Financial Inclusion in India – Yet Another Ritual or An Integrated Tool for Poverty Alleviation? :Financial Inclusion in India – Yet Another Ritual or An Integrated Tool for Poverty Alleviation? Prof Chowdari Prasad Alliance Business School, Bangalore December 30, 2008 at International Conference on “Better Business Practices for Sustainable Social Change” Organised by JKSHIM, Nitte, India and School of Social Policy and Practice,University of Pennsylvania, USA


Millennium Development Goals :4/22/2009 JKSHIM, Nitte, India 2 Millennium Development Goals More than one billion people struggle to survive on less than one dollar a day. Another 2.7 billion live on less than two dollars a day In 2000, 147 nations (UN) agreed that, together, the citizens of the world must work to put an end to severe poverty by 2015. They drafted eight important goals which, when achieved, will improve the lives of the three billion people living in dire poverty


The Eight Goals :4/22/2009 JKSHIM, Nitte, India 3 The Eight Goals Eradicate Extreme Poverty and Hunger Achieve Universal Primary Education Promote Gender Equality and Empower Women Reduce Child Mortality Improve Maternal Health Combat HIV/AIDS, Malaria and Other Diseases Ensure Environmental Sustainability and Develop a Global Partnership for Development


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World Savings Bank Institute :4/22/2009 JKSHIM, Nitte, India 5 World Savings Bank Institute Only global representative of savings and retail banks Founded in 1924, represents savings and retail banks and associations in thereof in 86 countries of the world (Asia-Pacific, the Americas, Africa and Europe – via the European Savings Banks Group) At the start of 2005, assets of member banks amounted to more than 7,506 bn Euros


UNO : International Year of Micro Credit - 2005 :4/22/2009 JKSHIM, Nitte, India 6 UNO : International Year of Micro Credit - 2005


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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. :4/22/2009 JKSHIM, Nitte, India 8 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.


The Dimensions of the Challenge in India :4/22/2009 JKSHIM, Nitte, India 9 The Dimensions of the Challenge in India Area - 3.3 million square kilometers Population - 1 billion + GDP ~ US$3.9 trillion Annual Growth rate 8.5 to 9% last 5 Years Total number of banks in operation in country - 300+ Total number of bank branches in country – 76,000 + Unbanked Population: 400 Million !


Slide 10:4/22/2009 JKSHIM, Nitte, India 10 37.7% of Indian households do not have access to a nearby water source 49% do not have a proper shelter 69.5% do not have access to suitable toilets 85.2% of Indian villages do not have a secondary school and 43% of Indian villages do not have an all-weather road connecting them The bare truth


WHAT IS FINANCIAL EXCLUSION? :4/22/2009 JKSHIM, Nitte, India 11 WHAT IS FINANCIAL EXCLUSION? Financial Exclusion No Savings No Insurance No assets No bank account No access to money advice No affordable credit


Financial Exclusion and Allied Phenomena :4/22/2009 JKSHIM, Nitte, India 12 Financial Exclusion and Allied Phenomena Financial Exclusion Financial Exploitation Financial Discrimination Financial Illiteracy


Who are Financially Excluded :4/22/2009 JKSHIM, Nitte, India 13 Who are Financially Excluded Poor Socially under-privileged Disabled Old as well as children Women Uneducated Ethnic Minorities Un-employed


Financial Inclusion - Definition :4/22/2009 JKSHIM, Nitte, India 14 14 Financial Inclusion - Definition “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.” - NABARD


Slide 15:4/22/2009 JKSHIM, Nitte, India 15 Financial Inclusion Credit Cards Bank A/Cs - Savings Empowerment of SHGs Insurance Lack of Assets (for Collateral) Affordable Credit Financial Advice Payments + Remittances Financial Inclusion : The Indian Perspective


Slide 16:4/22/2009 JKSHIM, Nitte, India 16 1904 - Cooperative Societies Act 1954 - Rural Credit Survey Committee 1955 - State Bank fo India created for rural penetration 1969 - 19 Commercial Bank Nationalised, All India Rural Credit Review Committee 1970 - Lead Bank Scheme - States/Districts 1975 - Regional Rural Bank - Hybrid banks 1981 - 6 more Commercial Banks nationalised 1992 - SHG - Bank Linkage Programme 2001 - Kisan Credit Card / Swarojgar Credit Card / Gramin Tatkal Card - Committee on Financial Inclusion Set up Financial Inclusion – Institutionalisation milestones since early 1900’s


