(Study Material for IPS LCE) Socio Economic Development in India: Financial Inclusion, Financial Deepening And Economic Growth

Important Materials on Socio Economic Development in
India for IPS LCE Examination
Financial Inclusion, Financial Deepening And Economic Growth

Courtesy: Ministry of Information
and Broadcasting publication division

Financial Inclusion, Financial Deepening And Economic

We are justifiably proud of our robust and resilient
financial system that has over the years, grown in size and complexity. The
financial system today encompasses a host of institutions including 75,170
branches of commercial, mainly public sector banks across the country; 15,612
branches of 82 Regional Rural Banks; 14,000 or so cooperative bank branches; 95,
626 outlets of Primary Agricultural Credit Cooperative societies, NBFCs mutual
fund companies et al,yet the problem of exclusion from access to formal
financial services is so acute that despite the penetrative outreach of the
financial system 50% of the country is unbanked. (Source: Report on Trend and
Progress of Banking in India, 2010.) With the access of banking services being
limited in rural areas, the reliance on informal sources of finance is
considerably high. Further, the divide across various geographical regions too
is significant in terms of access to banking services. The western, southern and
northern regions have been far ahead of the north-eastern, eastern and central
regions not only in terms of branch intensity but also in terms of per capita
deposit/credit. Thus moving towards universal financial inclusion is our
national commitment and RBI’s policy priority. Financial access is necessary as
it enables access to financial services like savings, credit, remittance,
insurance, pensions from formal financial institutions at cheaper cost. Taken
together this enables movement from the margin to the mainstream. It allows a
paper trail of transactions effected through the banking system and thus curbs
illegal transactions. The inhibitors to this process are the small ticket
character of loans. Low value, high volume nature of transactions in the penny
economy make administration of loans and recoveries costly .Once appropriate
technological solutions are in place technology can be leveraged effectively to
leapfrog the barriers of geography.RBI emphasises a bank led model of financial
inclusion relying on ICT solutions.

Table: Percentage share of debt of households from various sources

Source Rural Urban
Formal sources 57.1 75.1
Of which, Cooperatives 27.3  
Commercial banks 24.5 29.7
Informal sources 42.9 24.9
Of which, Professional Moneylenders 19.6  
Professional moneylenders 19.6 13.2
Traders 2.6 1.0
All sources 100.0 100.0

Table:  Indicators of banking outreach across geographical regions

Region Population per bank branch (‘000) Amount of deposits per capita (Rs.) Amount of credit  per capita (Rs.)
North-eastern region 19.8 17,775 6,119
Central region 18.0 17,183 8,028
Eastern region 18.5 20,413 10,267
Southern region 10.3 39,870 36,778
Northern region 10.7 63,766 47,554
Western region 12.9 86,393 67,171
All-India 13.9 38,833 28,232

It is axiomatic that well diversified broad-based and inclusive financial
systems significantly raise growth, alleviate poverty, and expand economic
opportunity. This is secured through the process of building robust sustainable
and scalable solutions through greater financial deepening. Access is inversely
proportional to income. In the absence of financial deepening it is not easy to
access the full range of goods and services from mainstream institutional
providers. Poorer households and smaller enterprises face difficulties in
obtaining basic banking services, inhibitions arise on account of the
transaction costs, risk perceptions, inadequate infrastructure, information
barriers, and other factors.

Financial inclusion is the delivery of financial services, at affordable
cost, to vast sections of disadvantaged/low-income groups excluded from the
formal financial system. The Reserve Bank provides overall macropolicy direction
and supports new products and services such as the No Frills Accounts ,GCC and
KCC,relaxed regulatory dispensation on branch authorisation& KYC norms, besides
providing financial support through the two funds operationalized through NABARD
namely Financial Inclusion Technology Fund and the Financial Inclusion Fund.

Opening of No-frills Accounts

Basic banking ‘no-frills’ account with ‘nil’ or very low minimum balances as
well as charges that make such accounts accessible to vast sections of the
population were introduced as per RBI directive in 2005. As on March 2011, 7.44
crore ‘no frills accounts’ have been opened by banks with outstanding balance of
Rs.6565.68 crore.

