S S Mundra: Financial inclusion in India - the journey so far and the way
ahead
Address by Mr S S Mundra, Deputy Governor of the Reserve Bank of India, at the BRICS
Workshop on Financial Inclusion, Mumbai, 19 September 2016.
* * *
Shri Santhosh Kumar Gangwarji, Honorable Minister of State for Finance, Government of
India; Shri Ashwani Kumar, Chairman, IBA & CMD, Dena Bank; Shri Rajiv Rishi, Deputy
Chairman, IBA & CMD, Central Bank of India; Dr. Madnesh Kumar Mishra, JS(DFS) & Mission
Director-Financial Inclusion, GOI; delegates to the Workshop; ladies and gentleman! At the
outset, I would like to compliment Department of Financial services, GOI and IBA for organizing
this workshop on Financial Inclusion under the BRICS Forum. It is indeed a pleasure for me to
speak to you from this Forum today.
2. Financial Inclusion is a much cherished policy objective for us in India and our economic
policy has always been driven by an underlying intent of a sustainable and inclusive growth.
Although I would not dwell at length about the virtues of financial inclusion before this learned
audience, I would still like to draw reference to a profound ILO Declaration of Philadelphia
(1944) which states that "Poverty anywhere is a threat to prosperity everywhere." The policy
makers in India too i.e. Government of India and the RBI, had an early realisation about the
implications of poverty for financial stability and have endeavored to ensure that poverty is
tackled in all its manifestations and that the benefits of economic growth reaches the poor and
excluded sections of the society.
3. I wish to use this Forum to brief you on our journey towards the goal of universal financial
inclusion in India, the challenges encountered and the way forward. But before, I get into the
subject proper; let me for the benefit of our international participants, state our definition of
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 in a fair and
transparent manner by mainstream institutional players".
Role of RBI in financial inclusion
4. As I said earlier, RBI has been pursuing the goal of financial inclusion for a long time. RBI's
financial inclusion efforts can be traced back to the 1960s when the focus was on channelizing
of credit to the neglected sectors of the economy and weaker sections of the population. While
the Government of India nationalized the banking operations of few commercial banks in two
tranches in 1969 and 1980; RBI also took initiatives like laying down priority sector lending
requirements for banks, Lead Bank Scheme, establishment of Regional Rural Banks
(RRBs1975-76), Service Area Approach (1989), Self-Help Group-Bank Linkage Programme (1989-
90), setting up of Local Area Banks etc., all aimed at making available benefits of banking
services to the masses.
5. Although these measures resulted in impressive gains in enhancing the outreach of banking
services and extent of credit to the population, there were certain structural challenges which
impeded the progress of financial inclusion. On the supply side, absence of technology was a
major impediment as it restricted expansion of banking services to far-flung areas of the
country comprising of 600 thousand plus villages. In the absence of technology, developing a
cost-effective delivery model also remained a challenge.
6. Since 2006, RBI has adopted a planned and structured approach to address the issues of
financial inclusion. RBI's approach has been to focus both on the demand as well as on the
supply side. This has in a large way been possible due to the availability of technology and its
gradual adoption within the banking processes. Let me elaborate on some of these measures
and consequent achievements.
7. Institutionalization of the framework of Banking Correspondents (BCs) has been a major
step towards enhancing access of banking services. RBI advocated a combination of "Brick
and Mortar" structure with "Mouse and Click" technology for extending financial inclusion in
geographically dispersed areas.
8. On the regulatory side, the banks were mandated to open at least 25 per cent of their new
branches in unbanked rural centers. Taking into account the difficulties encountered by
common people in meeting the "Know Your Customer (KYC)" requirements for opening bank
accounts, several measures were taken. For example, RBI allowed banks to accept
selfcertification for opening of basic service bank accounts. RBI has encouraged banks to open
Aadhaar1 Enabled Bank Accounts by linking Aadhaar numbers of individuals, wherever
available, with the Basic Savings Bank Accounts opened for them, so that their credit histories
can also be built up over time.
9. Co-terminus with the above efforts, RBI also encouraged banks to adopt a structured and
planned approach to financial inclusion with commitment at the highest levels through
preparation of Board-approved Financial Inclusion Plans (FIPs). The first two phases of
FIPs implemented over 2010-13 and 2013-16 were interspersed with the implementation of
PMJDY by the Government of India during 2014-15, whereby the supply side efforts received
an extra push.
