Financial Inclusion

Faster implementation of Financial Inclusion Programs is seen after 2010-11. Commercial banks opened new rural branches, increased coverage of villages, set up ATMs and digital kiosks, deployed BCs(Business Correspondents), opened no-frills accounts, and provided credit through Kisan Credit Cards (KCC), General Credit Cards (GCC), and other specific products designed to cater to the financially excluded segments. The introduction of core banking technology and proliferation of alternate delivery channels aided the process of inclusion on a larger scale. The statistics on key banking network give a sense of the pace of progress of banking outreach as part of Financial Inclusion.

Recent Developments

Global Findex Report 2017 (April, 2018)

The World Bank on April 19, 2018 released the Global Findex Report 2017 indicating that 55 percent of new bank accounts opened globally are from India itself.

The Global Findex Report analyses data of 144 economies to demonstrate that how people use financial services. The report was produced by the World Bank with funding from the Bill & Melinda Gates Foundation and in collaboration with Gallup Inc.

  • India witnessed a great jump in the account ownership during 2014-2017 as 80 percent Indians owned a bank account in 2017; there were only 35 percent bank account holders in 2011. Also, India has significantly reduced the gender gap in providing access to financial services with 77% women against 83% men having bank accounts.
  • Globally, 65% of women have an account compared with 72% of men, a gap of seven percentage points that has been unchanged since 2011.
  • Between 2014 and 2017, account ownership in India rose by more than 30 percentage points among women as well as among adults in the poorest 40% of households.
  • Among men and among adults in the wealthiest 60% of households, it increased by about 20 percentage points.
  • India has 190 million adults without a bank account despite the success of the ambitious Jan Dhan Yojana, making it the world’s second largest unbanked population after that of China.
  • India stands second for largest unbanked population: Despite having a relatively high account ownership, India claims a large share of the global unbanked population, after China. Over 190 million Indian adults still do not have a bank account.

Financial Inclusion Index

The Union Minister of Finance and Corporate Affairs, Arun Jaitley on September 25 launched the Financial Inclusion Index after his Annual Performance Review Meeting with CEOs of the Public Sector Banks in New Delhi. Though the Index will be released soon.

Key Points

  • Department of Financial Services (DFS), Ministry of Finance will release an Annual Financial Inclusion Index (FII) which will be a measure of access and usage of a basket of formal financial products and services that includes savings, remittances, credit, insurance and pension products.
  • The index will have three measurement dimensions;
    1. Access to financial services
    2. Usage of financial services and
    3. Quality.
  • The single composite index gives a snap shot of level of financial inclusion that would guide Macro Policy perspective.
  • Financial Inclusion Index can be used directly as a composite measure in development indicators.
  • It enables fulfilment of G20 Financial Inclusion Indicators requirements.

Amalgamation of RRBs

  • The government has decided to start the consolidation process of Regional Rural Banks (RRB) after a gap of six years and bring down the number of such entities to 38 from 56 now.

Objectives

  • The amalgamation process is being done ostensibly to enable RRBs cut overheads, improve their capital and use technology, besides helping them draw better scale-efficiency, higher productivity, improved financial inclusion and greater credit flow to rural areas.

Consolidation of RRBs

  • This is the third phase of consolidation among RRBs.
  • The first phase of consolidation was in 2004-05 when RRBs of same sponsor banks, within a state, were merged. As a result, the number of RRBs came down from 196 to 82.
  • The second phase was in 2011-12, when RRBs with geographical contiguous areas of operation within a state were merged, across sponsor banks. As a result, the number of RRBs further declined to 56.

About RRB

  • RRBs, which were formed under the RRB Act, 1976, provide credit and other facilities to small farmers, agricultural labourers and artisans in rural areas.
  • In RRBs, 50 per cent is held by the Central government, 35 per cent by the sponsor banks and 15 per cent by the state government. The new amendment in the RRB Act says that thecentral government and sponsor can hold up to 51 per cent stake.
  • RRBs were established originally with these goals in mind and with the hope of getting the best mix of credit co-operatives as well as commercial banks. They were intended to serve the credit needs of backward areas.

Darpan Launched for Financial Inclusion

  • The Ministry of Communications on December 21 launched DARPAN – “Digital Advancement of Rural Post Office for A New India” Project to improve the quality of service, add value to services and achieve “financial inclusion” of un-banked rural population.
  • The Project shall increase the rural reach of the Department of Posts and enable BOs to increase traffic of all financial remittances, savings accounts, Rural Postal Life Insurance, and Cash Certificates; improve mail operations processes by allowing for automated booking and delivery of accountable article; increase revenue using retail post business; provide third party applications; and make disbursements for social security schemes such as MGNREGS.

1st NABARD All India Rural Financial Inclusion Survey (NAFIS)

  • All India Financial Inclusion Survey (NAFIS) was conducted by National Bank for Agriculture and Rural Development (NABARD).
  • The survey with reference year of 2015-16 covered around 40,327 rural households, and highlighted that the average annual income of an agricultural household is Rs 1,07,172 as compared to Rs 87,228 for families engaged in non-agricultural activities.

Financial Inclusion in India

Financial inclusion broadens the resource base of the financial system by developing a culture of savings among large segment of rural population and plays its own role in the process of economic development. Further, by bringing low income groups within the perimeter of formal banking sector; financial inclusion protects their financial wealth and other resources in exigent circumstances. Financial inclusion also mitigates the exploitation of vulnerable sections by the usurious money lenders by facilitating easy access to formal credit.

