Usha Thorat: Financial inclusion and information technology
Keynote address by Ms Usha Thorat, Deputy Governor of the Reserve Bank of India, at the
"Vision 2020 - Indian Financial Services Sector", hosted by NDTV, Mumbai, 12 September
2008.
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It is indeed very heartening to be here at this WIPRO-NDTV Convergence Conference on
"Vision 2020 - Indian Financial Services Sector". I thank the organizers for inviting me here
today.
Introduction
The banking system has grown enormously in the last five years keeping pace with and in
some cases leading the country's remarkable economic growth. Simultaneously, the banking
system has improved its strength, efficiency and resilience. There have also been significant
improvements in the payments and settlements system and electronic payments and RTGS
is now much more in use. IT has played a major role in these achievements. Today banks
have centralised operations, more and more banks and branches are moving to CBS,
network based computing, new delivery channels such as networked ATMs, internet
banking, smart card based products, mobile access etc and are using IT for customer
relationship management, customer transaction pattern analysis credit profiling and risk
management.
At the same time, large number of households continues to be excluded from the formal
banking system and as per some recent surveys their share has increased. The extent and
reasons for exclusion are many and have been well documented in the Rangarajan
Committee (RC) and more recently in the very comprehensive and analytical section on
financial inclusion in RBI's latest Currency and Finance (RCF) released a few days ago. The
RCF points out that despite the broad international consensus regarding the importance of
access to finance as a crucial poverty alleviation tool, it is estimated that globally over two
billion people are currently excluded from access to financial services (United Nations, 2006).
Definitional issues
No universally accepted definition of financial inclusion is available. Financial inclusion has
generally been defined in terms of exclusion from the financial system. Broadly, financial
exclusion is construed as the inability to access necessary financial services in an
appropriate form due to problems associated with access, conditions, prices, marketing or
self-exclusion. The working or operational definitions of financial exclusion generally focus on
ownership or access to particular financial products and services. There is no single
comprehensive measure that can be used to indicate the extent of financial inclusion across
economies. Specific indicators such as number of bank accounts, number of bank branches,
that are generally used as measures of financial inclusion, can provide only partial
information on the level of financial inclusion in an economy.
Measures of financial exclusion
Whatever measure one may use for India, it is apparent that the financially excluded
constitute a significant share of the population especially amongst the low income groups.
Based on the AIDIS 2002 survey, RC showed that 111.5 million households had no access
to formal credit. It also showed that 17 million households were indebted to moneylenders.
The recent Arjun Sengupta Report on financing enterprises in the unorganized sector has
pointed out that only 2.4 million out of 58 million units in this sector (with investment of less
than Rs 25000 ) have got credit from commercial banks. The AIDIS 2002 also showed that
lower the asset class or income, higher the degree of exclusion. These findings are
corroborated by Invest India Incomes and Savings Survey (2007). The survey showed that
32.8% of households had borrowed from institutional sources and 67.2 % had borrowed from
non institutional sources. The survey also found that 70 per cent of earners in the annual
income bracket of more than Rs.400, 000 borrowed from institutional sources as compared
with only 27.5 per cent in the case of earners in the income bracket of less than Rs.50,000.
Causes of increased indebtedness from non institutional sources
A very interesting analysis by the RCF shows that the major reason for increase in the
overall household debt and the increase in the share of households indebted to
noninstitutional sources between 1991 and 2002 was a significant increase in current farm
expenditure and household expenditure, especially in rural areas. The "household
expenditure" includes expenditure incurred on purchase of residential plot; purchase,
construction, addition/alteration of building for residential purposes; purchase of durable
households assets, clothes, among others and expenditure on medical treatment, education,
marriages, and ceremonies. Thus, the "household expenditure" includes many items for
which households may find it difficult to obtain loans from institutional sources. The IIMS
Survey also suggests that a large portion of loan is taken by the households for meeting
financial emergency, medical emergency and social obligations. These three purposes
accounted for about 53 per cent of the loans availed of by indebted earners. Furthermore,
more than 60 per cent earners, indebted to non-institutional sources, took loans for the
aforesaid three purposes. In the case of emergencies, people may find it convenient to
approach non-institutional sources for their credit needs. Financial emergencies, for instance,
include unplanned expenditure on business, consumption and marriage, among others,
which may not be financed by banks and other institutional agencies.
