001 by which all
banks should provide such an account for their customers. All banks met this
deadline and many building societies also offer basic bank account. There is,
however, considerable evidence that banks are not always drawing these accounts to
the attention of people who might benefit from them, despite provisions in the
Banking Code to this effect (Banking Code Standards Board, 2002; Financial Services
Consumer Panel, 2002; National Association of Citizens Advice Bureaux 2002). The
revised Banking Code, due for publication in March 2005 will contain a strengthened
commitment to tell customers about basic bank accounts if they are appropriate to
their circumstances.
Access to basic bank accounts however, seem to be improving (Banking Code
Standards Board, 2003) and their impact can already be seen in statistics on
current account-holding. As we note above, the Family Resources Survey shows a
statistically significant fall in the proportion of households lacking a current
account between 2000-01 and 2002-03 - the period during which basic bank accounts
were being introduced.
Particularly large falls occurred among unemployed people (10 per cent),
single female pensioners (6 per cent) lone parents (4 per cent) and households with
only a part-time worker (4 per cent), all of which were statistically significant.
The second initiative to promote integration into banking services has been
the decision to pay all social security benefits and state pensions into a bank
account. This transfer to automated credit transfer began in 2003 and will be
completed in two years. In preparation for this transfer, the Government held
discussions with banks and the Post Office as a result of which basic bank account-
holders with any of the 16 main banks can now use their local post office to
undertake routine banking transactions. In addition, the Post Office has, itself,
developed a very limited-function account. Known as the Post Office card Account,
this is a card-based account into which state benefits and pensions (but no other
source of income) can be paid. Users can then draw money out of the account as and
when they need it. In other words, it operates like an ‘electronic purse’ or stored
value card. Early indications are that take-up of these Post Office accounts by
benefit recipients has been relatively high.
In the 2004 Budget Report, the Government has said that it will work in
partnership with both the financial services sector and community bodies to achieve
‘dramatic reductions’ in the numbers of people without a current account and
without an account of any kind (HM Treasury, 2004).

References

http://www.rbi.org.in/scripts/BS_SpeechesView.aspx?Id=218
http://www.rbi.org.in/scripts/BS_SpeechesView.aspx?Id=310
http://www.iibf.org.in/financeq/iib_financeinclusion.asp
http://www.hindu.com/2006/07/31/stories/2006073103551500.htm
http://commerce.nic.in/search_result.asp
http://www.apnaloan.com/articles/home-loan-india/financial-inclusion.html
http://www.businessworld.in/content/view/1244/
http://www.thehindubusinessline.com/2006/11/10/stories/2006111003741000.htm
Securing India’s place in the global economy – Adil S. Zainulbhai, Mckinsey
Quaterly, October 2007
Policy level response to financial exclusion in developed economies: lessons for
developing countries
Elaine Kempson, Adele Atkinson and Odile Pilley
The Personal Finance Research Centre, University of Bristol, September 2004

Submitted by : abhishek.kr.sharma

Date Submitted : 03/26/2008

Category : Economics

Views : 5216