State Bank of India :4/22/2009 JKSHIM, Nitte, India 17 State Bank of India Imperial Bank of India nationalised in 1955 Opened 400 rural branches immediately SBG with seven other associates - 1959 Rural, Village, Satellite, ADBs, ABD Branches Employed Graduates in Agri and Veterinary Sciences Adopted Villages, Slums and Schools Group Guarantee Scheme for liberal lending Technology, Biometric ATMs, hill-tops, waterways


SBI’s Mobile ATM in Kerala :4/22/2009 JKSHIM, Nitte, India 18 SBI’s Mobile ATM in Kerala


History of strategies for Inclusive Growth/Financial Inclusionin India :4/22/2009 JKSHIM, Nitte, India 19 19 History of strategies for Inclusive Growth/Financial Inclusionin India Phase I (1960 – 1980) Social control of Banks – (1960) Nationalisation of Banks – (1969) Setting up of Regional Rural Banks – (1975) Priority Sector lending stipulation by RBI - (1972) Lead Bank scheme – (1969)


History of Inclusive Growth/ Financial Inclusionin India :4/22/2009 JKSHIM, Nitte, India 20 20 History of Inclusive Growth/ Financial Inclusionin India Phase II (1980 – 2005) Integrated Rural Development programme/ SGSY promoted by Govt. Of India Microfinance programme– SHG – Bank linkage facilitated by NABARD Phase III (2005 onwards) Development of MFIs Financial Inclusion in a “MISSION” mode


Analysis of Financial Inclusion :4/22/2009 JKSHIM, Nitte, India 21 Analysis of Financial Inclusion State wise Exclusion


Analysis of Financial Inclusion :4/22/2009 JKSHIM, Nitte, India 22 Analysis of Financial Inclusion State wise Exclusion (Figures in ‘000)


Model for Financial Inclusion :4/22/2009 JKSHIM, Nitte, India 23 Model for Financial Inclusion Less constrained spending Low cost services Free Use of Money Easy pathway out of poverty Good Social,economic & Health outcomes High standard of living Financial lliteracy Good financial habits Good education Macro -environment Personal characteristics Commercial & regulatory environment Social/wider inclusion Financial inclusion Low or controlled debt Asset ownership Employment High Income Mainstream product Attributes: fees; Penalties,bundling,marketing Which suit those with higher income/assets


Eleventh Plan (2007-2012) :4/22/2009 JKSHIM, Nitte, India 24 Eleventh Plan (2007-2012) Is divided into three volumes (I) Inclusive Growth (II) Social Sector and (III) Agri-culture, Rural Development, Industry, Services and Physical Infrastructure Objectives:- 1. Income and Poverty: Accelerate GDP growth from 8% to 10% and maintain at 10% in the next Plan to double the per capita income by 2016-17 Increase agricultural GDP growth rate to 4% per year to ensure a broader spread of benefits Create 70 million new work opportunities Reduce educated unemployment to below 5% Raise real wage rate of unskilled workers by 20 per cent Reduce the headcount ratio of consumption poverty by 10 percentage points


Eleventh Plan (2007-2012) contd... :4/22/2009 JKSHIM, Nitte, India 25 Eleventh Plan (2007-2012) contd... 2. Education 3. Health 4. Women & Children 5. Infrastructure and 6. Environment


Banking system - 1969 :4/22/2009 JKSHIM, Nitte, India 26 Banking system - 1969 + about 340 cooperative banks with 100,000 primary societies for giving crop loans thru’ refinance from the Central Bank


Rural Banking / Finance Schemes :4/22/2009 JKSHIM, Nitte, India 27 Rural Banking / Finance Schemes Bank Credit – in Rural & Urban Areas Institutional & Non-Institutional Channels Institutional Channels Banks, Cooperatives, Micro Finance Institutions Non-Institutional Channels Landlords, Shop-keepers, traders/suppliers and Money Lenders Share down from 91% (1951) to 45% (1991) 87% SF/MF do not access formal system Intt rates range from 24 - 60 & even 120% pa


