K C Chakrabarty: Financial inclusion - issues in measurement and
analysis
Keynote address by Dr K C Chakrabarty, Deputy Governor of the Reserve Bank of India, at
the Bank for International Settlements-Central Bank of Malaysia Workshop on "Financial
inclusion indicators", Kuala Lumpur, 5 November 2012.
* * *
Assistance provided by Shri A.B. Chakraborty and Shri Bipin Nair in preparation of this address is gratefully
acknowledged.
Introduction
Mr. Muhammad bin Ibrahim, Deputy Governor, Bank Negara Malaysia and Chairman, Irving
Fisher Committee, Mr. Paul Van den Bergh, Head of Statistics, Bank for International
Settlements (BIS), senior officials from Statistics departments of Central Banks and
distinguished participants at the Workshop. I am delighted to be here for the Workshop on
Financial Inclusion Indicators organized jointly by the Bank Negara Malaysia and the BIS.
The importance of financial inclusion, based on the principle of equity and inclusive growth,
has been engaging the attention of policy makers internationally. Achieving universal
financial inclusion is, indeed, a global objective and has multiple dimensions. While each
jurisdiction will, perhaps, evolve its own delivery model, we need to learn from each other
and implement what is suitable in each constituency.1
The Irving Fisher Committee is engaged in statistical issues that are of interest to central
banks worldwide. As we all know, Irving Fisher was not only a celebrated economist who
gave us the Fisher equation of money and the theory of real interest rates, he was also a
pioneer in the development of the theory of index numbers. He once observed "One of my
chief objects has been to help make economics into a genuine science through careful and
sound analysis, usually carried out with the help of mathematical methods and statistical
verification."2 I trust this workshop will help provide practical perspectives on the critical
dimensions of measuring the depth of financial inclusion as also help streamline data
availability and related issues. As the program structure aptly notes, financial inclusion
principles and approaches have assumed an increasingly active role at the international level
in developing new research agenda, setting standards and promoting best practices to
improve financial inclusion. The focus on financial inclusion measurements and data gaps,
that this Workshop seeks to achieve, is very much timely and important.
The agenda of this workshop is very appropriate as currently we lack reliable and granular
data on financial inclusion, which restricts our ability to fully gauge the extent of exclusion
and the ground-level impact of the initiatives being undertaken. We need to work out
appropriate data structures and associated analytical frameworks for effective policymaking
and the standardisation of various approaches at the national, regional and global levels. In
order to appreciate the measurement and data needs, a broad understanding of the policy
initiatives is important. Against this background, I propose to briefly focus on: (i) Approaches
to financial inclusion - some international / national initiatives, (ii) Conceptual framework for
measurement and analysis of financial inclusion, (iii) International initiatives in measuring
financial inclusion and (iv)Indian perspectives. I will conclude with a few remarks.
Approaches to financial inclusion
International initiatives
The origins of the current approach to financial inclusion can be traced to the United Nations
initiatives,3 which broadly described the main goals of inclusive finance as access to a range
of financial services including savings, credit, insurance, remittance and other
"bankable"
banking / payment services to all households and enterprises at a reasonable
cost. The Report of the Centre for Global Development (CGD) Task Force on Access to
Financial Services (October, 2009)4 has laid down the broad policy principles for expanding
financial access, including institutional mechanisms, with particular emphasis on the need for
ensuring data collection, monitoring and evaluation. The G20 Toronto Summit (June, 2010)
had outlined the "Principles for Innovative Financial Inclusion", which serves as a guide for
policy and regulatory approaches aimed at 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 bank, insurance, and non-bank actors involved
in the delivery of a full range of affordable and quality financial services.
The global financial crisis has brought the need for financial inclusion into greater focus
worldwide as it is believed that widespread incidence of financial exclusion was one of the
factors that precipitated the financial crisis. While spread of financial inclusion is recognized
through formal financial institutions such as banks, credit unions, post offices or microfinance
institutions, the approach of keeping some/ all of these entities as a part of the core or as
support players, varies from country to country. Besides, it is important to note that the
defining principles of financial inclusion, coverage, role and responsibilities of institutions and
measurement / monitoring requirements have been evolving over the years.
