Anand Sinha: Financial inclusion and urban cooperative banks
Edited transcript of the comments by Mr Anand Sinha, Deputy Governor of the Reserve Bank
of India, at the launch of the Financial Inclusion program of Cosmos Bank, Pune, 6 January
2012.
* * *
Inputs provided by Nandakumar, S. Sankar and Bipin Nair are gratefully acknowledged.
Shri Shashikant Bugde, Chairman, Shri Krishnakumar Goyal, Vice-Chairman, Dr. Mukund
Abhyankar and other Directors of the Cosmos Bank, Shri Sudhir Thakre, Secretary, Rural
Development, Govt. of Maharashtra, all the aspiring women entrepreneurs present here this
evening and ladies and gentlemen. I am delighted to be here this evening amongst all of you
on the occasion of the launch of the Cosmos Bank's Financial Inclusion Programme. I would
like to thank the Cosmos Bank for inviting and giving me an opportunity to be a part of this
initiative which seeks to address one of the most pressing issues of our times.
Cosmos Bank is one of the oldest banks in the country and has recently completed
106 years of service. While nurturing the traditional values it has inherited, of serving the
small customer, the bank has also moved with times and has prepared itself for the future, by
adopting new technologies and advanced banking tools to add value to its services.
Today's initiative by the bank in launching this ambitious program of financial inclusion is
very commendable. Huge participation by women entrepreneurs in today's program, bodes
well for the financial inclusion initiatives being undertaken by the bank. Like charity, virtues
like thrift and discipline begin at home and what could be a better way than involving women
in this ambitious program aimed at inculcating thrift and including, into the financial fold, the
hitherto excluded. I am happy to note that the bank is not only helping the women by opening
accounts and granting loans but has also undertaken the task of imparting training, educating
them in preparing their own accounts, helping them sell their produce, etc. I am sure this
initiative by the Cosmos Bank would be a great success and would turn a new leaf in the
financial inclusion program.
Today's conference offers me a wide canvas to speak on. Both Urban Cooperative Banks
and the Financial Inclusion are two interesting topics in themselves. Combination of the two
is, by extension, a more interesting topic. In my speech today, I would touch upon the issues
related to financial inclusion program and the role of cooperatives in taking forward the
objectives of financial inclusion.
Cooperative banking
The cooperative movement involves autonomous association of persons united voluntarily to
meet their common economic, social and cultural needs through a jointly owned and
democratically controlled enterprise. Cooperatives, as business enterprises, are different
from other firms, in view of the fact that their ownership and control are directly vested in the
hands of the members. The cooperative structure is designed on the cooperative principles
of mutual help, democratic decision making and open membership. As remarked by Mr. Ban
Ki-moon, the UN Secretary General, Cooperatives are a reminder to the international
community that it is possible to pursue both economic viability and social responsibility.
Incidentally, the current year 2012 is declared by the UN as the International Year of
Cooperatives. Voluntary and open membership, democratic control, economic participation,
autonomy, training and concern for the community are some of the overarching values with
which the cooperatives have been associated with.
The Cooperative movement has a long history in India. Cooperative societies were set up in
India towards the close of the nineteenth century drawing inspiration from the success of
experiments related to the cooperative movement in Britain and the cooperative credit
movement in Germany. Since inception, the UCBs have been playing an important role in the
socio-economic development of the country by making available institutional credit at
affordable cost, particularly, in the urban and semi-urban areas. The extension of the
Banking Regulation Act, 1949 to cooperative societies, with effect from 1st March, 1966,
brought the cooperative banks within the ambit of the Reserve Bank's regulation and
supervision. Correspondingly, deposit insurance cover was also extended by DICGC to the
co-operative banks. While there has been a gradual growth in the UCB business over the
period, with deposits growing from Rs 167 crore to Rs 2, 12, 031 crore and advances
growing from Rs. 153 crore to Rs. 1, 36,341 crore during the period 1966 to 2011, the growth
of UCBs in the total banking business has not been commensurate with the overall growth of
the banking sector. Despite their large number, UCBs constitute a very small market share
with 3.5 per cent (as of March 31 2010) of the total banking sector.
Having briefly touched upon UCBs let me now draw your attention to the other important
topic of the day, Financial Inclusion.
Financial inclusion
Financial Inclusion is 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 and in a fair and
transparent manner by regulated mainstream institutional players.
Financial inclusion for an inclusive growth
Traditionally, we have observed that the poor are not welcomed to the banking fold with a
misconception that they are not bankable and that there is no business opportunity in offering
services to the under-privileged and poor people in the semi-urban rural areas and to
slumdwellers in the metropolitan cities. Banks and financial institutions had been, till recent times,
financially excluding these people on the pretext that;
 They have no or few assets,
They have nothing to offer as collateral,

 They have no business experience,
 They cannot be trained for availing financial services,
 They have no credit history, and
 They cannot understand the nuances of banking due to illiteracy or lower education.