Phases of Financial Inclusion

  • 1960-1990 – the aim was on channeling credit to weaker sections of the society and neglected sectors of the economy.
  • 1990-2005 – aimed at strengthening the financial institutions as part of financial sector reforms
  • 2005 onwards – the ‘Financial Inclusion’ was explicitly made as a policy objective and thrust was on providing safe facility of savings deposits.

index of Financial Inclusion Degree of Financial Exclusion Status)

High (0.5 < IFI < 1) - Kerala, Maharashtra, Karnataka

Medium (0.3 < IFI < 0.5) -Tamil Nadu, Punjab, Andhra Pradesh, Sikkim, Himachal Pradesh, Haryana

Low (0 < IFI < 0.3) - West Bengal, Uttar Pradesh, Gujarat, Tripura, Bihar, Assam, Nagaland, Manipur, Mizoram, Madhya Pradesh, Arunachal Pradesh, Odisha, Rajasthan

Nachiket Mor Committee

The Committee on Comprehensive Financial Services for Small Businesses and Low-Income Households headed by Dr. Nachiket Mor, submitted its final report on December 31, 2013.The Reserve Bank of India (RBI), on September 23, 2013, had appointed the Committee to propose measures for achieving financial inclusion and increased access to financial services. The Major Recommendations of the Committee were-

  • The Committee recommended that every resident receive a Universal Electronic Bank Account at the time of registering for an Aadhaar card.
  • The Committee proposed the setting up of Payments Banks whose primary purpose will be to provide payments services and deposit products to small businesses and low income households.These banks will be restricted to holding a maximum balance of Rs 50,000 per customer and will be required to have a minimum entry capital of Rs 50 crore.
  • It further proposed the setting up of Wholesale Banks which will lend to corporates and purchase securitised retail and small-business loans.
  • Sufficient access to affordable formal credit: The Committee recommended a number of steps to be taken to help banks manage their credit exposures effectively, including allowing banks to purchase portfolio insurance. Universal reporting of information with credit bureaus should be mandatory for all loans, especially kisan credit cards and general credit cards.

Banking Sector Reform for Financial Inclusion

Extension of ‘Swabhimaan’ Scheme: Under the Swabhimaan financial inclusion campaign, over 74,000 habitations with population in excess of 2,000 had been provided banking facilities by March 2012, using various models and technologies including branchless banking through business correspondents (BCs).

Setting up of the “Ultra Small Branches”: These are (wall-less) branches for the purpose of which is to reduce the infrastructural costs in setting up branches in rural areas. Under this initiative, the banks will appoint banking correspondent who will deal with all cash transactions and other routine work in that area.

Relaxation on Know-Your-Customer (KYC) Norms: KYC requirements for opening bank accounts were relaxed for small accounts in August 2005; thereby simplifying procedures by stipulating that introduction by an account holder who has been subjected to the full KYC drill would suffice for opening such accounts. It has now been further relaxed to include the letters issued by the Unique Identification Authority of India containing details of name, address and Aadhaar number.

Engaging Business Correspondents (BCs): In January 2006, RBI permitted banks to engage business facilitators (BFs) and BCs as intermediaries for providing financial and banking services. The BC model allows banks to provide doorstep delivery of services, especially cash in-cash out transactions, thus addressing the last-mile problem.

Self Help Group-Bank Linkage Programme: The Self-Help Group (SHG)-Bank Linkage Programme has emerged as the major micro-finance programme in the country.It is being implemented by commercial banks, regional rural banks (RRBs), and cooperative banks

Use of technology: Recognizing that technology has the potential to address the issues of outreach and credit delivery in rural and remote areas in a viable manner, banks have been advised to make effective use of information and communications technology (ICT), to provide doorstep banking services through the BC model where the accounts can be operated by even illiterate customers by using biometrics, thus ensuring the security of transactions and enhancing confidence in the banking system.

General-purpose Credit Card (GCC): With a view to helping the poor and the disadvantaged with access to easy credit, banks have been asked to consider introduction of a general purpose credit card facility up to Rs 25,000 at their rural and semi-urban branches. The objective of the scheme is to provide hassle-free credit to banks’ customers based on the assessment of cash flow without insistence on security, purpose or end use of the credit. This is in the nature of revolving credit entitling the holder to withdraw up to the limit sanctioned.

Kisan Credit Card Scheme: The Kisan Credit Card (KCC) has been an important initiative for universal access of farmers to institutional credit.

Simplified branch authorization: To address the issue of uneven spread of bank branches, in December 2009, domestic scheduled commercial banks were permitted to freely open branches in tier III to tier VI urban centers, subject to reporting.

Opening of branches in unbanked rural centers: To further step up the opening of branches in rural areas so as to improve banking penetration and financial inclusion rapidly, the need for the opening of more bricks and mortar branches, besides the use of BCs, was felt.

The concept of differential banks: The RBI introduced the concept of “Payment Banks” and “small banks” to attract serious players and push financial inclusion. It allowed corporate houses, including telecom players and retail chains, to set up payment banks, and also gave them the option of forming joint ventures with commercial banks.

Pradhan Mantri Jan DhanYojna: The Government in 2014 declared the beginning of the end of financial untouchability in India, with the opening of an estimated 1.5 crore bank accounts across the country, in an exercise unprecedented in scale in economic history.

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