Financial inclusion - national initiatives
Several countries across the globe now look at financial inclusion as the means for a more
comprehensive growth, wherein, each citizen of the country is able to use his/her earnings as
a financial resource that they can put to work to improve their future financial status and
simultaneously contribute to the nation's progress.
Initiatives for financial inclusion have come from the financial regulators, the governments
and the banking industry. While the banking sector has taken several steps to promote
financial inclusion, legislative measures have also been initiated in some countries. For
example, in the United States, the Community Reinvestment Act (1977) requires banks to
offer credit throughout their area of operation and prohibits them from targeting only the rich
neighbourhood. The German Bankers' Association introduced a voluntary code in 1996
providing for an "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 United
Kingdom, a "Financial Inclusion Task Force" was constituted by the government in 2005 in
order to monitor the development of financial inclusion.
The history of financial inclusion in India is actually much older than the formal adoption of
the objective. The nationalization of banks, Lead Bank Scheme, incorporation of Regional
Rural Banks, Service Area Approach and formation of Self-Help Groups - all these were
initiatives aimed at taking banking services to the masses. The brick and mortar
infrastructure expanded; the number of bank branches multiplied ten-fold - from 8,000+ in
1969, when the first set of banks were nationalized, to 99,000+ today. Despite this wide
network of bank branches spread across the length and breadth of the country, banking has
still not reached a large section of the population. The extent of financial exclusion is
staggering. Out of the 600,000 habitations in the country, only about 36,000+ had a
commercial bank branch. Just about 40 per cent of the population across the country has
bank accounts. The proportion of people having any kind of life insurance cover is as low as
10 per cent and proportion having non-life insurance is abysmally low at 0.6 per cent. People
having debit cards comprise only 13 per cent and those having credit cards only a marginal
2 per cent of the population.
The National Sample Survey data (2002-03) revealed that nearly 51 per cent of farmer
households in the country did not seek credit from either institutional or non-institutional
sources of any kind. A number of rural households are still not covered by banks. They are
deprived of basic banking services like a savings account or minimal credit facilities. The
proportion of rural residents who lack access to bank accounts is nearly 40 per cent, and the
figure rises to over three-fifths in the eastern and north-eastern regions of India. Accordingly,
our primary objective is to take banking to all excluded sections of the society, rural and
urban.
A more focused and structured approach towards financial inclusion has been followed since
the year 2005 when Reserve Bank of India decided to implement policies to promote
financial inclusion and urged the banking system to focus on this goal. Our focus has,
specifically, been on providing banking services to all the 600 thousand villages and meeting
their financial needs through basic financial products like savings, credit and remittance. The
objectives of financial inclusion, in the wider context of the agenda for inclusive growth, have
been pursued through a multi-agency approach. In 2006, the Government of India
constituted a Committee on Financial Inclusion,5 which made a wide range of
recommendations on the strategies for building an inclusive financial sector and gave a
national rural financial inclusion plan. Government of India has set up the Financial Stability
and Development Council (FSDC), which is mandated, inter alia, to focus on Financial
Inclusion and Financial Literacy issues. In order to further strengthen the ongoing financial
inclusion agenda in India, a high level Financial Inclusion Advisory Committee has been
constituted by RBI. The Committee would pave the way for developing a viable and
sustainable banking services delivery model focussing on accessible and affordable financial
services, developing products and processes for rural and urban consumers presently
outside the banking network and for suggesting appropriate regulatory framework to ensure
that financial inclusion and financial stability move in tandem. Financial sector regulators
including RBI are fully committed to the Financial Inclusion Mission. I will cover this in more
detail in a subsequent section.
Framework for measurement and data analysis requirements - conceptual issues
An essential pre-requisite for measurement is to understand the context and framework of
financial inclusion. Any effort to measure the various dimensions of financial inclusion is not
possible without explaining the context and framework. The basic framework for
measurement of financial inclusion should cover some important dimensions.
