K C Chakrabarty: Financial inclusion - a road India needs to travel
Article by Dr K C Chakrabarty, Deputy Governor of the Reserve Bank of India, published on
www.livemint.com on 21 September 2011.
PDF charts to the above speech can be found on the Reserve Bank of India's website.
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India has seen historic progress and growth in the past decade. While the growth story has
been impressive, there are causes for concern on other dimensions. We have a long way to
go in addressing concerns of absolute poverty. Low-income Indian households in the
informal or subsistence economy often have to borrow from friends, family or usurious
moneylenders. 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 death of the primary breadwinner.
Unrestrained access to public goods and services is an essential condition of an open and
efficient society. It is argued that as banking services are in the nature of a public good, it is
essential that the availability of banking services to the entire population without
discrimination is the prime objective of public policy. Expectations of poor people from the
financial system is security and safety of deposits, low transaction costs, convenient
operating time, minimum paper work, frequent deposits, and quick and easy access to credit
and other products, including remittances suitable to their income and consumption.
It is now well understood that commerce with the poor is more viable and profitable, provided
there is ability to do business with them. The provision of uncomplicated, small, affordable
products can help bring low-income families into the formal financial sector. Taking into
account their seasonal inflow of income from agricultural operations, migration from one
place to another, and seasonal and irregular work availability and income, the existing
financial system needs to be designed to suit their requirements. Mainstream financial
institutions such as banks have an important role to play in this effort, not as a social
obligation, but as a pure business proposition.
Appropriate financial products
Financial inclusion is the process of ensuring access to appropriate financial products and
services needed by vulnerable groups such as weaker sections and low-income groups at an
affordable cost in a fair and transparent manner by mainstream institutional players.
Financial inclusion has become one of the most critical aspects in the context of inclusive
growth and development.
The importance of an inclusive financial system is widely recognized in policy circles and has
become a policy priority in many countries. Several countries across the globe now look at
financial inclusion as the means to more comprehensive growth, wherein each citizen of the
country is able to use earnings as a financial resource that can be put to work to improve
future financial status and adding to the nation's progress.
Initiatives for financial inclusion have come from financial regulators, governments and the
banking industry. The banking sector has taken a lead role in promoting financial inclusion.
Legislative measures have been initiated in some countries. For example, in the US, the
Community Reinvestment Act (1997) requires banks to offer credit throughout their entire
area of operation and prohibits them from targeting only the rich neighbourhoods. In France,
the law on exclusion (1998) emphasizes an individual's right to have a bank account.
The German Bankers' Association introduced a voluntary code in 1996 providing for a
socalled "everyman" current banking account that facilitates basic banking transactions. In
South Africa, a low-cost bank account, called Mzansi, was launched for financially excluded
people in 2004 by the South African Banking Association. In the UK, a Financial Inclusion
Task Force was constituted by the government in 2005 in order to monitor the development
of the process.
Several African countries have harnessed the unique aspects of mobile banking to drive
financial inclusion. A G-20 (Group of Twenty) Financial Inclusion Experts Group has been
launched. The Principles for Innovative Financial Inclusion serve as a guide for policy and
regulatory approaches with the objectives of fostering safe and sound adoption of innovative,
adequate, low-cost financial delivery models, helping provide conditions for fair competition
and a framework of incentives for the various banking, insurance, and non-banking entities
involved and delivery of the full range of affordable and quality financial services.
Broader financial inclusion
India has, for a long time, recognized the social and economic imperatives for broader
financial inclusion and has made an enormous contribution to economic development by
finding innovative ways to empower the poor. Starting with the nationalization of banks,
priority sector lending requirements for banks, lead bank scheme, establishment of regional
rural banks (RRBs), service area approach, self-help group-bank linkage programme, etc.,
multiple steps have been taken by the Reserve Bank of India (RBI) over the years to
increase access to the poorer segments of society.
Also see
 General Credit Cards (PDF)
 Kisan Credit Cards (PDF)
It encouraged expansion of bank branches, especially in rural areas, resulting in multifold
increase in branch network from around 8,000 in 1969 to more than 89,000 today, spread
across the length and breadth of the country. The accompanying chart and graph show
population group-wise distribution of bank branches of scheduled commercial banks,
including RRBs, over all these years.
Also see / Branches of Scheduled Commercial Banks (PDF)
Despite all these efforts, a significant proportion of the households, especially in rural areas,
still remained outside the coverage of the formal banking system. It is estimated that about
40% of Indians lack access even to the simplest kind of formal financial services.
The major barriers to serve the poor, apart from socioeconomic factors such as lack of
regular income, poverty, illiteracy, etc., are the lack of reach, higher cost of transactions and
time taken in providing those services. Products designed by the banks are not tailored to
suit the needs of low-income families. The existing business models do not pass the test of
scalability, convenience, reliability, flexibility and continuity.
