K C Chakrabarty: Financial deepening by putting financial inclusion
campaign into mission mode
Address by Dr K C Chakrabarty, Deputy Governor of the Reserve Bank of India, at the
23rd Skoch Summit, Mumbai, 17 June 2010.
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1. Dr C Rangarajan, Hon'ble Chairman, Economic Advisory Council to the Prime Minister,
Mr Hari Sankaran, Managing Director and CEO, IL& FS, Shri S. S. Tarapore, Distinguished
Fellow, Skoch Development Foundation, Shri J Sriram, CEO Mobile Commerce Venture,
Bharti Airtel Ltd, and of course the main organiser of this function Mr Sameer Kochhar,
distinguished guests, ladies and gentlemen. I have come here to say a few words about
financial inclusion which is closely related to the topic of this Summit, i.e. Financial
Deepening. One of the preconditions for deepening of any process is the existence of a large
number of participants. Hence, financial inclusion is a necessary condition for financial
deepening.
2. Let us consider how financial deepening can address concerns of growth with equity
and ensure pro-poor growth. Financial sector development and deepening drives economic
growth by mobilizing savings and investing in the growth of the productive sectors. The
institutional infrastructure of the financial system contributes to reducing information,
contracting and transaction costs, which in turn accelerates economic growth and promotes
pro-poor growth. We firmly believe that increasing financial inclusion reduces the economic
vulnerability of households, promotes economic growth, alleviates poverty and improves the
quality of peoples' lives. Thus, expansion of banking leads to increasing availability of finance
to spur economic growth and helps alleviate poverty.
Barriers to this process
3. Barriers for poor people to access appropriate financial services include
socio-economic factors e.g., lack of education-illiteracy, gender and age, low and irregular
income, and geography, regulatory factors e.g. mandatory requirements of identity
documentation and product design factors.
4. A major barrier cited to expand appropriate services to poor by financial service
providers is the cost of providing those services including administering small loans. While
transaction costs do not vary in direct proportion to a transaction's size and larger number of
transactions bring down the costs, serving the poor with small value services is not viable
using conventional retail banking or insurance approaches. We have to promote
technological and institutional innovation as a means to expand financial system access and
usage, including addressing infrastructure weaknesses.
5. Innovation in delivery and design of financial services targeting the poor and the
excluded, presents challenging policy and regulatory issues. Even the G-20 has set up the
Financial Inclusion Experts Group to address these issues of ensuring Financial Inclusion
and global safety nets. Global awareness of the challenges and barriers and hands-on
experience with policy, regulation and supervision is limited. Industry innovation has thus far
frequently outpaced the capacity of policymakers to respond. When we talk of reaching to the
people, we must understand what types of problems are faced by customers and what is the
solution. Any policy and regulatory responses will therefore need to focus on articulating
flexible approaches that can take account of multiple and competing objectives and that can
accommodate further innovation. A key source of innovation is the capacity of technology to
reduce costs and overcome other barriers to the provision of sustainable financial services to
the excluded.
6. Till a few years ago, there was a dearth of appropriate technology. But, now that
technology has arrived, we have taken several initiatives to bring about financial inclusion.
What we require is a business model and a delivery model. With this in view, RBI advised
banks to formulate a board approved financial inclusion plan for the next three years. All
banks have drawn up their financial inclusion plans and we are engaged in active
discussions with banks on their plans. Through this approach, we are putting the financial
inclusion campaign into mission mode. Based on our assessment and learning, we have
advised them to review and revise their plans. Our broad approach on achieving planned,
sustained and structured financial inclusion is as under:
Technology: seamless integration of front-end with back-end
7. First, the transformational role of technology needs to emphasised. Financial
deepening is taking banking to people. We are speaking of this for the last four decades post
nationalization; we have failed if we see that the current coverage is of barely 32,000 rural
commercial bank branches. Scalable financial inclusion cannot happen without stable and
reliable Information and Communications Technology (ICT). Not only the bank branches but
also the branches of Regional Rural Bank's must also be on Core Banking Solution (CBS),
without which it would not be possible to scale up the financial inclusion efforts. The
transactions through the hand held front end-devices should be seamlessly integrated with
banks' main server. These devices must be capable of transacting the four minimum
products as mentioned in a subsequent paragraph. There should be a provision in the smart
card for integration with the UID number under the Aadhaar Project.
Banking services: need to increase the bouquets of products
8. Second, it is not enough to open a No Frills Accounts (NFA) and maintain that banking
services are available. De minimus, four banking products need to be provided for it to
qualify as availability of banking services. These are:
a. A Savings cum overdraft account
b. A Pure Savings Product ideally a recurring or variable recurring deposit
c. A Remittance Product for EBT and other remittances
d. Entrepreneurial Credit such as GCC, KCC
The number of NFA opened present a very rosy picture, however, evaluation studies show
that accounts once opened lie dormant as the poor do not have enough money to put in the
deposit accounts. Hence, the need to transact is not there. If the banks want customer
acquisition and that poor customers transact with them, they must permit overdrafts in the
accounts. To begin with, very small amounts such as Rs 200, Rs 500 etc. could be
sanctioned. The needs of the poor for consumption smoothing and for lifecycle events such
as medical emergency, weddings, funerals, etc. are pressing and need immediate
gratification. They need to be made aware that to meet their emergency credit needs, an
overdraft facility exists and they can avail should they require. This would bring them to the
banks to transact and enable the banks to sell other products apart from making the entire
exercise viable. For those, who only wish to save, a pure savings product like a recurring or a
variable recurring deposit product could be offered. A remittance product to facilitate EBT or
other remittances should also be offered. For entrepreneurial credit, products such as GCC,
KCC, etc. could be offered. This is the minimum set of products that needs to be offered.
