Taking Banking Services to the Common Man – Financial Inclusion

What is Financial Inclusion?

Financial inclusion is delivery of banking services at an affordable cost to the vast sections of disadvantaged & low income groups. Unrestrained access to public goods & services is the sine qua non of an open & efficient society. As banking services are in the nature of public good, it is essential that availability of banking & payment services to the entire population without discrimination is the prime objective of the public policy.

The scope of financial inclusion 

The scope of financial inclusion can be expanded in two ways.

(a)     Through state-driven intervention by way of statutory enactments ( for instance the US example, the Community Reinvestment Act & making it a statutory right to have bank account in France).

(b)    Through voluntary effort by the banking community itself for evolving various strategies to bring within the ambit of the banking sector the large strata of society.

When bankers do not give the desired attention to certain areas, the regulators have to step in to remedy the situation. This is the reason why the Reserve Bank of India is placing a lot of emphasis on financial inclusion.

In India the focus of the financial inclusion at present is confined to ensuring a bare minimum access to a savings bank account without frills, to all. Internationally, the financial exclusion has been viewed in a much wider perspective. Having a current account / savings account on its own, is not regarded as an accurate indicator of financial inclusion. There could be multiple levels of financial inclusion & exclusion. At one extreme, it is possible to identify the ‘super-included’, i.e., those customers who are actively & persistently courted by the financial services industry, & who have at their disposal a wide range of financial services & products. At the other extreme, we may have the financially excluded, who are denied access to even the most basic of financial products. In between are those who use the banking services only for deposits & withdrawals of money. But these persons may have only restricted access to the financial system, & may not enjoy the flexibility of access offered to more affluent customers.

Consequences of Financial Exclusion

Consequences of financial exclusion will vary depending on the nature & extent of services denied. It may lead to increased travel requirements, higher incidence of crime, general decline in investment, difficulties in gaining access to credit or getting credit from informal sources at exorbitant rates, & increased unemployment, etc.  The small business may suffer due to loss of access to middle class & higher-income consumers, higher cash handling costs, delays in remittances of money.  According to certain researches, financial exclusion can lead to social exclusion.

 Indian Scenario

Bank nationalization in India marked a paradigm shift in the focus of banking as it was intended to shift the focus from class banking to mass banking. The rationale for creating Regional Rural Banks was also to take the banking services to poor people.  The branches of commercial banks & the RRBs have increased from 8321 in the year 1969 to 68,282 branches as at the end of March 2005. The average population per branch office has decreased from 64,000 to 16,000 during the same period. However, there are certain under-banked states such as Bihar, Orissa, Rajasthan, Uttar Pradesh, Chattisgarh, Jharkh&, West Bengal & a large number of North-Eastern states, where the average population per branch office continues to be quite high compared to the national average. As you would be aware, the new branch authorization policy of Reserve Bank encourages banks to open branches in these under banked states & the under banked areas in other states. The new policy also places a lot of emphasis on the efforts made by the Bank to achieve, inter alia, financial inclusion & other policy objectives.  

One of the benchmarks employed to assess the degree of reach of financial services to the population of the country, is the quantum of deposit accounts (current & savings) held as a ratio to the adult population. In the Indian context, taking into account the Census of 2001 (ignoring the incremental growth of population thereafter), the ratio of deposit accounts (data available as on March 31, 2004) to the total adult population was only 59% (details furnished in the table). Within the country, there is a wide variation across states. For instance, the ratio for the state of Kerala is as high as 89% while Bihar is marked by a low coverage of 33%. In the North Eastern States like Nagal& & Manipur, the coverage was a meager 21% & 27%, respectively.  The Northern Region, comprising the states of Haryana, Chandigarh & Delhi, has a high coverage ratio of 84%. Compared to the developed world, the coverage of our financial services is quite low. For instance, as per a recent survey commissioned by British Bankers' Association, 92 to 94% of the population of UK has either current or savings bank account.

Steps towards financial inclusion

In the context of initiatives taken for extending banking services to the small man, the mode of financial sector development until 1980’s was characterized by

• A hugely expanded bank branch & cooperative network & new organizational forms like RRBs
• A greater focus on credit rather than other financial services like savings & insurance, although the banks & cooperatives did provide deposit facilities
• Lending targets directed at a range of ‘priority sectors’ such as agriculture, weaker sections of the population, etc
• Interest rate ceilings with significant government subsidies channeled through the banks & cooperatives, as well as through related government programmes
• A dominant perspective that finance for rural & poor people was a social obligation & not a potential business opportunity.

With a view to enhancing the financial inclusion, as a proactive measure, the  RBI in its Annual Policy Statement, while recognizing 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, 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 & number of transactions in such accounts would be restricted & made known to customers in advance in a transparent manner. All banks are urged to give wide publicity to the facility of such no frills account so as to ensure greater financial inclusion.

Further, in order to ensure that persons belonging to low income group both in urban & 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 who intend to keep balances not exceeding rupees fifty thousand (Rs. 50,000/-) in all their accounts taken together & the total credit in all the accounts taken together is not expected to exceed rupees one lakh (Rs.1,00,000/-) in a year. 

The Way Forward

The banks should come out of inhibited feeling that very aggressive competition policy & social inclusion are mutually exclusive. As demonstrated elsewhere, the mass banking with no-frills etc. can become a win-win situation for both. Basically banking services need to be “marketed” to connect with large population segments & these may be justifiable promotional costs. The opportunities are plenty.

• In the context of India becoming one of the largest micro finance markets in the world especially in the growth of women’s savings & credit groups (SHGs) & the sustaining success of such institutions which has been demonstrated by the success of SEWA bank in Gujarat, low cost banking is not necessarily an unviable venture/proposition. 
• The IBA may explore the possibility of a survey about the coverage in respect of financial inclusion keeping in view the geographical spread of the banks & extent of financial services available to the population so as to assess the constraints in extension of financial services to hitherto unbanked sections & for initiating appropriate policy measures.
• It may be useful for banks to consider franchising with other segments of financial sector such as cooperatives, RRBs etc. so as to extend the scope of financial inclusion with minimal intermediation cost.
• Since large sections of low income groups transactions are related to deposits & withdrawals, with a view to containing transaction costs, 'simple to use' cash dispensing & collecting machines akin to ATMs, with operating instructions & commands in vernacular would greatly facilitate financial inclusion of the semi urban & rural populace. In this regard, it is worthwhile to emulate the example of ‘e-Choupal’ project brought forth through private sector initiative.

Conclusion 

It is becoming increasingly apparent that addressing financial exclusion will require a holistic approach on the part of the banks in creating awareness about financial products, education, & advice on money management, debt counseling, savings & affordable credit. The banks would have to evolve specific strategies to exp& the outreach of their services in order to promote financial inclusion. One of the ways in which this can be achieved in a cost-effective manner is through forging linkages with microfinance institutions & local communities. Banks should give wide publicity to the facility of no frills account. Technology can be a very valuable tool in providing access to banking products in remote areas. ATMs cash dispensing machines can be modified suitably to make them user friendly for people who are illiterate, less educated or do not know English.

To sum up, banks need to redesign their business strategies to incorporate specific plans to promote financial inclusion of low income group treating it both a business opportunity as well as a corporate social responsibility. They have to make use of all available resources including technology & expertise available with them as well as the MFIs & NGOs. It may appear in the first instance that  taking banking to the sections constituting “the bottom of the pyramid”, may not be profitable but it should always be remembered that even the relatively low margins on high volumes can be a very profitable proposition. Financial inclusion can emerge as commercial profitable business. Only the banks should be prepared to think outside the box!