Financial Inclusion through Micro-finance:

Dr.B.K.Swain Since the nationalization of commercial banks the banking industry has shown tremendous growth in volume and geographical reach. However, despite making significant improvements in all the areas relating to financial viability, profitability and competitiveness, there are concerns that banks have not been able to include vast segment of the population, especially the underprivileged sections of the society into the fold of basic banking services. Even at the global level efforts are also being made to study the causes of financial exclusion and strategies are designed to ensure financial inclusion of the poor and disadvantaged. The reasons may vary from country to country and so also the strategy could also vary to widespread the efforts of financial inclusion, which can truly lift the financial condition and standards of life of the poor and the disadvantaged. 1. Defining Financial Inclusion: Financial inclusion is delivery of banking services at an affordable cost to the vast sections of disadvantaged and low-income groups. As banking services are in the nature of public-goods, it is essential that availability of banking and payment services be made to the entire population without discrimination. 2. The Scope of Financial Inclusion: The scope of financial inclusion can be expanded in two ways i.e. either through state-driven intervention by way of statutory enactments or through voluntary effort made by the banking community itself for evolving various strategies to bring large section of population with in the ambit of the banking sector. When bankers do not give the desired attention to certain areas, the regulators have to step into remedy the situation. This is the reason why the Reserve Bank of India is placing a lot of emphasis on financial inclusion. The focus of the financial inclusion at present is confined to ensuring a bare minimum access to a savings bank account without frills, to all. Internationally, the financial exclusion has been viewed in a much wider perspective. Just having a current account or savings account on its own, is not regarded as an accurate indicator of financial inclusion. There could be multiple levels of financial inclusion and exclusion. It is the paradox that at one extreme there are customers who are actively and persistently courted by the financial services industry, and who have at their disposal a 1

wide range of financial services and products. At the other extreme, we have the financially excluded, who are denied access to even the most basic of financial products. In between are those who use the banking services only for deposits and withdrawals of money. But these persons also have only restricted access to the financial system, and do not enjoy the flexibility of access offered to more affluent customers. 3. Consequences of Financial Exclusion: Consequences of financial exclusion will vary depending on the nature and extent of services denied. It may lead to increased level of harassment, higher incidence of crime, general decline in investment, difficulties in gaining access to credit, getting credit from informal sources at exorbitant rates and increased unemployment, etc. The small business may suffer due to loss of access to high middle-class and higher-income consumers, higher cash handling costs and delays in remittances of money etc. According to some research study, financial exclusion can lead to social exclusion. 5. Steps towards Financial Inclusion: In the context of initiatives taken for extending banking services to the small customers, the mode of financial sector development until 1980s was characterized by an expanded bank branch network, cooperative banks and new organizational forms like Regional Rural Banks (RRBs); a greater focus on rural credit rather than other financial services like savings, insurance etc. though banks & cooperatives; lending targets directed at a wide range of priority sectors such as agriculture, small business and weaker sections of the population, etc; interest rate ceilings, imposed mostly in case of directed lending; significant government subsidies channeled through cooperatives and banks in connection with related government programmes; based on a perspective that credit for rural poor people was a social obligation and not a potential business opportunity. It is absolutely beyond any doubt that the financial access to masses has significantly improved in the last three and a half decades. But the basic question still remains, whether it has been good enough. The quantum of deposit accounts held, as a ratio to the adult population has not been uniformly encouraging. There is a tremendous

