Introduction

With a huge rural population, that is economically challenged Financial Inclusion is indispensible for the sustainable growth of India. Former UN Secretary-General Kofi Annan said:The stark reality is that most poor people in the world still lack access to sustainable financial services, whether it is savings, credit or insurance. The great challenge before us is to address the constraints that exclude people from full participation in the financial sector. Together, we can and must build inclusive financial sectors that help people improve their lives. A holistic financial inclusion could be expedited with the maximum use of information, communication and technology-enabled services supported by an extensive Financial Literacy mission. According to the UK Financial Inclusion Taskforce, there are three main concerns in financial inclusion; access to banking, access to affordable credit and access to free face-to-face financial advice. The term 'Financial Inclusion' is defined as an extension of banking and financial services at an affordable cost to unbanked people of the community. Unlike financial inclusion, 'Financial Exclusion' signifies the lack of access (by the economically poor and unbanked people of society) to appropriate, low-cost, fair and safe financial products and services. Financial Inclusion: Challenges & Opportunities23rdSkoch Summit, 2010
What is Financial Inclusion? Dr. C. Rangarajan committee on financial inclusion defines it as: "Financial inclusion may be defined as the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost." The financial services include the entire range - savings, loans, insurance, credit, payments etc. The financial system has to provide its function of transferring resources from surplus to deficit units but both deficit and surplus units are those with low incomes, poor background etc. By providing these services, the aim is to help them come out of poverty. So far, the focus has only been on delivering credit (it is called as microfinance but is microcredit) and has been quite successful. Similar success has to be seen in other aspect of finance as well. Rationale behind Financial Inclusion Finance has come a long way since the time when it wasn't recognized as a factor for

growth and development. It is now attributed as the brain of an economic system and most economies strive to make their financial systems more efficient. It also keeps policymakers on their toes as any problem in this sector could freeze the entire economy and even lead to a contagion. The policymakers have set up their task force/committees to understand how financial inclusion can be achieved including advanced economies like United Kingdom. India also set up a committee under the chairmanship of Dr. C.Rangarajan to suggest measures to increase financial inclusion (hence called the Rangarajan Committee on Financial Inclusion: Challenges & Opportunities 23 rd Skoch Summit, 2010 Page 4 Financial Inclusion). The World Bank had organized a conference in March 2007 and has released a report titled "Finance for All" in November 2007. Who are the excluded and why? Many people across the globe are excluded from mainstream banking. These range from people with low income to people with low information and accessibility to people with no social security or insurance cover. The main reasons behind exclusion are: Lack of information: Lack of information about the role and function of banks, banking services and products, interest rates, etc. stop people from including themselves in mainstream banking. Insufficient documentation: Many people (even in metropolis and urban areas) are unable to show their self identification documents during the opening of a bank account or during taking a loan. Lack of awareness: Many people are unaware of the banking terms and conditions laid down from time to time.

High transaction charges: Various commercial banks across the globe levy transaction charges on credit or debit transactions, on over usage of banking services, on cheque book issuance etc Lack of access: Accessibility is a problem from all those people who live in geopolitically isolated regions. Moreover, as most of the commercial banks are located in the vicinity of cities, people in rural areas (mainly in developing countries) have a Financial Inclusion: Challenges & Opportunities 23 rd Skoch Summit, 2010 Page 5 geographical barrier in accessing banks. Illiteracy: Because of illiteracy, a substantial number of people are unable to take recourse to banking services. Financial Inclusion: India The Reserve Bank of India setup a commission (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, that, too, from a pilot project in UT of Pondicherry, by Dr. K. C. Chakraborthy, the chairman of Indian Bank. Mangalam Village became the first village in India where all households were provided banking facilities. In addition to this KYC (Know your Customer) norms were relaxed for people intending to open accounts with annual deposits of less than Rs. 50, 000. General Credit Cards (GCC) 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 (BF) or business correspondents (BC) 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 Financial Inclusion: Challenges & Opportunities 23 rd Skoch Summit, 2010 Page 6 result of the campaign states or U.T.s like Pondicherry, Himachal Pradesh and Kerala have announced 100% financial inclusion in all their districts. Reserve Bank of Indias 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 road block to financial inclusion in many states. Apart from this there are certain in Current model which is followed. There is inadequate legal and financial structure. India being a mostly agrarian economy hardly has schemes which lend for agriculture. Along with Microfinance we need to focus on Micro insurance too. Financial exclusion It has been found that financial services are used only by a section of the population. There is demand for these services but it has not been provided. The excluded regions are rural, poor regions and also those living in harsh climatic conditions where it is difficult to provide these financial services. The excluded population then has to rely on informal sector (moneylenders etc) for availing finance that is usually at exorbitant rates.