Some of the other causes for greater recourse to non institutional sources as identified by the
RCF are deceleration in bank credit to households in the context of change in banks'
behaviour in the 1990s due to their impaired balance sheets and tightening of prudential
norms and the slowdown in formal credit to households in the context of the slowdown in
agriculture and allied activities that may have induced such households to approach
noninstitutional sources to meet their credit requirements. The RCF has however noted that the
last round of NSSO survey related to the year 2002. Subsequently, several policy initiatives
have been taken by the Government/Reserve Bank to improve the credit flow to agriculture
and the needy sectors. These measures had a significant positive impact on financial
inclusion as revealed by the data for subsequent period.
Challenges in achieving FI for inclusive growth
Looking at the findings of these surveys and analysis, it is quite clear that financial inclusion
has to be an urgent national priority if we are to achieve inclusive growth. The major
challenges in banks extending services to the excluded are large costs of covering the huge
numbers (cost of enrollment), relative high maintenance costs for such accounts, small ticket
size for each transaction, need for communication modes suited to the illiterate and in local
language, affordability of the product or service, need for local acceptance and involvement
of locally acceptable personnel, need for large scale coverage including over difficult
geographic terrain and areas where there is no electric power or normal telecommunication
facilities. Further, as is now very obvious from the recent surveys by AIDIS and IIMS, the
challenge also lies in offering to low income households and unorganized enterprises a
simple loan product which is not based on or linked to the purpose of the loan, the collateral
or assets held or income earned by the household but is purely based on cash flow and
credit record of the household.
Vision 2020
Looking to 2020, it is even more apparent that the task of banking the unbanked will be truly
daunting. Nearly 600 million new customers' accounts will have to be opened and serviced
through a variety of channels leveraging on IT.
RBI initiatives for FI
In the Annual Policy for 2005-06, for the first time the word financial inclusion was used and
banks were asked to open "no frills" or a basic banking account to all those desirous of
opening a bank account. Several other aspects such as simplified KYC, OTS for loans upto
Rs 25000, offering a GCC/simplified overdrafts etc were also covered. A decentralized
approach was advocated through targeting 100% financial inclusion district by district
involving the DCC and bank and government officials to facilitate enrolment and
identification. Another very important policy measure in January 2006 was to allow banks to
adopt the agency model or what is known as the Business facilitator /Business
Correspondent model for achieving greater outreach through intermediaries /agents. The
results have been extremely impressive. In just two years the number of no frills accounts
opened by banks has increased from around half a million accounts in March 2006 to 15
million in 2008. Going by the data from service providers offering smart card solutions, it may
be assumed that smart card accounts probably account for 2 to 3 million of these no frills
accounts. Evaluation by external agencies appointed by RBI has shown that while the first
stage of opening no frills accounts has been quite impressive, due to inadequate f follow up,
cost of transaction and access constraints, in many cases the accounts have not been
operated upon at all after having been opened. In order to improve access and use of these
accounts , banks will have to offer the services much closer to the customer either through
mobile branches, satellite offices, extension counters or using intermediaries like SHGs/MFIs
or through business correspondents using IT to increase scale, access and reduce cost. Also
as is obvious from the results of these recent studies and surveys, the credit product that has
to be offered, if the low income borrowers have to be brought into the formal system, has to
be simple covering all the needs of small borrowers. I have absolutely no doubt that the
simple overdraft or GCC based on cash flow/ track record is the way forward to meet the
challenges of providing access to the large numbers currently excluded.
