usha thorat : financial inclusion and millennium development goals speech by ms usha thorat, deputy governor of the reserve bank of india, at the 4th program on human development and state finances jointly organised by college of agricultural banking, reserve bank of india, undp and the planning commission, at cab, pune, 16 january 2006. * * * at the outset, i take this opportunity to thank the planning commission, the united nations development programme ( undp ) and the college of agricultural banking for inviting me to this very relevant program on human development and state finances. the central theme of the millenium development goals ( mdgs ) is reduction of poverty in all its forms. the mdgs emphasise human development indicators, especially those relating to women and children, to enable people to live a life of dignity. the role of the state in the achievement of the mdgs through fiscal measures to increase investment in economic and social capital is primary. the financial system can play a role in reinforcing many of the objectives of the mdgs involving savings, livelihood and economic infrastructure apart from providing an efficient payments system. the role of the community based organisations and ngos has been found to be vital in catalysing local participation to enhance the efficiency and transparency in the delivery of services essential for achievement of human development goals. thus the state governments, the formal financial system and community based organisations can be considered as the three pillars in achieving societal transformation. these three pillars perform distinct but mutually reinforcing roles that can have tremendous synergies. by financial inclusion we mean the provision of affordable financial services, viz., access to payments and remittance facilities, savings, loans and insurance services by the formal financial system to those who tend to be excluded. it is important to recognise that in the policy framework for development of the formal financial system in india, the need for financial inclusion and covering more and more of the excluded population by the formal financial system has always been consciously emphasised. what has now come to the fore is that even after decades of such emphasis there are large segments of the society outside the financial system. simultaneously the growth of the ngo and the self help groups has been significant and their linkage with banks has facilitated greater financial inclusion. these groups are mainly of women and the recovery rates are high. there is no subsidy element and the outreach and penetration continues to grow. the coverage is several times that under government sponsored schemes. where groups have been consciously promoted under government sponsored schemes, the

that rbi has taken to promote financial inclusion i. as a proactive measure, the rbi in its annual policy statement for the year 2005 - 06, while recognising the concerns in regard to the banking practices that tend to exclude rather than attract vast sections of population, urged banks to review their existing practices to align them with the objective of financial inclusion. in the mid term review of the policy ( 2005 - 06 ), the rbi exhorted the banks, with a view to achieving greater financial inclusion, to make available a basic banking ‘ no frills ’ account either with nil or very minimum balances as well as charges that would make such accounts accessible to vast sections of the population. the nature and number of transactions in such accounts would be restricted and made known to customers in advance in a transparent manner. all banks have been urged to give wide publicity to the facility of such ‘ no frills ’ account. a number of banks have since come out with schemes for such ‘ no frills ’ account facility. ii. further, in order to ensure that persons belonging to low income group both in urban and rural areas do not face difficulty in opening the bank accounts due to the procedural hassles, the kyc procedure for opening accounts has been simplified for those persons with balances not exceeding rupees fifty thousand ( rs. 50, 000 ) and credits in the accounts not exceeding rupees one lakh ( rs. 1, 00, 000 ) in a year. iii. rrbs have been specifically advised to allow limited overdraft facilities in ‘ no frills ’ accounts without any collateral or linkage to any purpose. the idea is that provision of such overdraft facility provides a ready source of funding to the account holder who is thereby induced to open such accounts. from the bank ’ s point of view, the offering of a " no frills " account should represent the beginning of a sustainable relationship that will be mutually beneficial. looking at the numbers involved, there is no doubt that banks should look at technology based solutions and low cost delivery mechanisms that will reduce transaction cost of such services with the volumes required to make such a model sustainable. iv. for all borrowers where the principal amount is less than rs 25000, banks have been asked to offer a one time settlement scheme. as there are large number of such very small npas with banks, offer of such an ots is expected to restore borrowing relationship with the formal