Usha Thorat: Financial inclusion and millennium development goals
Speech by Ms Usha Thorat, Deputy Governor of the Reserve Bank of India, at the 4th Program on
Human Development and State Finances jointly organised by College of Agricultural Banking,
Reserve Bank of India, UNDP and the Planning Commission, at CAB, Pune, 16 January 2006.
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At the outset, I take this opportunity to thank the Planning Commission, the United Nations
Development Programme (UNDP) and the College of Agricultural Banking for inviting me to this very
relevant program on human development and State finances.
The central theme of the Millenium Development Goals (MDGs) is reduction of poverty in all its forms.
The MDGs emphasise human development indicators, especially those relating to women and
children, to enable people to live a life of dignity. The role of the State in the achievement of the MDGs
through fiscal measures to increase investment in economic and social capital is primary. The financial
system can play a role in reinforcing many of the objectives of the MDGs involving savings, livelihood
and economic infrastructure apart from providing an efficient payments system. The role of the
community based organisations and NGOs has been found to be vital in catalysing local participation
to enhance the efficiency and transparency in the delivery of services essential for achievement of
human development goals. Thus the State Governments, the formal financial system and community
based organisations can be considered as the three pillars in achieving societal transformation.
These three pillars perform distinct but mutually reinforcing roles that can have tremendous synergies.
By financial inclusion we mean the provision of affordable financial services, viz., access to payments
and remittance facilities, savings, loans and insurance services by the formal financial system to those
who tend to be excluded. It is important to recognise that in the policy framework for development of
the formal financial system in India, the need for financial inclusion and covering more and more of the
excluded population by the formal financial system has always been consciously emphasised. What
has now come to the fore is that even after decades of such emphasis there are large segments of the
society outside the financial system. Simultaneously the growth of the NGO and the Self Help Groups
has been significant and their linkage with banks has facilitated greater financial inclusion. These
groups are mainly of women and the recovery rates are high. There is no subsidy element and the
outreach and penetration continues to grow. The coverage is several times that under government
sponsored schemes. Where groups have been consciously promoted under government sponsored
schemes, the recovery is just 50 per cent as compared to 90 per cent plus recovery under the
voluntary movement. Furthermore, there are reports that groups are promoted under the sponsored
programmes just to avail of the subsidy. It is, therefore, essential that the strengths of the voluntary
NGO/SHG movement are not lost while establishing linkages between this sector and banks in
achieving the MDGs. In the context of the overall fiscal constraint faced by most States, the linkages
between the formal financial system and the community based organisations can be effectively
exploited by the State Governments to meet the challenges of ensuring achievement of the MDGs.
I would like to share with you two recent cases witnessed by me that could be of some interest and
relevance. The first relates to women self help groups (SHGs) that I recently visited in Ajmer. The
NGO, has catalysed groups that consist of poor Muslim women and trained them in making crochet
caps for the nearby dargah. The groups now supply these caps and other items to distant places.
Initially the women were neither taken seriously nor supported by their men folk, but after successive
drought years when they found that the supplementary income from the women enabled the families
to be free from starvation, the SHGs gained credibility and won the support of the men folk. The
leaders have become so empowered that they go to Ajmer and even to Jaipur for procurement of yarn
and for marketing the produce. In the process of empowerment the women are actively encouraging
their children including girls to be regular in school and they have shown active interest in adult literacy
classes. They now want to learn how to keep their accounts on the computer. There is much more
consciousness on sanitation issues and preventive health care. These women are also prepared to
travel as far as Kutch for exchange of experiences with other women SHGs involved with craft
production. The SHG is supported by banks and NABARD under the SHG bank linkage programme.
The other case relates to a visit to three villages near Kolhapur where the Zilla Parishad with active
involvement of the gram panchayat and banks are building toilets with the entire expenditure of a toilet
construction met through bank loans given to individual families through a very simple procedure. The
loans are based on assessment of family's cash flow and repayable over four years. The toilets range
from the simplest soak pit type to more elaborate ones linked to bio gas units. The procurement of
septic tanks and material has been arranged on wholesale basis; locally trained masons are executing
the work, with labour inputs from the villagers themselves so as to keep costs and consequently the
loan amount low. There is no subsidy element in the financing. While returning from this village, we
passed through another village. It was dark and suddenly as the cars headlights hit the road, we saw
women from either side of the road getting up hurriedly. This image starkly brought home the meaning
of the MDGs for ensuring human dignity.
These cases represent the progress that can be made in achievement of MDGs where there is local
leadership, community participation and involvement of the financial sector with the Government
playing a facilitating role. What is significant is that in both these cases there is no subsidy or
budgetary support. The question is whether these are replicable and can we achieve the desired
scale? The answer is yes provided the three pillars, viz., the State government, the formal financial
system and the community based organisations work together. Without connecting rural roads, there
is very little that can be achieved by the formal financial system or NGOs. Hence it is appropriate that
due emphasis is being placed on rural roads and rural connectivity. This has to be an area for priority
for state funding.
