K C Chakrabarty: Financial inclusion of urban poor in India
Keynote address by Dr K C Chakrabarty, Deputy Governor of the Reserve Bank of India, at
the Annual National Seminar titled "Financial inclusion of urban poor" conducted by the
American India Foundation, New Delhi, 28 January 2013.
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Assistance provided by Smt. Sushma Vij in preparation of this address is gratefully acknowledged.
Ms. Lata Krishnan, Chair, American India Foundation (AIF); Mr. M. A. Ravi Kumar, CEO, AIF;
Prof. Sanghmitra S. Acharya, Jawaharlal Nehru University; Mr. Pradeep Kashyap, Vice
Chair, AIF; Mr. Michael Markels from the World Bank; Ms. Kavita N. Ramdas, Ms. Madhu P.
Kishwar, Mr. Mathew Titus and Ms. Sujata Lamba, the panelists for today's discussion,
Mr. Hanumant Rawat, Director, AIF; delegates at the seminar, ladies and gentlemen. It is a
pleasure to be here today at the fifth Annual National Seminar being conducted by the AIF in
New Delhi. I am happy to see that Dr. Pradip Sarmah from Guwahati, who is a pioneer in the
design of light weight rickshaws and organizing Joint Liability Group for rickshaw pullers, is
present here today.
I am very glad to note that from a very humble beginning in 2001, AIF has emerged as the
leading non-profit organization in the country, involving Indian-Americans, dedicated not only
to the task of upliftment of India's poor but also to development of a vibrant social ecosystem.
In collaboration with grassroot NGOs and government agencies, AIF has been successfully
running several projects related to education, livelihood, and public health, with emphases on
elementary education, women's empowerment, and HIV/AIDS, respectively. I understand
that AIF has so far reached out to more than 1.7 million of India's less fortunate and
successfully transformed their lives by providing them a sustainable means of livelihood.
Though on a standalone basis, number of lives touched by AIF is very impressive, it simply
dwarfs in comparison to the sheer enormity of the challenge that we, as a nation, face i.e. of
reaching out to a population of 1.2 billion. Even to reach remotely close to the target number,
we would not only need scaling up of efforts by institutions like AIF, but also the involvement
of many more such governmental and non-governmental organizations. Our experience with
the Financial Inclusion programs has highlighted that unless the intermediaries involved
develop sustainable delivery models and are able to run these activities as a viable business
proposition, success would remain elusive. Therefore, apart from a sense of commitment,
what we really need for these drives to succeed is a sustainable delivery model, which other
institutions could imbibe from AIF and emulate.
It is, indeed, very heartening to note that the AIF has chosen to focus on the subject of
Financial Inclusion of Urban Poor for its Annual Seminar and I compliment the Foundation for
this. As you all know, financial inclusion has been a key area of focus for the Reserve Bank
of India and I firmly believe that forums such as this provide us an opportunity to put our
minds together to introspect on what more needs to be done to meet the ambitious goals we
have set for ourselves. I, therefore, thank the organizers for inviting me and providing me the
opportunity to present my views on the topic.
Though the Indian economy has witnessed tremendous growth lately, vast sections of our
society have remained excluded from the India growth story due to various socio-economic
factors. It is ironic that despite our cities seeing widespread affluence, large pockets of
financial exclusion should exist right at the very heart of these cities. Every year, a large
number of people migrate from villages to cities in search of a better life for themselves and
their families. They take up non-contractual and non-permanent jobs of vendors, porters,
hawkers, construction workers, domestic workers, rickshaw pullers, etc. These people need
fast, low cost, convenient and safe avenues of savings, credit and remittances to meet their
needs. However, in view of the non-permanent nature of their occupations, they frequently
shift base within city or even across cities. Bankers are generally found to be shy in providing
them banking services, for obvious reasons.
What do we mean by Financial Inclusion?
