Measures for achieving financial

inclusion in India

Thought Paper

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Measures for achieving financial

inclusion in India
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.
- Former UN Secretary-General Kofi Annan

Financial exclusion
India is said to live in its villages, a valid
statement, considering that nearly 72% of our
population lives there. However, a significant
proportion of our 6,50,000 odd villages does
not have a single bank branch to boast of,
leaving swathes of the rural populace in financial
exclusion. To a large extent, Indias development
hinges on this segments economic growth;
therefore, it is imperative to bring the unbanked
population within the ambit of banking.
Invariably, financially excluded people depend
on money lenders even for their day to day

needs, borrowing at exorbitant rates to finally

get caught in a debt trap. On top, people in
far-flung villages are completely ignorant of
financial products like insurance, which could
protect them in adverse circumstances.
Moreover, the rural poor suffer from financial
impediments, thanks to their seasonal income,
irregularity of work and job-related migration.
In the light of such issues, the need of the hour
is a financial ecosystem built to meet their
requirements and better their living standards.

Towards financial inclusion

The concept of financial inclusion is not a new
one. Nationalization of banks, priority sector
lending stipulations, the lead bank scheme,
establishment of Regional Rural Banks, launch
of Self Help Groups bank linkage programs
were all part of the Reserve Bank of Indias (RBI)
initiative to provide financial access to the
unbanked and underbanked masses. However,
the movement gathered momentum after 2005,
when the regulator highlighted the need for
financial inclusion in its Annual Policy Statement,
and a symbolic beginning was made when in
the same year, Indian Bank brought all 800
households in Mangalam village in Pondicherry
within its fold.
That being said, progress has been rather slow.
Although there are more than 89,000 branches

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in India today, 40% of Indians continue to

languish without access to any kind of banking
service. This can be attributed to the poverty,
illiteracy and lack of regular income of the
unbanked, as well as banks limited reach,
high transaction costs and unsuitable product
portfolios. Also, as the normal banking model is
found wanting in terms of scalability, convenience,
reliability, flexibility and continuity, banks
hesitate to set up shop in rural areas. For financial
organizations to give inclusion their best shot,
it must evolve from being a social or regulatory
obligation into a viable business proposition.
The need therefore, is to shift from a cost centric
model to a win-win revenue generating model
that provides quality banking services at the
customers doorstep.

RBI initiatives
The Reserve Bank is navigating the path to
financial inclusion by means of regulations and
guidance. It has initiated several measures to help
bank the unbanked:

No-frills accounts
People in the financially excluded zone find
it quite difficult to meet the requirements of
normal savings accounts. Recognizing this
problem, the RBI has made it mandatory for
banks to provide no-frills savings accounts
without a minimum balance requirement. The
transaction charges are reasonable and small
overdrafts are also allowed.

Overcoming language barrier

Large sections of the Indian population are
not conversant with English and Hindi, the
languages mostly used in bank forms. Banks are
therefore required to provide forms pertaining
to account opening, disclosure etc. in the regional
language as well.

Simplification of KYC norms

Most rural inhabitants dont have any of the
identity documents that are required for
account opening and compliance with Know
Your Customer (KYC) norms. For that reason, the
account opening process has been simplified
for people who intend to keep balances not
exceeding Rs.50,000 and whose total credit in all
the accounts taken together is not expected to
exceed Rs. 100,000 in a year. Small accounts can
now be opened on the basis of an introduction
from another account holder who has satisfied
all the KYC norms.

Rural intermediaries
In January 2006, the RBI permitted banks
to appoint the following organizations as
business intermediaries:
Non Governmental Organizations (NGOs/SHGs),
Micro Finance Institutions (MFI), and
Other civil society organizations

They can be employed as business facilitators

or correspondents, the difference between the
two being that the former provide education
regarding financial products and collect
documents on the banks behalf whereas the
latter provide restricted financial and banking
services such as deposit collection and money
lending, again on behalf of the bank.
However, there is a general opinion that rural
outreach programs depend excessively on
business correspondents (BCs) and that bank
branches should play a greater role.

