Revisiting Financial Inclusion

(Tanushree Mazumdar)¹

In December 2005 the Reserve Bank of India (RBI) had issued a circular to all scheduled commercial banks and regional rural banks to make available a basic no-frills bank account (with nil or minimum balance) in order to make it accessible to greater sections of the population. Subsequently several banks announced that they have achieved 100 per cent financial inclusion in some districts. RBI has conducted an evaluation of such districts where 100% financial inclusion is reported to have taken place and presented the results. The evaluation exercise was carried out by various external agencies such as Mahatma Gandhi Labour Institute, Ahmedabad, NABARD Consultancy Services (NABCONS), Bangalore, National Institute of Rural Development Hyderabad, among others. The following conclusions can be drawn from the findings of the report.

1. Though 100% financial inclusion has not taken place in any of the districts surveyed by the agencies, all of them have achieved more than 50% financial inclusion. The percentage of the financially included is particularly high in 7 districts of Karnataka (almost 100 %), 12 districts of Himachal Pradesh (97.83%), Gurdaspur and Mansa districts of the Punjab (95.44%), Rajsamand district of Rajasthan (92.7%). The lowest percentage of financial inclusion was reported in the Hooghly district of West Bengal (51.23%).

2. While the report does not give reasons why banks failed to achieve 100% financial inclusion it gives reasons why most of the no-frills accounts remain inoperative. The reasons range from illiteracy of the people, distance from the bank branch, lack of interest, lack of savings, etc. One may infer that these reasons could also, to a great extent, explain the banks failing to meet the 100% target in the select districts.

The RBI is concerned about the slow progress in financial inclusion and has directed the banks to take several steps to step up the momentum on financial inclusion. There are two concerns here: one, to increase the number of people with bank accounts and two, to make the accounts so opened more operational. The steps suggested by RBI include providing banking services to account holders closer to their homes using a variety of channels including satellite offices, mobile offices, business correspondents, etc. Further RBI also suggests providing General Credit Card (GCC)/small overdrafts along with no-frills accounts to encourage them to actively operate the accounts. The RBI also suggests that banks conduct awareness drives and leverage technology to make financial inclusion more effective.

It might be time to revisit financial inclusion and see what worked in the districts that have achieved 100 per cent financial inclusion or where financial inclusion has been more effective. That might provide some insight into factors that facilitate or help financial inclusion. Some of the successful examples of financial inclusion have tied opening of bank accounts with the issues of their livelihoods or fulfilment of their basic needs. In these cases the bankers have been very motivated and have taken proactive steps to make banking services available to the people at their door-step.

Take the example of Puducherry where the Indian Bank implemented the Mangalam Model for rural financial inclusion. This was the first national pilot project on financial inclusion and was implemented by the Indian Bank (which is the SLBC convenor in Puducherry) in 2005 at the insistence of the RBI. The project was successfully implemented with the help of motivated bankers working in close co-operation with business correspondents/business facilitators and volunteers in the villages. Technology was used to establish low cost ATMs/cash dispenser, kiosk banking, etc. Indian Bank also implemented an urban financial inclusion model in Mumbai (the Dharavi model) almost along similar lines as the Mangalam project i.e. by going to the doorsteps of the slum dwellers and opening bank accounts for them, handing over of passbooks, etc. Technology was used here as well in the form of smart cards which enabled doorstep banking at Dharavi. While commenting on lessons drawn from their financial inclusion experience, Mr. M.S. Sundara Rajan, CMD, Indian Bank, notes that for bringing about successful financial inclusion banks have to take proper measures to organise the people into groups for inculcating the habit of thrift which will ultimately enable them to avail of credit facilities (Sundar Rajan, 2007)

Another successful experiment of financial inclusion is the provision of solar energy lights by the Aryavart Gramin Bank through innovative financing in the remote villages and hamlets of Uttar Pradesh (http://www.tatabpsolar.com/press_spotlight.html).The scheme not only helped light homes in the villages of UP but also provided employment to the literate youths in the villages as business facilitators who were trained by the company providing the solar lights for maintenance of the systems. Financial inclusion was successful in this case because it was tied to one of the basic needs of the people. The villagers opened bank accounts and used them actively because they were availing of the bank credit to finance the lighting of their homes.

The other instance of successful financial inclusion is in Andhra Pradesh where the Rural Development Department of Government of Andhra Pradesh launched a pilot project in six Mandals of Warangal district for payment of Social Security Pensions (SSP) and National Rural Employment Guarantee Scheme (NREGS) benefits to the beneficiaries. This project involved six banks and the used the services of business correspondents for the purpose of making payments to the beneficiaries and other transactions that the beneficiaries might want to conduct with the bank. This project was a success because it was directly linked to the livelihoods of the villagers and because the banks were able to economically leverage technology to reach out to the people who could not be reached through the branches.

The Kisan Mitra Scheme of the Punjab National Bank succeeded in bringing more than 40 villages under 100% inclusion (Chakrabarty, 2007). The Scheme has been helping farmers in formation of Kisan clubs, Self Help Groups and motivating them to undertake vermin compost units, orchard farming and other such activities. As each of these activities would require finance, it is not surprising that PNB has been able to achieve its target of 100% financial inclusion in the villages where the Scheme has been implemented.

Drawing on the experience of the various banks, as illustrated above, the factors that have helped in making financial inclusion successful are: motivated bankers, use of technology to reach out to people at their homes (taking care of the distance factor), using the services of business correspondents/business facilitators and tying finance with basic/livelihood needs.

Worldwide, mortgage lending to the marginal sections of the society has proven to be useful in mainstreaming the financially excluded in the formal financial system (RBI, 2008). This further lends support to the importance of linking basic/livelihood needs with finance. The microfinance movement may not have got the kind of stupendous success that it has had it not helped tap the entrepreneurial skills of its clients. Therefore, linking finance to people’s livelihood issues is very critical if banks want to financially include the vast population of our country.

References:

• Chakrabarty K.C. (2007), ‘Uplifting Rural Poor: A case of Punjab National Bank’, CAB calling, July-September 2007, Vol 31, No.3
• Sundara Rajan, M.S. (2007), ‘Replication of Financial Inclusion: Opportunities and Challenges- Indian Bank Experience’,CAB Calling, July-September 2007, Vol. 31, No.3
• Reserve Bank of India Circular ‘100 per cent Financial Inclusion- Evaluation by external agencies-Broad findings’dated January 22, 2009
• Reserve Bank of India (2008), ‘Report on Currency and Finance 2006-08- Volume II),2008

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