Before I turn to the specifics of Financial Inclusion of urban poor, let us spend a minute in
understanding the meaning of the term itself. We have defined Financial Inclusion as "the
process of ensuring access to appropriate financial products and services needed by all
sections of the society in general and vulnerable groups such as weaker sections and low
income groups in particular, at an affordable cost, in a fair and transparent manner, by
regulated, mainstream institutional players". Financial Inclusion is important not only from the
perspective of the benefit it provides to the poor but also from the perspective of overall
stability of the social and economic system of the country. Financial Inclusion of the poor has
a multiplier effect on the economy as a whole, through higher savings pooled from the vast
segments of the population present at the bottom of the pyramid. There is a potential for
transforming the lives of these excluded groups by providing access to formal savings
arrangements and extension of credit by banks for emergency and entrepreneurial purposes,
thereby enabling the poor to create assets, generate stable income, build resilience to meet
macro-economic and livelihood shocks and bring about an improvement in their financial
condition and living standards.
Our strategy for Financial Inclusion
Financial Inclusion is an integral part of policy making at Reserve Bank of India. We have
taken significant steps in the form of regulatory relaxations, introduction of innovative
products, and various supportive measures towards this objective. We have adopted a
bank-led approach for financial inclusion in the country and encouraged the leveraging of
technology while remaining neutral to the technology choice made by individual banks. The
effort made by all stakeholders has resulted in increased reach of banking services to
hitherto excluded remote locations. Today, banking connectivity has reached nearly
204800 villages through brick and mortar branches, Business Correspondents (BCs) and
other modes. During the last 3 years, 96.25 million Basic Savings Bank Deposit Accounts
(including erstwhile No Frill Accounts) have been opened.
Exclusion of the urban poor
The rural inhabitants have largely remained the focus of our financial inclusion efforts since a
large proportion of our villages are still unbanked. This has also been under the premise that
the reach of banking network in urban areas is already quite high and, hence, access to
banking services should be available to all. The ground reality, however, is quite shocking.
The problem of exclusion is widespread even in urban areas, especially, for the
disadvantaged and low-income groups, despite there being no dearth of bank branches. As
part of the financial inclusion drive, while banks have opened 13434 BC outlets in urban
localities during the last 3 years, the progress is far from what was hoped for. Many of the
urban poor still have no access to formal financial products and services like savings, credit,
remittance and insurance, forcing them to depend on usurious informal sources to meet their
personal, health, and livelihood-related needs. Not surprisingly, they struggle to repay such
borrowings, which further impede their ability to escape the vicious circle of poverty.
Migrant workers
One important section of the urban poor, which is adversely impacted by the problem of
financial exclusion in urban areas, is the migrant workers' group. Migrant workers in urban
areas mostly comprise people from low-income households who generally leave their village
homes in search of better income and employment opportunities. Many of these people work
and live at their work sites and are paid daily wages. They need a secure place to keep their
savings and the facility to remit small amounts of money at frequent intervals. In most of the
migration corridors, the migrants have outstanding loans at their origin points, mainly from
informal sources, and the remittances are the major source of loan repayment.
Rickshaw pullers
Before we delve into the issues that plague the financial inclusion efforts for the urban poor
and the migrant workers, let me spend some time talking about one important sub-section of
this population, the rickshaw pullers - a group which is the focus of the initiatives made by
the AIF under the Rickshaw Sangh programme. Rickshaw Pullers provide a much needed
and valuable public service, especially for the low income groups in cities, at very cheap
rates. In areas where lanes and by-lanes are too small for vehicular traffic, cycle rickshaws
are the only practical means of transport. In most cities, in the absence of any feeder service
between the major transport network stations like railways, metro rail, bus, etc., there is
always a demand for cycle-rickshaws.
While no pan-India study on rickshaw pullers is available, it is estimated that there are about
8 million rickshaw pullers in the country, with only about 1.1 million being registered at
various municipalities. With an average of five persons dependent on each rickshaw puller,
close to about 40 million people are dependent on rickshaw pullers for their subsistence,
making it an important livelihood source for a sizeable section of our population.
