BANKING FINANCIAL INCLUSION
IN INDIA
Financial inclusion is the availability of banking services at an
affordable cost to disadvantaged and low-income groups. In
India the basic concept of financial inclusion is having a saving
or current account with any bank. In reality it includes loans,
insurance services and much more.
The first-ever Index of Financial Inclusion to find out the extent
of reach of banking services among 100 countries, India has
been ranked 50. Only 34% of Indian individuals have access to
or receive banking services. In order to increase this number
the Reserve Bank of India had the Government of India take
innovative steps. One of the reasons for opening new branches
of Regional Rural Banks was to make sure that the banking
service is accessible to the poor. With the directive from RBI,
our banks are now offering No Frill Accounts to low income
groups. These accounts either have a low minimum or nil
balance with some restriction in transactions. The individual
bank has the authority to decide whether the account should
have zero or minimum balance. With the combined effort of
financial institutions, six million new No Frill accounts were
opened in the period between March 2006-2007. Banks are
now considering FI as a business opportunity in an overall
environment that facilitates growth.
The main reason for financial exclusion is the lack of a regular
or substantial income. In most of the cases people with low
income do not qualify for a loan. The proximity of the financial
service is another fact. The loss is not only the transportation
cost but also the loss of daily wages for a low income individual.
Most of the excluded consumers are not aware of the banks
products, which are beneficial for them. Getting money for
their financial requirements from a local money lender is easier
than getting a loan from the bank. Most of the banks need
collateral for their loans. It is very difficult for a low income
individual to find collateral for a bank loan. Moreover, banks
give more importance to meeting their financial targets. So
they focus on larger accounts. It is not profitable for banks to
provide small loans and make a profit.
Financial inclusion mainly focuses on the poor who do not have
formal financial institutional support and getting them out of
the clutches of local money lenders. As a first step towards this,
some of our banks have now come forward with general
purpose credit cards and artisan credit cards which offer
collateral-free small loans. The RBI has simplified the KYC (Know
your customer) norms for opening a No frill account. This will
help the low income individual to open a No Frill account
without identity proof and address proof.
In such cases banks can take the individuals introduction from
an existing customer whose full KYC norm procedure has been
completed. And the introducer must have a satisfactory
transaction with the bank for at least 6 months. This simplified
procedure is available to those who intend to keep a balance
not exceeding Rs.50,000 in all accounts taken together. With
this facility we can channel the untapped, considerable amount
of money from the low income group to the formal economy.
Banks are now permitted to utilize the service of NGOs, SHGs
and other civil society organizations as intermediaries in
providing financial and banking services through the use of
business facilitator and business correspondent models.
Self Help Groups are playing a very important role in the
process of financial inclusion. SHGs are usually groups of
women who get together and pool money from their savings
and lend money among them. Usually they are working with
the support of an NGO. The SHG is given loans against the
group members guarantee. Peer pressure within the group
helps in improving recoveries. Through SHGs nearly 40 million
households are linking with the banks. Micro finance is another
tool which links low income groups to the banks.
Yet, banks are fighting to fulfill the Financial Inclusion dream.
The main reason is that the products designed by the banks are
not satisfying the low income families. The provision of
uncomplicated, small, affordable products will help to bring the
low income families into the formal financial sector. Banks have
limitations to reach directly to the low income consumers.
Correspondents can be considered to be an excellent channel
which banks can use to distribute their product information.
Educating the consumers about the financial benefits and
products of banks which are beneficial to low income groups
will be a great step to tap their potential.
Banks are now using new technologies like mobile phones to
reach low income consumers. It is possible that the telephone
providers themselves will start basic banking services like
savings and payments. Indian telecom consumers have few
links to financial institutions. So without much difficulty
telecom providers can win the battle with banks. Banks should
therefore be proactive about transferring this technology into
an opportunity.
The Indian Government has a long history of working to expand
financial inclusion. Nationalization of the major private sector
banks in 1969 was a big step. In 1975 GOI established RRBs with
the same aim. It encouraged branch expansion of bank
branches especially in rural areas. The RBI guidelines to banks
shows that 40% of their net bank credit should be lent to the
priority sector. This mainly consists of agriculture, small scale
industries, retail trade etc. More than 80% of our population
depends directly or indirectly on agriculture. So 18% of net
bank credit should go to agriculture lending. Recent
simplification of KYC norms are another milestone.
Financial inclusion is a great step to alleviate poverty in India.
But to achieve this, the government should provide a less
perspective environment in which banks are free to pursue the
innovations necessary to reach low income consumers and still
make a profit. Financial service providers should learn more
about the consumers and new business models to reach them.
In India Financial inclusion will be good business ground in
which the majority of her people will decide the winners and
losers.
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