Snapshot of progress
10. Let me quote some numbers.
i) The number of banking outlets in villages went up from 67,694 in March 2010 to
5,86,307 in March 2016 after RBI permitted appointment of BCs and laid out a
roadmap for spreading banking services in rural India through a mix of bank branches
and BC outlets. In addition, the number of urban locations covered through BCs has
also surged from 447 in March 2010 to 1,02,552 in March 2016.
ii) The Basic Savings Bank Deposit Accounts (BSBDAs) have gone up from 73 million
in March 2010 to 469 million as on March 31, 2016. Under the PMJDY alone, until
June 1, 2016t, 220 mn accounts have been opened with an approximate balance of
Rs. 384 bn.
iii) There were 47.31 million small farm sector credit accounts and 11.3 million small
nonfarm sector credit accounts with an outstanding of Rs. 5130.7 billion and Rs. 1493.3
billion outstanding respectively as on March 31, 2016. The number of small farm and
non-farm sector credit accounts stood at 24.3 million and 1.4 mn respectively in March
2010.
iv) The total number of transactions in BC-ICT accounts which were around 26 million
during 2010-11 have increased to 826.81 million as on March 31, 2016.
11. For most other countries these numbers may appear overwhelming, however, we still have
a long way to go here in India and we are extremely mindful of that. There are plenty of
challenges - low volume of transactions in the basic bank accounts, inactive BC outlets,
inaccessibility, poor connectivity etc. Last year, RBI had set up an Expert Committee on
Medium Term Path for Financial Inclusion under ED (Deepak Mohanty) which was tasked to
draw up a medium term and long term roadmap for FI. The committee has made about
80 actionable recommendations which are being pursued by RBI.
12. Following a paradigm shift in the Financial Inclusion landscape, a need was felt for
convergence of the FI efforts of various stakeholders. Accordingly, RBI has reconstituted the
high-level inter-institutional Financial Inclusion Advisory Committee (FIAC) for undertaking a
continuous review of the policies on FI; monitoring of the progress in Financial Inclusion and
the financial literacy; evaluation of its impact through conduct of study/surveys and for
preparation of a National Strategy for Financial Inclusion.
Other recent measures
New banking entities permitted in the financial inclusion space
13. RBI has granted in-principle approval to some entities to set up differentiated banks namely
"Small Finance Banks" (SFBs) and "Payments Banks" to further the cause of financial inclusion
in the country. Other than serving as vehicles for savings, SFBs and Payments banks are
expected to enhance the supply of credit to small business units, small and marginal farmers,
micro and small industries and other entities in the unorganized sector and enable provisions
for cost-efficient remittance services in a secured technology driven environment respectively.
Role of payment system in promoting financial inclusion
14. Considering the strong linkage between financial inclusion and the payment systems, RBI
has taken several steps. Some of these include encouraging use of Mobile Banking, pre-paid
instruments in the form of digital wallets and mobile wallets, operationalization of the Aadhaar
Bridge Payment System (ABPS) and Aadhaar-Enabled Payment system (AEPS) etc.
Increasing brick and mortar presence
15. While there is considerable improvement in access of banking services through a mix of
physical and virtual mode, it is believed that there should be a fair balance between the number
of BCs and brick and mortar branches for better alignment of the inclusion efforts. Accordingly,
it is mandated to open physical bank branches in all villages above a population of 5000 in a
phased manner. We feel this would also enable banks to not only provide quality financial
services but also timely support to their BC network.
Creation of BC registry and certification
16. The BC Model is a critical lynchpin of our Financial Inclusion initiative. We believe that to
support the BC structure, a vital first step is developing a BC Registry. This would not only
ensure greater oversight on the functioning of BCs but would also provide more confidence to
the end customers. A scheme for graded certification/ training programme for BCs is also being
introduced to enable the BCs with a good track record and advanced training to handle
complex tasks that are beyond deposits and remittances.
