Financial inclusion: Banks made some headway in 2010-11

A. J. Vinayak Share print T+

Mangalore, Dec. 30: Almost half the population in the country do not have deposit accounts in banks. Less than 10 per cent have loan accounts with banks. The extent of financial exclusion in India is staggering. But some change in these depressing numbers is underway. India has ambitious plans to bring everyone under the formal banking network within the next few years. It seems to have made rapid strides in the past year if the villages covered under the financial inclusion programme are any indication. Now at least one-sixth of the six lakh plus villages in the country have a channel to access banking network. The number of villages under the formal banking network, which was around 54,000 in March 2010, doubled in a span of one year. At the end of June 2011, the banks in the country had covered nearly 1.07 lakh villages under the financial inclusion programme. The share of brick-and-mortar network of branches in a country with a total of more than 93,000 branches remains at 36 per cent. According to RBI statistics, all commercial banks in the country

had a total branch network of 93,080 branches at the end of March 2011. Of them, 33,602 were in rural areas. In such a situation, most banks prefer using a business correspondent (BC) model for expanding their network in the un-banked areas in the country. The BC units more than doubled during 2011. Of the more than 1.07 lakh villages that came under banking network during the year, 84,274 were covered through BCs till June 2011. This was 32,684 villages at the end of March 2010. It was not that brick-and-mortar model was given a go-by during the year. More than 1,300 brick-and-mortar branches were opened in the un-banked villages of the country in 2011. Other channels such as mobile vans made a huge jump from mere 99 in March 2010 to more than 460 during this calendar year. While speaking at a seminar on financial inclusion in New Delhi in October this year, Dr K.C. Chakrabarty, Deputy Governor of Reserve Bank of India, had said that 2.20 lakh un-banked villages will be covered by banking network by March 2012, and 3.52 lakh villages by March 2013. He also hoped to add more than 2100 brick-and-mortar outlets by March-end.

N-E SITUATION
Significantly, financial inclusion in urban areas also got some well-deserved attention from bankers. While only 433 urban locations in the country were covered by BC in March 2010, it increased to 4,524 locations in June this year. Most banks took the advantage of tapping the potential of un-organised sector such as street vendors and slum-dwellers. North-East remains one of the complex challenges for financial inclusion. The main reasons are: difficult terrain, lower population densities, poor infrastructure, inadequate communication facilities and law and order problems. In one of the media interviews recently, Dr D. Subbarao, RBI Governor, had said that there are 3,250 villages in the north-eastern region falling into the category of population of above 2,000 with no-banking facility. Of these, 1,031 villages were covered by banking channels at the end of September 2011. The RBI, which has a special dispensation scheme for opening bank branches in north-eastern region, provides one-time capital cost and recurring costs for five years for supporting a bank branch. The State Governments are required to provide the required premises, residential accommodation for the staff and security for the bank branch.

NO-FRILLS UP
One of the major initiatives in taking forward financial inclusion is opening of no-frills' account, which is a nil or low minimum balance account. DrChakrabarty had stated in one of his speeches that 7.91 crore no-frills' accounts were opened by banks with outstanding balance of Rs 5,944.73 crore till June this year. These figures were 4.93 crore and Rs 4,257.07 crore, respectively, in March 2010.

Some users made use of overdraft facilities in these accounts. Banks had provided 9.34 lakh overdrafts amounting to Rs 37.42 crore up to June 2011, as against 1.31 lakh overdraft accounts and Rs 8.34 crore in March 2010. Referring to these figures, DrChakrabarty had said that if we are able to sustain the progress that has been achieved in the last one and a quarter years then the target of achieving universal financial inclusion is attainable.

ONE-FOURTH IN UNBANKED
With the scheduled commercial banks opening nearly 20 per cent of the total number of new branches in rural centres (tier 5 and tier 6) with population up to 49,999 in the last two years, the RBI's monetary policy statement for 2011-12 in April mandated them to allocate at least 25 per cent of the total number of branches proposed to be opened during a year in un-banked rural centres. Since December 2009, the RBI allowed domestic scheduled commercial banks to freely open branches in tier 3 to tier 6 centres with population up to 49,999 under general permission, subject to reporting. (According to RBI, tier 5 centres are those having population of 5000 to 9,999 and tier 6 centres are those having population of less than 5000.)

WHAT IS POSSIBLE
India now has more than 84,000 Business Correspondents to take banking to un-banked areas. If the banks, with the help of their branch managers at the grassroots levels, take care to properly identify, select, train and orient BCs, they can become an effective tool for expanding banking activities in the years to come. Coupled with proper telecom and technology infrastructure, this may help the customer at the bottom of the pyramid to operate in anywhere any bank' system. The high penetration of mobile telephony in the country and advances in secure transfer mechanisms has also helped increase mobile phones as delivery channels. Many banks are taking the route of mobile banking to explore the potential of migrant labours in the country. To enable fund transfer through mobile phones for small ticket transactions, RBI has waived the need for end-to-end encryption for transactions of value up to Rs 5000. Financial inclusion with the help of mobile banking is expected to gain pace in the years to come. The number of active accounts under financial inclusion is expected to increase in the coming years, as the government is planning to disburse subsidy payments directly to the beneficiaries' under below poverty line. Added to this, social security payments and NREG schemes are likely contribute a good amount for keeping these accounts active. With financial inclusion drive gaining pace, the coming year is likely to provide further impetus for growth. Now it is time for synergising the strengths of the stakeholders such as banks,

governments, insurance companies, mutual funds, pension companies, NGOs, MFIs, telecom companies and technology providers to gain the best in this drive.