Rural Banking - Committees :4/22/2009 JKSHIM, Nitte, India 28 Rural Banking - Committees Rural Banking Enquiry Com – 1950 All India Rural Credit Survey – 1954 State Bank of India – 1955; Associates - 1957 National Credit Council – 1967 Gadgil Study Group : LBS : 1969 14 Banks Nationalisation : 1969 Differential Interest Scheme : 1972 Dantwala Committee : RRBs : 1975 6 Banks Nationalisation : 1980 Service Area Approach : 1989 : Loan Melas, Debt Waivers Financial / Banking Sector Reforms : 1991 / 1997 IRDP, DWCRA, TRYSEM, NREGP, Kisan Credit Cards... Dr Raghuram Rajan Committee on FSR...2007


Financial Sector Reforms :4/22/2009 JKSHIM, Nitte, India 29 Financial Sector Reforms Transparency of Balance Sheets – No Accrual but actual a/c system Corporate Governance and Disclosures NPA Norms – Provisioning for Bad Debts, DRTs, CDR, OTS Privatisation, Mergers, Consolidation of Banks Basel I & II Norms, KYC, AML guidelines Deregulation of Interest Rates, Wealth Management... Downward Revision of CRR, SLR... Introduction of PLR, CAR (Tier I & II Capital) ... Re-organisation – Branch Relocations, Closure / Timings.. Computerisation – ATMs, Mobile/Internet Banking, Credit/ Debit Cards Voluntary Retirement Scheme - Customer Service, CRM., Ombudsman Scheme Asset Liability / Risk Management New Products / Services – Outsourcing, Franchisees, DSAs, Dematerialisation, ARCIL, Bancassurance, CIBIL, SMERA, MSMED Act, CGTSME, Mutual Funds, Educational Loans, Retail Banking... Roadmap for new Foreign Banks / Branches - 2009


Slide 30:4/22/2009 JKSHIM, Nitte, India 30 Bank network for rural credit Reserve Bank of India Government of India NABARD Public Sector Banks (27) RRBs (196) June 2002 Private Banks (31) Rural Semi-urban Urban Metro Total 19,275 10,903 8,737 7,203 46,118 12,060 2,037 359 17 14,473 1,138 1,761 1,322 1,155 5,376 Foreign Banks (41) 0 2 20 180 202 TOTAL 32,473 14,703 10,438 8,555 66,169 + the cooperative banks


Com’l Banks & branch expansion :4/22/2009 JKSHIM, Nitte, India 31 Com’l Banks & branch expansion


Reserve Bank of India :4/22/2009 JKSHIM, Nitte, India 32 32 Government of India NABARD Public Sector Banks (28) RRBs (96) LABs (4) Private Banks (24) Rural Semi-urban Urban Metro Total 18,197 11,736 10,247 9,726 49,906 11,444 / 5 2,481 / 14 522 / 11 59 / 0 14,506 / 30 987 2,077 2,102 1,901 7,067 Credit Cooperatives SCB – 31 DCCB – 367 PACS – 108779 SCARDB – 20 PCARDB - 727 13,104 NBFCs registered with RBI. 1853 Urban Co-operative banks with 7217 branches. Foreign Banks Urban – 43, Semi Urban – 2, Metro – 227. (Total 272) Formal Bank Network In India Reserve Bank of India


Com’l Banks and Branches :4/22/2009 JKSHIM, Nitte, India 33 Com’l Banks and Branches


Priority Sector Lending and Poverty Alleviation Programs :4/22/2009 JKSHIM, Nitte, India 34 Priority Sector Lending and Poverty Alleviation Programs NCC recommendations in 1968 Priority Sector defined – Agl, SSI & Others Target 33-1/3 % (1979) revised 40% (1985) Foreign Banks too to lend 32% of NBC CS Murthy (RBI) Working Group revision and new guidelines in April 2007 To include Small and Micro Enterprises as per MSMED Act, 2006


Outstanding Credit to Priority Sector from Banking Sector(Rs in Crore) :4/22/2009 JKSHIM, Nitte, India 35 Outstanding Credit to Priority Sector from Banking Sector(Rs in Crore)