The misconceptions are slowly giving way to the belief that inclusive growth is necessary for
the overall growth and development and that the excluded need to be brought into the fold of
financial system. Given the belief that credit is a basic human right, as advocated by the
Nobel Laureate, Professor Muhammad Yunus, and that the poor can overcome poverty by
generating their own employment and income, we have to develop, on an urgent basis, a
financial system which takes care of the needs of the poor. Access to affordable financial
services - especially credit and insurance - enlarges livelihood opportunities and empowers
the poor to take charge of their lives. Such empowerment aids social growth of the economy
on a sustainable basis. Apart from these benefits, Financial Inclusion imparts formal identity,
provides access to the payments system and to safety nets such as deposit insurance.
Financial Inclusion is critical for achieving inclusive growth in the country. To achieve that, we
have to expand our scope of financial inclusion initiatives to reach out to people at the
grassroot level. We have adopted a two pronged strategy to achieve this objective:
(a) Through voluntary effort by the banking community by evolving various strategies to
bring unbanked people within the ambit of the banking sector, and, more
importantly;
(b) By creating a demand by the people themselves to pull the banks, financial
institutions and other service providers towards them to offer banking and financial
services at a competitive and affordable rate.
The Financial Inclusion initiatives will go a long way in not only financially including and
empowering the people but also as an avenue of providing excellent business opportunities
for the financial market participants. Contrary to common perception, financial inclusion is a
potentially viable business proposition because of the huge untapped market that it seeks to
bring into the fold of banking services. Financial inclusion, prima facie, needs to be viewed as
"money at the bottom of the pyramid" and business models should be so designed to be at
least self-supporting in the initial phase and profit-making in the long run. It is important to
keep in mind that service provided should be at an affordable cost.
Self help groups:
The SHG-bank linkage model draws inspiration from the co-operative movement and
involves an intensive effort to move away from traditional reliance on concessionary
refinance from financial institutions and envisages making the rural poor self-supporting and
self-sustaining. This delivery mechanism is indeed a blend of the proximity, responsiveness
& flexibility of an informal system and the financial & infrastructural back-up of a formal
system. Self Help Groups are playing a very important role in the process of financial
inclusion. SHGs are groups of people who get together and pool money from their savings
and lend money among themselves. The SHG is given loans against the group members'
guarantee. Peer pressure within the group helps in improving recoveries.
The SHG-Bank linkage program, in India, which commenced in 1992, has grown
phenomenally. The program which started with a target of 500 SHGs in 1992 now has
74.62 lakh SHG covering over 97 million rural households. Of the total 74.62 lakh SHGs,
over 47.8 lakh SHGs have access to direct credit facilities from banks with an outstanding
loan amount of Rs. 31,221 crore as at end of March 2011. One of the most distinguishing
features of the program is that a majority (81.7 per cent) of the SHGs are exclusive woman
groups. Women SHGs have accounted for 75.5 per cent of the total savings and 83.7 per
cent of the total loan outstanding of SHGs in 2010-11.
SHGs have also proven to be profitable propositions for rural and semi-urban bank branches
with over 95% of recovery and aggregated transactions (one SHG means 10 to 20 individual
members). Unlike the majority of agriculture and rural clients, SHGs operate their saving
accounts on a regular basis, and they maintain credit balances in their accounts. It is a
unique model with many challenges and many more opportunities. Above all, the SHG has
given the poor women an identity, access to information, and bargaining power.
Poor women have always had to bear the double burden of being poor and women. The
SHG model opens up new possibilities for the member-borrowers especially women.
Interaction among members affords an insight into the inter & intra-household dynamics with
women gaining a greater say in household decision-making. Economic upliftment through
this linkage gives a sense of purpose, direction and new meaning to lives of
memberborrowers.
It is a well known fact that every individual, howsoever poor he/she may be, has the potential
to save. SHGs have become effective instruments in realizing that potential. It should be
noted that the SHG model generally requires compulsory savings from members. SHGs
have inculcated the saving habit among the poor and it is observed that the SHG saving
amounts and their corpuses are growing at very high rate year after year.
To achieve better results, banks purveying micro credit would have to strive to graduate from
enterprise formation orientation to enterprise transformation orientation in terms of providing
technical assistance and training to help the existing micro-enterprises make a quantitative
and qualitative leap in terms of scale of production and marketing.
An extremely important benefit of this model is the empowerment effect. Broad indicators of
poverty such as vulnerability, physical & social isolation, powerlessness, insecurity and lack
of self-respect have always been major roadblocks in the development of the poor. Interface
with member-borrowers has revealed that the impact of SHG interactions on the borrowers'
sense of self has been remarkable and this transformation is bound to result in many other
significant socio-economic changes. In fact, the courage with which some of the women
today spoke on the stage, is a manifestation of the empowerment brought about by SHG.
