Financial Inclusion – Policies, Tools And Institutions: N.srinivasan

Financial Inclusion – Policies, tools and institutions

N.Srinivasan

Financial Inclusion – the Indian context • Bringing underserved and marginalised in to the mainstream economy • Covering barter and cash economy under the formal payments system • Ensuring effective and safe savings and credit facilities to all sections of people Banking services are a public good- to be made available to those who have a need

Savings accounts - March 2007

Institution Commercial banks

Number of deposit accounts (Millions) 320.9

Regional Rural Banks

52.7

Urban cooperative banks

50.0

Rural cooperative banks Post office

-60.8

Total Formal Institutions Primary cooperative societies (members) Self Help Groups (member savers) Total

125.8 53.3 663.5

Numbers ahead

India

Number No of No of of adults loan a/cs deposit a/cs

Gap

600 mn

480 mn or 130 mn?

122 mn

466 mn

Multiple accounts of the same borrower not factored – the gap is actually larger

Issues • Large number of potential clients not covered • Sparsely populated areas and remotely located areas not covered • Uncovered clients not economically significant in terms of business volumes • Branch network limited compared to the number of excluded

Issues • Staff strength in banks low compared to additional effort needed • Large inter-state variations in per branch and per staff work loads • KYC norms entail additional time and cost • Impact on profitability

What is inclusion today No frills accounts General Credit Cards • Offering low balance savings accounts is a drain on banks’ resources • Loans – especially for livelihoods is the better option – but not preferred by banks • Insurance – only distribution - ineffective coverage

New client acquisition -MF Client outreach

(in millions) 2006-07 2007-08 Banking system (SHGs) 38.02 45.20 MFIs 10.04 14.01 Total 48.06 59.21

Significant initiatives • AP experiment of smart card based NREGS payment accounts • Bhamashah campaign in Rajasthan – enrolment of 5 million new clients to achieve inclusion with state’s support – now facing hurdles of a political nature • Several bank specific initiatives

Policy • Inclusion as an objective • Study of the issues, institutions and means • Launch of new products • Introduction of new mechanisms (BC, BF, Mobile banking, Prepaid instruments, etc) • Linking benefits transfer with inclusion

Tools • Funding mechanism to cover technology and other costs • Financial literacy drive • Debt counseling initiative • New products as tools?

Technology • Wide variety – to help in customer acquisition – Transaction processing – Accounting – MIS – Monitoring Handheld devices, Point of Sale devices, card readers, cell phone devices, cell phones

concerns • Physical network inadequate – faster roll out of technology and agency banking needed • Savings emphasized - much less talk of credit and insurance • Primary focus on commercial banks – Cooperatives, MFIs ignored • CSR view of inclusion is not helpful • Technology to make institution’s life comfortable – customer focus needed • Agent banking could increase risks – mitigation to take care of customer protection too

Conclusion • It is a challenge – but also an opportunity • Tomorrow’s clients today – with some costs hopefully being absorbed by inclusion fund • Investment in technology would be of long term help – FITF is available • Business volumes would get up built up over the next few years on the back of large number of new clients • It is not a cost; nor a vain effort – it is an investment in future of the bank as well the underserved people.

thanks

Internal preparedness • Need to identify staff and train staff in fast client acquisition • Skills of contracting outsourced services • Investment in software and networking to render remote KYC compliance easy • Active role of SLBC and DLCC for documenting best practices and sharing the same • Lobbying with RBI for a relook at KYC norms for the inclusion agenda • Lobbying with GoI and RBI for access to financial inclusion fund - based on results achieved and investment in technology

How – the strategies Overarching concerns • Cost effectiveness • Early completion of the task Strategies • Use of technology • Outsourcing of services – correspondents and facilitators

How - strategies • Devising a credible KYC compliance procedure that would satisfy RBI ( such as a bankers committee at the block level) • Campaign mode of enrolling clients • Usage of facilitator model to use SHGs, NGOs, Farmers clubs and MFIs - especially in agriculture finance • Financing of MFIs, cooperatives and SHGs in larger numbers to achieve indirect inclusion -