Financial inclusion Plans for banks (2016-19)
17. To sustain the momentum of achieving the financial inclusion objectives by setting FIP
targets for banks, the third phase of Financial Inclusion Plans for the next three years
2016-19 has been initiated. Under the third phase, the focus is on more granular monitoring
of the progress made by banks under FIPs at district level.
Demand side interventions
18. Having spoken about the progress and some recent measures taken by RBI on supply
side, let me talk about an equally important, but less focussed, demand side aspects of
Financial Inclusion. As I mentioned earlier, banks have opened about 440 million accounts
under the push from RBI and the PMJDY and hence, it is right time to focus on the demand
side which is to focus on enhancing capabilities so that the individual is in a position to not
merely avail the offered services, but is also capable of demanding preferred products and
services suitable to her need/choice. Our belief is that unless the demand side measures
adequately supplement the supply side measures, the goal of financial inclusion would remain
the proverbial "wild goose chase".
Financial Literacy Centres (FLCs) / rural self employment training institutes
19. Banks in India have been mandated to set up FLCs for extending financial literacy.
Currently, about 1380 FLCs across India are functional which adopt a tailored approach to
conduct of camps. Special focus is given on people newly inducted into the banking system.
Besides this, tailored camps are conducted for five different target groups i.e. farmers, small
entrepreneurs, SHGs, School students and senior citizens. Going forward, given the
challenges of skewed distribution of existing FLCs in a few states, limited outreach and to have
an exclusive focus on financial literacy at the ground level, we are encouraging banks to set
up CFLs (Centres for Financial Literacy) at the block level on a pilot basis in a few states.
20. The Rural Self Employment Training Institutes (RSETIs) have been set up by various banks
all over the country at the district level. The key objective of RSETI is "Short term training and
long term hand holding with assistance to credit linkage for trainees".
Direct benefit transfer and Aadhaar seeding of accounts
21. An important driver for enhancing the demand side of financial inclusion is Direct Benefit
Transfer (DBT). It has the potential to be game changer. If entitlements under various state
sponsored schemes starts directly flowing into the bank accounts of individuals under DBT
mode, it can act as a catalyst to encourage saving habit leading to build up of investment and
seed capital for availing productive credit.
Let me now come to the way forward.
Way forward
22. I feel in order to motivate and nudge consumers to begin seeking formal financial services,
there is need to focus on what I have named 3 Ps- Products, Processes and People. Let me
elaborate.
a) Suitable Products. The traditional approach of "take it or leave it" is not going to work
for the people who are new to the financial system. Many of them do not have a
continuous income stream. Their incomes are generally seasonal and hence erratic.
Also, many have only a meagre amount to save and their needs are widely different
from those of regular consumers. All these necessitate a customer centric product
design taking into consideration the lifecycle needs of customers at every stage.
Simultaneously, it is also important to prevent mis-selling of financial products to
the newly inducted customers without due consideration around suitability. I have also
noticed overzealousness in few quarters to provide credit to the new entrants to the
fold of the financial sector. It is important to ensure that this overzealousness does
not result in over-indebtedness. We must be mindful of the fact that these individuals
have entered the formal financial system after a lot of pushing and prodding and it
would be difficult to bring them back into the formal financial sector, if they leave
feeling cheated/dejected.
b) Transparent Processes. Another area of concern is transparency in the processes.
By transparency, I mean an objective communication about the products, procedures,
documentation and other necessary formalities to be completed while making a
financial transaction. Transparent processes result in greater trust and confidence in
the financial system.
c) Committed People. Both the suitable products, and the transparent processes need
to be complemented by committed people who are willing to listen keenly, empathize
with the consumers and willing to walk that little extra to welcome the customers into
the formal financial system.
The 3x3x3matrix
23. I believe once the above 3 Ps are in place, a focus on 3x3x3 matrix would be important
for enhancing financial capability of individuals and for achieving financial inclusion. The 3x3x3
matrix refers to three sections of the society which need a greater focus, pitching of products
based on three kinds of surpluses that people generate and the three types of institutions that
have a central role to play.
The three section approach - improving credit absorption capacity
24. Firstly, in India, when we talk of inclusive growth, there are three sections that would
warrant special focus. i) the small and marginal farmers, share croppers, ii) micro and small
industries and iii) the low salary earners in the unorganized sectors. Collectively, this section
makes a significant part of the population that needs enhancement in their financial
capabilities. Also, these sections are extremely important contributors to the country's GDP
and labour force.