Now let me come to the crucial part of my talk today - Role of banks, particularly UCBs, in
furthering financial inclusion, the facilitating role played by the Reserve Bank and the road
ahead.
It is well recognized that there are many supply side and demand side factors impeding the
inclusive growth, such lack of awareness about the financial products, unaffordable products,
high transaction costs, and products which are not convenient or inflexible. Addressing
demand side factors are as much important as addressing the supply side factors. Opening
of more bank branches, offering of customized products etc address the supply side factors
while the financial literacy initiatives address the demand side factors by sensitizing the
people of the need for and benefits of joining the formal financial system.
UCBs, by their structure and nature of clientele, are well designed to cater to financial
inclusion. The very basis of co-operative structure is mutual help and thrift. Considering the
specific features of UCBs such as their organizational structure (member driven), clientele,
easy access and reputation as a friendly neighbourhood bank, these highly localised
institutions have the potential for widening and deepening financial inclusion in their area of
operation.
Measures undertaken to promote financial inclusion
It has been RBI's endeavour to remove all hurdles in the way of its regulated entities in
achieving financial inclusion objectives. Some of the salient measures undertaken in this
regard are:
Introduction of new products
(i) Opening of "No-Frills" accounts: A "No Frills" account is one for which no
minimum balance is insisted upon and for which there are no service charges for not
maintaining the minimum balance, introduced as per RBI directive in 2005. Banks
have been advised to provide small Over Drafts in these "no frill" accounts.
(ii) General Credit Cards (GCC)/Kisan Credit Cards (KCC): GCCs/KCCs help purvey
credit where the credit facility is in the nature of a revolving credit entitling the holder
to withdraw up to the limit sanctioned., Limits are sanctioned without insistence on
security or purpose, based on the assessment of household cash flows. Interest rate
on the facility is completely deregulated.
Relaxed regulatory requirements
i. Relaxed regulatory dispensation on Know Your Customer (KYC) norms: KYC
requirements for small accounts were relaxed in August 2005, by stipulating that
introduction by an account holder, who has been subjected to full KYC drill, would
suffice for opening such accounts, or, that the bank can take any evidence to its
satisfaction as to the identity and address of the customer. During the year, it has
been further relaxed to include job card issued by NREGA duly signed by an officer
of the State Government or the letters issued by the Unique Identification Authority
of India containing details of name, address and AADHAAR number as a valid
identity proof.
ii. Simplified branch authorisation: To increase the reach of banking network,
domestic scheduled commercial banks have earlier been permitted to freely open
branches in Tier 2 to Tier 6 centres (with population of less than 1,00,000) under
general permission, subject to reporting. Recently, incentives have been provided
for opening branches in Tier 2 centres also. Further, domestic scheduled
commercial banks have been permitted to open branches in rural, semi urban and
urban centres in the North Eastern States and Sikkim, without the need to take
permission from Reserve Bank in each case, subject to reporting.
iii. Business Correspondent/ Business Facilitator: In January 2006, the Reserve
Bank permitted banks to engage Business Facilitator and Business Correspondent
(BC) as intermediaries for providing financial and banking services. The BC model
allows banks to provide door step delivery of services especially "cash in - cash out"
transactions at a location much closer to the rural population, thus addressing the
last mile problem. The list of eligible individuals/entities who can be engaged as BCs
is being enlarged from time to time. For-profit companies have also been allowed to
be engaged as BCs. As on Sep 2011, banks have reported deploying 75316
BCs which covered 97979 villages.
iv. Opening of branches in unbanked rural centres: A need was felt for opening of
more brick and mortar branches, besides the use of BCs, to further improve banking
penetration and, more importantly, financial inclusion. Accordingly, banks 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
centres.
v. Special Dispensation scheme for opening of branches in NER- To improve
banking penetration in hitherto unbanked North-East region, the Reserve Bank
asked the State Governments and banks to identify centres where there is a need
for setting up either full-fledged branches or those offering forex facilities, handling
government business or for meeting currency requirements. It has also offered to
fund the capital and running costs for five years provided the State Government
concerned is willing to make available the premises and put in place appropriate
security arrangements.
vi. Financial Inclusion Plan for Banks: In our effort to achieve a sustained, planned
and structured financial inclusion, all public and private sector banks were advised
to put in place a Board approved three year Financial Inclusion Plan (FIP). These
plans broadly include self determined targets in respect of rural brick and mortar
branches to be opened; business correspondents (BC) to be employed; coverage of
unbanked villages with population above 2000 as also other unbanked villages with
population below 2000 through branches/BCs/other modes; no-frill accounts opened
including through BC-ICT; Kisan Credit Cards (KCC) and General Credit Cards
(GCC); 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 is
being closely monitored by the Reserve Bank.
vii. Measures specific to UCBs: UCBs have been advised to step up their financial
inclusion efforts by utilizing appropriate technology. Certain other measures such as
enhancing maximum limits on unsecured loans and advances, revising credit limits
permitted for individual housing loans, extension of area of operations for UCBs,
permitting lending to SHGs and JLGs and permitting the use of BCs have been
undertaken to further the financial inclusion drive.