First, financial inclusion, financial literacy and consumer protection are the three major planks
of financial stability. While financial inclusion acts from the supply side, providing the financial
market/services that people demand, financial literacy stimulates the demand side, making
people aware of what they can demand. The demand side issues in financial inclusion
include knowledge of financial products and services, credit absorption capacity, etc. These
issues are faced by both developing and developed countries. The supply side issues cover
financial markets, network of banks and other financial institutions, appropriate design of
products and services, etc. These issues are mostly faced by the developing countries. A
framework for financial inclusion needs to take into account various aspects such as the
demand and supply side issues; assessment of enabling environment; issues in penetration,
barriers to financial inclusion, etc.
Second, availability of appropriate financial products, including at the very least, savings
products, emergency credit, payment products and entrepreneurial credit are important
aspects of financial inclusion environment. Further, regarding ease of access, the various
dimensions are timely access, distance, pricing and terms & conditions. In addition to this,
the fairness & appropriateness of products is also an important dimension in the context of
financial education of customers and for consumer protection.
Third, the monitoring framework should cover transaction level, customer level and products
and services level monitoring, at the micro level. In addition, monitoring at the macro level is
also an important dimension for assessment of the outcome of policy, viability of delivery
models, etc. This calls for impact analysis and penetration studies.
Information needs vary based on progress in implementation of financial inclusion initiatives.
Accordingly, information needs can be broadly categorized as those needed at
Proposal/Definition stage, Environmental stage, Implementation stage, Monitoring stage and
Overall Assessment stage. Some of the most basic indicators to measure access for
brick & mortar structures include number of branches per 1000 population and number of
ATMs per 1000 sq.km. On the other hand, for alternate banking outlets such as the
Information and Communication Technology (ICT) based Business Correspondent (BC)
Model, basic indicators include ratio of branches to BC outlets, number of villages covered
per BC, etc. While monitoring products, data on number of products, types of products,
return on products and their related characteristics are important. At the implementation
& assessment stage, it is important to measure progress of initiatives through impact
analysis and penetration of financial inclusion by studying the growth / changing pattern of
customers and products, volume of transactions, returns on the products, etc. It is important
to note that for macro and micro level impact studies, appropriately designed periodic
surveys would be a useful tool. Surveys are also needed for assessing viability of delivery
models, sustenance of initiatives, gauging the spread of financial literacy and measuring
barriers to financial inclusion.
A robust financial inclusion design depends on a multiplicity of parameters encompassing
varied socio-economic backdrops and feasible financial service delivery mechanism that
would vary from region to region. This is particularly so for a country like India, which is
distinguished by its vastness of topographical, demographic as also socio-economic
diversity. Like any broad based financial system, financial inclusion measures and
performance monitoring system require a rich body of performance data and analytics. Many
a time, country comparisons brought out by international bodies based on their dedicated
database dwells on much aggregative data comparison which, when seen granularly,
bespeaks a different story. This is very relevant in financial inclusion analytics, which
requires new kinds of identifiable indicators based on the evolving needs of financial
inclusion plan and program.
Concepts and definitional issues
The fact that financial inclusion concepts have different meanings in different parlance has
often led to difficulty in using a standard yardstick for benchmarking its policy parameters.
The associated difficulties are that the targeted variables used for financial inclusion may
differ from one country or organisation to another because of different institutional set up.
Inherent weaknesses in the linkages between the financial inclusion database and welfare
parameters of the society add to the complexity. Moreover, there are no agreed composite
measures of financial inclusion which could facilitate comparisons across time and
geography. Therefore, in order to ensure consistency and accuracy in measurement of
financial inclusion parameters, it is essential that the parameters concerned are objectively
defined in the first stage of the measurement process. As a way forward, we need to assess
financial behaviour and understand where the challenges and opportunities lie for the future.
To do that, we need high-quality, multi-dimensional, comparable financial inclusion data
based on internationally standardized terms and concepts. As such, the measurement needs
also include analytics for correct interpretation of data and establishment of international
benchmarks.
Various dimensions of data on financial inclusion
There are several structural dimensions in the process of building up data on financial
inclusion. These include:
(i) Measurement of the progress in financial inclusion initiatives by way of building up
suitable indictors. Such indicators must contain data on access to (supply of) and usage of
(demand for) financial services as well as their coverage and penetration. Measuring
availability and actual use of deposit accounts, payment services, credit for poor households
(micro-credit schemes), micro-level insurance products ought to be part of the framework.
(ii) The second aspect relates to understanding constraints or barriers for financial
inclusion and development of indicators for assessing the same.