Population Group-wise o/s credit(% to Total) :4/22/2009 JKSHIM, Nitte, India 36 Population Group-wise o/s credit(% to Total)


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Slide 41:4/22/2009 JKSHIM, Nitte, India 41 FGD


Financial Inclusion and Micro Finance :4/22/2009 JKSHIM, Nitte, India 42 Financial Inclusion and Micro Finance Commenced in seventies sporadically SEWA in India set up in the year 1975 Foundation for International Community Assistance (FINCA) in 1984 started Village Banking by Dr John Hatch, a Full Bright Scholar working in Bolivia UN Millennium Development Goals : 2000 2005 – International Year of Micro Credit


Business Facilitators and Business Consultants :4/22/2009 JKSHIM, Nitte, India 43 Business Facilitators and Business Consultants MFIs operating in 19 countries in different continents (including India) Outsourcing of Financial Inclusion permitted by RBI – NGOs, SHGs, MFIs, Civil Society Organisations, etc Pilot Project by Indian Post – 5 Districts of Tamil Nadu – NABARD experiment – to be extended to Maharashtra, Madhya Pradesh, Meghalaya, etc..


Post Offices (for savings, the figure is small) :4/22/2009 JKSHIM, Nitte, India 44 Post Offices (for savings, the figure is small)


Indian MFIs in the Top 50 List in the World – 2007 :4/22/2009 JKSHIM, Nitte, India 45 Indian MFIs in the Top 50 List in the World – 2007


Index of Financial Inclusion (IFI) :4/22/2009 JKSHIM, Nitte, India 46 Index of Financial Inclusion (IFI) Proposed by Ms Mandira Sharma, ICRIER Measured in 100 countries A multi-dimensional index, captures information on various dimensions Easy to compute and is comparable across countries Three basic dimensions – Banking Penetration, Availability of Banking Services and Usage of Banking System India ranked poorly, below African countries like Kenya and Morocco – ranked 50th much below China but above Russia considering number of bank branches, ATMs, people served, amounts of bank deposits and credit


Micro Credit Rating International Ltd. (M-CRIL) :4/22/2009 JKSHIM, Nitte, India 47 Micro Credit Rating International Ltd. (M-CRIL)


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NABARD’s Largest Financial Inclusion Programme in the World :4/22/2009 JKSHIM, Nitte, India 49 49 NABARD’s Largest Financial Inclusion Programme in the World 58 million poor households provided access to banks through 3.48 million SHGs. Savings of SHGs with banks $ 703 million. Bank loans availed by SHGs $ 2473 million NABARD Refinance support $1412 million NABARD Promotional support $5.5 million SHG- Bank Linkage programme in India facilitated by NABARD, implemented by Banks, NGOs and Government agencies


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Slide 51:4/22/2009 JKSHIM, Nitte, India 51 Outreach of the SHG Bank Linkage Program No. of SHGs in Thousands No. of Households in Million


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Micro-Finance reach in India :4/22/2009 JKSHIM, Nitte, India 53 Micro-Finance reach in India Microfinance in India through its two major channels – SHG Linkage and MFIs – served over 33 million Indians, up by 9 million over FY 2006-07 4 out of 5 microfinance clients in India are women. Micro-credit portfolio of India Microfinance was Rs. 22,000 crore 75% are accounted for by SHG Linkage, 20% by large MFIs and 5% by medium and small MFIs SHG Linkage reports over Rs. 3,500 crore savings, only MFI Bank, KBS Bank reports about Rs. 40 crore savings portfolio MFIs operate in 209 out of 331 districts of the country, 28% of the new clients are from Urban areas. Source : Sa-dhan, Bharat Micro-finance Report, 2008


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SBI’s e-Gram Project in Gujarat :4/22/2009 JKSHIM, Nitte, India 55 SBI’s e-Gram Project in Gujarat To provide all banking products / services Customers not to visit branches personally Target more than 5,000 rural ICT kiosks Villagers to start a bank a/c with Rs. 50 Zero balance accounts also permitted MOU with Indian Postal Dept to act as a facilitator for 50 Post Offices at Surendra nagar, Anand and Bharuch districts Also signed with Gujarat Agro Ind Corp to market bank’s products in 700 out of its 1200 outlets


