Fi­nan­cial In­clu­sion: An Over­view

Economic Challenger - - CONTENTS - −Dr. M. Su­mathy

As long as you’re go­ing to be think­ing any­way, think big." Don­ald Trump.

The log­i­cal next step from Don­ald Trump’s state­ment is that as long as you’re free to choose, choose only to be the world’s best. Not much point for a free coun­try, for ex­am­ple, to as­pire only to poverty al­le­vi­a­tion. Let us choose to be­come the world’s rich­est coun­try, ever. That should at least fix the mi­nor in­con­ve­nience of poverty.

Fi­nan­cial in­clu­sion or in­clu­sive fi­nanc­ing is the de­liv­ery of fi­nan­cial ser­vices at af­ford­able costs to sec­tions of dis­ad­van­taged and low in­come seg­ments of so­ci­ety. Un­re­strained ac­cess to pub­lic goods and ser­vices is the sine qua non of an open and ef­fi­cient so­ci­ety. It is ar­gued that as bank­ing ser­vices are in the na­ture of pub­lic good, the avail­abil­ity of bank­ing and pay­ment ser­vices to the en­tire pop­u­la­tion with­out dis­crim­i­na­tion is the prime ob­jec­tive of this pub­lic pol­icy. The term "fi­nan­cial in­clu­sion" has gained im­por­tance since the early 2000s, and is a re­sult of find­ings about fi­nan­cial ex­clu­sion and its di­rect cor­re­la­tion to poverty. Fi­nan­cial in­clu­sion is now a com­mon ob­jec­tive for many cen­tral banks among the de­vel­op­ing na­tions.

The key fo­cus of Fi­nan­cial In­clu­sion in­cludes four prod­ucts: A pure sav­ings prod­uct with in­built over­draft fa­cil­ity. A Re­cur­ring De­posit prod­uct. A Re­mit­tance prod­uct and. En­trepreneur­ship credit in the form of KCC/ GCC.

The key ob­jec­tives of Fi­nan­cial In­clu­sion

Ex­tend­ing for­mal bank­ing sys­tem among less priv­i­leged in ur­ban & ru­ral In­dia. Wean­ing them away from un­or­ga­nized money mar­kets and money­len­ders. Equip­ping them with the con­fi­dence to make in­formed fi­nan­cial de­ci­sions.

The Key In­dus­try Ini­tia­tives to­wards Fi­nan­cial In­clu­sion

Re­lax­ation of Know Your Cus­tomer (KYC) guide­line for No−Frill ac­counts. In­tro­duc­tion of Busi­ness Cor­re­spon­dent (BC) Model for ser­vice de­liv­ery in re­mote ar­eas Adop­tion of In­for­ma­tion & Com­mu­ni­ca­tion Tech­nol­ogy ( ICT) based model for en­hanc­ing outreach. In­te­gra­tion of Elec­tronic Ben­e­fit Trans­fer (EBT) for dis­burse­ment of Government Grants. Re­or­ga­ni­za­tion of Aad­har Num­ber un­der KYC norms. Fi­nan­cial in­clu­sion can make lit­tle head­way with­out ef­forts to fur­ther fi­nan­cial lit­er­acy. In­dia’s small towns are mak­ing their pres­ence felt in the na­tion’s eco­nomic land­scape. It is not just the FMCG or con­sumer durable com­pa­nies or car mak­ers who are rush­ing to In­dia’s hin­ter­land, but also a slew of bank­ing and fi­nan­cial ser­vices com­pa­nies that are ramp­ing up their op­er­a­tions. Over the last cou­ple of years, th­ese small cities and towns have shown an in­creas­ing ap­petite for fi­nan­cial prod­ucts. But can fi­nan­cial in­clu­sion ever suc­ceed with­out fi­nan­cial lit­er­acy? If peo­ple are not aware about ba­sic fi­nan­cial plan­ning and lack the skills to save and in­vest, can they mit­i­gate eco­nomic hard­ship and shocks that may come their way? Will this look not im­pact the long−term strat­egy of com­pa­nies to de­velop ru­ral mar­kets?