Beyond this, banks are free to provide any other products such as insurance, mutual funds,
etc. as per their assessment and capability.
Coverage: need for transparency
9. Third, the issue of coverage. So far, even when a customer from a remote village
comes and opens an account with a bank branch in a city, that city branch includes that
remote village as covered by banking services. We are clarifying that for a village to be
considered covered by banking services, either a bank branch has to be present or a
Business Correspondent (BC) is 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 names of
the BC/branch covering a particular village need to be indicated on the banks website.
Financial inclusion plan: integrated with banks' business plans
10. Fourth, financial inclusion plans must be integrated with the normal business plans of
the banks. We believe that banking to the poor is a viable business opportunity but costs and
benefit exercise needs to be attempted by the banks to make financial inclusion congruent
with their business models. Banks must view financial inclusion as a huge business
opportunity and perfect their delivery models.
Operational issues: need for intermediate structure
11. Fifth, the banks need to examine the operational issues related to the BC model such
as cash handling. They need to evaluate whether an intermediate brick and mortar structure
is required between the base bank branch and BCs for more effective supervision of the
BCs. This structure, which should be manned by banks' own skeletal staff can have a safe
where BCs can deposit cash, a CBS terminal and passbook printing facility. Over a period of
time, this can morph into a full fledged satellite branch of the Bank
Urban financial inclusion: not to be lost sight of
12. Sixth, financial inclusion is sometimes erroneously treated as synonymous with rural
poverty. Concerns of urban poverty also need to be factored in and the needs of various
groups as rickshaw pullers, construction workers, migrant workers, etc. must be factored in
and products and services crafted as per their needs by the banking system to address
urban financial inclusion.
Monitoring: need for a structured approach
13. Seventh, we would be closely monitoring the progress made by the banks as per their
financial inclusion plans. A structured reporting format has been made available for
meaningful compilation and analysis of data. The banks need to do similar structured data
compilation exercise at the state/district level which will facilitate monitoring at the
district/state/bank level. A structured approach will ensure that this time the outcome of our
financial inclusion efforts will be different and will not meet the same fate as previous ones.
Other issues
14. Let me reiterate that financial inclusion is not mere State Benefit Transfers. Loans must
be extended and savings and borrowings habits need to be inculcated among the poor. Poor
do not require cheap credit but prompt credit. It is an anomaly that while they are pressed to
pay exorbitant rates of interest to the money lender, the mainstream financial institutions are
still shy of lending to them. In the ultimate analysis, financial inclusion is a driver of economic
growth and poverty alleviation.
15. Inclusive financial sector development makes two complementary contributions to
poverty alleviation: financial sector development is a driver of economic growth which
indirectly reduces poverty and inequality; and appropriate, affordable, financial services for
poor people. Critical to our efforts at securing sustained economic growth are the expansion
of last mile access to finance. Thus financial inclusion is no longer a policy choice but is a
policy compulsion. In a bank based model, customers have a direct contractual relationship
with a bank or similar prudentially regulated and supervised financial institution - a basic
bank account, a savings account, a savings cum overdraft account, a transaction account, a
loan, or some combination - even though the customer may deal exclusively with the staff of
one or more retail agents hired to conduct transactions on the bank's behalf. In the non-bank
based model the contractual relationship is with a non-bank service provider such as a
mobile network operator or an issuer of stored-value payment instruments. Customers
exchange cash at a retail agent in return for an electronic record of value. This virtual
account is stored on the service provider's server. Nevertheless, although there is no
contractual relationship directly between a bank and a customer, a bank is always involved,
for example as a potentially safe and liquid place for the nonbank provider to hold the float
.Our model in India as of now is a bank led model and in this way we are able to address
consumer protection issues which are of paramount concern given the nature of the
vulnerable clientele we are dealing with. Here, financial capability building through financial
literacy and education also assume great importance. We have mandated the setting up of
Financial Literacy and Credit Counselling Centres which are expected to go a long way in
ameliorating the lot of the customer although it should be understood that first we have to
provide financial access.
16. Finally, let me stress that currently we are marketing the paradigm of financial inclusion
through the bank-led model. It is thus for the banks to rise up to the challenge and meet it in
full measure. What we mean by no access to finance for the excluded is that no access from
the formal financial system; so a word of necessary caution for banks; the paradigm of
financial inclusion is ultimately one of the continued relevance for the banking sector as other
actors are waiting anxiously in the wings waiting for a go ahead.
17. India has good IT talent as also financial sector talent and hence this experiment to
bring ICT based financial inclusion is not only relevant to India but to the entire globe as
success of this experiment can be replicated elsewhere. Entire world is looking at these
developments with keen interest. We need to meet these expectations.
18. We have a broad based government-Central Bank commitment to financial inclusion to
help alleviate poverty. Our aim is to help create an enabling policy and regulatory
environment for innovative financial inclusion. The present enabling environment will critically
determine the speed at which the financial services access gap will close for the people
currently excluded.
19. Thank you. I wish the 23rd Skoch Summit all the best and hope the deliberations here
throw new light on various aspects of financial deepening.