SHGs and MFIs role in FI
The need for informality in credit delivery and easy access is demonstrated by the fact that
SHGs and MFIs constitute the fastest growing segment in recent years in reaching out to
small borrowers. These institutions are able to effectively address the small ticket and last
mile issues. In the four years between 2003 and 2007, small borrower bank accounts (credit)
i.e. upto Rs 25000 increased marginally from 36.9 million to 38.6 million, while SHGs'
borrowing members grew from 10 million to 40.5 million and MFIs' borrowers grew from 1.1
million to 8 million. In 2007-08, MFIs have added 6 million clients increasing their outreach to
14 million as per data brought out by Sa Daan.
Role of ICT in FI
To be able to ensure that the challenges of banking the unbanked are met effectively and
converted into growing and sustainable business for banks, there is no alternative to
adoption of ICT solutions on a very large scale and range. ICT solutions are required to
capture customer details, facilitate unique identification, ensure reliable and uninterrupted
connectivity to remote areas and across multiple channels of delivery, offer multiple financial
products (banking, insurance, capital market) through same delivery channel while ensuring
consumer protection, develop comprehensive and reliable credit information system so
essential for efficient credit delivery and credit pricing, develop appropriate products tailored
to local needs and segments, provide customer education and counseling, enable use of
multi media and multi-language for dissemination of information and advice.
ICT for FI - RBI initiatives
I now turn to the specific initiatives of RBI in regard to ICT for Financial Inclusion. The very
first initiative was emphasizing the use of IT solutions while adopting the agency or BC model
for financial inclusion. A paper placed on the RBI website has envisaged a scheme with RBI
support for providing satellite connectivity for remote area branches. The reports of three
working groups set up by RBI to consider support to RRBs and UCBs in computerizing their
operations and adopt IT solutions for financial inclusion have been placed in public domain
for comments. These groups have recommended that the IDRBT could offer interest free
loans to UCBs and RRBs for adoption of IT. Based on comments and response RBI will be
firming up these schemes. Recognizing the penetration of mobile phones (including amongst
the low income population) and the enormous opportunities they offer in extending the
banking outreach. RBI had placed a paper on mobile banking in the public domain and the
guidelines are now being finalized. The NFS is able to offer nationwide networking of ATMs
and can facilitate banking transactions including remittances through ATMs linked to the
NFS. Effective from April 1, 2009 a customer will be able to use any ATM (including other
bank ATMs) to operate his /her account at no cost. Other initiatives include those aimed at
ensuring quicker, safer currency and funds transfer. In fact RBI has put on its web-site
yesterday an approach paper on rationalisation of service charges for usage of electronic
products, which would facilitate easier movement of funds at lower costs.
Electronic benefit payments
Recognising the several advantages of using bank accounts for disbursal of government
benefits, many State Governments have decided to disburse NREGA payments social
security benefits electronically through no frills bank accounts and in some States with such
accounts operated through smart cards with bio-metric identification. A Committee set up by
RBI examined the various models through which such payments can be made and has
recommended a bank led model with sharing of costs between Government and banks.
Appropriate support from the RBI or the Financial Inclusion Technology Fund could also be
thought of in the initial stages. Such accounts that have been opened to receive government
benefits/payments can become the base for a host of other financial services and facilitate
the objective of financial inclusion.
Regulatory framework
The regulations relating to IT solutions for banking services in general and financial inclusion
in particular relate to ensuring integrity of banking system and ensuring customer protection.
These cover customer identification/authentication, customer confidentiality/ privacy,
KYC/AML issues, outsourcing, bank's responsibility for their agents, ensuring inter-
operability and open standards, imaging standards and adherence to payments system
regulations.
Way forward
On the way forward the challenges are going to be banks using multiple channels for delivery
of variety of financial services, developing synergies with MFIs and SHGs by introducing
seamless ICT based models linked to such intermediaries, availability of skilled manpower to
facilitate the adoption of IT on such large scale, use of IT for credit information and efficient
credit delivery and risk management in a much bigger way, moving away from the use of
cash and emergence of enough leaders in the banking system especially in the public sector
banks/RRBs and cooperative banks to recognize the opportunities and take advantage of
their specific strengths including location.