Deepali Pant Joshi: Strategy adopted for financial inclusion
Speech by Dr Deepali Pant Joshi, Executive Director of the Reserve Bank of India, at a
workshop, organised by the Government of Madhya Pradesh, New Delhi, 24 January 2014.
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One of the major challenges for next decade or more to banks in the country is to capture the
banking business of over 50% population of this country of over 1.2 billion people. Poor
people need to be provided with access to financial products at low transaction cost. They
need to be provided assistance on the demand side (in terms of financial awareness and
literacy) as well as on the supply side (in the form of availability of customized financial
products). Taking into account their seasonal inflow of income from agricultural operations,
migration from one place to another seasonal and irregular work availability and income, the
existing financial system needs to be designed to suit their requirements and to be more
responsive to their needs. No doubt banks and regulators play a major role in this, but we
also need to think beyond traditional ways and delivery channels to speed up the efforts.
Dr. Raghuram Rajan, Hon'ble Governor, RBI has powerfully enunciated the need for broad
based diversified growth leading to rapid reduction in poverty. Governor has also laid down
RBI's developmental measures for the near future on five pillars and one of the most
important pillar amongst them is Financial Inclusion where the objective is to expand access
of finance to small and medium enterprises, the unorganized sector, the poor, and remote
and underserved areas of the country.
The approach adopted for achieving the objectives under financial inclusion
RBI's perspective on Financial Inclusion aims at giving a specific direction to the collaborated
efforts to gain synergic benefits. Therefore, we have defined Financial Inclusion as "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."
Reserve Bank of India has made sustained efforts to increase the penetration of formal
financial services in unbanked areas, while continuing with its policy of ensuring adequate
but viable flow of credit to priority sectors of the economy. We have adopted a structured,
planned and integrated approach towards FI which is focusing on improving access to
financial services and also encouraging demand for financial services through financial
literacy initiatives. Some of the defining features of our approach to FI are:
Institutional mechanism
Under the institutional mechanism put in place for financial inclusion, we have the Financial
Stability and Development Council (FSDC), which has an exclusive mandate for financial
inclusion and financial literacy. A separate Technical Group on financial inclusion and
financial literacy, under the Chairmanship of a Deputy Governor, has been set up under the
aegis of FSDC. The Group has representations from all the financial sector regulators. In
order to spearhead efforts towards greater financial inclusion, RBI has constituted a Financial
Inclusion Advisory Committee (FIAC) under the Chairmanship of Deputy Governor. The FIAC
has few Directors from the Central Board of RBI and experts drawn from NGO sector/other
civil society representatives, etc. as members. At the State level, there are State Level
Bankers Committee (SLBC) further supported by Lead District Managers (671 Districts) at
the district level.
Bank led model
In India, we have adopted a bank- led model for financial inclusion, which seeks to leverage
on technology. The FI initiatives would have to be ICT based and would ride on new delivery
models that would need to be developed by the market participants to best suit their
requirements.
Our experience has shown 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. Other players such as mobile
companies have been allowed to partner with banks in offering services collaboratively.
Integrated approach - financial inclusion & financial literacy
Considering that financial Literacy is an important adjunct for promoting financial inclusion,
consumer protection and ultimately financial stability, RBI has adopted an integrated
approach wherein efforts towards Financial Inclusion and Financial Literacy would go hand in
hand.
Bouquet of financial products
In the absence of banks a large number of informal intermediaries had mushroomed, mostly
in the rural areas, which were acting as proxy to the banks. Such unregulated entities were in
the business of extending only credit products that too at exorbitant rates of interest mostly to
the illiterate section of the population. This had resulted in huge indebtedness amongst the
poor people. With our renewed efforts under financial inclusion we have now advised banks
to ensure that all the financial needs of the customers are met by offering, at the minimum,
four basic products to customers, viz.
The idea is to ensure that customers who are linked to the banking system is provided with
all the basic financial products that are required to enhance their income generation capacity
thus helping them to come out of poverty. Such an initiative is expected to be a win-win
situation for both banks as also the large section of poor people residing in the rural areas.
