K C Chakrabarty: Inclusive growth - role of financial sector
Address by Dr K C Chakrabarty, Deputy Governor of the Reserve Bank of India, at the
National Finance Conclave 2010, Bhubaneswar, Orissa, India, 27 November 2010.
* * *
Assistance provided by Shri A K Misra in preparation of this address is gratefully acknowledged.
1. Prof Ashok Kolaskar, Vice Chancellor, KIIT University, Dr Achyuta Samanta,
Founder, KIIT University & KISS, Dr Karmarkar, MD, NABARD, distinguished guests, ladies
and gentlemen. It is a pleasure and privilege to be here at the National Finance Conclave -
2010 being organized by School of Management, KIIT University, Bhubaneswar. KIIT
University under the leadership of Dr Samanta is a living example to the society of the way of
practicing social inclusion through spread of education. I take this opportunity to congratulate
the University for the pioneering role it plays in spreading quality education and also for
organizing this Conclave. The theme of the Conclave, which is "Inclusive Growth: Role of the
Financial Sector", focuses on an issue having a great significance not only for a country like
ours but the entire world. Since the term inclusive growth is used very widely and loosely, I
wish to spend some time in discussing this in little detail.
2. Inclusive growth as the literal meaning of the two words refers to both the pace and
the pattern of the economic growth. The literature on the subject draws fine distinction
between direct income redistribution or shared growth and inclusive growth. The inclusive
growth approach takes a longer term perspective as the focus is on productive employment
rather than on direct income redistribution, as a means of increasing incomes for excluded
groups. Inclusive growth is, therefore, supposed to be inherently sustainable as distinct from
income distribution schemes which can in the short run reduce the disparities, between the
poorest and the rest, which may have arisen on account of policies intended to jumpstart
growth. While income distribution schemes can allow people, to benefit from economic
growth in the short run, inclusive growth allows people to "contribute to and benefit from
economic growth".
3. The "inclusive growth" as a strategy of economic development received attention
owing to a rising concern that the benefits of economic growth have not been equitably shared.
Growth is inclusive when it creates economic opportunities along with ensuring equal access to
them. Apart from addressing the issue of inequality, the inclusive growth may also make the
poverty reduction efforts more effective by explicitly creating productive economic opportunities
for the poor and vulnerable sections of the society. The inclusive growth by encompassing the
hitherto excluded population can bring in several other benefits as well to the economy. The
concept "Inclusion" should be seen as a process of including the excluded as agents whose
participation is essential in the very design of the development process, and not simply as
welfare targets of development programmes (Planning Commission, 2007).
4. The Indian economy, though achieved a high growth momentum during 2003-04 to
2007-08, could not bring down unemployment and poverty to tolerable levels. Further, a vast
majority of the population remained outside the ambit of basic health and education facilities
during this high growth phase. In recent decades, economic and social inequalities have
increased alongside high growth rates which have exacerbated regional inequalities. Over
25% of Indians continue to live in abject poverty. As a result, Inclusive growth has become a
national policy objective of the Union Government. The 11th five-year plan (2007-2012)
envisions inclusive growth as a key objective. The Plan document notes that the economic
growth has failed to be sufficiently inclusive particularly after the mid-1990s. It has identified
agriculture, infrastructure, health care and education as critical areas for achieving higher
inclusive growth. Thus, the Eleventh Plan Document tries to restructure the policies in order
to make the growth faster, broad-based and inclusive by reducing the fragmentation of the
society. Huge investments in agriculture, education and health, and rural infrastructure were
the key elements of the inclusive growth strategy as envisaged. Broadly, the policies aim at
increasing the income and employment opportunities on the one hand and on the other; it
tries to finance programmes which are capable of making the growth more inclusive.
Inclusive growth: role of financial sector
5. There are supply side and demand side factors driving Inclusive Growth. Banks and
other financial services players largely are expected to mitigate the supply side processes
that prevent poor and disadvantaged social groups from gaining access to the financial
system. Access to financial products is constrained by several factors which include: lack of
awareness about the financial products, unaffordable products, high transaction costs, and
products which are not convenient, inflexible, not customized and of low quality. Financial
Inclusion promotes thrift and develops culture of saving and also enables efficient payment
mechanism strengthening the resource base of the financial institution which benefits the
economy as resources become available for efficient payment mechanism and allocation.
The empirical evidence shows that countries with large proportion of population excluded
from the formal financial system also show higher poverty ratios and higher inequality. If we
are talking of financial stability, economic stability and inclusive growth with stability, it is not
possible without achieving Financial Inclusion. Thus financial inclusion is no longer a policy
choice but is a policy compulsion today. And banking is a key driver for inclusive growth.
However, we must bear in mind that apart from the supply side factors, demand side factors,
such as lower income and/or asset holdings also have a significant bearing on inclusive
growth. Owing to difficulties in accessing formal sources of credit, poor individuals and small
and macro enterprises usually rely on their personal savings or internal sources to invest in
health, education, housing, and entrepreneurial activities to make use of growth opportunities.
What is different this time?
6. The role of the financial sector in the financial inclusion efforts in India, date back to
early 60s when the focus was on channeling of credit to the neglected sectors of the
economy and weaker sections of the population. Starting with 1990s the focus shifted to
strengthening financial institutions as part of financial sector reforms. The merits of financial
sector reform need to be seen through the prism of what finance could do to harness the
growth potential with stability, and financial inclusion represents a critical component of the
policy process that intends to make the financial system serve the needs of the real
economy. The 1990s also saw introduction of self-help groups - bank linkage programme
and launch of Kisan credit cards in the country. The present phase of pursuing financial
inclusion as a declared policy objective started in 2005. So, if financial inclusion efforts has
been going on for that long, and clearly we have not succeeded, what is different this time
and why are we talking so confidently about achieving universal financial inclusion now. It is
because of the following reasons:

the focus on inclusive growth which has become the mantra of the times;

the Information and Communication Technology required by the formal financial
sector for penetrating widespread unbanked areas in a cost effective way is now
available;

the realization that the "Poor is Bankable". FMCG companies, telecom companies
and other retailers are all concentrating on the untapped rural markets for growth.
Formal financial sector players also have realized that vast untapped excluded
areas have growth opportunities not only for low cost deposits/funds but also for
other products such as micro-credit, micro-insurance, and micro-pension etc.
7. In the remaining part of my address, I wish to devote on the objectives, bottlenecks
and strategies in achieving financial inclusion in India. I would give you a glimpse of the
present phase of financial inclusion efforts including some misunderstood definitions and the
initiatives being taken by the Reserve Bank of India. I would end my speech with a sneak
peek at some of the targets that banks in India have set for themselves in next 3 years or so.
Definition: financial inclusion
8. A lot of confusion prevails amongst a lot of people about what constitutes Financial
Inclusion. So, let me define it for you. Financial inclusion is the process of ensuring access to
appropriate financial products and services needed by vulnerable groups such as weaker
sections and low income groups at an affordable cost in a fair and transparent manner by
mainstream institutional players. The Governor of RBI has announced that we need to
achieve financial inclusion through the mainstream financial institutions whether by mobile or
card. We have reposed our faith in mainstream financial institutions to achieve financial
inclusion. But, he has also made it clear that we cannot wait indefinitely for banks to come
forward and exploit this opportunity of financial inclusion, otherwise we may have to look for
other models of furthering financial inclusion. But, for the time being these issues have been
resolved.
Objectives
9. What are the objectives of our financial inclusion efforts? It is to take banking services
to everybody to meet their entire savings, credit and remittance needs initially, and needs for all
other financial products and services subsequently. It is initially focused on villages with
population above 2000 but the banks need to plan to cover villages with population below 2000
in an integrated manner over a period of next 3 to 5 years. The objective is also to provide
banking services to entire population residing in Urban and Metro Centers.
Bottlenecks
10. The bottlenecks and difficulties in achieving complete financial inclusion in our
country are fairly well known. The major obstacles are:
(i) The gigantic nature of the task, keeping in view the number of financially excluded
people.

In India, almost half the country is unbanked.

Of the 6 lakh villages in India, only approximately 50,000 have bank branches.
 India has the highest number of households (145 million) excluded from
Banking.
 Only 10% of the population has any kind of life insurance and 9.6% of the
population has non-life insurance coverage.
I may hasten to add that this is not an India specific problem but a global one indeed.

2.5 billion adults, just over half of world's adult population, do not use formal
financial services to save or borrow.

2.2 billion of these unserved adults live in Africa, Asia, Latin America, and the
Middle East.