scope for financial coverage if we have to improve the standards of life of those deprived people. As a pro-active measure to enhance the financial inclusion, the Reserve Bank in its Annual Policy Statements, while recognizing the concerns in regard to the banking practices that tend to exclude rather than attract vast sections of population, urged banks to review their existing practices to align them with the objective of financial inclusion. The Reserve Bank, time and again exhorted the banks to achieve greater financial inclusion, to make available a basic banking no frills account either with nil or very minimum balances as well as to take minimum charges that would make such accounts accessible to vast sections of the population. The nature and number of transactions in such accounts would be restricted and made known to customers in advance in a transparent manner. All banks are urged to give wide publicity to the facility of such no frills account so as to ensure greater financial inclusion. Further, in order to ensure that persons belonging to low income group both in urban and rural areas do not face difficulty in opening the bank accounts due to the procedural hassles, the Know Your Customer (KYC) procedure for opening accounts has been simplified for those persons who intend to keep balances not exceeding rupees fifty thousand in all their accounts taken together and the total credit in all the accounts taken together is not expected to exceed rupees one lakh in a year. 6. The Way Forward for Expanding Credit: The banks should come out of inhibited feeling that very aggressive competition policy and social inclusion are mutually exclusive. As demonstrated elsewhere, the mass banking with no-frills accounts can become a win-win situation for both. Basically banking services need to be marketed to connect with large population segments and these may be justifiable for incurring promotional costs. In this regard, the opportunities are plenty. In the context of India becoming one of the largest micro finance markets in the world especially in the growth of womens savings and credit groups and the sustaining success of such institutions, which has been demonstrated by the success of Sewa bank in Gujarat. Thus, justifying low cost banking is not necessarily an unviable proposition.

The Indian Banks Association may explore the possibility of a survey about the coverage in respect of financial inclusion keeping in view the geographical spread of the banks and extent of financial services available to the population so as to assess the constraints in extension of financial services available hitherto unbanked sections and for initiating appropriate policy measures.

It may be useful for banks to consider franchising with other segments of financial sector such as Cooperatives, NBFCs, and RRBs etc. so as to extend the scope of financial inclusion with minimal intermediation cost.

Since large sections of low-income groups transactions are related to deposits and withdrawals, with a view to containing transaction costs, 'simple to use' cash dispensing and collecting machines akin to ATMs, with operating instructions and commands in vernacular would greatly facilitate financial inclusion of the semi-urban and rural populace.

It is becoming increasingly apparent that addressing financial exclusion will require a holistic approach on the part of the banks in creating awareness about financial products, education, and advice on money management, debt counseling, savings and affordable credit. The banks would have to evolve specific strategies to expand the outreach of their services in order to promote financial inclusion. One of the ways in which this can be achieved in a cost-effective manner is through forging linkages with micro-finance institutions and local communities.

Banks should give wide publicity to the facility of no frills account. Technology can be a very valuable tool in providing access to banking products in remote areas. ATMs cash dispensing machines can be modified suitably to make them user friendly for people who are illiterate, less educated or do not know English to carry out the transactions.

Further, banks need to redesign their business strategies to incorporate specific plans to promote financial inclusion of low-income group treating it both as a business opportunity as well as a corporate social responsibility. They have to make use of all available resources including technology and expertise available with them as well as

with the Micro-finance Institutions (MFIs) and Non-Governmental Organizations (NGOs). It may appear in the first instance that taking banking to the sections constituting the bottom of the pyramid, may not be profitable but it should always be remembered that even the relatively low margins on high volumes can be a very profitable proposition. Financial inclusion can emerge as commercial profitable business. 7. Regulatory Approach towards Rural Credit: The Reserve Bank of India has continued to lay stress on the need for financial inclusion of the under-privileged sections, which have hitherto remained outside the periphery of the banking system. Through a series of new measures announced in its Credit Policy, it has once again shown concern for this segment of population which has been unable to draw benefits from the banking system despite the extensive network of the public sector Banks. State Level Bankers Committee (SLBC) conveners in all States have been given the responsibility of reaching 100% financial inclusion in at least one district in their area. Apart from providing banks an opportunity to widen the customer base, they can keep operating costs down by building products around technology. The permission to Banks to use the services of NGOs, SHGs, MFIs and Post Offices as intermediaries for providing financial and banking services will augment the client base and will help to move towards 100% financial inclusion. The formation of a working group to formulate schemes for reasonable bank charges will bring in more number of customers with affordable operative charges. The initiatives to persuade banks to publish and display various service charges will improve transparency. Overall, the Annual Policy Statement prompts banks to view financial inclusion of low-income groups as both a business opportunity as well as a social responsibility and enables the industry to take one more step towards bringing banking to the masses. 7. Challenges of Credit Flow through Financial Inclusion: There is plenty of interest in the subject of financial inclusion, not only in India but in developed countries too. The terminology may be new and the rationale for its adoption rooted in todays socio-economic thinking, but for the Indian financial sector it is hardly original. Nor has this sector willfully shunned inclusive practices, whether directed by policy makers or by market forces.