Combination of branch and BC structure
We are advocating a combination of Brick and Mortar structure with Click and Mouse
technology for extending financial inclusion, especially in geographically dispersed areas.
Banks have to make effective use of technology to provide banking services in remote areas.
In addition to creating a large network of small branches in rural areas, the Reserve Bank
has permitted banks to utilise the services of intermediaries in providing banking services
through the use of business correspondents. 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.
Leveraging on technology
Penetrating banking services through the traditional brick and mortar model was expensive
for banks. We realized that the task of Financial Inclusion was gigantic and would not be
possible without actively leveraging on technology. We have therefore encouraged banks to
leverage on technology to attain greater reach and penetration for minimizing the cost of
providing financial services in far flung areas of the country. With adoption of technology it
has been possible for banks to deliver banking products and services to the doorsteps of
villages.
Engaging Business Correspondents: The Reserve Bank has permitted banks to engage
Business Facilitators (BFs) and Business Correspondents (BCs) as intermediaries for
providing financial and banking services. The BC Model allows banks to provide door step
delivery of services especially to do "cash in - cash out" transactions, thus addressing the
"last mile" problem. The list of eligible individuals/entities who can be engaged as BCs are
being widened from time to time and we have adopted a test and learn approach to this
process. Now, even for profit organisations excluding NBFCs and Telcos have been
permitted to operate as BCs of banks.
Relaxation of KYC norms: The strict KYC norms inhibited linkage of common people with
the Banking System. Know Your Customer (KYC) requirements for opening bank accounts
have been relaxed for small accounts. Further, in order to leverage on the initiative of UIDAI,
we have allowed "Aadhaar" as one of the eligible document for meeting KYC requirements
and very recently have also allowed banks to provide e-KYC services provided through the
Aadhaar platform.
Simplified branch authorisation: To address the issue of uneven spread of bank branches,
branch licensing norms have been relaxed considerably and banks are now free to open
branches in centres with population less than 1 lakh under general permission, subject to
reporting.
Opening of branches in unbanked rural centres: To further step up the opening of
branches in rural areas, banks have been mandated to open at least 25 per cent of the
branches in unbanked rural centres. To help facilitate achieving this mandate, banks have
been advised to open to open small intermediary brick and mortar structures between the
base branch and the unbanked villages. The idea is to create an eco-system for ensuring
efficient delivery of services, efficiency in cash management, redressal of customer
grievances and closer supervision of BC operations. This is expected to facilitate quicker
branch expansion in unbanked rural centres.
Financial inclusion plan of banks
We have 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 phase of FIPs was implemented over the period
2010-2013. The Reserve Bank has used the FIPs to gauge the performance of banks under
their FI initiatives. In this direction we have put in place a structured and comprehensive
monitoring mechanism for evaluating banks' performance vis-à-vis their targets. To ensure
support of the Top Management of the Bank to the Financial Inclusion process and to ensure
accountability of the senior functionaries of the bank, one on one annual review meetings are
held with CMDs/CEOs of banks. A snapshot of the progress made by banks under the
Financial Inclusion Plan during the period from April 2010 to March 2013 are as follows:
• Banking outlets in villages have increased to nearly 2,68,000 from 67,694 outlets in
March 2010.
About 7,400 rural branches have been opened during this 3-year period compared
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with a reduction of about 1300 rural branches during the last two decades.
Nearly 109 million Basic Savings Bank Deposit Accounts (BSBDAs) have been
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added, taking the total number of BSBDA to 182 million. The share of ICT-based
accounts has increased substantially. The percentage of ICT accounts to total
BSBDAs increased from 25 per cent in March 2010 to 45 per cent in March 2013.
• With the addition of nearly 9.48 million farm sector households during this period,
33.8 million households have been provided with small entrepreneurial credit as at
the end of March 2013.
With the addition of nearly 2.24 million nonfarm sector households during this
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period, 3.6 million households have been provided with small entrepreneurial credit
as at the end of March 2013.
• About 490 million transactions have been carried out in ICT-based accounts through
BCs during the three-year period.