Also see
 Villages Covered (PDF)
 Branches Vs Business Correspondents (PDF)
In India, the term financial inclusion first featured in 2005, when RBI, in its annual policy
statement of 2005-06, while recognizing the concerns in regard to the banking practices that
tend to exclude rather than attract vast sections of the population, urged banks to review
their existing practices to align them with the objective of financial inclusion.
National commitment
Moving towards universal financial inclusion has been both a national commitment as well as
a public policy priority for our country. To achieve the ultimate objective of reaching banking
services to all the 600,000 villages, financial inclusion has to become a viable business
proposition for the banks.
For this to happen, the delivery model needs to be devised carefully so as to move from a
cost-centric model to a revenue-generation model. This will help in providing customers with
quality banking services at their doorstep and at the same time generating business
opportunities for the banks. This is sustainable only if delivery of banking services, at the
minimum, includes the following four products:
 A savings-cum-overdraft account
 A remittance product for electronic benefits transfer (EBT) and other remittances
 A pure savings product, ideally a recurring deposit scheme
 Entrepreneurial credit in the form of a kisan credit card (KCC) or a general credit
card (GCC)
RBI has been undertaking financial inclusion initiatives in a mission mode through a
combination of strategies ranging from provision of new products, relaxation of regulatory
guidelines and other supportive measures to achieve sustainable and scalable financial
inclusion.
In India, RBI has initiated several measures to achieve greater financial inclusion, such as
facilitating no-frills accounts and GCCs for small deposits and credit. Some of these steps
are:
Opening of no-frills accounts: Basic banking no-frills accounts with nil or very low
minimum balance as well as charges that make such accounts accessible to vast sections of
the population. Banks have been advised to provide small overdrafts in such accounts.
Relaxation on know-your-customer (KYC) norms: KYC requirements for opening bank
accounts were relaxed for small accounts in August 2005, thereby simplifying procedures by
stipulating that introduction by an account holder who has been subjected to the full KYC drill
would suffice for opening such accounts.
The banks were also permitted to take any evidence as to the identity and address of the
customer to their satisfaction. It has now been further relaxed to include the letters issued by
the Unique Identification Authority of India containing details of name, address and Aadhaar
number.
Engaging business correspondents (BCs): In January 2006, RBI permitted banks to
engage business facilitators (BFs) and BCs as intermediaries for providing financial and
banking services. The BC model allows banks to provide doorstep delivery of services,
especially cash in-cash out transactions, thus addressing the last-mile problem. The list of
eligible individuals and entities that can be engaged as BCs is being widened from time to
time. With effect from September 2010, for-profit companies have also been allowed to be
engaged as BCs.
Use of technology: Recognizing that technology has the potential to address the issues of
outreach and credit delivery in rural and remote areas in a viable manner, banks have been
advised to make effective use of information and communications technology (ICT), to
provide doorstep banking services through the BC model where the accounts can be
operated by even illiterate customers by using biometrics, thus ensuring the security of
transactions and enhancing confidence in the banking system.
Adoption of EBT: Banks have been advised to implement EBT by leveraging ICT-based
banking through BCs to transfer social benefits electronically to the bank account of the
beneficiary and deliver government benefits to the doorstep of the beneficiary, thus reducing
dependence on cash and lowering transaction costs.
GCC: With a view to helping the poor and the disadvantaged with access to easy credit,
banks have been asked to consider introduction of a general purpose credit card facility up to
25,000 at their rural and semi-urban branches. The objective of the scheme is to provide
hassle-free credit to banks' customers based on the assessment of cash flow without
insistence on security, purpose or end use of the credit. This is in the nature of revolving
credit entitling the holder to withdraw up to the limit sanctioned.
Simplified branch authorization: To address the issue of uneven spread of bank branches,
in December 2009, domestic scheduled commercial banks were permitted to freely open
branches in tier III to tier VI centres with a population of less than 50,000 under general
permission, subject to reporting. In the north-eastern states and Sikkim, domestic scheduled
commercial banks can now open branches in rural, semi-urban and urban centres without
the need to take permission from RBI in each case, subject to reporting.
Opening of branches in unbanked rural centres: To further step up the opening of
branches in rural areas so as to improve banking penetration and financial inclusion rapidly,
the need for the opening of more bricks and mortar branches, besides the use of BCs, was
felt. Accordingly, banks have been mandated in the April monetary policy statement to
allocate at least 25% of the total number of branches to be opened during a year to
unbanked rural centres.
Road map for providing banking services in unbanked villages with a population of
more than 2,000: Banks were advised to draw up a road map to provide banking services in
every unbanked village having a population of over 2,000 by March 2012. RBI advised banks
that such banking services need not necessarily be extended through a bricks and mortar
branch, but could also be provided through any of the various forms of ICT-based models.