This leads to a vicious cycle. First, high cost of finance implies that first poor person has to earn much more than someone who has access to lower cost finance. Second, the major portion of the earnings is paid to the moneylender and the person can never come out of the poverty. High cost: It has also been seen that poor living in urban areas don't utilize the financial services as they find financial services are costly and thus are unaffordable. Hence, even if financial services are available, the high costs deter the poor from accessing them. Financial Inclusion: Challenges & Opportunities 23 rd Skoch Summit, 2010 Page 7 For example, to open a checking account in Cameroon, the minimum deposit requirement is over 700 dollars, an amount higher than the average GDP per capita of that country, while no minimum amounts are required in South Africa or Swaziland. The fees for transferring 250 dollars internationally are 50 dollars in the Dominican Republic, but only 30 cents in Belgium. Non-price barriers: Access to formal financial services also requires documents of proof regarding a persons' identity, income etc. The poor people do not have these documents and thus are excluded from these services. They may also subscribe to the services initially but may not use them as actively as others because of high distance between the bank and residence, poor infrastructure etc. Behavioral aspects: Research in behavioral economics has shown that many people are not comfortable using formal financial services. The reasons are

difficulty in understanding language, various documents and conditions that come with financial services etc. There are a number of positive externalities of financial inclusion. One of the important effects is one is able to reap the advantages of network externality of financial inclusion as the value of the entire national financial system increases. Yet another reason why financial inclusion is a quasi-public good is that the consequent fuller participation by all in the financial system makes monetary policy more effective and thus enhances the prospects of noninflationary growth. Financial Inclusion: Challenges & Opportunities 23 rd Skoch Summit, 2010 Page 8 Challenges to Financial Inclusion Several challenges like large area, cost of small value transactions, weak delivery model, unsuitable products, infrastructure, lack of finances, management support have to be effectively dealt with. The automation of core banking processes with the use of channels such as ATM, IVR based Tele-banking, Internet banking, the banking industry has become more profitable. Banks however, face an uphill task of reaching out to the mass customers in remote areas such as villages. Naxal Movement, low Return OnInvestment (ROI), customer behavior, operating expenses inhibits banks from expansion in rural areas. Financial Inclusion in India- Policy Perspective Financial Inclusion has become a buzzword now but in India it has been practiced for quite sometime now. RBI has made efforts to make commercial banks open branches in rural areas. Priority sector lending was instituted to provide loans to small and medium enterprises and agricultural sector. Further special banks were set up for rural areas like Rural Cooperative Banks, Regional Rural Banks.

The government also set up national level institutions like NABARD, SIDBI to empower credit to rural areas and small and medium enterprises. Despite the rural policy-push, above statistics suggest majority of the population continues to be financially excluded. The efforts were further intensified by RBI and its Annual Policy (2005-06) mentioned: RBI will implement policies to encourage banks which provide extensive services while disincentivising those which are not responsive to the banking needs of the community, including the underprivileged. The nature, scope and cost of services will be monitored Financial Inclusion: Challenges & Opportunities 23 rd Skoch Summit, 2010 Page 9 to assess whether there is any denial, implicit or explicit, of basic banking services to the common person. Banks are urged to review their existing practices to align them with the objective of financial inclusion. This RBI focus led to a few key developments: No-Frill accounts: In November 2005, RBI asked banks to offer no-frills savings account which enables excluded people to open a savings account. Normally, the savings account requires people to maintain a minimum balance and most banks now even offer various facilities with the same. No-frills account requires no (or negligible) balance and is without any other facilities leading to lower costs both for the bank and the individual. The number of no-frills account has increased mainly in public sector banks from about 0.4 million to 6 million between March 2006 and March 2007. The number of No-frill accounts in private sector banks also increased from 0.2 million to 1 million in the same period. No

significant increases were there in foreign banks. This is understandably so as majority of rural and sub-urban bank offices are in public sector banks. Usage of Regional language: The Banks were required to provide all the material related to opening accounts, disclosures etc in the regional languages. Simple KYC Norms: 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 who intend to keep balances not exceeding rupees fifty thousand (Rs. 50,000/-) in all their accounts taken together and the total credit in all the accounts taken together is not expected to exceed rupees one lakh (Rs.1,00,000/-) in a year. Easier Credit facilities: Banks have been asked to consider introducing General purpose Credit Card (GCC) facility up to Rs. 25,000/- at their rural and semi urban branches. GCC is in the nature of revolving credit entitling the holder to withdraw up to the limit sanctioned. The limit for the purpose can be set Based Financial Inclusion: Challenges & Opportunities 23 rd Skoch Summit, 2010 Page 10 on assessment of household cash flows; the limits are sanctioned without insistence on security or purpose. The Interest rate on the facility is completely deregulated. A simplified mechanism for one-time settlement of overdue loans up to Rs.25, 000/- has been suggested for adoption. Banks have been specifically advised that borrowers with loans settled under the one time settlement scheme will be eligible to re-access the formal financial