(iii) Another important dimension is the collection of transactional data on amount of credit
extended, deposits placed, remittances made, etc. This is important in order to gauge the
effectiveness of the financial inclusion initiatives. Merely opening of accounts without
ensuring transactions undermines the beneficial impact of the financial inclusion measures.
(iv) Finally, diverse data are required to be pooled and benchmarked at international level.
In this respect, one needs to take a stock of current status of data relevant for building up
globally applicable indicators.
Basic data covering both the quantitative and qualitative aspects can be obtained through
self-reporting templates by the formal financial intermediaries or by means of household
surveys. There is also a need for international benchmarking of financial inclusion indicators
as practices followed across the developed and developing economies can vary
considerably. It is necessary to develop standard statistics on a comparable and consistent
scale in order to set benchmarks and best practices for structuring plans for financial
inclusion.
International databases on financial inclusion indicators
Financial Inclusion is fast emerging as a candidate for being a core driver of sustainable
long-term economic growth and is, therefore, attracting the attention of central bankers and
various global developmental and financial institutions. It is, however, emerging that a lot of
ground remains to be covered in understanding the reach of the financial sector, and
particularly, the degree to which vulnerable groups such as the poor, women, and youths are
excluded from formal financial systems. Availability of systematic indicators of the use of
different financial services needs to be improved in most economies and consequently, at the
global level. It is heartening to note that multilateral organisations such as the World Bank
and the International Monetary Fund (IMF) are paying attention to the development of
relevant database, besides focussing on the issue of financial inclusion through policy
prescriptions and guidelines.
The World Bank database, known as the Global Financial Inclusion database (Global
Findex), provides survey based data as part of the annual Gallup World Poll. The survey
conducted in 2011 covered at least 1,000 adults each in 148 economies using randomly
selected, nationally representative samples. The focus of the Global Findex Database
encompasses a set of indicators that measure how adults save, borrow, make payments,
and manage risk, stressing thereby on how a well-functioning financial system serves the
vital purpose of offering savings, credit, payment, and risk management products to people
with a wide range of needs. Inclusive financial systems allowing broad access to financial
services, without price or non-price barriers to their use, are especially likely to benefit poor
people and other disadvantaged groups. Without inclusive financial systems, poor people
must rely on their own limited savings to invest in their education or for entrepreneurial
activities, while small enterprises would need to rely on their limited earnings to take
advantage of promising growth opportunities. This can contribute to persistent income
inequality and slower economic growth. Findex reports data in terms of the proportion of
people (of age 15+) for a number of parameters such as (a) who have saved money with
financial institutions or other sources, (b) taken loan from financial institutions or other
sources, (c) paid for health / agriculture insurance and (d) used cheques / electronic payment
/ mobile payment systems for financial transactions. The World Bank has released a
research study on the database in April 2012. A snapshot of the data on some indicators for
select countries is given in Annex 1. The study reveals that:
i) 50 per cent of adult population worldwide report owning an account with a formal financial
institution, but actual operation and use of these accounts for transactions varies widely
across regions and economies.6 And when one starts probing the numbers granularly, the
actual spread of financial inclusion indicators across countries would turn out to be wider.
ii) Financially excluded populace is predominant in developing countries, where only
41 per cent adults have a formal account, with only 37 per cent of women having formal
account against 46 per cent of men; the gender gap widens further because of varying
degrees of income inequalities observed among the developing countries.
iii) The cross country comparison would reveal that bank account penetration, measured as a
per cent of adult population, varies widely across the countries. In high-income economies,
account based financial inclusiveness is much higher with 89 per cent adults having
accounts with formal financial entities. For India, account penetration is reported to be
35 per cent7 (43.7 per cent for men and 26.5 per cent for women) while China scored better
at 63.8 per cent (67.6 per cent for men and 60 per cent for women). South Korea reported
high account penetration at 93 per cent, universality of education, and particularly, the
spread of financial literacy.
iv) However, such aggregative nature of data masks many critical performance related
information for understanding the depth and granularity at sub-national level. Another
speciality of the database (FINDEX) used in the World Bank study is that it is a survey based
reporting system which may have small sample biases and such constraints are natural for
household surveys, particularly, when they involve people in the lower rung of the financial
inclusion pyramid.