About 73,000 such unbanked villages were identified and allotted to various banks through
state-level bankers' committees.
Financial inclusion plans of banks for three years: RBI advised all public and private
sector banks to submit a board-approved, three-year financial inclusion plan (FIP) starting
April 2010. These plans broadly include self-set targets in respect of rural bricks and mortar
branches opened; BCs employed; coverage of unbanked villages with a population above
2,000 as also other unbanked villages with population below 2,000 through branches; BCs
and other modes; no-frills accounts opened, including through BC-ICT; KCCs and GCCs
issued; and other specific products designed by them to cater to the financially excluded
segments.
Banks were advised to integrate board-approved FIPs with their business plans and to
include the criteria on financial inclusion as a parameter in the performance evaluation of
their staff. The progress by commercial banks (excluding RRBs) during the year 2010-11
clearly indicates that banks are on the right path towards deploying BCs, villages covered,
opening of no-frills accounts, and grant of credit through KCCs and GCCs. The numbers
would be much higher if the figures pertaining to RRBs were to be added.
Long way to go
As indicated above, while India has made enormous strides towards greater financial
inclusion, there is a long way to go, about 500,000 villages are yet to be provided with
banking services. The financial inclusion for the underprivileged will lead to hosts of
downstream opportunities with an estimated 500,000 jobs for the participants to work as BCs
at remote villages.
In a networked India in which banking services are extended to all villages, ultimately, a
socalled model will emerge where customers will have the option to transact with the bank of
their choice in any village by using UID (unique identity)-enabled micro-ATMs (automated
teller machines), reducing the dependence on cash and lowering transaction costs. The task
is gigantic, but definitely achievable by following a systematic approach:
 Awareness in general, coupled with financial awareness on opening and operating
accounts, must accompany the financial inclusion initiative.
 Banks should prepare comprehensive plans to cover all villages, through a mix of
branchless banking and bricks and mortar branch banking. They should speed up
enrolment of customers and opening of UID-enabled bank accounts. It envisages
putting in place a system that enables routing of all social benefits to bank accounts
electronically as also seamless cash transfer to the poor, as and when the
government replaces the age-old system of subsidy and public distribution system
with cash transfers.
The success of the BC model is highly dependent on the kind of support provided by base
branches, especially for cash management, documentation and redressal of customer
grievances. Hence, it is necessary that a bricks and mortar structure is available to support
about 8-10 BCs at a reasonable distance of 2-3km. These branches can be low-cost
intermediary simple structures comprising minimum infrastructure for operating small
customer transactions and can act as an effective supervisory mechanism for BC operations.
 As mentioned earlier, banks must provide a minimum four products - a no-frills
savings account with an overdraft facility, a pure savings product, entrepreneurial
credit and remittance services, and new products tailored to income streams of poor
borrowers and according to their needs and interests. Banks must be able to offer
the entire suite of financial products and services to poor clients at attractive pricing.
Though the cost of administering small-ticket personal transactions is high, this can be
brought down if banks effectively leverage ICT solutions. This can be attained through
product innovation with superior cost efficiency. They must understand and penetrate the
rural markets efficiently to cross-sell products and services. Mobile banking has tremendous
potential and the benefits of m-commerce need to be exploited.
 It is important that adequate infrastructure such as digital and physical connectivity,
uninterrupted power supply, etc., is available. All stakeholders will have to work
together through sound and purposeful collaborations. Local and national-level
organizations have to ensure that these partnerships look at both commercial and
social aspects to help achieve scale, sustainability and impact.
This collaborative model will have to tackle exclusion by stimulating demand for appropriate
financial products, services and advice with the appropriate delivery mechanism, and by
ensuring that there is a supply of appropriate and affordable services available to those that
need them.
 Mindset, cultural and attitudinal changes at grass roots and cutting-edge technology
levels of branches of banks are needed to impart organizational resilience and
flexibility. Banks should institute systems of reward and recognition for personnel
initiating, ideating, innovating and successfully executing new products and services
in the rural areas.
Conclusion
Empirical evidence shows that economic growth follows financial inclusion. Boosting
business opportunities will definitely increase the gross domestic product, which will be
reflected in our national income growth. People will have safe savings along with access to
allied products and services such as insurance cover, entrepreneurial loans, payment and
settlement facility, etc.
Our dream of inclusive growth will not be complete until we create millions of
microentrepreneurs across the country. All budding entrepreneurs have to face these challenges
and find solutions. People working in the social sector should work for filling up the deficit
existing in the economic and social arena.
To sum up, financial inclusion is the road that India needs to travel toward becoming a global
player. Financial access will attract global market players to our country and that will result in
increasing employment and business opportunities. Inclusive growth will act as a source of
empowerment and allow people to participate more effectively in the economic and social
process.