Fi­nan­cial lit­er­acy must be the cen­ter­piece of fi­nan­cial in­clu­sion. A sur­vey was con­ducted re­cently to gauge the strengths and weak­nesses of fi­nan­cial ed­u­ca­tion world­wide, and to find so­lu­tions to chal­lenges that ex­ist. Among 28 coun­tries sur­veyed across the world, In­dia stands at 22nd spot, clearly in­di­cat­ing the work that lies ahead. While ur­ban ar­eas are per­ceived to be high on fi­nan­cial lit­er­acy, this may not nec­es­sar­ily be the case. Fi­nan­cial lit­er­acy is also de­pen­dent on spread of the bank­ing net­work. Only 40 per cent of In­dia’s to­tal pop­u­la­tion has ac­cess to for­mal bank­ing chan­nels, and the prob­lem is acute when one looks at the vil­lages, where only 5 per cent have a brick−and−mor­tar branch. This ex­plains why fi­nan­cial lit­er­acy lev­els in ru­ral In­dia are poor.


The Government and the RBI have been work­ing to­wards bring­ing the coun­try’s hith­erto un­banked re­gions and pop­u­la­tion into the fold of for­mal bank­ing sys­tem. While im­prov­ing pen­e­tra­tion is one pil­lar of this strat­egy, the other key com­po­nent is mak­ing In­dia fi­nan­cially lit­er­ate. And while progress has been made, there is more to be done. The prin­ci­pal rea­son for im­prov­ing fi­nan­cial lit­er­acy is the im­pact it has on fi­nan­cial in­clu­sion and sta­bil­ity. You can es­tab­lish a brick−and−mor­tar branch with all the fi­nan­cial of­fer­ings, but you can’t bring a cus­tomer on board un­less you ed­u­cate him. Higher de­gree of aware­ness and un­der­stand­ing about bank­ing and fi­nan­cial prod­ucts is the first step to­wards cre­at­ing de­mand and in­creas­ing adop­tion. Fi­nan­cial lit­er­acy re­quires an un­der­stand­ing of the in­for­ma­tion gap across con­sumer seg­ments, banked and un­banked, and craft­ing com­mu­ni­ca­tion strate­gies that ad­dress the unique needs of spe­cific seg­ments. It would be wrong to as­sume that a con­sumer liv­ing in a met­ro­pol­i­tan city is fi­nan­cially lit­er­ate be­cause he is sur­rounded by a va­ri­ety of fi­nan­cial in­sti­tu­tions of­fer­ing a plethora of choices. Maybe he in­vests in tra­di­tional bank­ing in­stru­ments like sav­ings and fixed de­posits, but can be ed­u­cated on man­ag­ing his con­sump­tion bet­ter or in­vest­ing in eq­uity mar­kets. In­di­ans are known to be great savers, some­thing that is re­flected in the over­all domestic sav­ings rate which stands at a healthy 31 per cent. How­ever, this fig­ure has dropped over the last cou­ple of years, which is in part due to higher con­sump­tion ex­pen­di­ture by house­holds, es­pe­cially in ur­ban ar­eas. Also, our study re­veals that In­di­ans do not have more than three months of sav­ings, in case they face an emer­gency.