Likewise, the IMF has initiated the "Financial Access Survey" (FAS) in 2009, in an endeavour
to put together cross country data and information relating to the issue of financial inclusion
and has published the data in July 2012.8 According to IMF, the FAS is the sole source of
global supply-side data on financial inclusion, encompassing internationally comparable
basic indicators of financial access and usage. It is the data source for the G-20 Basic Set of
Financial Inclusion Indicators endorsed by the G-20 Leaders at the Los Cabos Summit in
June 2012. The FAS database currently contains annual data, for the period 2004-2011, for
187 jurisdictions, including all G20 economies. The FAS data covers data on country-wise
availability of bank branches and ATMs per 1000 sq.km. and per 100,000 adults, number of
deposit and loan accounts with banks per 1000 adults and deposit-GDP and credit-GDP
ratios. A glimpse of the data is given in Annex 2.
While such initiatives are most commendable and fill a major data gap at macro level, it has
to be reckoned that data on financial inclusion is needed at both macro and micro levels. The
latter can provide distributional characteristics of financial inclusion and is, therefore, crucial
in the context of policy initiatives and assessing their outcome. Moreover, the IMF data
reveals significant gaps at individual country level, which needs to be bridged so as to
improve its utility.
Data on barriers for financial inclusion
Even within the existing set of account based financial services, lot of variations exist in
actual delivery models because of varied levels of technological absorption and cost of
operation. No less binding are the legal and bureaucratic constraints and lack of appropriate
infrastructure and financial literacy which requires to be countered in order to bring the
financially excluded segments within the formal financial access network. For example,
identifying unbanked segments for making them bankable is a challenging task, be it
habitation, land ownership title or adopting a common authorised identification code.
Benchmarking the data on constraints hindering progress in the financial inclusion initiatives
would immensely help in identifying common concerns and replicating successful ideas
across jurisdictions. In this regard, concerted international initiatives would help build up
requisite data for good policy making.
Financial inclusion initiatives in India
I have already outlined some important milestones in the development of financial inclusion
policy initiatives in India. A broad definition is adopted as follows:
"Financial inclusion is the process of ensuring access to appropriate financial
products and services needed by all members of the society in general and
vulnerable groups in particular, at an affordable cost in a fair and transparent
manner by mainstream institutional players"
We have adopted a bank led model in India to introduce a bouquet of products related to
savings, payments & credit together. It is recognised that only the mainstream banking
institutions have the ability to offer the suite of products required to bring in
effective/meaningful financial inclusion. Other intermediaries and technology partners such
as mobile companies have been allowed to partner with banks in offering services
collaboratively. In this context, it is necessary to point out that MFIs/NBFCs/NGOs on their
own may not be able to bring about financial inclusion, as the range of financial products and
services which are considered as the bare minimum for financial inclusion purposes, cannot
be offered by them. But they play an extremely important role in furthering financial inclusion
in the sense that they bring people and communities into the fold of the formal financial
system.9
Further, the initiatives are technology driven so as to make the financial services deliverable
in a cost effective manner, tailor made by the market participants to best suit their
requirements. RBI has encouraged the ICT model which would enable banks to overcome
the barriers of geography and ensure efficient financial inclusion. The ICT based delivery
model adopted should be technology-neutral to facilitate easy up-scaling and customization,
as per individual requirements. Against this background, the major initiatives taken by RBI
include the following:
i. Encouraged the SHG-Bank Linkage Model, one of the largest micro finance models
in the world, under which 4.79 million SHGs have been credit linked, covering
97 million poor households (till March 2012).
ii. Mandated Commercial Banks including Regional Rural Banks to migrate to the Core
Banking Platform.
iii. Substantially liberalised the BC based service delivery model in phases.
iv. Permitted domestic scheduled commercial banks to freely open branches in Tier 2
to Tier 6 centres.
v. Mandated banks to open at least 25% of all new branches in unbanked rural
centres.
vi. Substantially relaxed the Know Your Customer (KYC) documentation requirements
for opening bank accounts for small customers.
vii. Encouraged Electronic Benefit Transfer for routing social security payments through
the banking channel.
viii. Pricing for banks totally freed; Interest rates on advances totally deregulated.
ix. Separate programme for Urban Financial Inclusion initiated.