system for fresh credit. Other rural intermediaries: Banks were permitted in January 2006, to use other rural organizations like Nongovernmental organizations, self-help groups, microfinance institutions etc for furthering the cause of financial inclusion. Using Information Technology: A few Pilot projects have been initiated to test how technology can be used to increase financial inclusion. Usha Thorat in her speech (June 19, 2007) pointed to a few measures: Smart cards for opening bank accounts with biometric identification. Link to mobile or hand held connectivity devices ensure that the transactions are recorded in the bank's books on real time basis. Some State Governments are routing social security payments aas also payments under the National Rural Employment Guarantee Scheme through such smart cards. The same delivery channel can be used to provide other financial services like low cost remittances and insurance. The use of IT also enables banks to handle the enormous increase in the volume of transactions for millions of households for processing, credit scoring, credit record and follow up. Economic Research: The need for Financial Inclusion with an Indian perspective Financial Education: RBI has taken number of measures to increase financial literacy in the country. It has set up a multilingual website in 13 languages Financial Inclusion: Challenges & Opportunities 23 rd Skoch Summit, 2010 Page 11

explaining about banking, money etc. It has started putting up comic strips to explain various difficult subjects like importance of saving, RBI's functions etc. These comics explain myriad and complex concepts in an entertaining manner. The website states: The Reserve Bank of India has undertaken a project titled "Project Financial Literacy". The Objective of the project is to disseminate information regarding the central bank and general banking concepts to various target groups, including, school and college going children, women, rural and urban poor, defence personnel and senior citizens. The project has been designed to be implemented in two modules, one module in which Money Kumar will familiarise you with the role and functions of the Reserve Bank of India; and through the other module, Raju will introduce you to banking concepts. Lead Bank Scheme The Lead Bank Scheme targets the Aam Admi being crucial to Business Correspondent model for reaching the unbanked rural people and extending microfinance services. With operational modalities not being spelt out, the programme seeks to provide banking facilities to habitations with a population of more than 2,000. Insurance and other services will also be extended which has been the demand of microfinance institutions. The industry is demanding a more liberal and flexible approach with less regulations to make the scheme successful. Recent Budget on Financial Inclusion & Microfinance The microfinance programme this year received a boost in terms of more allocation to the twin-funds managed by NABARD for financial inclusion. Set up in 2007-08 the Financial Inclusion: Challenges & Opportunities 23 rd Skoch Summit, 2010 Page 12

Financial Inclusion Fund and the Financial Inclusion Technology Fund have been the core of governments actions programme to achieve financial inclusion. With an additional Rs.100 crore (INR 1,000 million) for each of these funds, the government has cleared the decks for functional phase of ensuing Business Correspondent model in rural areas. In addition, the programme for linking Self Help Groups (SHGs) with the banking system, re-designated as the Micro-Finance Development and Equity Fund in 2005-06 with a corpus of Rs.200 crore (INR 2,000 million) has seen doubling of allocation to Rs. 400 crore (INR 4,000 million) in the current budget. A positive development indeed but the focus is likely to be in the northeastern and eastern region, where many anti-poverty programmes have yielded little result in terms of improving the financial access norms to the poor and rural households. Access to banking services One important point that the finance minister made in his opening remarks was to ensure the growth of banking system to meet the needs of a modern economy, expansion in geographic terms and improve access to banking services. While the RBI is considering giving some additional banking licenses to private sector players, Non Banking Financial Companies (NBFCs) could also be considered, if they meet the RBIs eligibility criteria. While this addresses the long-time demand of NBFCs to raise deposits from the members, it is unlikely to help the microfinance sectors emerging MFI-NBFCs which have been seeking similar privilege. Committee on Financial Inclusion (CFI)Financial Inclusion: Challenges & Opportunities 23 rd Skoch Summit, 2010 Page 13

Government of India constituted a Committee to enhance financial inclusion in India on 22 June 2006. The Committee presented its report in January 2008. The report has analyzed financial inclusion in detail. CFI has initiated a mission called National Rural Financial Inclusion plan. It has set targets to increase FI in the country across regions and across institutions (banks, rural regional banks etc). It has suggested measures to address both, supply and demand constraints in increasing financial inclusion. The measures to address supply constraints aim to provide finance (via banks, microfinance etc). Demand constraints imply that despite the supply people do not come forward because of number of factors. The report says: It is widely recognized in economic literature that there are at least five different types of capital - physical (roads, buildings, plant and machinery, infrastructure), natural (land, water, forests, livestock, weather), human (nutrition, health, education, skills, competencies), social (kinship groups, associations, trust, norms, institutions) and financial. One of the causes as well as consequences of poverty and backwardness is inadequate access to all these forms of capital. Thus to look at financial inclusion in an isolated way is problematic. The report suggests measures to address demand constraints in all the other forms of capital as well. To address human capital it stresses on health and education; for natural capital - enhance access to land which could provide collateral; for physical capital- improve infrastructure; social capital- develop institutions like gram panchayats etc. The interim report was presented before the Budget (2007-08). The Finance Minister in the Budget decided to implement, immediately, two recommendations. The first was to establish a Financial Inclusion Fund with NABARD for meeting the cost of