At the other end of the spec­trum are those who haven’t had any ex­po­sure to for­mal bank­ing. An RBI study of fi­nan­cial lit­er­acy and credit coun­sel­ing cen­ters re­veals low aware­ness lev­els about ex­is­tence of such cen­ters. The con­tent dis­trib­uted at th­ese cen­ters goes lit­tle be­yond the bank’s pub­lic­ity ma­te­rial. So while at one end there is an ur­gent need to spread the net­work to ed­u­cate ci­ti­zens, it is equally im­por­tant to en­sure that the in­for­ma­tion shared by such cen­ters is neu­tral and in a lan­guage that the av­er­age per­son can un­der­stand. This brings us back to tar­get con­sumer seg­men­ta­tion, and the need to match skills to be im­parted with the pop­u­la­tion cat­e­gory. We need to cre­ate an army of fi­nan­cial lit­er­acy train­ers, well equipped to ed­u­cate peo­ple on money man­age­ment. There is also a greater un­der­stand­ing in In­dia as well as around the globe of weav­ing fi­nan­cial plan­ning skills in school ed­u­ca­tion. Our sur­vey re­veals that the world­wide av­er­age age of in­tro­duc­ing fi­nan­cial lit­er­acy to chil­dren is 11.3 years. It is heart­en­ing to note that the cen­tral bank is en­gag­ing with school boards to in­tro­duce th­ese con­cepts in the cur­ricu­lum.


Go­ing for­ward, tech­nol­ogy will play a key role in pro­mot­ing fi­nan­cial in­clu­sion and

fi­nan­cial lit­er­acy. Ac­cord­ing to re­search by Su­mit Aggarwal, se­nior fi­nan­cial econ­o­mist with the Fed­eral Re­serve Bank of Chicago and a vis­it­ing pro­fes­sor at the In­dian School of Busi­ness, In­ter­net−savvy In­di­ans are 20 per cent more fi­nan­cially lit­er­ate than Amer­i­cans and on par with Euro­peans. Real time in­for­ma­tion, up­dates on prod­ucts and norms, bet­ter fi­nan­cial man­age­ment and in­vest­ment de­ci­sion mak­ing can be en­abled through safe and se­cure tech­nol­ogy plat­forms. The choices made by a fi­nan­cially aware con­sumer will help de­velop prod­ucts that are rel­e­vant and lead to fi­nan­cial in­no­va­tion. We need to de­velop a scal­able and multi− pronged ap­proach to­wards fi­nan­cial lit­er­acy. This re­quires time, plan­ning and col­lab­o­ra­tion among var­i­ous stake­hold­ers.


The Re­serve Bank of In­dia (RBI) set up the Khan Com­mis­sion in 2004 to look into fi­nan­cial in­clu­sion and the rec­om­men­da­tions of the com­mis­sion were in­cor­po­rated into the mid− term re­view of the pol­icy (2005−06). In the report RBI ex­horted the banks with a view of achiev­ing greater fi­nan­cial in­clu­sion to make avail­able a ba­sic " no−frills" bank­ing ac­count. In In­dia, fi­nan­cial in­clu­sion first fea­tured in 2005, when it was in­tro­duced by K C Chakrabor­thy, the chair­man of In­dian Bank. Man­galam Vil­lage be­came the first vil­lage in In­dia where all house­holds were pro­vided bank­ing fa­cil­i­ties. Norms were re­laxed for peo­ple in­tend­ing to open ac­counts with an­nual de­posits of less than Rs. 50,000. Gen­eral credit cards (GCCs) were is­sued to the poor and the dis­ad­van­taged with a view to help them ac­cess easy credit. In Jan­uary 2006, the Re­serve Bank per­mit­ted com­mer­cial banks to make use of the ser­vices of non−gov­ern­men­tal or­ga­ni­za­tions (NGOs/ SHGs), mi­cro−fi­nance in­sti­tu­tions, and other civil so­ci­ety or­ga­ni­za­tions as in­ter­me­di­aries for pro­vid­ing fi­nan­cial and bank­ing ser­vices. Th­ese in­ter­me­di­aries could be used as busi­ness fa­cil­i­ta­tors or busi­ness cor­re­spon­dents by com­mer­cial banks. The bank asked the com­mer­cial banks in dif­fer­ent re­gions to start a 100% fi­nan­cial in­clu­sion cam­paign on a pi­lot ba­sis. As a re­sult of the cam­paign states or UTs like Pondicherry, Hi­machal Pradesh and Ker­ala an­nounced 100% fi­nan­cial in­clu­sion in all of their dis­tricts. Re­serve Bank of In­dia’s vi­sion for 2020 is to open nearly 600 mil­lion new cus­tomers’ ac­counts and ser­vice them through a va­ri­ety of chan­nels by lev­er­ag­ing on IT. How­ever, il­lit­er­acy and the low in­come sav­ings and lack of bank branches in ru­ral ar­eas con­tinue to be a road­block to fi­nan­cial in­clu­sion in many states and there is in­ad­e­quate le­gal and fi­nan­cial struc­ture. The first−ever In­dex of Fi­nan­cial In­clu­sion to find out the ex­tent of reach of bank­ing ser­vices among 100 coun­tries, In­dia has been ranked 50. Only 34% of In­dian in­di­vid­u­als have ac­cess to or re­ceive bank­ing ser­vices. Self Help Groups are play­ing a very im­por­tant role in the process of fi­nan­cial in­clu­sion. SHGs are usu­ally groups of women who get to­gether and pool money from their sav­ings and lend money among them. Usu­ally they are work­ing with the sup­port of an NGO. The SHG is given loans against the group mem­bers’ guar­an­tee. Peer pres­sure within the group helps in im­prov­ing re­cov­er­ies. Through SHGs nearly 40 mil­lion house­holds are link­ing with the banks. Mi­cro fi­nance is an­other tool which links low in­come groups to the banks.