Small Overdrafts in No-frills Accounts

Banks have also been advised to provide small ODs in no frill accounts. Up to
March 2011, banks had provided 41.77lakh ODs amounting to Rs.198.73 crore.

General Credit Cards

Banks have been asked to consider introduction of a General Purpose Credit
Card (GCC) facility up to Rs. 25,000/- at their rural and semi-urban braches.
The credit facility is in the nature of revolving credit entitling the holder to
withdraw up to the limit sanctioned. Based on assessment of household cash
flows, the limits are sanctioned without insistence on security or purpose.
Interest rate on the facility is completely deregulated. As on March 2011, banks
had provided credit aggregating Rs.1287.66 crore in 8.83 lakh General Credit
Card (GCC) accounts.

Relaxed Regulatory Dispensation on KYC Norms

Know Your Customer (KYC) requirements for opening bank accounts have been
relaxed since August 2005 and simplified for accounts with balances not
exceeding Rs. 50,000/- and aggregate credits in the accounts not exceeding Rs.
one lakh a year. Introduction by an account holder who has been subjected to
full KYC drill would suffice for opening such accounts or the bank can take any
evidence as to the identity and address of the customer to the satisfaction of
the bank.

Simplified Branch Authorisation

To address the issue of uneven spread of Bank branches, since December 2009,
domestic scheduled commercial banks are permitted to freely open branches in
Tier 3 to Tier 6 centres with population of less than 50,000 under general
permission, subject to reporting. In the North Eastern States and Sikkim,
domestic scheduled commercial banks can now open branches in rural, semi urban
and urban centres without the need to take permission from Reserve Bank in each
case, subject to reporting.

Business Correspondent/ Business Facilitator Model

In January 2006, the Reserve Bank permitted banks to utilise the services of
non-governmental organizations (NGOs), micro-finance institutions (other than
Non-Banking Financial Companies) and other civil society organisations as
intermediaries in providing financial and banking services through the use of
business facilitator and business correspondent (BC) models. The BC model allows
banks to do ‘cash in – cash out’ transactions at a location much closer to the
rural population, thus addressing the last mile problem. From September 2010
banks have been permitted to engage the following individuals/entities as BC.
(i) Retired bank employees, retired teachers, retired government employees and
ex-servicemen, individual owners of kirana/ medical /Fair Price shops,
individual Public Call Office (PCO) operators, agents of Small Savings schemes
of Government of India/Insurance Companies, individuals who own Petrol Pumps,
authorized functionaries of well run Self Help Groups (SHGs) which are linked to
banks, any other individual including those operating Common Service Centres (CSCs);

(ii) NGOs/ MFIs set up under Societies/ Trust Acts and Section 25 Companies ;
(iii) Cooperative Societies registered under Mutually Aided Cooperative
Societies Acts/ Cooperative Societies Acts of States/Multi State Cooperative
Societies Act;
(iv) Post Offices; and
(v) Companies registered under the Indian Companies Act, 1956 with large and
widespread retail outlets, excludingNon Banking Financial Companies (NBFCs).
Banks have reported employing 40942 BCs which covered 78078 villages.
As on March 2011, 281.33 lakh smart cards have been issued by banks as part of
their efforts to drive Information and Communication Technology (ICT) – based
financial inclusion.


Based on the recommendations of the “Committee on Financial Inclusion” set up
by the Government of India under Dr. C. Rangarajan, two Funds, the “Financial
Inclusion Fund (FIF)” for meeting the cost of developmental and promotional
interventions for ensuring financial inclusion, and the “Financial Inclusion
Technology Fund (FITF)”, to meet the cost of technology adoption has been set up
at NABARD with an overall corpus of Rs. 500 crore each Special package for North
Eastern States
To improve banking penetration in the North-East, the Reserve Bank asked the
State Governments and banks to identify centres where there is a need for
setting up either full-fledged branches or those offering forex facilities,
handling government business or for meeting currency requirements. It has also
offered to fund the capital and running costs for five years provided the State
Government concerned is willing to make available the premises and put in place
appropriate security arrangements. Meghalaya has been the first off the block,
and eight centres have been allotted to three public sector banks, following a
bidding process. Branches at two of the agreed centres in Meghalaya have been
opened in Januaryat Gamberge and in Nongshillong in February 2011 and the third
such branch is expected to be openedshortly. A lot of Stress is also being laid
on spreading financial literacy and financial education.