Micro Finance Bill 2007 :4/22/2009 JKSHIM, Nitte, India 56 Micro Finance Bill 2007 Bill introduced in Parliament in March 2007 To regulate MFIs in India Proposed NABARD as regulator Conflicting with promotional and participatory role in SHG-Bank Linkage Program Bill referred to experts for opinion and kept in abeyance To re-examine and finalise the provisions


Financial Education :4/22/2009 JKSHIM, Nitte, India 57 Financial Education RBI’s Financial Education Initiative “Project Financial Literacy”, games, films... In 13 Indian Languages including English To disseminate information regarding Central (Money Kumar) and General Banking (Raju) concepts to various target groups including school and college going children, women, rural and urban poor, defence personnel and senior citizen www.rbi.org/financialeducation


TECHNOLOGY DEVELOPMENTS IN BANKING :4/22/2009 JKSHIM, Nitte, India 58 TECHNOLOGY DEVELOPMENTS IN BANKING ALPMs CLEARING HOUSE CAR,CRR,SLR,PS,NPAs CREDIT/DEBIT CARDS NICNET,I-NET, RABMN INFINET, RBINET BANKNET, NDS, SFMS MICR, ATMs, SWIFT DEMAT, IT ACT-2000 INTERNET BANKING ECS, EFT, SEFT, RTGS CROSS SELLING ALM & RM, MIS CRM, KYC, AML Core Banking Solutions KISAN /SME CARD CREDIT INFO BUREAU DISASTER MANAGEMENT Cheque Truncation CYBER CRIMES – HACKING, PHISHING, PHARMING, TROJAN, SKIMMING, ETC SMART CARDS


ACCION International :4/22/2009 JKSHIM, Nitte, India 59 ACCION International ACCIÓN International, a private nonprofit organization founded in 1961, works to reduce poverty by providing financial services through its network of partner financial institutions to the millions of working poor throughout the world Mission: Give people the tools they need to work their way out of poverty Pervasive, permanent impact Means:By building strong microfinance institutions Core Operating Principles:Social impact and scaleSustainabilityLink to commercial markets


Technology Solutions being tried in India :4/22/2009 JKSHIM, Nitte, India 60 60 Technology Solutions being tried in India Smart card, hand held terminal, central CPU Low cost ATMs Mobile Phone Banking SMS Banking Public Call Office (PCO) Connectivity.


Way Forward :4/22/2009 JKSHIM, Nitte, India 61 61 Way Forward Targets fixed for each Branch of Commercial Bank/Regional Rural Bank to : Open 250 accounts every year Issue 100 Farmers’ Credit Card Issue 100 General Credit Card Distribute 100 micro insurance policies


Way Forward (contd...) :4/22/2009 JKSHIM, Nitte, India 62 62 Way Forward (contd...) Micro Finance Sector (Development and Regulation) Bill, 2007 under consideration Setting up of Rural Credit Information Bureau Ensuring effectiveness of Business Facilitator (BF) / Business Correspondent (BC) Micro finance Development and Equity Fund Micro finance Ombudsman Regulatory and developmental power to NABARD


Recommendations :4/22/2009 JKSHIM, Nitte, India 63 Recommendations Benefits of economic development to percolate down to needy sections of population GOI to concentrate on (i) infrastructure development (ii) basic amenities (iii) integration of water source (iv) setting up of SEZs (v) opening of e-choupals (vi) strengthening of Postal services (vii) enlisting of Farmers Clubs, NGOs, etc., (viii) Agricultural Research Stations (ix) Opening of Vocational Training Centres, Industrial Training Institutes for rural youth ... Employment / Income generation leads to FI...


Conclusions :4/22/2009 JKSHIM, Nitte, India 64 Conclusions 100% Housing, Employment, Electrification, Literacy yet to be achieved after 6 decades of planned development 100% Financial Inclusion in next 5 years? FI is existing in countries like UK, USA too FI is not to be an old wine in new bottle Financial Intermediaries are complying with all developmental programs It is a collaborative effort between Govt, Banks, NGOs, Development Financial Institutions, etc..


Questions please? :4/22/2009 JKSHIM, Nitte, India 65 Questions please?


Thanks for your Attention :Thanks for your Attention Chowdari.p@absindia.org chowdarip@gmail.com Mob: 09242124642 080-27841605