Information and Communications

Technology (ICT)
The Reserve Bank has also encouraged banks to
harness the power of technology for maximizing
reach and enhancing viability. ICT has thus
enabled even illiterate customers to operate
bank accounts using biometrics, rendering the
signature redundant. Bank correspondents carry
handheld ICT devices so that customers may
transact at their doorstep. By ensuring security,
technology-based banking infuses confidence in
the minds of the customers.

Electronic bank transfers

ICT banking also facilitates electronic transfer
of social security benefits directly to the
beneficiaries. This reduces dependence on cash,
thereby lowering transaction cost and minimizing
chances of fraud by unscrupulous middlemen.

Easier credit
Banks have been advised to introduce a general
purpose credit card facility, General Credit Cards
(GCCs), to be precise, with a Rs. 25,000 limit
in their rural and semi-urban branches. For
customers, this translates to easy access to
revolving credit sans the need to furnish security
or statement of purpose.

Financial education
Financial literacy will go a long way in achieving
financial inclusion. Accordingly, the RBI has

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initiated several financial education measures.

For example, it publishes comic strips to explain
the concept of savings.

Simplified branch authorization

With the objective of facilitating uniform branch
growth, the RBI has permitted banks to freely
open branches in tier III to tier VI centers
with population less than 50,000, subject to
reporting. On the other hand, banks can open
branches in any center rural, semi-urban or
urban in the Northeast without applying for
permission each time, again subject to reporting.
It was felt that the use of BCs should be
supplemented by establishing branches in
rural areas to improve banking access. A bank is
therefore obliged to locate one in four branches
opened during a year, in an unbanked region.

Roadmap
By March 2012, banks were required to chart
out a roadmap for providing banking services
(branch or ICT enabled), to every unbanked village
with a population of over 2,000.

Three year plan for financial inclusion

Banks were also advised to submit a three year
Financial Inclusion Plan (FIP) beginning April
2010. These board-approved plans had to set
their own targets in terms of rural branches to
be opened, BCs to be employed, banking services
to be provided in unbanked villages, number
of Kisan and General Credit Cards to be issued
and products to be exclusively designed for the
financially excluded segments.

More can be done

Although substantive measures are already in
place, certain additional policy tweaks and
initiatives by individual banks will succeed in
pulling out more people from financial oblivion.

Behavioral economics
Time and again, it has been seen that when given
a choice in the matter, most people do not
subscribe to a beneficial plan or product. A
case in point is the pension plan. When it was
initially introduced as an option, 90% of employees
did not enroll.
For the success of its financial inclusion program,
the government should make subscription to
financial services mandatory. At the same time,
it should also realize that simplification of
procedures will encourage more people to use
banking services.

Addressing social issues

Financial inclusion initiatives might come
a cropper if associated social issues are not
addressed simultaneously.
Take for instance
the marginalization of women in rural society.
Although women are known to be more savings
savvy than men, a large percentage are not

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permitted to own a savings account. Community

education will sensitize the menfolk and enable
women to understand and fight for their rights.
Banks can do their bit by making banking
products and services more attractive to
women, by offering higher fixed deposit rates
and creating products suited to their needs.

Moving beyond traditional products

Banks should move beyond deposit and credit
products and introduce insurance, mutual funds
and pension plans to people living in financial
seclusion, enabling them to earn higher returns,
manage risk better and provide for their retirement.

Infrastructure
Establishment of rural infrastructure is a
prerequisite for financial inclusion and all
stakeholders, banks included, have to contribute
towards setting up connectivity and ensuring
power supply among other things. Banks should
also endeavor to bond with the rural community
by initiating programs to adopt schools,
conduct vocational courses for the rural youth
and so on. An improved rural economy will
surely result in better business for banks.

A word of caution
Although financial inclusion is a must for the
countrys progress, banks need to exercise
caution. Overzealousness on their part might
give rise to a subprime crisis-like situation. They
ought to draw a clear line between sound and

unsound practices and chalk out a financial

inclusion strategy, which while enabling the
poor to get out of their impoverished condition
will also enhance their own profitability.

References
1. www.hindu.com/2010/08/10/stories/201008
1050780300.htm

Rajesh Jeganathan
Senior Associate Consultant, Infosys

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