Deepali Pant Joshi: Consumer protection - agenda for inclusive growth
Address by Dr Deepali Pant Joshi, Executive Director of the Reserve Bank of India, at the
National Seminar on "Consumer protection - agenda for inclusive growth", New Delhi,
24 July 2013.
* * *
Thanks to Smt. Sonali Sengupta, General Manager for presenting the speech at ASSOCHAM, New Delhi.
Assistance rendered by Mr. Bipin Nair, Assistant General Manager, Smt. Mruga Paranjape, Manager is gratefully
acknowledged.
I congratulate Assocham on the timely initiative of hosting this event and bringing to the
centre stage of debate very critical issues as customer Empowerment and Financial
Inclusion.
The "post crisis" world is governed by a new paradigm of customer empowerment. The
financial crisis has highlighted the importance of financial consumer protection for the
longterm stability of the global financial system. Rapid increase in the use of financial services
brings into sharp salience the need for strengthened financial regulation and consumer
education to protect and empower consumers.
Consumer empowerment is a central goal. Education of consumers through information
disclosure or through consumer literacy is utilized as a means to even out asymmetries of
bargaining power between consumers and financial services providers. In the area of
consumer credit and financial literacy, investment empowerment relies on the consumers'
ability to understand complex financial products and their knowledge and experience of using
such products and services.
All financial products contain risks and also offer rewards. Financially literate consumers are
individuals who are equipped to assess risks and to make informed decisions about the
suitability of financial products to their situation.
There are differences between individual consumers. This granularity arises due to the
differences in incomes of consumers. The largest issue to be tackled is an asymmetry of
bargaining power between the financial services provider and the consumer of services. The
consumers are always the weaker parties in need of protection. Consumers need to be
enabled to navigate the financial markets to make choices beneficial to their needs. They
should be able to understand complex financial products and should be equipped with the
knowledge and skills to assess risks and make informed decisions about the suitability of
financial products to their situation.
A well-functioning consumer protection regime provides effective safeguards for retail
financial services consumers while empowering consumers to exercise their legal rights and
fulfil their legal obligations.
The Banking Ombudsman Scheme provides clear consumer protection rules with regard to
banking products and services. The necessary institutional arrangement for grievance
redress is in place. However, these rules need objective, timely and fair implementation. All
these three aspects are important.
BCSBI has also developed codes of conduct and these codes are widely publicized and
expected to be adhered to.
Dispute resolution mechanisms to be effectively utilized require financial literacy of
consumers and this is the process of consumer empowerment which alone can ensure
financial inclusion.
Financial inclusion and inclusive growth
Financial exclusion is a barrier to attaining a high growth rate it should be the unremitting
endeavour to draw the excluded into the pale of mainstream financial institutions A
developed financial system broadens access to funds and banking facilities conversely in an
underdeveloped financial system high cost informal sources as moneylenders proliferate.
Lower the availability of funds and higher their cost fewer are the economic activities that can
be financed and hence lower the resulting economic growth. Today we are painfully aware
that there are a vast number of unreached people excluded from formal financial services
Potential entrepreneurs small enterprises fail to grow and prosper due to capital constraints.
Financial deepening is thus a necessary for economic growth as Dr Manmohan Singh has
explained. The goal of the development process is to include every last member of our
society especially those at the margins. This not only broadens the support base for
development it also strengthens the ability to perform the core developmental goal.
Extent of financial exclusion in India
Let us be clear as to the enormity of the challenge half of the country is unbanked Thirty four
years after bank nationalisation and extensive bank branch building 6 lakh villages in India,
rural branches of SCBs including RRBs number 33,495.
Post nationalization, number of bank branches of scheduled commercial banks increased
Starting with 1990s the focus shifted to strengthening financial institutions as part of financial
sector reforms. Number of rural branches actually came down in the decade of the nineties
leading in the middle of the next decade to critical concerns on inclusion.
Financial Inclusion and inclusive growth
Inclusive growth allows people to "contribute to and benefit from economic growth".
Bank led model
Keeping in view the existing infrastructure of bank branches in India, we have adopted a
bank-led model for financial inclusion which leverages technology for optimisation of results.
The FI initiatives are ICT enabled and ride on new delivery models be customised by market
participants to best suit their requirements. The development of the habit of banking would
lead to an increase in savings and investment improve the efficiency of allocation of capital
and increase the ability of monetary authorities to stabilise the economy in times of crisis.
Our experience shows that the goal of financial inclusion is better served through
mainstream banking institutions as only they have the ability to offer the suite of products
required to bring in effective/meaningful financial inclusion. A well-functioning financial
system creates necessary conditions for more rapid economic growth so that there is a
positive correlation between economic growth and the financial system.
Minimum bouquet of products and services
To meet the criterion of availability of banking services, a minimum of four basic products
must be offered to customers:
•
A savings cum overdraft account
• A pure savings account, ideally a recurring or variable recurring deposit
•
A remittance product to facilitate EBT and other remittances, and
•
Entrepreneurial credit products like a General Purpose Credit Card( GCC) or a
Kisan Credit Card (KCC)
Since size of population and the distribution foot print of bank branches are not enough to
cater each and every person in the country; to increase number of bank branches through
FIP following initiatives were taken:
Relaxed regulatory requirements
i. Relaxed regulatory dispensation on KYC norms: Know Your Customer (KYC)
requirements for opening bank accounts have been relaxed and simplified,
especially for small accounts with balances not exceeding Rs. 50,000/- and
aggregate credits in the accounts not exceeding Rs. one lakh a year. In modification
to the earlier guidelines on KYC norms, RBI has now advised banks not to insist on
introduction for opening bank accounts of customers. In addition to this RBI has now
allowed banks to use Aadhaar Card as a proof of both identity and address and the
MNREGA Job Card as an officially valid document for opening of bank accounts.
