Financial Inclusion

Financial Inclusion is based on the premise that the country’s development should
provide opportunities to those who have previously not been able to come across those
opportunities or not have been able to avail those opportunities even when the
opportunities knocked at their doors. In our country, since independence at least, only the
mainstream section of our society has had these opportunities. Any development program
should ensure that more and more citizens of our country should get opportunities so that
they can alleviate themselves from their present state of substandard level of living.

The ultimate objective of development planning is human development or increased

social welfare and well-being of the people. Increased social welfare of the people
requires a more equitable distribution of development benefits along with better living
environment. Development process therefore needs to continuously strive for broad-
based improvement in the standard of living and quality of life of the people through an
inclusive development strategy that focuses on both income and non-income dimensions.
The challenge is to formulate inclusive plans to bridge regional, social and economic
disparities. The Eleventh Five Year Plan sought to address this challenge by providing a
comprehensive strategy for inclusive development, building on the growing strength of
the economy.

Inclusive Development2

The major dimensions of inclusive development include poverty alleviation, employment

generation, health education, and social welfare. Inclusive development can be seen in
terms of progress in social inclusion and financial inclusion. Despite more than six
decades of planned economic development, a large part of the population, particularly
segments like landless agricultural labourers, marginal farmers, SCs, STs, and OBCs,
suffers social and financial exclusion. Accordingly, the Government's policies are

2
Extracted from Sections 12.8, 12.9 and 12.10 of the Economic Survey, 2010-11. Pg. 294
directed towards economic and social upliftment of these segments so as to enable
everyone to reap the benefits of growth.

2
Financial Inclusion –The present status

Notwithstanding the government’s policies the story so far goes like this. Even today
large swathes of India are ‘financially excluded’. At least 73 per cent of farmer
households are in need of formal financial services. Out of 600,000 villages in the
country, only 30,000 have a bank branch. Only 40 per cent of the country’s 1.2 billion
people have bank accounts. Nine out of 10 people do not have insurance. Debit cards
cover only 13 per cent of the population and credit cards, a mere 2 per cent. “We are
totally under-banked as a nation,” says Nachiket Mor, former president of ICICI
Foundation for Inclusive Growth.

The Expert Views

Finance of veteran and former executive director of Reserve Bank of India (RBI), Y.S.P
Thorat, believes that a bureaucratic approach to banking mixed with a subsidy culture and
loan write-offs was unable to reach the poor at the bottom of the pyramid. Thorat is also
of the opinion that our policy makers, so many years, assumed that they knew what the
poor of this country needed and it was the policymakers’ job to tell them (the poor) what
they needed.

The Debacles

Failures have been numerous. Banks were often directed by the government to first lend
to the poor, only to write those loans off a few years later. Schemes like Integrated Rural
Development (IRDP) failed utterly. It is said that the biggest challenges to financial
inclusion has been the unwillingness of bank staff to work in villages. A 2004 study
funded by the UK department for International Development (DFID), found that more
than 60 percent of rural managers in Madhya Pradesh had a ‘negative attitude’ about their
work locations. “The study showed that sending an urban guy to rural posting means that


Extracted from a article on Financial Inclusion appearing in the November 2010 issue of India Forbes. Pg.
63
he is left out of the mainstream; “He feels no sympathy for the rural sector,” says Mr.
Thorat.

Only a little more than a decade ago this void created by non-committal attitude of the
bank staff was filled by Microfinance Institutions (MFI). With their lower costs and local
staff they were able to corner almost the market for the low value loans. However MFI
are now under attack for charging very high interest rates. The current scenario therefore
is not enough to deepen financial inclusion to the next 100 million.

The New Initiatives

The growing attention to financial inclusion can be traced back to Reserve Bank of
India’s 2005-06 Annual Policy Statement where it advised the banks to offer no frills’
accounts with zero or low minimum balances to low income customers. The bank also
lowered the “Know Your Customer” (KYC) norms for them. On Republic Day 2006,
RBI issued a one and-a-page long circular allowing banks to appoint agents or banking
Correspondents (BC) to provide services on their behalf. Since it was practically not
possible to have brick and mortar branch everywhere the facility of BC was mooted by
RBI to make financial services accessible to people.

However it was late September 2006 that RBI allowed for profit-enterprises to become
banking correspondents. This could be called a revolution because now a profit-seeking
enterprise could become a banking point. This could also be a boon for the consumer
good companies for whom the main growth drivers are the rural markets. Companies like
Dabur, Emami, ITC and Nestle are seriously considering this option.

RBI has also asked all the banks to come up with a three-year road map for financial
inclusion. In addition to this the central Government has announced its plan to expand
financial coverage to all villages with a population of 2000 or more by 2012. SBI
responded to this call of the Government by employing 15000 banking correspondents
(BCs) and covering 50,000 unbanked villages by the end of 2010 alone. SBI will be
roping in 40,000 BCs within three years. SBI is so aggressive that it is fitting ATM in
vans and sending them to villages in Madhya Pradesh.

Private banks are also planning to make their contribution. HDFC Bank plans to help 10
million people to cross the bridge to financial viability in the next five years. Aditya Puri,
managing director, HDFC, believes that it is just enough to give a poor person a loan and
open an account. The person should have the wherewithal to create an enterprise. HSBC
has already started offering personal loans to low income segments. Citi India has
partnered with at least 22 MFIs and launched the National Alliance for Financial Literacy
(NAFiL) in October 2008 to run awareness campaign on sound financial practices.

Technology companies have also sensed the opportunity riding on the financial inclusion
wave in the country. Intel, a world leader in microprocessors, has recently produced a
bank-as-you-go device. A bank representative can take this device on a village visit ,
enroll new customers and handle transactions . Everything is synchronized with the bank
servers over the GPRS technology.

Another experiment is the e-kiosk. IT company Drishtee has tied up with State Bank of
India to provide kiosk banking across rural Assam. ATM maker NCR Corp. has launched
a cash dispensing machine called EasyPoint 70 Tijori, designed for small grocery stores
to act as banking touch points for the low income group.

But the most revolutionary development which everybody awaits is the “Unique
Identification (UID) or ‘Aadhaar’ project. An estimated 600 million residents are to
receive Aadhaar numbers over the next four years. The system will be backed by an
online biometric authentication service. It is quite likely that that Aadhaar will become
the default KYC requirement in the country.

The UID project is also planning to roll out micro ATM or a device which works in a
business correspondent like a kirana store. A person with a bank account goes to this BC,
authenticates himself using Aadhaar and withdraws his money. It will be a multi-vendor
micro ATM with interoperable transactions so that it would not matter which bank
account you were holding.