Typical of the migrant labour communities, the rickshaw pullers also seldom possess
dependable identities, references or contacts. They, usually, do not have access to
institutional finance and, hence, find it difficult to raise funds to purchase their own rickshaws.
According to available data, 90-95% of rickshaw pullers rent rickshaws on a daily basis and
pay rentals as high as ₹.25 - 50 per day, which could, thus, add up to ₹1500 per month, for a
rickshaw costing ₹10000 - 12000. They pay such usurious rents for years but never become
owners of the rickshaw. On days when the rickshaw puller does not take up the activity due
to illness, social events, or other reasons, he does not have any income. Moreover, during
the cropping season, the rickshaw pullers often return to their home towns, resulting in
disruption of their regular occupation. All this results in them have irregular and unstable
income, which is vulnerable to disruption by a multitude of factors. Having their own
rickshaws would encourage them to continue with their occupation all through the year, and
help in bringing consistency in their income streams, which is essential for any kind of
financial planning.
It is, therefore, important that there is an effort to extend support to these groups so as to
make their livelihoods sustainable. The initiative taken by the AIF in bringing together various
stakeholder groups to improve the economic prospects of the rickshaw pullers is, indeed,
commendable and I hope that the Rickshaw Sangh programme is extended all over the
country and that it succeeds in bringing about a credible improvement in the quality of lives of
this hard working group.
Some experiments have already been done by adopting a Joint Liability Group (JLG) model
for delivery of rickshaw loans. For instance, under the Punjab National Bank's "JANMITRA
RICKSHAW FINANCING SCHEME", need based loans are provided to desirous persons on
easy terms and conditions so that these people can come out of the clutches of money
lenders. The financing is done under tie-up arrangement with NGOs sponsored by American
India Foundation Trust (AIFT) as well as other local NGOs. The NGO arranges for
completing the formalities like registration with the local Municipal body. The extent of loan
includes the cost of the rickshaw, cost of uniform, license fee for two years and three years'
premium for life and health insurance of the rickshaw puller. In this instance, a special design
of rickshaw was created in association with IIT Guwahati, which resulted in a light weight
rickshaw that ensured an all-weather comfortable seating for passengers and sufficient
space for storage of luggage. This also ensured a unique identity of the rickshaw financed
under the scheme. The design of the rickshaw had sufficient space for advertisement on the
back. The guarantee of partnering NGOs is an assurance to the bank as well as the
manufacturers. The banks have lesser risk to deal with; the individuals are supported by the
quality check of the rickshaws; and the manufacturers are assured of their payment by the
bank.
There are scores of success stories under this scheme, which has resulted in providing
employment to several poor people and helping them live a dignified life. Their
collectivization and empowerment through the instrument of credit and the consequent
means of livelihood - the rickshaw, seems to be a turning point in their lives. In this
experiment, change in the income levels is evident, supplemented by the improvement in the
perception of self. A large number of homeless and identity-less migrant labourers became
rickshaw owners and got integrated with financial services of the banks.
The Rickshaw Sangh programme has, currently, been rolled out in 18 cities in 6 states. As
per data provided to me, more than 40000 rickshaws have been covered under the
programme with total credit extended being ₹140 million. One important feature of note in the
Rickshaw Sangh programme is that it is not just restricted to providing a rickshaw to the
target group, but also includes providing necessary municipal permit, insurance (both on the
asset and on the life), bank account, photo ID and a uniform. This bundled approach greatly
improves the impact the programme is likely to have on the beneficiaries. At this stage of the
Rickshaw Sangh programme, it is heartening to note that an assessment of the programme
has been carried out with the objective of understanding the impact it has had on the
beneficiaries and other stakeholders involved in the programme. Besides, it also seeks to
ascertain the non-economic impact that the programme would have had on the beneficiaries.
I do hope that the outcome of the study provides valuable guidance on how to take the
programme further in terms of both its penetration across the country and the impact it has
on the social and economic lives of the beneficiaries.