Of the 1.2 billion adults who use formal financial services in Africa, Asia, and
the Middle East, at least two-thirds, a little more than 800 million, live on less
than $5 per day.
However, some of the critical indicators for access to finance in India along with
benchmark indicators for selected high-income OECD member countries (Table 1)
reveal that while there have been improvements during 2001-08 but it is still very
adverse as compared to OECD economies.
(ii) Non-availability of appropriate banking technology till a few years ago. Lack of
proper physical infrastructure, digital connectivity, etc. in some parts of the country.
If Financial Inclusion is to take place, it can only be through Information and
Communication Technology (ICT) based models.
(iii) Lack of proper Business Models. Banks still perceive this as a burden and an
imposition and not as a viable Business Model.
(iv) Lack of cost effective scalable Delivery Models. There is no facilitating and effective
Delivery Model especially when problems are encountered. Business Correspondent
(BC) based Delivery Model is still in the evolutionary stage.
(v) The costs of administering low value transactions and of financial intermediation are
perceived to be on the higher side.
(vi) Planned, strategic and concerted efforts were lacking. It requires massive efforts
from all stakeholders.
Strategy
11. What has been our broad strategy for achieving planned, sustained and structured
Financial Inclusion? It is through a planned approach to the entire gamut of issues whose
detailed steps are enumerated below:
(i) We have advised banks to formulate a board approved Financial Inclusion Plan
(FIP) for the next three years. We have not imposed a uniform model so that each
bank is able to build its own strategy in line with its Business Model and comparative
competitive advantage.
(ii) FIPs must be integrated with the normal Business Plans of the banks. We have
freed interest rates and have also allowed banks to charge their customers for other
transactions. We believe that banking to the poor is a viable business opportunity
but a cost-benefit analysis needs to be done by the banks to make Financial
Inclusion congruent with their Business Models. Banks must view Financial Inclusion
as a viable Business Model.
(iii) Banks must view Financial Inclusion as a huge business opportunity and perfect
their Delivery Models. BC based delivery model has been made more flexible and
inclusive.
(iv) For effective implementation of the Financial Inclusion strategies, banks must fix
technology aspects first including completion of Core Banking Solution (CBS) in all
their branches and those of sponsored RRBs, and seamless integration of front-end
devices with the back-end systems. Without this, it would not be possible to scale up
the activities.
(v) There is a need to increase the bouquet of products currently being offered. During
discussions on their FIPs, banks have been advised to provide a minimum of four
products to the account holder, viz:
(a) A savings cum overdraft account
(b) A pure savings account, ideally a recurring or variable recurring deposit
(c) A remittance product to facilitate EBT and other remittances, and
(d) Entrepreneurial credit products like a General Purpose Credit Card (GCC) or a
Kisan Credit Card (KCC)
Apart from these minimum basic products, banks can offer any other product like
insurance, mutual funds, etc. to the account holders.
(vi) On the issue of coverage, we have clarified that for a village to be considered
covered by banking services, either a bank branch has to be present or a BC has to
be visiting/present in that village. There must be a bifurcation between villages with
more than 2000 population and those with less than 2000 population. The plan
needs to cover in an integrated manner both categories of villages. The name of the
BC/branch covering a particular village needs to be indicated on the banks website.
(vii) Special focus on Financial Inclusion at Urban and Metro centers through a functional
approach.
(viii) Involve all the stakeholders in the process. Governments, both Central and State,
NGOs, technology vendors, Industry Associations, Insurance and Mutual Fund
companies, society at large.
(ix) RBI's efforts have been to remove all regulatory bottlenecks for facilitating greater
Financial Inclusion. Pricing has also been made free.
Myths about financial inclusion
12. Let me now come to a couple of myths surrounding Financial Inclusion and the first
of which is that Banks are not willing to do greater Financial Inclusion. In reality, the truth is
that without appropriate technology, they could not have done it even when willing. It is not
their willingness but the lack of ability to deliver which is coming in the way. The second myth
is that the cost of achieving Financial Inclusion is too high. In reality, costs can easily be
borne by banks. Overall cost of Financial Inclusion will not be more than Rs 3000/4000 crore
per year. State and Central Governments can obviously provide a helping hand. Thus, the
basic problem is not the cost or willingness, but the absence of Business Model and ICT
based Delivery Model.
What do the FIPs indicate?
13. In the end, I only wish to say that the above steps initiated for creating a framework
of sustainable Financial Inclusion are conceptually very sound. However, the real test is in
successful execution and implementation. Just to give you a sense of the numbers being
compiled from the FIPs submitted by the banks to understand the enormity of the task in next
two and a half years.

Close to 2,00,000 BCs/CSPs (customer service points) to be deployed

Over 4,000 rural brick and mortar branches to be opened in unbanked villages

Over 10 crore no frills accounts to be opened

Over 3 crore KCCs and about 70 lakh GCCs to be issued
The banks will really have to gear up for implementation of these plans. The numbers look
good and if we can successfully execute the plans India can present a role model to the
world.
Conclusion
14. In conclusion, I would like to reiterate that the current policy objective of inclusive
growth with stability is not possible without achieving universal Financial Inclusion. Thus,
financial inclusion is no longer a policy choice today but a policy compulsion. And as agents
entrusted with the task of achieving financial inclusion, the role of the mainstream financial
sector in achieving inclusive growth becomes central. I am sanguine that with the concerted
efforts of all the stakeholders, our planned, sustained and structured Financial Inclusion
efforts would bear fruits and we can take the country not only towards an even higher growth
rate but a growth which is inclusive and all encompassing. I am quite sure the students and
faculty of KIIT will play a pioneering role in innovating and establishing an appropriate
Business Delivery Models through the involvement of all stakeholders to make Financial
Inclusion a reality. This Conclave will definitely throw up some innovative ideas in this
direction. I am pleased to inaugurate this Conclave and wish it all the success!
Thank you.
References
Chakrabarty, Dr K. C. (2009): "Banking: Key Driver for Inclusive Growth", Address delivered
at the Mint's "Clarity Through Debate" series in August 2009 at Chennai.
Government of India (2006): Report of the Working Group on Savings Eleventh Five Year
Plan, Planning Commission, December.
Government of India (2007), Eleventh Five Year Plan Document, Planning Commission.
Government of India (2008), The Committee on Financial Inclusion (Chairman: C. Rangarajan).
Inclusive Growth Analytics: Framework and Application (2009). Elena Ianchovichina and
Susanna Lundstrom, World Bank.
Reserve Bank of India (2008), Report on Currency and Finance 2006-08.