The SHG movement in India has enabled social and economic inclusion of women. The SHG-bank
linkage movement where SHGs are linked to banks in a gradual way - initially through savings and
later through loan products - has been able to ensure financial inclusion to a certain extent. However,
there is a need to increase their credit absorptive capacity as a large number of SHGs linked to the
banking system are utilising the credit only for consumption purposes. They have to migrate to
employment generating activities so as to be able to fully reap the benefits of economic freedom.
Nevertheless, the SHGs and in many cases SHG federations have played a pivotal role in the creation
of social capital and empowerment. There are hundreds of examples where the SHGs have worked
with NGOs and Government agencies to bring drinking water to their villages, conduct regular health
camps, organise adult literacy camps and generally improve the social status of members. For
example, the SHG Federations active in Tamil Nadu have been able to provide life insurance products
through an internally administered scheme. In Kerala, the Kutumbashree model set up by the
Government covers a variety of financial services as also health insurance. The Friends of Women's
World Banking (FWWB) have started a Social Security Project in association with micro finance
agencies/NGOs and insurance companies to provide life insurance to lakhs of persons and non life
insurance products like livestock insurance and health insurance. Other innovative products like hut
insurance, food security, pension scheme, etc., too have been launched. Since the SHG
Federations/NGOs or, the MFIs provide the gateway to a large number of families and absorb
administrative costs both in insuring and in claim settlement, such schemes have been able to keep
the premium to the minimum. In Orissa there are reports about an NGO working amongst disabled
women living in abject poverty. Their intervention has resulted in finding a united voice for these
women, getting the necessary certificates and thus getting facilities due to them and also bank finance
for economic activities.
Apart from the SHG bank linkage, the experience of the formal banking system partnering with micro
finance organisations set up as societies, cooperatives, trusts and NBFCs including Section 25
companies has also been extremely encouraging. These tend to be on a larger scale with services
ranging from health, education, marketing apart from savings, loans and insurance. These linkages
have also grown without government intervention and have proved to be efficient. In both models, the
challenge is in reducing transaction cost so as to keep the services affordable while covering costs
and thereby ensuring increase in outreach and sustainability.
The formal financial system has to recognise the huge business potential coming from the unmet
demand for financial services from those who normally tend to be excluded. The focus on financial
inclusion comes from the recognition that financial inclusion has several externalities which can be
exploited to the mutual advantage of those excluded, the banking system and society at large. Banks
need to understand the market and develop products suited to the clientele. They need to develop
data sets to evolve risk assessment models for proper rating and pricing. Financial inclusion has to be
viewed as a business strategy for growth and banks need to position themselves accordingly. Further
improvements in rural connectivity, through roads, power and telecom, can ensure greater penetration
by the financial system into remote areas and provide safe and efficient financial services to large
segments of the financially excluded. Use of IT, apart from speeding up transaction time and reducing
cost, facilitates building automatic safeguards by ensuring on-line identification, authorisation,
monitoring, transparency and accountability and in turn enables banks to deal with much larger
numbers with minimum risk. The State governments will need to ensure such rural connectivity and
also facilitate capacity building to use IT in a big way.
Let me now proceed to highlight some of the recent initiatives that RBI has taken to promote financial
inclusion
i. As a proactive measure, the RBI in its Annual Policy Statement for the year 2005-06, while
recognising 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), the 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
have been urged to give wide publicity to the facility of such 'no frills' account. A number of banks
have since come out with schemes for such 'no frills' account facility.
ii. 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 with balances not exceeding
rupees fifty thousand (Rs. 50,000) and credits in the accounts not exceeding rupees one lakh
(Rs.1,00,000) in a year.
iii. RRBs have been specifically advised to allow limited overdraft facilities in 'no frills' accounts
without any collateral or linkage to any purpose. The idea is that provision of such overdraft facility
provides a ready source of funding to the account holder who is thereby induced to open such
accounts. From the bank's point of view, the offering of a "no frills" account should represent the
beginning of a sustainable relationship that will be mutually beneficial. Looking at the numbers
involved, there is no doubt that banks should look at technology based solutions and low cost delivery
mechanisms that will reduce transaction cost of such services with the volumes required to make such
a model sustainable.
iv. For all borrowers where the principal amount is less than Rs 25000, banks have been asked to
offer a one time settlement scheme. As there are large number of such very small NPAs with banks,
offer of such an OTS is expected to restore borrowing relationship with the formal system and thereby
obviate the need to go back to the informal system. Banks, however need to give wide publicity to the
scheme at their rural and semi urban branches. In case where the loans are under government
sponsored schemes the State Level Bankers' Committee (SLBC) is expected to evolve a suitable
policy.
v. In urban areas, credit cards enable households to manage to get their credit needs met by the
banking system, with not only the ability to make purchases on credit but also facility to draw cash
against card. In the rural areas, there are no points of sale or outlets where plastic cards can be used.