In my opinion, a major issue that projects focusing on the economic upliftment of the poor
often face is the lack of adequate emphasis on proper training and capacity building, which
seriously debilitates the ability of the beneficiaries to manage their assets and income without
adequate handholding. A major challenge to the success of projects focusing on
improvement of living standards of the rickshaw pullers is the non-availability of a
standardized and comfortable rickshaw model. In a country which has a booming cycle
industry with an impressive export pedigree, there are no organized manufacturers of cycle
rickshaws. In the absence of standard designs, the local manufactures waste much time and
effort in building a rickshaw. I hope AIF would look into this aspect, tie up with some major
manufactures, urge them to build on existing research, such as the one carried out by IIT
Guwahati, and design standardized, modular, cost-effective machines, which can be easily
dismantled and reassembled at locations away from manufacturing bases.
Impediments in Financial Inclusion of urban poor
Let me now return to the key impediments in achieving Financial Inclusion of the urban poor.
Among the factors keeping the urban poor and the migrant workers out of the formal financial
system are their low and irregular earnings, migrant nature of the population, inability to
produce adequate documentation, bigger family size with single earning member and
financial illiteracy leading to poor money management skills. They are also deterred by
problems in understanding language, inconveniences related to travelling and waiting time
and other conditions that come with the formal financial system. It is, indeed, sad that many
migrant workers do not have adequate information about the remittance facilities offered by
banks, and even those who have accounts with banks, do not use them effectively.
Furthermore, only a few migrants and their families are insured against the risks they face
every day. As a result of lack of financial literacy and general apathy, even those who have
money continue to keep their savings either at home or prefer to participate in informal
savings schemes like chit fund.
There is no denying the fact that the informal sources are attractive and pervasive in cities
due to the speed and ease and the multiplicity of services they can give. That is why the poor
prefer to borrow from informal sources even at exorbitant interest rates of 5-8 per cent per
month as the lender understands their financial situation and constraints. Hence, any time
(24x7x365) availability of credit, especially in times of emergency, is preferred by the
borrowers despite the exploitative interest rates. The most crucial challenge in case of
migrant workers is proof of identity. The migrant nature of their job does not allow them to
have dependable identities, references or contacts and, therefore, very often, they are
denied the financial access due to lack of adequate KYC documents. Besides, the
indifference of the urban poor to the formal sources of finance, despite these being less
costly, is also attributable to the attitude and mindset of the service providers, which needs to
be facilitating and supportive Experience suggests that the financially excluded population is
more comfortable tapping the informal sources to finance their needs, which are much more
"flexible" and "convenient".
The need, therefore, is for the formal financial institutions to adapt their product offerings and
delivery platforms to meet the specific needs of the urban poor. The reasons why the
informal systems are so popular needs to be studied and their strong points need to be
incorporated into the practices of the formal service providers to the extent possible. Besides,
in order to meet the remittance requirements of migrants, banks should identify major
inter-state migration corridors in the country and explore partnership with NGOs in different
sets of origin-destination pairs.
Adopt a functional cluster based approach
The challenge is to convert poverty into prosperity for the people, while at the same time,
implementing it as a viable business opportunity for banks. For that purpose, we must adopt
a functional cluster based approach, well suited to the specific needs of different segments
like Household workers, Construction workers, Weavers, Hawkers, Rickshaw pullers, Auto
Drivers, etc. There has to be a multi-pronged, holistic approach that could include enhancing
financial literacy to build up demand, capacity building and mindset changes of
bank staff/ BCs, development of need based innovative products, alternate delivery channels
through BCs and tie-ups with NGOs to ensure socially responsible delivery of services with
consumer protection.
In fact, product innovation in financial services, keeping in view the life cycle needs of the
urban poor, should form the basis of banks' strategy to bring these groups into the financial
system. Banks should innovate to create demand-oriented savings, credit and remittance
products that are customized to the lifestyle patterns and income streams of the urban poor.