Policy Interventions to Strengthen Financial Inclusion

CBS in RRBs: Given the strategic positioning of Regional Rural Banks (RRBs),
the Reserve Bank has directed all RRBs to be CBS- compliant and by September
2011, this is expected to give a further fillip to financial Inclusion efforts
given the penetrative outreach of the RRBs in the rural areas.
Scaling up IT: Banks had been urged in May 2007 to scale up IT initiatives for
financial inclusion speedily while ensuring that solutions are highly secure,
amenable to audit, and follow widely-accepted open standards to ensure eventual
inter-operability among the different systems.
Mobile Banking: Mobile banking guidelines for banks were issued in October 2008.
Since December 2009, banks have been permitted to offer this service to their
customers subject to a daily cap of Rs 50,000/- per customer for both funds
transfer and transactions involving purchase of goods/services.
Roadmap for Banking Services:In November 2009, banks were advised to draw up a
roadmap to provide banking services through a banking outlet in every village
with population over 2,000, extending financial inclusion to more than one lakh
villages. Banking services may not necessarily be extended through a brick and
mortar branch but provided through any of the ICT- based models, including
through Business Correspondents (BCs). A total of 72,814 such unbanked villages
were identified and as on March 2011, 24,710 banking outlets have been opened in
various villages across the country.
Financial Inclusion Plan for Banks: All domestic commercial banks- public and
private sector were advised in January 2010 to draw up specific Board approved
Financial Inclusion Plans (FIP) by March 2010 incorporating some basic minimum
qualitative features, and quantitative indicators with a view to rolling them
out over the next three years. Such Board-approved FIPs are an integral part of
their business plans and include criteria on financial inclusion in the
performance evaluation of their field staff.
Can ICT and government macro policies support the expansion of financial access
so as to build an inclusive Financial Sector?

UID Project and Financial Inclusion

The Unique Identification Authority proposes to furnish an identity card that
will satisfy the Know Your Customer (KYC) norms of banks, thereby giving a
fillip to financial inclusion. Aadhaar aims to provide a Unique Identification
in the form of 12-digit unique number with some basic demographic and biometrics
information to every Indian citizen. As the UID numbers would be acceptable for
KYC compliance, UIDAI can act as a major facilitator for financial inclusion
through opening of bank accounts. While UID would provide a strict check on
customer’s identity through biometric authentication, the costs and time
required by the customer for opening accounts would be reduced substantially.
Further, online authentication system will save the cost of issuing smart cards
for the banking sector while increasing security.It would also help new
generation service providers, such as BCs and other technology service providers
(UIDAI, 2010).Banks can be registrars to the UID and through this collaborative
process are inclusion in the hitherto unserved and under-served geographies.
The issuance of a unique identification number that can be verified and
authenticated online,in a cost effective manner and is robust enough to
eliminate duplicate and fake identities is expected to provide a further fillip
to financial inclusion efforts. NREGA payments and payments under other
government benefit programmes as also all state benefit transfers are expected
to be routed through UID cards to eliminate all leakages and malpractices and
ensure that the right beneficiary receives timely and adequate recompense.
UID would also help in widening the scope of financial inclusion by bringing
those employed in the unorganised segments into the ambit of formal finance.
This would be possible by linking pension, provident fund and medical insurance
plans provided to employees to their accounts through the UID. It would thus
open up a whole new vista.
The scale and magnitude of this programme is unprecedented and requires
effective coordination between different tiers of the Government and between
regulators. It also seeks effective support from various public and private
sector agencies. Public policy and technology changes, can now fundamentally
alter banking . Banks need to mobilize resources from a wide deposit base and
extend credit to the unbanked and unreached ,hitherto not financed by banks.
Amartya emphasizes that capability and freedom enhancing social policies
generate stable civil societies. Thus financial inclusion which enables
attainment of equity with growth is a a global public good. Universal financial
inclusion by 2012 is our policy commitment. We have promises to keep and miles
to go before we slee.

Courtesy: Ministry of Information and Broadcasting
publication division

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