Untapped potential for the UCBs - financial inclusion
The client profile of UCBs today predominantly consists of priority sector segments viz. small
business establishments, SSI, retail traders, self-employed etc., who would not, normally,
find it easy to access commercial banks. The priority sector loans of the sector are today at
46 % as against the prescribed target of 40 %. Nearly 90 % of the loan accounts of the
sector are less than Rs five lakh in value. To this extent, UCBs are already into financial
inclusion. However, there remains a huge hidden potential waiting to be tapped. Given the
large number of small urban co-operative banks, and with 271 districts not having any
presence of UCBs, there exists a huge potential for UCBs to increase their spread and
business and also participate in the national mission of financial inclusion. Given their
respective sizes, it may well appear to be a David vs. Goliath contest as UCBs need to
compete with larger commercial banks in vying for the unbanked pie. However, there exists a
distinct first mover advantage which the UCBs have, in addition to their vast customer base.
UCBs need to capitalise on this advantage, else their potential customers will be covered by
the commercial and regional rural banks and UCBs will lose a good business opportunity.
Initially, it may appear that taking banking services to the sections constituting the "bottom of
the pyramid" may not be possible or viable, but as various studies reveal, even the relatively
low margins on high volumes can be a profitable proposition.
In semi-urban and rural areas, there are a number of unbanked and under banked districts
inhabited by people like artisans, migrant labour, small businessmen, retailers etc., who find
it difficult to join the formal financial sector and make use of various opportunities. It is highly
desirable on social as well as economic grounds that members of this class are brought into
the banking fold and the UCBs can certainly take a lead in this. UCBs should design their
business model to be self-supporting initially, and profitable in the long run. They should
integrate their financial inclusion plan into their annual business plans. UCBs should give
wide publicity to their services to connect with large population segments. It is also important
to keep in mind that the service provided should be at an affordable cost and in this regard,
technology will play a big part. With the wide reach of mobiles, mobile banking as an avenue
for furthering financial inclusion has to be explored. Adoption of appropriate and effective
technology, therefore, could be the key for financial inclusion efforts to succeed.
Conclusion
The current policy of inclusive growth with financial stability cannot be achieved without
ensuring universal financial inclusion. Though the efforts for universalisation of financial
inclusion are already underway, there are a number of challenges in this endeavour going
forward with about 480000 villages yet to be provided with banking services. The financial
inclusion for the underprivileged will lead to host of downstream opportunities such as jobs
for the participants to work as BCs at remote villages, technology providers etc., not to speak
of the huge economic growth the financial inclusion measures trigger. Banks need to
perceive Financial Inclusion as a profitable business model and not as an obligation. This
would be possible only if banks strive towards offering more and more credit products to
customers captured as part of the Financial Inclusion Plan and lower transaction cost by
leveraging technology. The key is to establish an appropriate business delivery model
through the involvement of all stakeholders to make Financial Inclusion a reality.
With regard to financial education, it is crucial to harness the power of women. Just as it is
said that a woman getting educated would educate the family, a woman being financially
literate and included, would pave way for inclusion of all members in the family. Given that
levels of general and financial literacy are fairly low among women, the effort should be to
devise innovative programmes of financial literacy targeted towards women. In this context, it
would be useful to study successful experiments from NGOs such as Self-Employed
Women's Association (SEWA) which has started a financial counselling training service for
poor self-employed women, including training for trainers, and identify how these one-off
successes can be replicated on a larger scale in a cost effective way.
Financial inclusion will act as a source of empowerment and allow people to participate more
effectively in the economic and social process. Banking on the poor could turn out to be a
rich banking proposition. Financial inclusion is a win-win opportunity for the poor, for the
banks and for the nation. Urban Co-operative Banks have a duty to rise up to meet these
aspirations, convert the perceived weakness into exciting opportunities and facilitate
inclusive growth. I wish the Cosmos Bank the very best in their Financial Inclusion initiatives.
Thank you.
References:
1. Chakrabarty, K.C.(2011), "Financial Inclusion - A road India needs to travel", Article
published in www.livemint.com on Oct 22, 2011
2. Rangarajan, C. (2008), Report of the Committee on Financial Inclusion
3. Status of Microfinance in India: 2010-11, NABARD