Yet, banks are fight­ing to ful­fill the Fi­nan­cial In­clu­sion dream. The main rea­son is that the prod­ucts de­signed by the banks are not sat­is­fy­ing the low in­come fam­i­lies. The pro­vi­sion of un­com­pli­cated, small, af­ford­able prod­ucts will help to bring the low in­come fam­i­lies into the for­mal fi­nan­cial sec­tor. Banks have lim­i­ta­tions to reach di­rectly to the low in­come con­sumers. Cor­re­spon­dents can be con­sid­ered to be an ex­cel­lent chan­nel which banks can use to dis­trib­ute their prod­uct in­for­ma­tion. Ed­u­cat­ing the con­sumers about the fi­nan­cial ben­e­fits and prod­ucts of banks which are ben­e­fi­cial to low in­come groups will be a great step to tap their po­ten­tial.

Banks are now us­ing new tech­nolo­gies like mo­bile phones to reach low in­come con­sumers. It is pos­si­ble that the tele­phone providers them­selves will start ba­sic bank­ing ser­vices like sav­ings and pay­ments. In­dian tele­com

con­sumers have few links to fi­nan­cial in­sti­tu­tions. So with­out much dif­fi­culty tele­com providers can win the bat­tle with banks. Banks should there­fore be proac­tive about trans­fer­ring this tech­nol­ogy into an op­por­tu­nity.

The In­dian Government has a long his­tory of work­ing to ex­pand fi­nan­cial in­clu­sion. Na­tion­al­iza­tion of the ma­jor pri­vate sec­tor banks in 1969 was a big step. In 1975 GOI es­tab­lished RRBs with the same aim. It en­cour­aged branch ex­pan­sion of bank branches es­pe­cially in ru­ral ar­eas. The RBI guide­lines to banks show that 40% of their net bank credit should be lent to the pri­or­ity sec­tor. This mainly con­sists of agri­cul­ture, small scale in­dus­tries, re­tail trade etc. More than 80% of our pop­u­la­tion de­pends di­rectly or in­di­rectly on agri­cul­ture. So 18% of net bank credit should go to agri­cul­tural lend­ing. Re­cent sim­pli­fi­ca­tion of KYC norms is an­other mile­stone.


