RBFI REFLECTION MEMO 2 20th July,2019

There are different institutions and programs which are pillars of financial inclusion drive in India; the bank is
one of those critical pillars. Fifty years ago, in 1969, PM Indira Gandhi took a major decision of Bank
Nationalisation with an objective of achieving social welfare, reducing private monopolies, expansion of
banking into rural areas and priority sector lending. Pre-Nationalisation, banks were more motivated to lend
to big businesses, inclined more towards opening a branch in urban areas which was not coherent with India’s
post-independence social welfare goals. Nationalisation helped to solve some of these problems with
mandates for opening branches in rural areas, government due diligence over banks, re-orientation of bank
lending etc. Also, nationalisation helped to build people’s trust in the bank, which motivated them to open
saving/deposit accounts in a bank. The outlook after nationalisation was looking positive as demand size was
concerned, but from supply-side, there was a question on the operations side and profitability, which raises
the question of sustainability and integrity of such operation. One of the interesting points to note here is that,
there was a geographical imbalance of penetration of banks before nationalisation; West and South of India
had a high penetration of banks while North, Central, North East and East had low penetration. But even after
nationalisation this imparity was not reduced as desired.

To reduce this disparity and next steps towards financial inclusion, Regional Rural Banks and Co-Operative
(Urban and Rural) Banks were established. It is interesting to note that both these models are different from
each other but aimed towards a common goal of financial inclusion. While nationalisation helped widen the
accessibility of banking system across the country, RRB and Co-operative bank increased the depth. Then the
question arises why this did not reduce the popularity of SHGs, MFIs or moneylenders. Because still banking
was considered as a place to deposit money, which they voluntary promote, also they do not have motivation
to reject saving the deposit account. However, credit deployment was done involuntarily; hence, this mode is
still active in their areas. The financial inclusion drive also accelerated by BSBD account, which forms the base
for PMJDY. However, this made me think, how much banks are motivated to open such an account? As in
PMJDY, they are also providing a debit card whose operational cost sometimes is much more than what the
customer can deposit, so there is again a question of sustainability of such drives. I believe that the real crux
of financial inclusion depends on how institution customised their traditional products as per the financially
excluded individual, which is done by many SFBs and MFIs.

To develop such products, we need to understand the financial behaviour of such individuals. Instead of giving
access to traditional products likes savings account, low interest credit (with long term repayment) we need
to dwell more on why do people save/why do they not save, why they prefer MFIs/SHG/Moneylender over
traditional credit loans provided by banks (one of the reason was repayment periods and loan sanction
procedures). I can relate one of finding by Professor Raj Laxmi on usage borrowed money. As a family with
fixed salary income, which used to exhaust at the end of the month, there was always need of money, to run
daily expenses and to handle an emergency, but just for a week or month which can be repaid from next
month salary. So, no bank provided such curated product; hence, the best option was moneylender. These
made emphasis the fact that poor are willing to pay a higher interest rate, but they want loan duration to be
short. Also, poor tend to spend on non-productive activities like entertainment (TV sets, radio), religious and
social ceremony which scrutinised credit deployment process to every individual-whether to give loans or not.
To deal with such, we need product innovation similar to Grameen Koota marriage, festive loan and many
other similar products along with the employee-friendly organisation. Vistaara financial services also breaking
the stereotype of Poor focused on MSME sector, which was not penetrated by other financial institution. This
was because of its informal nature of the sector. Process innovation helped them to sustain and scale their
business model. Both of these example taught me on thing, if we understand the need of individual and
become customer centric it is possible to develop a profitable and sustainable business model which will drive
financial inclusion process more rapidly.

Submitted by: Harshal Wankhede Roll No: 1811368 Word Count: 931
RBFI REFLECTION MEMO 2 20th July,2019

On the other side of credit is savings behaviour. Why savings tools were ignored by the poor is an important
question to ponder upon. To discuss this question, it was there is need to widen the definition of Poor and
rural. Before the myth-busting of poor definition, I also used to understand poor means person who does not
have money to save, who lives in a rural area and mostly a labour-worker or small farmer. This definition itself
excludes the poor who are living in an urban area and rejected by traditional banks either because of identity
issues or small ticket size. Also, we need to understand it is not poor do not save; it is just that they see other
options are a more viable option, like buying a cattle which will give them a regular income than going to the
bank and save which works on the laid back model. Poor are looking for an investment which will give them
access to doorstep banking, regular income or higher liquidity. Hence one needs to come with the same
innovations like Grameen Koota and Vistaara Financial Services did to accelerate Financial Inclusion process.

Submitted by: Harshal Wankhede Roll No: 1811368 Word Count: 931