25. The credit absorption capacity of the farmers can be enhanced through consolidation of
fragmented landholdings by ushering in land reforms or through pooling of land holdings in an
SHG format. Efforts to enhance the credit absorption capacity must also be supplemented
through financial literacy and vocational training initiatives, comprehensive insurance cover
against failure of crop & innovative practices in farming. Farmers also need to be sensitized
about the concept of financing against warehouse receipts to avoid distress sale of produce at
low prices.
26. Enhancing financial capability of mainly the micro and small entrepreneurs from amongst
the larger MSME fold would help these entrepreneurs to move away from the informal to the
formal sources of finance. Micro and small entities are typically enterprises with little or no
credit histories and with inadequate expertise in preparing financial statements etc. They
would, hence, need to be served with relevant products and at low cost by employing
innovative credit scoring models.
27. There is also a pressing need to scale up the skills of the low salary earners in the
unorganized sector through training inputs. Integrating the skill development initiatives with
secondary and intermediate level education would address the challenge of low education
levels and also provide school dropouts with employability skills. Dearth of formal vocational
education, high school dropout rates, inadequate skill training capacity, negative perception
towards skilling, lack of industry ready skills even in professional courses, continue to stand
out as some of the major causes of poor skill levels in the workforce. It is heartening to note
Government's commitment in encouraging entrepreneurship in the country through the new
national skill development mission.
The three surpluses approach - suitability in products and services
Let us now look at what I call as 3 surpluses.
28. The first group is the one that generates adequate surpluses. These people should be
sensitized about different avenues to invest so as to reach their financial goals with ease.
These may include investing in the capital market through shares, mutual funds, gold bonds
etc. The second category of people generate meagre surpluses. They are the people who will
be most suited for products like recurring deposits, SIPs etc. The third category comprises of
people who have recently come into the financial system, who live on subsistence income and
do not generate any meaningful surpluses. Our role as far as this group is to encourage them
to use the basic bouquet of financial products like BSBDA for daily transactions as well as
introduce them to electronic remittance channels. Similarly, customised basic term insurance
and pension products currently being made available to this target Group under the
Government of India initiatives can also go a long way in providing them some financial security
in the longer term.
The three Institutions approach - endless opportunities
29. The first category of institutions is whom I would call "Existing & Included". It refers to the
banks which have traditionally been leaders in bringing people in the formal financial system.
These "included" institutions must look to deliver on the promise of ensuring the 3 Ps. Under
the second category are institutions whom I refer to as "Existing, but not included" in the FI
Grand Plan in a structured way. They are financial Intermediaries like NBFCs and MFIs that
have a good last mile reach and should be leveraged upon. The third type is of the new
institutions that will start operations soon. Three SFBs have already started their operations.
Seven other entities hold in-principle approvals. We believe that they will be able to bring in
technology backed innovative last mile practices to serve their customers. The bottom-line is
that a coherent approach must be worked out so that the relative strengths of the three types
of institutions can be leveraged upon.
Conclusion
30. The vision for Financial Inclusion as envisaged by the Committee on Medium Term Path
to Financial Inclusion is that by 2021, empowered by formal finance, over 90 per cent of the
hitherto underserved sections of society would become active stakeholders in economic
progress. This is very much possible but it would require focussed efforts both on the supply
side as well as on the demand side. There is a strong business case in catering to the
underserved sections of the society, given the vast developments in the frontiers of digital
technology.
31. In conclusion, I would say that the cherished goal of universal Financial Inclusion can be
achieved only through synergistic efforts between the mainstream financial entities and fringe
players like rural co-operatives, NBFCs, MFIs, credit societies, NGOs ,etc. All of them have to
play a complementary role in championing the cause of financial inclusion. Time is ripe to
weave a financial inclusion tapestry where all these institutions can fit in a manner which brings
about their contribution in the most efficient manner. This is where the efforts of the
Government and RBI are currently focussed. I hope we can draw some useful lessons from
the experiences of other countries within the BRICS Forum and build upon them as we
continue our journey towards attainment of universal financial inclusion.
Thank you!