Banks have been recently advised by RBI to provide a General purpose Credit Card (GCC) facility at
their rural and semi urban braches The credit facility extended under the Scheme will be in the nature
of revolving credit. The GCC-holder will be entitled to draw cash from the specified branch of bank up
to the limit sanctioned. Banks would have flexibility in fixing the limit based on the assessment of
income and cash flow of the entire household. However, the total credit facility under GCC for an
individual should not exceed Rs.25,000. Interest rate on the facility may be charged as considered
appropriate and reasonable. The borrowers would be eligible for availment of the credit facilities
provided under GCC, as per their requirement, without any insistence on security and the purpose or
end-use of the credit. Fifty per cent of credit outstanding under GCC up to Rs.25,000 will be eligible for
being treated as indirect agricultural financing coming under the ambit of priority sector lending norms.
The eligibility criteria will be subject to review. It is not necessary that GCC should be linked to
purchases and GCC may not necessarily be in the form of a card. GCC can be issued in the form of a
Pass Book, if the holder of GCC desires to operate cash withdrawals from bank branches. It is
expected that banks will come out with their own schemes to popularise this product amongst the rural
clientele.
vi. A major recommendation made by the Internal Group set up by RBI on micro finance (Khan
Committee), currently under consideration, is to permit banks to use micro finance institutions as
business facilitators and correspondents to enable banks to increase their outreach and ensure
greater financial inclusion. This recommendation which will lead to provision of micro-finance services
at the doorstep of the customer, can make substantial change in the availability of comprehensive
financial services in rural areas and to the poor and the disadvantaged in both, rural and in urban
areas.
Banks need to view these recent measures as an opportunity to provide timely and adequate financial
services and increase their share in a rapidly growing market. In case of GCC or overdfrafts in 'no
frills' accounts, the interest rates can be appropriately fixed while building in incentives for prompt
payment.
Financial inclusion has several benefits. Establishment of an account relationship can pave the way to
the customer availing of a variety of savings products, loan products for consumption livelihood and
housing. The account can be used for making small value remittances at low cost and making
purchases on credit. The same banking account can also be used by State Governments to provide
social security services like health and calamity insurance under various schemes for the
disadvantaged. It is often felt that some contribution should be made by the beneficiary so that he has
some stake. However, the deterrent is that the cost of collection of the premium that can be more than
the premium itself. If however it is collected through a no frills account, the cost is practically nil. From
the bank's point of view, having such social security cover makes the financing of such persons less
risky and hence can be covered by the loan component. Reduced risk means more flow of funds at
better rates. Furthermore there is a complete audit trail and transparency. In other words the single
gateway of a banking account can be used for several purposes and represents a win-win situation.
The Employment Guarantee Scheme being rolled out in 200 districts in the country which would bring
in large number of people through their savings accounts into the banking system is another
opportunity to promote financial inclusion in its fullest sense.
I would now like to focus on the role of the State governments. While there is no alternative to raising
revenue through taxes and user charges so as to have the resource base to undertake huge
investment in physical and social capital, it is possible, even in the present milieu to give focused
attention to a few areas.
• Firstly, there are many programmes where the central assistance is not drawn down due to
the inability on the part of States to provide matching contribution and such allocations often
lapse. It could be considered whether contribution from the beneficiary (supported by a loan
from a bank) can be blended with the State's contribution to achieve the amount required to
use the Central assistance. Banks can tie up with community based organisations having a
good track record to provide the comfort of knowledge of the borrower.
•
Secondly, States can leverage on the provision of guarantees. There is a recent instance
where the State housing board has partnered with a bank for housing schemes for families
below poverty line (BPL) in urban areas where the housing board provides a first loss
guarantee to the extent of 10 per cent of the loan amount. The housing board identifies the
beneficiaries and helps in recovery. The title is passed only on completion of loan repayment.
In addition to making available the housing loan, health insurance cover is also provided with
either the premium being fully or partly provided by the State Government. There could be
calamity or accident cover as well. Like I mentioned earlier, such insurance reduces the risk of
the loan asset and can lead to more flow of funds and better pricing.
•
Thirdly, in urban areas, there is considerable scope for better pricing of services. It is common
knowledge that the poor end up paying more for various public goods, such as, water, power,
sanitation. Efficient provision of services, with minimum leakages, and their comparative
pricing is critical. Formulation of schemes that have a viable pricing policy will enable the
involvement of the financial system to ensure that adequate funds are available for such
infrastructure projects.
This initiative of the Planning Commission in conducting this programme in collaboration with the
United Nations Development Programme and the College of Agricultural Banking is indeed a very
welcome one to build synergy through mutuality and convergence of the efforts of all the major
stakeholders in the progress towards achievement of MDGs.
I find that your time here has been structured well with presentations by a number of eminent persons
on various aspects having a critical bearing on human development, such as, public health, livelihood,
government and group work as well as experience sharing ending up with an interesting quiz. I wish
you a fruitful week ahead.