The financial sectors relative neglect of the rural sector can be rationalized though not justified. Mainline bank finance in India is urban centric and overwhelming majorities of its staff are city bred. Equally important, cost of running a branch bank has historically been high. Numerous attempts at evolving a low cost business model for rural banking has not been totally successful. Thus, despite the well documented achievements of Indian public sector banks in spreading the banking habits for more than three and half decades since bank nationalization, large sections of people, who are the vulnerable sections of the society as well as some geographical areas face financial exclusion to a greater degree than the rest of the country. A number of non- traditional routes are being explored to increase coverage of the financial sector. Increased use of technology and licensing low cost entities to undertake basic banking functions are being thought of. While inclusive practices are not new to the mainline banks, what has changed is the environment. There is passive thinking that no-frills accounts that are being popularized may not be different from the five-rupee savings bank accounts of the seventies in the last century. However, in the context of much tougher guidelines for opening bank accounts, especially brought about by know-your-customer rules, there is inherent challenge to open such accounts as well as to make money and prevent benami accounts. 8. Serving Rural Poor through No-frills Bank Accounts: The no- frills savings bank account introduced by several commercial banks a few months ago had all the potential to revolutionize Indias rural agricultural economy as well as usher in the banking habit amongst a large number of the less privileged population. However, the product was lost among a myriad of financial offerings and most banks have shown little interest and vitality in marketing it. Thus, the trigger for greater financial inclusion is likely to remain the countrys aspiration at greater social and economic equity, rather than as a sign of things to come. There seems to be neither an inherent demand among the socially and economically deprived classes, nor a profit-driving urge amongst banks to market the new product. Though the Reserve Bank of India promoted the no-frills savings bank accounts with the express intention of bringing greater financial inclusion among the people, banking continues to remain an elitist to middle-class pursuit, restricted mainly to urban India.

Compounding the problem, several Cooperative and Regional Rural Banks have been trying to gain a foothold in semi-urban and urban pockets, even as the commercial banks continue to shy away from rural India. But for the strict guidelines and vigilant enforcement of the Reserve Bank, rural banking would have remained a mere tokenism. Despite such pacifism, financial inclusion is an essential pre- condition to build uniform economic development, both spatially and temporally, and ushering in greater economic and social equity. Financial inclusion also means extending the banking habit among the less privileged in urban and rural India and weaning them away form unorganized money markets and money lenders. But the path of financial inclusion continues to be daunting, not just for India, but to the developed world as well and economic development paradigm has revealed that equity is not axiomatic with economic development. The experience of several other countries reveals that conventional development models sometimes aggravated inequity. However, there are no shortcuts to financial inclusion. One advantage that our country enjoys in the endeavour towards greater financial inclusion and equity is that as a late entrant into the realm of accelerated economic development and it can learn much from the mistakes of other nations. Additionally, the Government has no qualms in pursuing accelerate economic development even while wearing the trademark of greater equity and financial inclusion on its sleeve. This has not only proved to be good politics, but good economics as well. There are several government and non-government programmes aimed at reducing poverty and bringing greater equity in the country. But few have proved to be inherently productive and sustainable. Financial inclusion can transform some of them into productive and self-sustainable projects. The micro-credit programme launched through numerous Non-Government Organizations has found fancy with the banking industry and can prove to be an excellent tool to bring in greater equity through financial inclusion. Several of the micro-credit schemes have been eminently successful and have brought rich rewards to the beneficiaries. With hardly any NPAs in micro-credit disbursal, banks have begun to pursue and extend micro-credit aggressively. Some banks have been able to double micro-credit disbursal while contemplating entering the arena in a big way. Micro-credit

should not only be used to redress poverty and usher in greater equity, but should prove a tool bring the rural and urban under-privileged into total financial inclusion as well. Most of the beneficiaries continue to view NGOs and banks as conduits of credit. As a large number of the schemes are proving successful recently, it is time that banks started playing a more pro-active role. No-frills account should be promoted to plough back the returns from the savings habit and ensuring that banks act as a repository of savings and sources of credit. There are several rural and urban development programmes promoted by the Government to eradicate poverty. If banks are also made an effective intermediary, greater financial inclusion could be one of the meritorious outcomes. As some of the projects become successful and self-sustaining, greater financial inclusion would become possible. But the Government would have to do its homework thoroughly to identify projects where intermediation by banks is possible. The benefits will percolate not only to target population, but to banks as well.