ii. Mandatory requirement for opening branches in unbanked villages: To further
step up the opening of branches in rural areas so as to improve banking penetration
and financial inclusion rapidly, the need for opening of more brick and mortar
branches, besides the use of BCs, was felt. Accordingly, domestic SCBs have been
mandated in the Monetary Policy Statement - April 2011 to allocate at least 25 per
cent of the total number of branches to be opened during a year in unbanked rural
(Tier 5 and Tier 6) centres. There are few studies on the impact of bank branches
and development. In 2003 Burgess and Pande examined the branch expansion
policy of commercial banks implemented post nationalisation. From 1990 to 1997
the RBI branch authorisation policies specified that banks could establish a new
bank branch in a location with one or more bank branches only if they set up four
branches in a location with no new bank branches This regulatory prescription
ensured that banks opened rural branches in states where financial development
was lower to address the regional inequities in development. Their results to
evaluate the impact of a new rural branch on poverty suggested that a one percent
increase in the number of banks in rural locations reduced rural poverty by 0.36%
per cent and increased total output by 0.55% per cent Rural branch expansion also
increased non primary sector output and non-agricultural employment. These
favourable effects show the positive influence of bank branches on economic
development Banks to the 1990s disbursed a greater share of credit to the less
developed states this trend reversed after the 1990s.
iii. In the Annual Policy Statement for 2013-14, banks have been advised to consider
frontloading (prioritizing) the opening of branches in unbanked rural centres over a
three year cycle co-terminus with their FIPs. This is expected to facilitate faster
branch expansion in unbanked rural centres.
"Step into a bank step out of poverty is our central message"
iv. In January 2006, the
Business correspondent/ Business facilitator model.
Reserve Bank permitted banks to utilise the services of non-governmental
organizations (NGOs), micro-finance institutions (other than Non-Banking Financial
Companies) and other civil society organisations as intermediaries in providing
financial and banking services through the use of business facilitator and business
correspondent (BC) models. The BC model allows banks to do "cash in - cash out"
transactions at a location much closer to the rural population, thus addressing the
last mile problem. As on March 31 2013, banks have reported deploying
1,95,380 BCs which covered 2,21,341 villages.
v. Introducing technology. To ensure sustainability and scalability of business model,
technology was adopted. It leads to higher costs at initial stage however; it brings
better opportunities and optimization of result. The UID is also good instrument of
connecting to all the people once it gets effectively operational.
vi. The direct benefit transfer scheme and the Adhar number are going to be very
significant in the years to come the RBI has accepted Adhaar as a proof of identity
and as fulfilling KYC requirements 1st of January, 2013. Nearly 11 lakh beneficiaries
have received the benefit directly into their bank accounts.
Financial inclusion plans of banks for 3 years
RBI in January 2010 had advised all public and private sector banks to submit a Board
approved three-year Financial Inclusion Plan (FIP) starting April 2010. Banks were advised
to devise FIPs congruent with their business strategy and comparative advantage to make it
an integral part of their corporate plans. These plans broadly included self-set targets in
respect of rural brick and mortar branches opened, BCs employed, coverage of unbanked
villages with population above 2000 as also other unbanked villages with population below
2000 through branches/BCs/other modes, no-frills accounts opened including through
BC-ICT, Kisan Credit Cards (KCC) and General Credit Cards (GCC) issued, and other
specific products designed by them to cater to the financially excluded segments. Banks
were advised to integrate Board-approved FIPs with their business plans and to include the
criteria on financial inclusion as a parameter in the performance evaluation of their staff. The
implementation of these plans was closely monitored by the Reserve Bank on a monthly
basis through a quantitative reporting format. Qualitative aspect under FIP was monitored
through a qualitative report submitted by banks on quarterly basis.
A snapshot of the progress made by banks under the 3 year Financial Inclusion Plan
(April 10 - March 13) for key parameters during the three year period is given below:
Challenges in financial inclusion
•
Business Model: The business models are yet to emerge hence upscaling is not
taking place. Banks need to evolve Appropriate Business Model .Credit linkage is
vital Electronical Benefit Transfers are useful but to be users of financial products
the SCRIPT Savings Credit Remittance Insurance Pension and Transfers must be
available both sides of the equation Access and Usage must be equally strong.
• BC model was envisaged as cheaper model of doorstep delivery as opposed to
bank branches however the ease and comfort of transaction for the customer is
higher at bank branch level.
•
Limitations and Lack of infrastructure for scaling up; physical and technical
infrastructure roads and in several cases digital connectivity also hampers the
process
•
The biggest challenge remains the need for attitudinal change and of empathy
with the customer the need for a Buy In and of passionate belief and commitment to
the idea of financial inclusion.
New banks
New banks are expected bring sustainable business models, bring innovation in banking
products and services and improve penetration of banking activities. We need new banks to
bring new business models and not for derivative products and investment banking. At
mezzanine finance level, Banks also need sensitivity to default rates. They require an
estimation of extent of losses, loss given default our message is that Financial Inclusion
should be viewed nether from the prophet or the profit motive but as a pragmatic business
opportunity by the Banks. I would do well to sum up with Dr P Chidambarams enunciation
Dr Chidambaram stated The reforms since 1991 have changed the face of the Indian
economy India is slowly but surely being recognised. Economic reforms have led to a sharp
decline in people below the poverty line sustainability of the reform process demands that all
sections of society stand to gain from it only if the poorer sections of society also perceive a
visible change in quality of their life will the reform process continue in our vibrant
democracy. I thank you for a patient hearing and wish your deliberations all success.
Annex
1. Progress in modes of FI delivery
2. Progress in KCCs and GCCs
3. Progress in number of accounts
4. Progress in O/D facility availed