V Leeladhar: Taking banking services to the common man - financial inclusion
Commemorative lecture by Mr V Leeladhar, Deputy Governor of the Reserve Bank of India, at the
Fedbank Hormis Memorial Foundation, Ernakulam, 2 December 2005.
* * *
Ladies and Gentlemen,
I am truly honoured to deliver the Fedbank Hormis Memorial Foundation commemorative lecture. The
illustrious list of the previous years' speakers indicates the kind of significance this commemorative
lecture has acquired over the years. The late Shri K.P.Hormis, founder of Federal Bank, was a
visionary and left behind an institutional set up in the form of Federal Bank which has been doing
yeoman service for well over seventy five years. The Fedbank Hormis Memorial Foundation, a public
charitable trust, has been furthering the cause of banking and finance by providing knowledge and
training in the areas of banking, finance, economics and management to banking professionals as well
as deserving students who are specializing in these areas. As the life and times of late Shri
K.P.Hormis were spent largely in taking banking to the masses, which is indicated by Federal Bank's
mix of urban and rural coverage, I thought it would be appropriate for me to speak on taking banking
services to the common man - financial inclusion, a topic of contemporary significance and relevance.
The banking industry has shown tremendous growth in volume and complexity during the last few
decades. Despite making significant improvements in all the areas relating to financial viability,
profitability and competitiveness, there are concerns that banks have not been able to include vast
segment of the population, especially the underprivileged sections of the society, into the fold of basic
banking services. Internationally also efforts are being made to study the causes of financial exclusion
and designing strategies to ensure financial inclusion of the poor and disadvantaged. The reasons
may vary from country to country and hence the strategy could also vary but all out efforts are being
made as financial inclusion can truly lift the financial condition and standards of life of the poor and the
disadvantaged.
What is financial inclusion?
•
Financial inclusion is delivery of banking services at an affordable cost to the vast sections of
disadvantaged and low income groups. Unrestrained access to public goods and services is
the sine qua non of an open and efficient society. As banking services are in the nature of
public good, it is essential that availability of banking and payment services to the entire
population without discrimination is the prime objective of the public policy.
The scope of financial inclusion
The scope of financial inclusion can be expanded in two ways.
a) through state-driven intervention by way of statutory enactments (for instance the US
example, the Community Reinvestment Act and making it a statutory right to have bank
account in France).
b) through voluntary effort by the banking community itself for evolving various strategies to
bring within the ambit of the banking sector the large strata of society.
When bankers do not give the desired attention to certain areas, the regulators have to step in to
remedy the situation. This is the reason why the Reserve Bank of India is placing a lot of emphasis on
financial inclusion.
In India the focus of the financial inclusion at present is confined to ensuring a bare minimum access
to a savings bank account without frills, to all. Internationally, the financial exclusion has been viewed
in a much wider perspective. Having a current account / savings account on its own, is not regarded
as an accurate indicator of financial inclusion. There could be multiple levels of financial inclusion and
exclusion. At one extreme, it is possible to identify the 'super-included', i.e., those customers who are
actively and persistently courted by the financial services industry, and who have at their disposal a
wide range of financial services and products. At the other extreme, we may have the financially
excluded, who are denied access to even the most basic of financial products. In between are those
who use the banking services only for deposits and withdrawals of money. But these persons may
have only restricted access to the financial system, and may not enjoy the flexibility of access offered
to more affluent customers.
Consequences of financial exclusion
Consequences of financial exclusion will vary depending on the nature and extent of services denied.
It may lead to increased travel requirements, higher incidence of crime, general decline in investment,
difficulties in gaining access to credit or getting credit from informal sources at exorbitant rates, and
increased unemployment, etc. The small business may suffer due to loss of access to middle class
and higher-income consumers, higher cash handling costs, delays in remittances of money. According
to certain researches, financial exclusion can lead to social exclusion.
International experience in promoting financial inclusion
An interesting feature which emerges from the international practice is that the more developed the
society is, the greater the thrust on empowerment of the common person and low income groups. It
may be worthwhile to have a look at the international experience in tackling the problem of financial
exclusion so that we can learn from the international experience.