Fi­nan­cial in­clu­sion in In­dia is of­ten closely con­nected to the ag­gres­sive mi­cro credit poli­cies that were in­tro­duced with­out the ap­pro­pri­ate reg­u­la­tions over­sight or con­sumer ed­u­ca­tion poli­cies. The re­sult was con­sumers be­com­ing quickly over−in­debted to the point of com­mit­ting sui­cide. Lend­ing in­sti­tu­tions saw re­pay­ment rates col­lapse af­ter politi­cians in one of the coun­try’s largest states called on bor­row­ers to stop paying back their loans, threat­en­ing the ex­is­tence of the en­tire 4 bil­lion−a−year In­dian mi­cro credit in­dus­try. This cri­sis has of­ten been com­pared to the mort­gage lend­ing cri­sis in the US.

The chal­lenge for those work­ing in the fi­nan­cial in­clu­sion field has been to sep­a­rate mi­cro−credit as only one as­pect of the larger fi­nan­cial in­clu­sion ef­forts and use the In­dian cri­sis as an ex­am­ple of the im­por­tance of hav­ing the ap­pro­pri­ate reg­u­la­tory and ed­u­ca­tional pol­icy frame­work in place.


The bank­ing in­dus­try has shown tremen­dous growth in vol­ume and com­plex­ity dur­ing the last few decades. De­spite mak­ing sig­nif­i­cant im­prove­ments in all the ar­eas re­lat­ing to fi­nan­cial vi­a­bil­ity, prof­itabil­ity and com­pet­i­tive­ness, there are con­cerns that banks have not been able to reach and bring vast seg­ment of the pop­u­la­tion, es­pe­cially the un­der­priv­i­leged sec­tions of the so­ci­ety, into the fold of ba­sic bank­ing ser­vices. In­ter­na­tion­ally also ef­forts are be­ing made to study the causes of fi­nan­cial ex­clu­sion and de­sign strate­gies to en­sure fi­nan­cial in­clu­sion of the poor and dis­ad­van­taged. The rea­sons may vary from coun­try to coun­try and so also the strat­egy but all out ef­forts are needed as fi­nan­cial in­clu­sion can truly lift the stan­dard of life of the poor and the dis­ad­van­taged.


As our former Pres­i­dent Dr.Ab­dul Kalam men­tioned small aim is a crime. Ig­nor­ing the poor, down­trod­den is not cor­rect. Bank­ing fa­cil­ity has to reach the un­der­priv­i­leged so that the habit of sav­ings can be in­cul­cated in ev­ery­body’s mind. Let us all make the vil­lagers in In­dia to un­der­stand this con­cept fully and de­velop the na­tion in a re­mark­able way.


1. Com­mem­o­ra­tive Lec­ture by Shri V.Lee­lad­har, Dy. Gov­er­nor, Re­serve Bank of In­dia on ’Fi­nan­cial In­clu­sion’ at the Fed­bank Hormis Me­mo­rial Foun­da­tion at Er­naku­lam on De­cem­ber 2, 2005.

2. In­au­gu­ral ad­dress by Smt. Usha Tho­rat, Dy.Gov­er­nor, RBI at the Fi­nan­cial Plan­ning Congress 2006 on "Es­tab­lish­ing Con­sumer Cen­tric Fi­nan­cial Ser­vices De­liv­ery In­fra­struc­ture" or­ga­nized by the Fi­nan­cial Plan­ning Stan­dards Boards of In­dia on May 29, 2006 at New Delhi.

3. Press Note dated 16.5.2006 on Report and Draft Bill on So­cial Se­cu­rity for Un­or­gan­ised Work­ers − Government of In­dia, Na­tional Com­mis­sion for En­ter­prises in the Un­or­gan­ised Sec­tor un­der Chair­man­ship of Dr. Ar­jun Sen­gupta.

4. Report of the Com­mit­tee on In­for­mal Fi­nan­cial Sec­tor Statis­tics (Sum­mary) un­der Chair­man­ship of Dr.C.Ran­gara­jan.

5. Role of Fi­nan­cial In­ter­me­di­a­tion Ser­vices in the In­for­mal Sec­tor.

6. Fi­nan­cial In­clu­sion Task­force: Report on progress to­wards the shared goal.

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