Banking outlets

We have now created a large banking network and have also managed to open a large
number of small accounts. The focus under the FI plan has now shifted towards leveraging
the banking network created for extending other products viz. credit, etc. which will help
make the business more viable for banks. This would also ensure that the large number of
accounts opened see large volume of transactions taking place and people reap the benefits
of getting linked to the formal financial institutions.
Roadmap for providing Banking Services in unbanked villages: With financial inclusion
gaining increasing recognition as a business opportunity and with all banks geared to
increase presence, we adopted a phase-wise approach to provide banking services in all
unbanked villages in the country. On completion of the first phase where nearly
74000 villages with population more than 2000 were provided with a banking outlet, we are
now in the second phase where the remaining unbanked villages, numbering close to
4,90,000, have been identified in villages less than 2000 population and allocated to banks,
for opening of banking outlets by Match 2016. Under the roadmap for provision of banking
facilities in villages with less than 2000 population, SLBC, Madhya Pradesh has identified
and allotted 47660 unbanked villages among various, out of which 18986 unbanked villages
are required to be covered by March 2014.
Direct Benefit Transfer - The GoI has plans to route the social security payments through
the banking network by leveraging on the Aadhaar Enabled Payment System based
platform. In order to ensure smooth roll out of the Government's Direct Benefit Transfer
(DBT) initiative, banks have been advised to open accounts of all eligible individuals and to
seed the existing and new accounts with Aadhaar numbers.
Financial Literacy - We have realized that Financial Literacy is an important adjunct for
promoting financial inclusion. We have adopted an integrated approach, wherein our efforts
towards Financial Inclusion and Financial Literacy go hand in hand. Through Financial
literacy and education, we disseminate information on the general banking concepts to
diverse target groups, including school and college students, women, rural and urban poor,
pensioners and senior citizens to enable them to make informed financial decisions. To
support this we have nearly 800 financial literacy centres set up by banks. We have designed
a mass scale Financial Literacy Program with an objective to integrate the financially
excluded population with low level of income and low literacy level with the formal financial
system. Financial Literacy Centres organize Outdoor Literacy camps which are spread over
a period of three months and delivered in three phases wherein along with creating
awareness, accounts are also opened in the Literacy camps.
Way forward - issues and challenges
Structure
With adoption of new branchless delivery channels by banks, there is a need for banks to
revamp the structure for carrying out banking operations. There cannot be a fixed structured
defined which can be adopted by all the banks. Each bank has to based on its current
architecture develop a structure that can enhance its financial inclusion efforts. This would
entail the following:-
• Review of the HR policies with respect to recruitment of staff in view of the FI
requirements. Separate cadre of staff can be thought off for catering to the needs of
providing banking services in far flung rural areas.
• Banks have to think and act differently and make themselves more flexible so as to
meet even the smallest requirements of the rural population.
BC model
There are many challenges being faced while implementing BC model. Sustainability and
scalability of the BC model is essential. More and more innovative products will have to be
introduced which would benefit both banks as well as the rural people and at the same time
make the BC model more viable. Review of the cash management practices for delivery of
banking services through the branchless modes need to be done for ensuring scaling up of
the various models.
Transactions
During the first phase of our FI initiative, we have had success as regards opening of
banking outlets by banks and also in opening bank accounts for large number of individuals.
Going forward our idea is to enable more transactions in these accounts by providing more
credit products, which will not only help rural people to avail of credit at comparatively lower
rates of interest but at the same time also make the BC model viable for banks. Banks have
been advised to leverage upon the Direct Benefit Transfer initiative of the Government of
India for linking all the individuals to the banking system and for utilizing the large amounts
likely to be credited in these accounts for encouraging issue of deposit and credit products.
Collaboration
Finally, financial inclusion cannot be achieved without the active involvement of all
stakeholders like RBI, other financial regulators, banks, governments, NGOs, civil societies,
etc. The current policy objective of inclusive growth with financial stability cannot be achieved
without ensuring universal financial inclusion. Banks alone will not be able to achieve this
unless an entire support system would be partnering with them in this mission. All the
stakeholders need to join hands and make it possible.
Thank you.