The Financial Inclusion Task Force in UK has identified three priority areas for the purpose of financial
inclusion, viz., access to banking, access to affordable credit and access to free face-to-face money
advice. UK has established a Financial Inclusion Fund to promote financial inclusion and assigned
responsibility to banks and credit unions in removing financial exclusion. Basic bank no frills accounts
have been introduced. An enhanced legislative environment for credit unions has been established,
accompanied by tighter regulations to ensure greater protection for investors. A Post Office Card
Account (POCA) has been created for those who are unable or unwilling to access a basic bank
account. The concept of a Savings Gateway has been piloted. This offers those on low-income
employment £1 from the state for every £1 they invest, up to a maximum of £25 per month. In addition
the Community Finance Learning Initiatives (CFLIs) were also introduced with a view to promoting
basic financial literacy among housing association tenants.
A civil rights law, namely Community Reinvestment Act (CRA) in the United States prohibits
discrimination by banks against low and moderate income neighborhoods. The CRA imposes an
affirmative and continuing obligations on banks to serve the needs for credit and banking services of
all the communities in which they are chartered. In fact, numerous studies conducted by Federal
Reserve and Harvard University demonstrated that CRA lending is a win-win proposition and profitable
to banks. In this context, it is also interesting to know the other initiative taken by a state in the United
States. Apart from the CRA experiment, armed with the sanction of Banking Law, the State of New
York Banking Department, with the objective of making available the low cost banking services to
basic banking account
consumers, made mandatory that each banking institution shall offer and in
case of credit unions the basic share draft account, which is in the nature of low cost account with
minimum facilities. Some key features of the basic banking account are worth-mentioning here.
•
the initial deposit amount required to open the account shall not exceed US $ 25
•
the minimum balance, including any average balance, required to maintain such account
shall not exceed US $ 0.10
•
the charge for periodic cycle for the maintenance of such accounts to be declared up front
•
the minimum number of withdrawal transactions which may be made during any periodic
cycle at no charge to the account holder must at least be eight
• a withdrawal shall be deemed to be made when recorded on the books of the account
holder's banking institution
•
except, as provided below, an account holder shall not be restricted as to the number of
deposits which may be made to the account without incurring any additional charge
•
the banking institution may charge account holders for transactions at electronic facilities
which are not operated by the account holder's banking institution as well as other fees
and charges for specific banking services which are not covered under the basic banking
account scheme
•
every periodic statement issued for the basic banking account should invariably cover on it
or by way of separate communiqué maximum number of withdrawals permitted during each
periodic cycle without additional charge and the consequences of exceeding such maximum
and the fee if any, for the use of electronic facilities which are not operated by the account
holder's banking institution.
An interesting feature of basic banking account scheme is the element of transparency i.e. the banking
institution should, prior to opening the account, furnish a written disclosure to the account holder
describing the main features of the scheme i.e. the initial deposit amount required to open the
account, minimum balance to be maintained, charge per periodic cycle for use of such account,
maximum number of withdrawal transactions without any additional charge and other charges
imposed on transactions for availing electronic facility not operated by the account holder's banking
institution, etc.
Coverage of Banking Services (Ratio of Demand Deposit Accounts to the adult population)
No. of No. of
acc. acc.
Adult Per Per
Populatio Total No. 100 of 100 of
Region/State/Union Current Savings Total n (Above Of popula adult
Territory Accounts Accounts Population 19 years) accounts tion pop.