Offering micro-saving products, per se, to meet the savings needs of these groups, might not
be enough. Innovative financial products offering possible investment opportunities, besides
catering to the savings needs, have to be thought of for bringing the urban poor into the
banking system. Insurance offers protection to assets created under credit programmes and
protects savings from being wiped out by shocks arising out of sickness, death, accidents or
asset loss caused by fire, drought, floods and riots. The section of the urban poor, who are
determined to save regularly, even with their low earnings, should be provided an investment
option that fetches reasonable rate of return on their savings, without exposing them to
significant risks. Mutual funds and pension schemes for the unorganized sector, customized
to the financial needs of the poor, have to be developed.
As noted above, in case of rickshaw pullers, the organization of functional clusters into
groups is central to their linkage to the banking system. Formation of JLGs of the urban poor
for provision of bank credit, with collective obligations for interest and loan repayments, is an
option. Banks can also explore avenues for individual loans to select JLG members who
establish a good track record through group borrowings, possess the requisite
entrepreneurship skills and who want larger loans for productive purposes.
Linking with existing Urban Development Projects: Training and capacity building
workshops can be arranged under urban development projects like the Jawaharlal Nehru
National Urban Renewal Mission (JNNURM). There will be a possibility of growth of more
homogenous groups required for forming JLG/SHGs in such areas. NGOs can play a
meaningful role in this direction.
Today's seminar must result into concrete actions. As an immediate measure, in order to link
the urban poor with the formal financial system, it is necessary that the banks take initiatives
in close coordination with local NGOs, state government and municipal authorities, to launch
campaigns to open bank accounts of urban poor in camp mode.
The problem of proof of identity for the migrant workers can be efficiently handled by
leveraging technology. Aadhaar cards issued by the UIDAI have the potential to be a game
changer. Aadhaar would serve not only as a clean, accessible identification to meet KYC
requirements, but would also facilitate Electronic Benefit Transfer of their benefits and
entitlements. The recent KYC relaxations permitted by RBI also allow for Aadhaar
documents to be accepted as both identity and address proof, provided the address given on
the account opening form is the same as the one on the Aadhaar document. Persons with a
valid Aadhaar Card would, thus, be able to transact at any bank, at any place. Hence, it is
also important to launch a one-time campaign to enroll everyone into Aadhaar, which would
remove the major barriers to inclusion of migrant workers.
Another major area that needs due attention is the task of making the urban poor
creditworthy. We cannot blame the banks alone for lack of credit penetration to this segment
of the society. Banks are into the business of lending, but at the same time, they also need to
factor in the repayment capacity of the borrower. Unless they firmly believe that the borrower
has the ability to build productive assets with the credit received, they would eschew taking
that credit risk. The NGOs have a very crucial role to play in this regard. They must lead a
mission to impart financial education, training and capacity building for this functional group
(rickshaw pullers, vegetable vendors, plumbers, masons, etc.) and prepare them to avail of
the entire suite of financial products and services i.e., savings, remittance, insurance and
pension from the banking sector, in addition to credit.
Another linkage for these functional groups with the formal financial system could be through
an intermediary who could possibly be a management expert. This person could engage with
a group of such individuals on a regular basis and professionally manage their affairs (say for
example, arranging for health insurance) for a fee. Accordingly, management institutions
could develop basic courses for preparing such managers who truly understand the needs
and deeds of these functional groups. All the above issues would require co-ordinated
response from all stakeholders.
Way forward
There is a need to create greater awareness about the banking services in order to bring the
urban poor under the banking network. Proper management of money by the urban poor is
critically important for meeting their life cycle as well as investment needs. There is scope to
plug non essential expenses and increase their savings behavior. The key strategies here
would be to educate, motivate and encourage. The Reserve Bank of India, as part of its
Financial Literacy programme, is issuing a Financial Literacy Guide which answers basic
questions related to managing money. Responses to certain basic queries such as Why to
save, how to save, why save in banks, When to borrow, Where to borrow from, etc. have
been provided in very simple and lucid language, through pictorial representation. This guide
can be used by all stakeholders as a standard curriculum for educating the financially
excluded poor people. Along with the Guide, we are also coming out with a Financial Diary
with basic messages in pictorial form for distribution to the participants in the Financial
Literacy Camps so that they can better plan their finances by keeping record of their income
and expenses on a regular basis. The easy-to-understand posters, with appealing pictures,
explain the importance of savings and the basic banking services. It is time for banks to play
a major role in the financial emancipation of the urban poor by conducting financial literacy
camps and providing door step user friendly access to services.
