Financial Inclusion in India

Why Financial Inclusion?

Financial inclusion (FI) means delivery of banking services at an affordable cost. Banking services = public good. So availability of banking and payment services to the entire population needs to be given without discrimination. It includes getting cheaper loans, Insurance (life, med, non-life, crop etc), Investment (Equity, MF, Pension plans etc).

Why?

Inculcate habit of saving in poor. Capital formation will get a boost.

Adequate, transparent & cheaper credits/ loans - will raise entrepreneurial spirit in poor people & result in prosperity.

Plug gaps & leaks in public subsidies & welfare progs. A study by McKinsey estimated that Rs. 1 lac crore could be saved each year in terms of manpower/time/ paperwork/ leaks if all govt subsidy/ benefit payments are done via e-payments.

Inequality falls more rapidly in areas that have more developed financial intermediaries = Empowerment.

Economic well being = social harmony. Bring Govt closer to poor people. It'll help inclusive growth efforts, and reduce poverty. No brainwashing by extremist/ Maoist/ Sucessionist elements.


What is being done by RBI/ Govt.

Access to banking network

1. Post office has vast network. They open Savings, RD, FD accounts. Also  Insurance, investments in Mutual funds, Payment & remittance services is being provided.

2. RRBs, cooperative banks, primary agricultural societies established for delivers.

3. Lead bank schemes (1969): RBI assigns a district to a bank which is responsible for promoting banking services and financial literacy there.

4. Business Correspondents (BC) system: Banks extend their services to villagers with help of agents, where opening brick-mortar branch is not profitable.

5. Bhartiya mahila bank setup for women empowerment.

6. White label ATMs: 2/3rd of these ATMs to be opened in semi urban and rural areas.

7. Banks to open at least 25% of their new branches in unbanked rural centres.

8. No Frills accounts for poor people. Later renamed to Basic Savings Bank Deposit Account (BSBDA): with relaxed KYC norms.

Giving Access to Credit (Loans)

Priority sector lending targets to banks.
Microfinance, various schemes for Self-help groups by NABARD
Interest Subvention scheme for farmers.
General Purpose Credit Card (GCC) and Kisan Credit Card (KCC) to help people get loans easily.

Giving More Access to Investment

National Savings certificates
Public Provident Funds
New Pension Scheme (NPS), Swavalamban (for people in unorganised sector).
Rajiv Gandhi equity savings scheme (Investing in equity Market: for First timers, upto 50K).
Inflation indexed bonds

Giving Access to Insurance
1. By Post office: tie-up with LIC & its own - offering various schemes.
2. Rashtriya Swasthya Bima Yojana (for BPL families, biometric smart-card based - cashless insurance for hospitalisation in public as well private hospitals, avail inpatient medical care of up to Rs 30K).

3. Rajiv Gandhi Shilpi Swasthya Bima Yojana: by Union Ministry of Textiles, in association with ICICI Lombard (for Craft persons, total medical cover of Rs.15K, death and permanent/partial disability by accident Rs.1.00 lakh).

4. Aam Aadmi Bima Yojana: for landless agricultural families, those involved in 46 other trades including beedi workers, carpenters, cobblers, fishermen etc. Life cover of Rs. 30K for natural death, Rs. 75K for death due to accidents. Scholarship of Rs 100/- per month for 2 children.


A recent committee by RBI named "Nachiket Mor committee" had outlined an ambitious plan of achieving total Financial inclusion by 1/1/2016. It recommended NBFCs to play major role in FI. But its report are being put on back burner as RBI & Finance ministry are not comfortable with the idea of NBFCs getting status of banks (via Payment banks- to open SB a/c & Wholesale banks - to give loans) without obligation of CRR, SLR.

Banking History | Private banks

Birth of RBI
By early 30s, there were >1200 banks in India! With Great depression of 1930s, Indian banks started to collapse - so British Indian Govt set-up RBI to supervise over banks in 1934.

Post Independence
Target of banks were merchants, upper middle class. They were not aiding Five-year plans of GOI (like cheaper loans to farmers). They were owned by industrialists & their policies were meant for their benefit. Hence GOI started nationalizaling banks.

Nationalisation: 1955 SBI, 1969- 14 banks, 1980 - 6 banks. Now govt majority share holder, GOI can pick board-of-directors, policy of its choice.

=>Now Banks were forced to give loans at very cheap rates, recovery became an issue (no quick legal recource available at that time), RBI kept CRR & SLR high (15, 40 % resp) all this means banks are left with little money to lend. No business expansion leads to decline in exports, in some ways it lead to BOP crises of 1991.

Narsimhan Committee I (by GOI in 1991)

Bank licences: 1st Round (1993):10 licences given, out of which 6 are running successfully viz. ICICI, HDFC, UTI (Axis bank in 2007), IDBI, Indus, DCB. Four banks failed at various stages.


Narsimhan Committee II (1998)
Introduce VRS. Legal reforms in loan Recovery => SARFAESI 2002.
Computerization, Electronic fund transfers (ECS, NEFT, RTGS). Allow more private & foreign players.

New Bank licences 2nd round (2001): Kotak Mahindra, Yes Bank.
New Bank licences 3rd Round (2013-14: Given to 2 out of 25: IDFC, Bandhan.

Pro & Against arguments for New Pvt Banks can be read here.

Few takeaways are:

-> As per census 2011:
Only 67% of Urban households & 54% of rural households are getting banking services.

-> Existing banks not sufficient for 100% financial inclusion.
only one in two Indians have bank account
Only one in seven Indians gets loan from banks (others have to rely on money lenders who charge 36% compound interest rate!)

-> "Inside RBI this is seen as an Experiment. RBI wants local/ niche banks". Bandhan is a micro-finance company based in WB. Giving license to it is RBI's push for Financial Inclusion, where "Lead banks/ mainstream banks" have failed.

Equipped with a licence Bandhan can now raise money from public @ 6-7 % & lend it at 10-15% as against ~20-24% it charges now. Read full ET article here. Now it needs to be seen how a NBFC makes transition to becoming a bank & how successful  it'll be for the rural poor.

GI tag

1) Geographical Indicator tagging: More to be added.