NORTHERN
REGION 4215701 52416125 132676462 67822312 56631826 43 84
Haryana 572660 8031472 21082989 11308025 8604132 41 76
Himachal Pradesh 134285 2433595 6077248 3566886 2567880 42 72
Jammu & Kashmir 277529 3094790 10069917 5379594 3372319 33 63
Punjab 1156137 13742201 24289296 14185190 14898338 61 105
Rajasthan 689657 12139302 56473122 28473743 12828959 23 45
Chandigarh 80607 1126696 900914 546171 1207303 134 221
Delhi 1304826 11848069 13782976 7929589 13152895 95 166
NORTH-EASTERN
REGION 476603 6891081 38495089 19708982 7367684 19 37
Arunachal Pradesh 10538 209073 1091117 544582 219611 20 40
Assam 378729 5071058 26638407 14074393 5449787 20 39
Manipur 12514 200593 2388634 1222107 213107 9 17
Meghalaya 24305 458779 2306069 1088165 483084 21 44
Mizoram 3441 117885 891058 476205 121326 14 25
Nagaland 13819 195452 1988636 995523 209271 11 21
Tripura 33257 638241 3191168 1784212 671498 21 38
EASTERN REGION 1814219 47876140 227613073 122136133 49690359 22 41
Bihar 464511 13225242 82878796 40934170 13689753 17 33
Jharkhand 166007 5834341 26909428 13737485 6000348 22 44
Orissa 228160 7030004 36706920 21065404 7258164 20 34
Sikkim 4097 125365 540493 288500 129462 24 45
West Bengal 942733 21544753 80221171 45896914 22487486 28 49
Andaman & Nicobar
Islands 8711 116435 356265 213660 125146 35 59
CENTRAL REGION 2202217 64254189 255713495 129316677 66456406 26 51
Chhattisgarh 192067 3346898 20795956 11209425 3538965 17 32
Madhya Pradesh 553381 11731918 60385118 31404990 12285299 20 39
Uttar Pradesh 1324509 45804350 166052859 82229748 47128859 28 57
Uttaranchal 132260 3371023 8479562 4472514 3503283 41 78
WESTERN REGION 3178102 49525101 149071747 86182206 52703203 35 61
Goa 81551 1584177 1343998 891411 1665728 124 187
Gujarat 955964 16220262 50596992 28863095 17176226 34 60
Maharashtra 2127240 31568184 96752247 56207604 33695424 35 60
Dadra & Nagar
Haveli 6076 69308 220451 122765 75384 34 61
Daman & Diu 7271 83170 158059 97331 90441 57 93
SOUTHERN
REGION
4666014 83386898 223445381 135574225 88052912 39 65
Andhra Pradesh 1156405 23974580 75727541 44231918 25130985 33 57
Karnataka 1086662 19147819 52733958 30623289 20234481 38 66
Kerala 600065 17669723 31838619 20560323 18269788 57 89
Tamil Nadu 1786514 22052812 62110839 39511038 23839326 38 60
Lakshadweep 491 22997 60595 33686 23488 39 70
Pondicherry 35877 518967 973829 613971 554844 57 90
ALL-INDIA 16552856 304349534 1027015247 541031553 320902390 31 59
Indian scenario
Bank nationalization in India marked a paradigm shift in the focus of banking as it was intended to shift
the focus from class banking to mass banking. The rationale for creating Regional Rural Banks was
also to take the banking services to poor people. The branches of commercial banks and the RRBs
have increased from 8321 in the year 1969 to 68,282 branches as at the end of March 2005. The
average population per branch office has decreased from 64,000 to 16,000 during the same period.
However, there are certain under-banked states such as Bihar, Orissa, Rajasthan, Uttar Pradesh,
Chattisgarh, Jharkhand, West Bengal and a large number of North-Eastern states, where the average
population per branch office continues to be quite high compared to the national average. As you
would be aware, the new branch authorization policy of Reserve Bank encourages banks to open
branches in these under banked states and the under banked areas in other states. The new policy
also places a lot of emphasis on the efforts made by the Bank to achieve, inter alia, financial inclusion
and other policy objectives.
One of the benchmarks employed to assess the degree of reach of financial services to the population
of the country, is the quantum of deposit accounts (current and savings) held as a ratio to the adult
population. In the Indian context, taking into account the Census of 2001 (ignoring the incremental
growth of population thereafter), the ratio of deposit accounts (data available as on March 31, 2004) to
the total adult population was only 59% (details furnished in the table). Within the country, there is a
wide variation across states. For instance, the ratio for the state of Kerala is as high as 89% while
Bihar is marked by a low coverage of 33%. In the North Eastern States like Nagaland and Manipur,
the coverage was a meager 21% and 27%, respectively. The Northern Region, comprising the states
of Haryana, Chandigarh and Delhi, has a high coverage ratio of 84%. Compared to the developed
world, the coverage of our financial services is quite low. For instance, as per a recent survey
commissioned by British Bankers' Association, 92 to 94% of the population of UK has either current or
savings bank account.
Steps towards financial inclusion
In the context of initiatives taken for extending banking services to the small man, the mode of
financial sector development until 1980's was characterized by
•
a hugely expanded bank branch and cooperative network and new organizational forms like
RRBs;
• a greater focus on credit rather than other financial services like savings and insurance,
although the banks and cooperatives did provide deposit facilities;
•
lending targets directed at a range of 'priority sectors' such as agriculture, weaker sections of
the population, etc;
•
interest rate ceilings;
•
significant government subsidies channeled through the banks and cooperatives, as well as
through related government programmes;
•
a dominant perspective that finance for rural and poor people was a social obligation and not
a potential business opportunity.