Some important features of the strategic initiatives for spreading financial inclusion in India
included:
i. A roadmap for providing banking services covering villages in a structured way. In
the first phase villages with population above 2000 was targeted. The focus has now
shifted to villages with population less than 2000.
ii. Introduction of New Products - Making available a minimum of four banking
products through the ICT based BC model.
iii. Our strategy has been to create an ecosystem comprising of a combination of
branches and ICT based BC outlets for evolving an effective financial inclusion
delivery model.
iv. In order to further facilitate financial inclusion, interoperability was permitted at the
retail outlets or sub-agents of BCs (i.e. at the point of customer interface), subject to
certain conditions, provided the technology available with the bank, which has
appointed the BC, supported interoperability. However, the BC or its retail outlet or
sub-agent at the point of customer interface would continue to represent the bank,
which has appointed the BC.
v. Banks have been advised that they may set up intermediate brick and mortar
structures (in rural areas) between the present base branch and BC locations, so as
to provide support to a cluster of BCs (about 8-10 BCs) at a reasonable distance of
about 3-4 kilometers. Such branches should have minimum infrastructure, such as
a Core Banking Solution (CBS) terminal linked to a pass book printer and a safe for
cash retention for operating large customer transactions and would have to be
managed full time by bank's own employees. It is expected that such an
arrangement would lead to efficiency in cash management, documentation,
resolving customer grievances and close supervision of BC operations.
vi. The evolution of the BC model comprises of the following four stages:
- Stage 1 : Mobile Business Correspondents
Stage 2 : Fixed Location Business Correspondent Outlets
-
- Stage 3 : Low Cost Intermediate Brick & Mortar Structures (Ultra Small Branches)
- Stage 4 : Full fledged Brick & Mortar Branches
vii. Financial Inclusion Plan (FIP) for Banks - All domestic commercial banks - public
and private sector have drawn a Board approved three year FIP starting April 2010.
The banking system's three Year FIPs include parameters such as:
i. No. of branches opened, of which the no. opened in unbanked villages and in
villages with population greater than or less than 2000
ii. No. of BC outlets opened
iii. No. of Basic Savings Bank Deposit Accounts opened
iv. No. of emergency credit (OD) provided
v. No. of Entrepreneurial credit (KCC/GCC) provided
vi. Transactions done in the above accounts through Brick & Mortar branches as well
as through BCs
These initiatives are being closely monitored by the Reserve Bank of India through monthly
reporting and annual comprehensive review.
Financial inclusion plan - achievements so far
A snapshot of the progress in certain key parameters in the recent period (March 2010 -
June 2012) are given below (Details in Annex 3):
i. Banking connectivity to more than 1,88,028 villages upto June 2012 from
67,694 villages in March 2010.
ii. All unbanked villages with population of more than 2000 persons, numbering around
74,000 are now connected with banks.
iii. Number of BCs increased to 120,098 from 34,532.
iv. More than 70 million basic banking accounts have been opened to take the total
number of such accounts to 147 million.
v. About 36 million people/families have been credit-linked.
In the context of this Workshop it is important to note that there has long been a statistical
system of capturing both macro and micro-level data on measurement of financial inclusion
in India, at least in respect of deposit and credit. The database on bank branch network, led
by scheduled commercial banks in India, give an idea about the reach of the formal banking
system in the form of an indicative banking penetration measure such as average population
per branch or number of deposit bank accounts per 1000 population. The data indicates that
the branch network of scheduled commercial banks have increased during last five years,
registering an improved coverage, in terms of population per branch, from 15,700 to 12,600.
Among the newly opened bank branches during the year, the share of rural and semi-urban
branches has gone up between 2007 and 2012. During the same period, there has been a
marginal improvement in the share of deposit accounts in rural centres and loan accounts in
semi-urban (Annex 4). Such measures, however, do not throw light on the distributional
aspect of the brick-mortar based branch network across regions or across the
socio-economic spectrum of population.
There is, therefore, a need to further expand these databases in order to improve their utility
as monitoring tools and MIS. There is also a lot to learn fr