Finclusion -cooperatives perspective

FINANCIAL INCLUSION Entrepreneurial Perspective:

FINANCIAL INCLUSION Entrepreneurial Perspective B. Yerram Raju Director Development & Research Services (P) Ltd, and Member, Expert Committee on Cooperative Banking, GoAP, Hyderabad

EXTENT OF FINANCIAL EXCLUSION :

EXTENT OF FINANCIAL EXCLUSION 51.4% of farmer households are excluded from both formal and informal sources Of the total farmer households, only 27% access formal sources of credit; one third of this group also borrow from non-formal sources In central, eastern and north-eastern region 64% are financially excluded 80% of the sources of finance in north-eastern regions are informal Well, the factual figures could be higher than the above figures published by NSSO Survey 59 th round.

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WHO ARE FINANCIALLY EXCLUDED Small and marginal farmers Landless laborers, oral lessees Self employed and unorganized sectors enterprises Urban slum dwellers, migrants, ethnic minorities and socially excluded groups Senior citizens , women , etc. Poverty anywhere is a threat to prosperity everywhere.

DEMAND AND SUPPLY SIDE REASONS FOR FINANCIAL EXCLUSION:

DEMAND AND SUPPLY SIDE REASONS FOR FINANCIAL EXCLUSION Demand Side: Lack of awareness, low income, social exclusion, illiteracy Supply side: distance from branch, branch timings, cumbersome documents and procedures, unsuitable products, language, staff attitude, etc.

MOST FREQUENT REASONS FOR FINANCIAL EXCLUSION:

MOST FREQUENT REASONS FOR FINANCIAL EXCLUSION Low income & literacy levels Nil or low savings Lack of awareness Lack of assets Unemployment/Under Employment Use of inappropriate products Financial illiteracy Poor financial habits Inadequacy of financial infrastructure

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CHARACTERISTICS OF FINANCIAL EXCLUSION Lack of access to services/products. Lack of perception of the value of availing of formal services/products. Lack of information and knowledge of services/products. Inability to chose between alternate services/products

THE ILL-WEB OF FINANCIAL EXCLUSION:

THE ILL-WEB OF FINANCIAL EXCLUSION

EFFECT OF FINANCIAL EXCLUSION:

EFFECT OF FINANCIAL EXCLUSION Income, social, and financial disparities aggravates M3 (broad money) calculations go awry Consumer Price Index and to an extent the Wholesale Price Index estimates will be less than accurate Measures related to price regulations, reserve ratios, credit off take etc could be ineffective Growth of organized sector stifles Clutch of unemployment persists Banking, financial and economic development gets held back.

KEY FINANCIAL RELATIONSHIPS OF FINANCIAL EXCLUSION:

KEY FINANCIAL RELATIONSHIPS OF FINANCIAL EXCLUSION Banking accounts and financial discipline Banking accounts and saving culture Banking accounts and investment culture Banking accounts and borrowings from formal sources of credit

FINANCIAL INCLUSION:

FINANCIAL INCLUSION Financial inclusion is the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost

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FINANCIAL INCLUSION & DEVELOPMENT INDICATOR Recent data shows that countries with large proportion of population excluded from the formal financial system also show higher poverty ratios and high inequality. Country Composite index of financial inclusion (percent of population with access to financial services) Poverty (percent of population below poverty line) India 48 28.6 (1999-00) Bangladesh 32 49.8(2000) Brazil 43 22.0(1998) China 42 4.6(1998) Indonesia 40 27.1(1999) Korean Republic 63 Malaysia 60 15.5(1989) Philippines 26 36.8(1997) Sri Lanka 59 25.0(1995-96) Thailand 59 13.1(1992) Source : World Bank (2006) and (2008)

FINANCIAL INCLUSION SEEKS TO::

FINANCIAL INCLUSION SEEKS TO: Increase financial outreach to under-served and un-served populations. Improve access at a reasonable cost to these populations to a range of financial services and products .

ESSENTIALS OF FINANCIAL INCLUSION:

ESSENTIALS OF FINANCIAL INCLUSION Access to payment systems Delivery of Banking & Financial Services Timings & other conveniences Cost Product Range Education - Health, Insurance, equity, etc. Penetration to deepest geographies Segmented approach Functional Financial Inclusion 13

BEYOND THE KEY SUGGESTIONS OF THE COMMITTEE ON FINANCIAL INCLUSION (JAN 2008):

BEYOND THE KEY SUGGESTIONS OF THE COMMITTEE ON FINANCIAL INCLUSION (JAN 2008) Reasonable rate of interest: any rate, as far as it is banker’s rate, is reasonable than the informal market’s rate Personal credit loans are used for business purposes – working capital and long term capital requirements Promote credit culture by engineering products offering credit as a multiple of deposits and savings Micro insurance: to explain and promote the concept rather than exploit the relationships to register business volumes and earn commissions Counsel the credit culture and financial discipline

CHALLENGES IN FINANCIAL INCLUSION:

CHALLENGES IN FINANCIAL INCLUSION Enormous Tasks Used Target Groups Vast Geographical Spread Small Value and High Transaction cost Limited Outreach Technology Infrastructure-Technological, Administrative, Organizational Business Model Products

FINANCIAL INCLUSION FOR ENTERPRENEURSHIP PROMOTION:

FINANCIAL INCLUSION FOR ENTERPRENEURSHIP PROMOTION Provide first-time credit to first-time yet prospective entrepreneurs Encourage banking habit by nurturing entrepreneurial thoughts and attempts Imbibe credit culture and financial discipline than scan for them

FINANCIAL INCLUSION THROUGH ENTERPRENEURSHIP PROMOTION:

FINANCIAL INCLUSION THROUGH ENTERPRENEURSHIP PROMOTION Ensure that the entrepreneur realizes the need to be financially included – he does it best when he could avail of his most sought first time credit Orient the prospective entrepreneurs about the KYC norms and other basic credit culture aspects instead of declaring him as ineligible Be open to receive and evaluate a prospective entrepreneur when he re-approaches with his updated status (credit)

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SCOPE OF COLLABORATION BETWEEN PROFESSIONAL BANKERS & FUTURE MANAGERS

COLLABORATION BETWEEN BANKS, FUTURE MANAGERS, AND PROSPECTIVE ENTREPRENUERS:

COLLABORATION BETWEEN BANKS, FUTURE MANAGERS, AND PROSPECTIVE ENTREPRENUERS Professional Bank(er)s Unbanked prospective entrepreneurs Future Managers

Collaboration from Banks & Bankers:

Collaboration from Banks & Bankers Professional Bankers / Banks Permit project works by management students on topics related to financial inclusion Conduct orientation programmes to management students Place mandates on management schools for research oriented field studies Recruit management graduates who have worked on the similar projects for related assignments / jobs Sponsor programmes at management schools to strengthen banks-management schools relationship

COLLABORATION FROM FUTURE MANAGERS:

COLLABORATION FROM FUTURE MANAGERS Future Managers Undertake projects actively in the areas related to financial inclusion / micro credit / angel funding / MSME sector etc Conduct awareness programmes for unbanked Develop potentiality rating tools and voluntarily assist bankers to pre-rate the potential prospective entrepreneurs Act as voluntary shadow relationship managers on behalf of bankers Pursue career in SME / Micro / Angel funding sectors

COLLABORATION FROM UNBANKED BUT PROSPECTIVE ENTREPRENEURS:

COLLABORATION FROM UNBANKED BUT PROSPECTIVE ENTREPRENEURS Unbanked but prospective entrepreneurs Avail of the facilities offered by Bankers Achieve to be eligible borrower under CGF scheme Be true and prompt to the banker; maintain financial discipline and positive credit culture Be a responsible account holder and stand as a model for other unbanked persons Entertain and encourage future managers to undertake projects on tiny, SME, micro finance etc topics and share the required information with them.

%Growth of Banking (2000-10):

%Growth of Banking (2000-10) Geographical segment Number of Branches 2000 2010 Deposits 2000 2010 Credit 2000 2010 Metro 13 17 42 57 61 66 Top100 22 27 59 69 75 78 Urban inclusive of Metro 29 37 66 77 78 83 Semiurban 22 24 20 13 11 10 Rural 49 37 14.60 9 10.44 7 32673 32289

Profile of Growth of Banking:

Profile of Growth of Banking Uneven levels of banking penetration marked the growth of banking during the last decade. the six metros have a share of around 63% of the total banking business in urban segment In Semi-Urban and Rural Centers (SURC) with about 750mn population, despite the addition of 4394 branches, their overall share in banking universe showed a decline from 70 to 61 percent with all the acclaimed Financial Inclusion efforts during the last decade. Rural centres’ Deposits declined from 15% to 9% and Credit from 11% to 7%. Similarly, the share of deposits in Semi-urban centers declined from 20% to 13% and the share of credit in these centers declined from 12% to 10%.

Policy Initiatives:

Policy Initiatives Financial Inclusion Technology Fund – Rs5000cr KYC norms in rural areas relaxed and made the reach accelerate Business Correspondent model ushered in. ICT are put in place; Mobile Banking, Smart Cards entered the fray. Both carry huge risks and the Chairman, SBI voiced his major concern in regard to the BCs just a few days ago. Review mechanism for FI thru Board and Regulator for the Board approved FI Plan in March 2010 put in place.

Health of Cooperatives (31.03.2010):

Health of Cooperatives (31.03.2010) Institution No.of Units No. of loss making Units Accumulated losses (crores State coop banks 31* 4 404 District Central Coop Banks 370* 95 5299 Primary Agri Coop Cr Societies (as on 31.03.05) 108779@ 40388 6862** State Coop Agri & Rural Devt Banks 20 8 150 Primary Coop Agri & Rural Dev Banks (PCARDB) 697 365 360 Notes: *9SCBs and 127DCCBs not complying with minimum capital requirements under Sec 11 of B.R. Act 1949 and are under supersession. @ Came down to 96200 in 2009 due to viability exercise carried out in some States.

Comparative Picture of PACS (2005) Vs Com Bks (1994):

Comparative Picture of PACS (2005) Vs Com Bks (1994) Cooperatives (2005) Commercial Banks Lack of diversification Risk Management non-pervasive Low volume of business Capital inadequacy Declining % of borrowing membership Income Accounting standards poor High Cost of management Wrong Asset Classification Imbalances in loan outstanding Burdened with NPAs due to implementation of Government Sponsored Programmes and priority sector programmes Unskilled staff Loss making Branches mostly in rural and semi-urban areas and staff inadequacies Manual Operations Poor Technology – Manual Operations Lack of professionalism Professionalism required improvements Lack of management information system MIS – inefficient and inaccurate Low interest margins Uneven Spread Improper Accounting practices Non-transparent Balance Sheets

Relief Packages:

Relief Packages Narasimham Committee (Com Banks) Around 33000 rural branches Vaidyanathan Committee (RCCS) 108500 PACS located in Villages IRAC Norms MOUs with State Govts for reducing State role and increasing member participation – legislative changes imperative Balance Sheet Transparency & Disclosure norms introduced State equity restricted to 25% Structural Changes Imbalances to be brought down Changes in Accounting Standards Accounting practices to improve & Disclosure norms introduced Timelines for Change effect HR Practices to improve Capital injection by the Govt PACS to expand the operations Capital Adequacy Standards Relief Package Rs.15000cr – announced in 2004 released after 2007 in stages.

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