It is absolutely beyond any doubt that the financial access to masses has significantly improved in the
last three and a half decades. But the basic question is, has that been good enough. As I mentioned
earlier, the quantum of deposit accounts (current and savings) held as a ratio to the adult population
has not been uniformly encouraging. There is a tremendous scope for financial coverage if we have to
improve the standards of life of those deprived people.
With a view to enhancing the financial inclusion, as a proactive measure, the RBI in its Annual Policy
Statement for the year 2005-06, while recognizing the concerns in regard to the banking practices that
tend to exclude rather than attract vast sections of population, urged banks to review their existing
practices to align them with the objective of financial inclusion. In the Mid Term Review of the Policy
(2005-06), RBI exhorted the banks, with a view to achieving greater financial inclusion, to make
available a basic banking 'no frills' account either with nil or very minimum balances as well as
charges that would make such accounts accessible to vast sections of the population. The nature and
number of transactions in such accounts would be restricted and made known to customers in
advance in a transparent manner. All banks are urged to give wide publicity to the facility of such no
frills account so as to ensure greater financial inclusion.
Further, in order to ensure that persons belonging to low income group both in urban and rural areas
do not face difficulty in opening the bank accounts due to the procedural hassles, the KYC procedure
for opening accounts has been simplified for those persons who intend to keep balances not
exceeding rupees fifty thousand (Rs. 50,000/-) in all their accounts taken together and the total credit
in all the accounts taken together is not expected to exceed rupees one lakh (Rs.1,00,000/-) in a year.
The way forward
The banks should come out of inhibited feeling that very aggressive competition policy and social
inclusion are mutually exclusive. As demonstrated elsewhere, the mass banking with no-frills etc. can
become a win-win situation for both. Basically banking services need to be "marketed" to connect with
large population segments and these may be justifiable promotional costs. The opportunities are
plenty.
• In the context of India becoming one of the largest micro finance markets in the world
especially in the growth of women's savings and credit groups (SHGs) and the sustaining
success of such institutions which has been demonstrated by the success of SEWA bank in
Gujarat, low cost banking is not necessarily an unviable venture/proposition.
•
The IBA may explore the possibility of a survey about the coverage in respect of financial
inclusion keeping in view the geographical spread of the banks and extent of financial
services available to the population so as to assess the constraints in extension of financial
services to hitherto unbanked sections and for initiating appropriate policy measures.
•
It may be useful for banks to consider franchising with other segments of financial sector
such as cooperatives, RRBs etc. so as to extend the scope of financial inclusion with
minimal intermediation cost.
•
Since large sections of low income groups transactions are related to deposits and
withdrawals, with a view to containing transaction costs, 'simple to use' cash dispensing and
collecting machines akin to ATMs, with operating instructions and commands in vernacular
would greatly facilitate financial inclusion of the semi urban and rural populace. In this
regard, it is worthwhile to emulate the example of 'e-Choupal' project brought forth through
private sector initiative.
Conclusion
It is becoming increasingly apparent that addressing financial exclusion will require a holistic approach
on the part of the banks in creating awareness about financial products, education, and advice on
money management, debt counseling, savings and affordable credit. The banks would have to evolve
specific strategies to expand the outreach of their services in order to promote financial inclusion. One
of the ways in which this can be achieved in a cost-effective manner is through forging linkages with
microfinance institutions and local communities. Banks should give wide publicity to the facility of no
frills account. Technology can be a very valuable tool in providing access to banking products in
remote areas. ATMs cash dispensing machines can be modified suitably to make them user friendly
for people who are illiterate, less educated or do not know English.
To sum up, banks need to redesign their business strategies to incorporate specific plans to promote
financial inclusion of low income group treating it both a business opportunity as well as a corporate
social responsibility. They have to make use of all available resources including technology and
expertise available with them as well as the MFIs and NGOs. It may appear in the first instance that
taking banking to the sections constituting "the bottom of the pyramid", may not be profitable but it
should always be remembered that even the relatively low margins on high volumes can be a very
profitable proposition. Financial inclusion can emerge as commercial profitable business. Only the
banks should be prepared to think outside the box!