developmental and promotional interventions. Financial Inclusion: Challenges & Opportunities 23 rd Skoch Summit, 2010 Page 14 The second was to establish a Financial Inclusion Technology Fund to meet the costs of technology adoption. The overall corpus for each fund was Rs.500 crore, with initial funding to be contributed by the Central Government, RBI and NABARD. In the 2008-09-budget statement, the Finance Minister proposed two more measures: one to add at least 250 rural household accounts every year at each of their rural and semi-urban branches of commercial banks (including regional rural banks) and two, to allow individuals such as retired bank officers, ex-servicemen etc to be appointed as business facilitator or business correspondent or credit counselor. The Finance Minister also proposed to expand the reach of NABARD, SIDBI and NHB. IT propelled e-Governance Models for Financial Inclusion The solution to the problem of Financial Inclusion in India is IT. The existing infrastructure framework should be made effective use of to speed up the financial inclusion. Postal Network: The government should consider tying up with private banks to deliver financial solutions to the un-banked, using its extensive postal network. The synergistic outreach of the existing postal system supplemented by banking functions is the answer to the challenges posed by rural markets. India has one of the worlds largest postal systems with its branches in the remotest areas. The people can easily connect with the postman this can be used to provide financial cover to the excluded masses and gradually full-fledged banking services may be extended. Mobile Banking: The transaction costs can be radically reduced even in remote

locations through M-banking. Digital Divide could be exacerbated at a lower level. The costs, ease of access for the consumers and the profitability of providers will ultimately decide the level of wireless penetration. Ubiquitous Technology: Rural banking must deliver an easy user experience which requires a ubiquitous technology with an innovative Geographical User Interface (GUI). Financial Inclusion: Challenges & Opportunities 23 rd Skoch Summit, 2010 Page 15 Bank accounts are already being opened with bio-metric identification which signals that FI initiatives can be achieved with the use of IT solutions for providing banking at doorsteps. Wireless connectivity can ensure that transactions get registered with the bank on real time basis. Conclusion Financial Inclusion is needed for rural and downtrodden masses that are the future growth engine of the economy. From the recent initiatives undertaken by the different world governments to foster financial inclusion, one cannot undermine the need to include the economically underprivileged in the mainstream banking sector. The role of various ICT tools and associated technologies in providing financial solutions to the unbanked is also substantial. Rural ATMs, plastic cards (like smart cards, biometric cards, etc.) and mobile payment technologies do have the ability to engage the unbanked sections. Steps have been taken by the Government for the expansion of banking services and linking of opportunities among various segments of financial sector like capital markets, insurance, etc. to achieve its aim of Inclusive Growth. High GDP growth in India, triggered by an open economy has created job opportunities in urban and semi-urban

India and it will go further into rural India, increasing the potential for growth to vast sections of disadvantaged and low income groups. Commercial banks are making use of the services of non-governmental organizations (NGOs/SHGs), micro-finance institutions, NBFCs, etc. as intermediaries for providing Financial Inclusion: Challenges & Opportunities 23 rd Skoch Summit, 2010 Page 16 financial and banking services which could be used as business facilitators (BF) or business correspondents (BC) by them. Government initiatives to support FI needs to be backed by progressive policies. This can be achieved only through Public- Private Partnership Model powered by ubiquitous technologies. References 1. Taking Banking Services to the Common Man Financial Inclusion, IIBF, Speech by Mr V.Leeladhar, Deputy Governor of the Reserve Bank of India. 2. ICRA Report on Financial Markets. 3. Financial Inclusion - the Indian experience - Usha Thorat, Deputy Governor RBI, June 2007 4. Extending Banking to the poor in India" , Amit Singhal/ Bikram Duggal, ICICI Bank 5. RBI Annual Reports 6. Speech by Dr Ranee Jayamaha, Deputy Governor of the Central Bank of Sri Lanka, at the Centre for Women's Research (CENWOR), Colombo, 4 April 2008 Source: Getting Finance in South Asia Phase IV-2008, World Bank. 7. Ref: Financial exclusion: A new angle to urban poverty in Latin America, 2005)

8. Source: OECD paper 9. ITU, www.itu.int. 10. UNCTAD India Project Research. Thanking Y