From the perspective of improving the living standards of the rickshaw pullers, we need
many more initiatives like the Rickshaw Sangh programme. The improvement in the financial
status of the urban poor, including the rickshaw pullers would be possible only if it is pursued
as an integral part of our financial inclusion initiatives. Providing access to finance for the
rickshaw pullers to own rickshaws should necessarily be at the core of these initiatives.
However, emphasis need also be on providing a holistic package, which supports the
rickshaw puller in leveraging his asset (the rickshaw) to pull himself and his dependents out
of poverty. Besides, technology needs to be used to facilitate the task of rickshaw pulling, so
that it becomes less physically demanding.
An appropriate, customized delivery channel is equally crucial in urban areas. South Africa's
E-Bank Plan demonstrates how a commercial bank can bundle services for low-income
clients. Its uniqueness lies in its focus on sensitivity to the needs of the basic banking
customer, which led to creation of a new product providing a cost efficient delivery
mechanism. The idea was to offer an integrated combination of product and delivery
features, including user friendly, conveniently located branches, by leveraging on technology.
E-banks are conveniently located in high-traffic areas in colourful, well-designed,
user-friendly kiosks. Instead of relying on traditional advertising methods, E-Bank has used
market presence, life insurance and prizes to generate word-of-mouth advertising. The
approach is providing product and delivery features that are valuable enough to make the
low-income clients willing to pay ATM transaction fees slightly above the market norm and
high enough to cover banking costs.
Conclusion
Bringing the urban poor into the mainstream of the financial system can act as an important
gateway for financial inclusion. Rolling out of an innovative financial product, delivered
through a user friendly channel, is central to achieving financial inclusion. This has to be
seamlessly integrated with a strategy to improve the financial literacy of the targeted groups.
Only then will we be able to avoid the problem of low level of transactions in the newly
opened accounts, which we are currently facing in our financial inclusion efforts in the rural
areas. As I have always maintained, technology has to be the bulwark around which our
financial inclusion efforts have to be developed. Innovative ICT solutions have to be
leveraged to provide door step services of specifically designed products at place and time
convenient to the targeted population group. Disbursement of bank loans in association with
well meaning NGOs and also involving them in proper monitoring/ hand holding of
beneficiaries can result in poverty alleviation for a large number of people.
Most importantly, society has to radically change its attitude towards labour and the people
providing us manual services. Every task has its dignity and we must respect the efforts put
in by these groups of people and their contribution in making our lives comfortable and
hassle-free. This will encourage us to appreciate the genuine problems of these groups and
work towards finding solutions for them. As I mentioned at the beginning, this is required not
just for the well-being of these vulnerable groups, but also for the stability and sustainability
of the social and economic system. I hope, we are, collectively, able to bring about this
change in our attitude, which would be a vital first step in the integration of these
marginalized groups.
I commend the initiative taken by the AIF along with all other stakeholders including the
commercial banks/ financial institution and NGOs towards the social and economic
emancipation of the rickshaw pullers through the Rickshaw Sangh programme. The task
before us is very challenging considering the large number of rickshaw pullers that are yet to
be touched by the programme. I hope the inputs from the assessment study help in
recalibrating the programme towards better meeting the goals set for it.
I once again thank the AIF for providing me the opportunity to present my views in this
seminar and do hope that the panel discussion to follow would throw up valuable ideas on
how to take the financial inclusion mission forward, particularly for the urban poor. I also
congratulate the recipients of the Awards for Outstanding Contribution to Financial Inclusion,
being given today and hope that not only do they continue with their good work, but they also
succeed in encouraging others to rededicate themselves to the goal of making our society a
truly inclusive one.
Thank you.