FI FUNDS
Based on the interim report of the Dr C. Rangarajan Committee on Financial Inclusion, the Union Budget for 2007-08 proposed to establish a Financial Inclusion Fund (FIF) with National Bank for Agriculture and Rural Development (Nabard) for meeting the cost of developmental and promotional interventions. It also proposed to establish a Financial Inclusion Technology Fund (FITF) to meet the costs of technology adoption. Each fund consists of an overall corpus of Rs 500 crore, to be contributed by the Government of India, RBI and Nabard in the ratio of 40:40:20 in a phased manner over five years, depending upon utilisation of funds. The assistance to banks began with a sanction of Rs 1.30 crore under FIF and Rs 4.22 crore under FITF to the banks in 2008-09. The amount of sanction was Rs 53.92 crore under FIF and Rs 134.90 crore under FITF till the end of November during the current financial year. The cumulative sanctions under FIF and FITF were Rs 92.58 crore and Rs 257.31 crore, respectively, and disbursements of Rs 21.78 crore and Rs 97.71 crore, respectively, till November-end. vinayakaj@thehindu.co.in Keywords: Financial inclusion, Banks, deposit accounts, loan accounts, no-frills' account

India has around 403 million mobile users of whom, about 46%, or 187 million, don't even have bank accounts. People can do without bank accounts but not mobile phones. Nearly 400 million Indians have bank accounts. Thats less than 40% of the countrys population. About 40% Indians have check-in accounts. 51 out of every 100 Indians had bank accounts in 1993. This has marginally gone up to 54 in 2007. 59% of adult population in India has bank accounts and that there is a large gap between the coverage of banking services in urban and rural pockets. In rural India, the coverage among the adult population is 39% against 60% in urban India. This, of course, doesnt necessarily mean that 60 out of every 100 Indian adults in cities have bank accounts as many people operate multiple accounts.

Only 5.2% of Indias 650,000 villages have bank branches even though 39.7% of the overall

branch network of Indian banks, or 31,727, are in rural India. The population covered by each branch has come down from 63,000 in 1969 to 16,000 in 2007 and the total number of check-in accounts held at commercial banks, regional rural banks, primary agricultural credit societies, urban cooperative banks and post offices during this period has risen from 454.6 million to 610.3 million. Still, very few people in the low-income bracket have access to formal banking channels. Only 34% of people with annual earnings less than Rs50,000 in urban India had a bank account in 2007. The comparative figure in rural India is even lower, 26.8%.

III. Microfinance background

History Microfinance in India can trace its origins back to the early 1970s when the Self Employed Womens Association (SEWA) of the state of Gujarat formed an urban cooperative bank, called the Shri Mahila SEWA Sahakari Bank, with the objective of providing banking services to poor women employed in the unorganised sector in Ahmedabad City, Gujarat. The microfinance sector went on to evolve in the 1980s around the concept of SHGs, informal bodies that would provide their clients with much-needed savings and credit services. From humble beginnings, the sector has grown significantly over the years to become a multi-billion dollar industry, with bodies such as the Small Industries Development Bank of India and the National Bank for Agriculture and Rural Development devoting significant financial resources to microfinance. Today, the top five private sector MFIs reach more than 20 million clients in nearly every state in India and many Indian MFIs have been recognized as global leaders in the industry. The Government of India and the RBI have a stated goal of promoting financial inclusion. According to recent RBI estimatesii, there are over 450 million unbanked people in India, most of whom live in rural areas. The term unbanked refers to people who have no access to formal financial services, but rather must rely on either family, or informal providers of finance, such as the village moneylender. It is undisputed that access to finance is critical for enabling individuals and communities to climb out of poverty. It is also generally agreed that relying on the limited resources of village moneylenders exposes the poor to coercive lending practices, personal risks and high interest rates, which can be a much as 150%iii The goal of financial inclusion must include the private sector. . Therefore the Indian Government and the RBI have a policy of financial inclusion. As part of this policy, the government requires Indian banks to lend to priority sectors, one of which is the rural poor. Until recently, banks were happy to lend money to MFIs who would then on-lend funds, primarily to poor women across rural India. The banks have welcomed this policy because historically they tended to charge MFIs average interest rates of 12-13% and benefited from 100% repayment rates. Thus, by lending to MFIs, banks have been able to meet their priority sector lending requirements with what historically has amounted to a risk-free and very profitable arrangement.

Microfinance in India is currently being provided by three sectors: the government, the private sector and charities. These three sectors, as large as they are, have only a small fraction of the capital and geographic scale required to meet the overwhelming need for finance amongst Indias rural poor. The top 10 private sector microfinance providers in India together serve less than 5% of the unbanked population of India approximately 20 million clientsiv . For example, SHARE Microfin Limited (SHARE) and Asmitha Microfin Limited (Asmitha), two of the five largest MFIs in India, have almost Rs 4,000 crore ($900MM) loaned to over 5 million poor women in 18 Indian states (prior to the crisis, the combined outstanding loan portfolio had been as high as Rs 6,750 crore ($1.525BN)). Yet, despite the size of MFIs like SHARE and Asmitha, only a fraction of the overwhelming need is being met. Private sector MFIs have an essential role to play if the goal of financial inclusion is to be realized, as neither the government nor charities have the capital nor business model required to meet the insatiable demand for finance in rural India. As the public listing of SKS Microfinance underscored, private sector institutions are able to attract increasingly large amounts of private capital, in order to accelerate the growth of the industry, which is essential to expanding financial inclusion as far and as fast as practicable.