Financial Inclusion | K C Chakrabarty
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Putting Financial Inclusion into Mission Mode
A major barrier cited to expand appropriate services to the poor is the cost of providing those services, including administering small loans. While transaction costs do not vary in direct proportion to a transaction's size, serving the poor with small value services is not viable using conventional approaches, says K C ChakrabartyOne of the preconditions for deepening of any process is the existence of a large number of participants. Hence, financial inclusion is a necessary condition for financial deepening. Financial deepening can address concerns of growth with equity and ensure pro-poor growth. Financial sector development and deepening helps mobilise savings, leading to increased investment in an economy’s productive sectors. The institutional infrastructure of the financial system contributes to reducing information, contracting and transaction costs, which in turn accelerate economic growth and promote pro-poor growth. In fact, increasing financial inclusion reduces the economic vulnerability of households, promotes economic growth, alleviates poverty and improves the quality of peoples’ lives. Thus, expansion of banking leads to increasing availability of finance to spur economic growth and alleviate poverty.
Barriers to Expansion
Barriers for poor people to access appropriate financial services include socio-economic factors, e.g., lack of education, illiteracy, gender and age, low and irregular income, and geography, apart from regulatory factors, like mandatory requirements of identity documentation and product design factors.
A major barrier cited to expand appropriate services to the poor by financial service providers is the cost of providing those services, including administering small loans. While transaction costs do not vary in direct proportion to a transaction’s size, and also because a larger number of transactions brings down the transaction costs, serving the poor with small value services is not viable using conventional retail banking or insurance approaches. It is here that technological and institutional innovation needs to be promoted as a means to expand financial system access and usage, including addressing infrastructure weaknesses.
Innovation in delivery and design of financial services targeting the poor and the excluded poses challenging policy and regulatory issues. Even the G-20 has set up an financial inclusion experts group to address issues of ensuring financial inclusion and global safety nets. Global awareness of the challenges and barriers, and hands-on experience with policy, regulation and supervision is limited. Industry innovation has thus far frequently outpaced the capacity of policymakers to respond. When one talks of reaching to the people, one must understand the problems that are faced by such people and accordingly formulate the solution. Any policy and regulatory responses will therefore need to focus on articulating flexible approaches that can take account of multiple and competing objectives, and that can accommodate further innovation. A key source of innovation is the capacity of technology to reduce costs and overcome other barriers to the provision of sustainable financial services to the excluded.
Till a few years ago, there was a dearth of appropriate technology. But, now that technology has arrived, several initiatives have been taken in the country to bring about financial inclusion. What is needed is a business model and a delivery model. It is keeping this in light that the Reserve Bank of India has advised all banks in the country to formulate a board-approved financial inclusion plan for next three years. This, it feels, will help put the financial campaign into a mission mode. The RBI’s broad approach on achieving planned, sustained and structured financial deepening includes the following:
Seamless Integration of Technology
The transformational role of technology in promoting inclusion needs to emphasised. Financial deepening is taking banking to people. Scalable financial inclusion cannot happen without stable and reliable information and communications technology (ICT). For scaling up financial inclusion efforts, it important that all banks adopt the core banking solution (CBS) not only in all bank branches but also in the branches of regional rural banks. Such centralised technology applications will aid the scaling up of all financial inclusion efforts. It will enable transactions through hand held front end-devices to be seamlessly integrated with the main server of the concerned bank. These devices must be capable of transacting the following four minimum products and services:
- A savings cum overdraft account;
- A pure savings product ideally a recurring or variable recurring deposit;
- A remittance product for EBT and other remittances; and,
- Entrepreneurial credit such as GCC and KCC.
Then there is the issue of coverage. So far, even when a customer from a remote village opened an account with a bank branch in a city, that branch included that remote village as being covered by banking services. For a village to be considered covered by banking services, either a bank branch has to be present or a business correspondent (BC) should be visiting or reside in that village. There must be a bifurcation between villages with more than 2000 population and those with less than 2000 population. The plan needs to cover in an integrated manner both categories of villages. The names of the BC/ branch covering a particular village need to be indicated on the bank’s website.
Integrating Bank Business Plans & Inclusion Efforts
Also, financial inclusion plans must be integrated with the normal business plans of the banks. Banking to the poor is a viable business opportunity but costs and benefit exercise needs to be attempted by the banks to make financial inclusion congruent with their business models. Banks must view financial inclusion as a huge business opportunity and perfect their delivery models.
The banks also need to examine the operational issues related to the BC model such as cash handling. They need to evaluate whether an intermediate brick and mortar structure is required between the base bank branch and BCs for more effective supervision of the BCs. This structure, which should be manned by banks’ own skeletal staff, can have a safe where BCs can deposit cash, a CBS terminal and passbook printing facility. Over a period of time, this can morph into a full fledged satellite branch of the bank.
Financial inclusion is sometimes erroneously treated as synonymous with rural poverty. Concerns of urban poverty also need to be factored in and the needs of various groups as rickshaw pullers, construction workers, migrant workers, etc., must be factored in and products and services crafted as per their needs by the banking system to address urban financial inclusion.
Today, the Reserve Bank of India is closely monitoring the progress made by the banks as per their financial inclusion plans. A structured reporting format has been made available for meaningful compilation and analysis of data. The banks need to do similar structured data compilation exercise at the state/district level, which will facilitate monitoring at the district / state / bank level. A structured approach will ensure that this time the outcome of financial inclusion efforts will be different and will not meet the same fate as previous ones.
Financial inclusion is not mere state benefit transfers. Loans must be extended and savings and borrowings habits need to be inculcated among the poor. The poor do not require cheap credit but prompt credit. It is an anomaly that while they are pressed to pay exorbitant rates of interest to the money lender, the mainstream financial institutions are still shy of lending to them.
Inclusive financial sector development makes two complementary contributions to poverty alleviation: financial sector development is a driver of economic growth, which indirectly reduces poverty and inequality; and appropriate, affordable, financial services for poor people. Critical to our efforts at securing sustained economic growth are the expansion of last mile access to finance.
Excerpts from address by K C Chakrabarty, Deputy Governor, Reserve Bank of India at the 23rd Skoch Summit on 17 June 2010 at Mumbai