9. Financial Inclusion for Credit Initiatives:

Extending the reach of formal financial institutions among the poorest of the poor should mean taking them out of the clutches of moneylenders. The reforms in the financial sector anywhere are meant to meet two major objectives i.e. profitability of the financial institutions as business entities and serving the needs of the real economy with due consideration for the principles of equity. But there are obvious contradictions. In the race for profitability, there is an obvious need to reduce operational costs. In the process, there is a natural exclusion of several sections of the society from the financial net. Reducing the adverse consequences of such exclusion and bringing the maximum number of people under the financial system is the key concern of financial institutions throughout the world. Indeed, financial inclusion is not an end in itself. Just having a bank account, or an insurance coverage, ipso-facto, does not mean an enhancement in the economic position or well being of a person. But it can act as a facilitator. As poverty is a well-known problem in most developing countries, what is needed is to develop mechanisms, which ensure that poverty is not exacerbated by lack of access to financial services. People need information and advice when they get into debt and such

information and guidance can best be delivered by appropriate mechanisms. If such effective mechanisms are put in place, they in turn reinforce the demand fro credit. While attempting to reach the hitherto excluded sections through a campaign mode is a laudable initiative, the reality of Indian banking still remains beyond the reach of many households. The latest Reserve Bank figures indicate that the 85 commercial banks concentrated in urban centers, account for 78 percent of Indias financial assets while cooperative banks and regional rural banks accounts for only nine percent and three percent, respectively. This explains, to some extent, the rural retrogression, which has its social reflections in phenomena as farmers suicides. Large institutional intervention, such as in the form of micro-finance, has shadow effect than really contributing to the dynamics of the economy. Large employment oriented rural programmes still suffer largely from inadequacy of backward and forward linkages. The conventional credittechnology-market approach should undergo a major change in favour of innovative organizational initiatives. 10. Concluding Remarks: The commercial banks as a whole are competing with each other to achieve high targets. In the process, even the bare minimum that is available with the poorer sections of the society will be siphoned off as savings. Though some of the banks have come forward with general-purpose kisan credit cards and artisan credit cards, which offer collateral free small loans but it does not actually help the interest of the poor people. For the poor man, finance is everything as it saves him from day-to-day hardships as well as to link his financial needs arise out of economic activities that are sustainable. Therefore, the poor not only need capital but also real services. It is this logic that underlines the setting up of the financial inclusion fund as also linking up such a fund with initiatives for local economic development. The public sector banks, which are champion in uplifting the rural poor, would think of linkages and support professional institutions and organizations that can deliver real services as also conceive and implement capacity building initiatives. As a first step, financial inclusion centers may be set up in such professional institutions. The very objectives of financial inclusion can better be achieved through such initiatives and sustainable economic proposition for the poor will become a reality.

References: Arunachalam. Ramesh: Alternative Technologies in the Indian Micro Finance Industry, Published by Action Aid, New Delhi, 1999; Bhatt Nitin, Thorat. Y.S.P: India Regional Rural Banks: The Institutional Dimension of Reforms, Journal of Microfinance, Vol. 3, No.1, 2001; Fisher. Thomas, Sriram. M.S: Beyond Micro-credit: Putting Development back into Micro-finance, Vistaar Publications, 2000; Greening. H, Bikki. Randhwa: A Framework for Regulating Microfinance Institutions, Published by the World bank, 1999; Joshi. Deepali Pant: Organization of Microfinance, Economic & Political Weekly, April, 2004; Joshi. V.C, Joshi. V.V: Managing Indian Banks, Published by Response Books, 2002; Kurum. F, Narayan. Sadagopan: Microfinance Regulation in India, Sadhan Publication, 2001; Littlefred. E, Martin Hollman: Microfinance overtake their Commercial peers, The banker, 2005; Robinson. Marguerite.S: Microfinance, the paradigm shift from credit delivery to Financial intermediation, Ashgate publication, 1998; Thingalaya. N.K: The other side of Rural Banking, BIRD Publication, Lucknow, 2000. -0-0-0-0-0-0-

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