"Financial inclusion is delivery of banking services at an affordable cost ('no frills' accounts,) to the vast sections of disadvantaged and low income group. As banking services are in the nature of public good, it is essential that availability of banking and payment services to the entire population without discrimination is the prime objective of the public policy."
Importance of FINANCIAL INCLUSION
The policy makers have been focusing on Financial Inclusion of Indian rural and semirural areas primarily for three most important pressing needs.
- Creating a platform for inculcating the habit to save MONEY – The lower income category has been living under the constant shadow of financial duress mainly because of the absence of savings. The absence of savings makes them a vulnerable lot. Presence of banking services and products aims to provide a critical tool to inculcate the habit to save. Capital formation in the country is also expected to be boosted once financial inclusion measures materialize, as people move away from traditional modes of parking their savings in land, buildings, bullion, etc.
- Providing formal credit avenues – So far the unbanked population has been vulnerably dependent of informal channels of credit like family, friends and moneylenders. Availability of adequate and transparent credit from formal banking channels shall allow the entrepreneurial spirit of the masses to increase outputs and prosperity in the countryside,
- Plug gaps and leaks in public subsidies and welfare programmes – A considerable sum of money that is meant for the poorest of poor does not actually reach them. While this money meanders through large system of government bureaucracy, much of it is widely believed to leak and is unable to reach the intended parties. Government is therefore, pushing for direct cash transfers to beneficiaries through their Bank Accounts rather than subsidizing products and making cash payments.
Steps taken to support FINANCIAL INCLUSION
- Banking services reach homes through business correspondents - The banking systems have started to adopt the business correspondent mechanism to facilitate banking services in those areas where banks are unable to open brick and mortar branches for cost considerations. Business Correspondents provide affordability and easy accessibility to this unbanked population. Armed with suitable technology, the business correspondents help in taking the banks to the doorsteps of rural households. So far, 110,000 business correspondents have been employed through the business facilitator and business correspondent
- (BC) models and set up goals for banks to provide access to formal banking to all 74,414 villages with population over 2000.
- No-frills accounts: These accounts provide basic facilities of deposit and withdrawal to accountholders makes banking affordable by cutting down on extra frills that are no use for the lower section of the society. These accounts are expected to provide a low-cost mode to access Bank Accounts. RBI also eased KYC (Know Your customer) norms for opening of such accounts.
- Kisan Credit Card (KCC) - from the year 1998-99, to meet production credit requirements and short-term credit needs in a timely and hassle-free manner credit for crop production.
- Lead Bank Scheme - 1969: aimed at forming a coordinated approach for providing banking facilities. To enable banks to assume their lead role in an effective and systematic manner, all districts in the country (except the metropolitan cities of Mumbai, Kolkata, Chennai and certain Union Territories) were allotted among Public Sector Banks and a few Private Sector Banks. The
- Lead bank role is to act as a consortium' leader for co-coordinating the efforts of all credit institutions in each of the allotted districts for expansion of branch banking facilities and for meeting the credit needs of the rural economy. For the preparation of District Credit Plans and monitoring their implementation a Lead bank Officer (LBO) now designated as Lead District Manager was appointed in 1979.
- Local Area Banks (1996) -are expected to bridge the gap in credit availability and strengthen the institutional credit framework in the rural and semi-urban areas. Although the geographical area of operation of such banks will be limited, they will be allowed to perform all functions of a scheduled commercial bank. Licences are given out in under-banked or unbanked areas of the country. Some of these local area banks could eventually become full-fledged banks at some stage the local area banks are likely to have a capital adequacy ratio higher than 15% to offset higher risk arising from being geographically focused. The scheduled commercial banks are required to have a capital adequacy ratio - ratio of capital fund to risk weighted assets expressed in percentage terms - of 12%
- Swabhiman - Opening of Bank accounts covering the habitations with minimum population at least through Business correspondent model providing cash services. Habitations with population more than 1600 in plain areas and 1000 in north-eastern and hilly states as per 2001 census are covered.
- Direct Benefit Transfer: Cash transfer through Aadhar Payment Bridge requires Bank accounts which lead to financial inclusion.
- Interest subvention scheme: facilitates access to cheap credit from the banks indirectly through interest subsidies from the govt. It is a subsidy of interest given by Government to certain sectors like Textiles/ Farm. For example, a textile company borrow from Bank at 10% and Government gives subvention of 2%. Hence net bank takes interest from textiles companies 8%. Other sectors have to pay 10% to the bank. Likewise, Farm or Agriculture sectors borrows from Bank at 10% and they will get 4% subvention from the govt. Certain sectors are covered by the system of Differential rate interest (DRI) which is less than base rate e.g. Educational loans, export credit, agriculture, credit to weaker sections.
- Priority Sector Lending: Reserve Bank of India allows banks to provide a specified portion of the bank lending to a few specific sectors like agriculture and allied activities, micro and small enterprises, poor people for housing, students for education and other low income groups and weaker sections. The highlights of priority sector lending is given below:
- It aims at an all-round development of the economy as opposed to focusing only on the financial sector.
- Broad categories of priority sector for all scheduled commercial banks are:
(a) Agriculture and Allied Activities; (b) Small Scale Industries (Direct and Indirect Finance); (c) Small Business / Service Enterprises; (d) Micro Credit; (e) Education loans; and (f) Housing loans.
- 40 percent of adjusted net bank credit or credit equivalent amount to be given as priority sector lending.
- Agriculture category includes farm credit, agriculture infrastructure and ancillary activities.
- For service sector, bank loans up to Rs. 5 crore per unit to micro and small enterprises and Rs.10 crore to medium enterprises.
- Export credit to cover 2% cap on loans for domestic banks and foreign banks with >20 branches.
- Education loans of Rs. 10 lakh for vocational courses irrespective of the sanctioned amount.
- Housing loans of Rs. 28 Lakh in metro cities and Rs. 20 Lakh in other cities, towns and villages.
- Loan of Rs. 5 crore for building social infrastructure, including schools, health care facilities, drinking water facilities and sanitation facilities.
- Loan of Rs. 15 crore for buying solar based power generators, biomass based power generators, and wind mills.
There are eight Categories.
(ii) Micro, Small and Medium Enterprises
(iii) Export Credit
(vi) Social Infrastructure
(vii) Renewable Energy
Rashtriya Mahila Kosh (RMK)- to facilitate credit support to poor women for their socio- economic upliftment;
- Pradhan Mantri Jan Dhan Yojana (PMJDY) is India's National Mission for Financial Inclusion to ensure access to financial services, namely Banking, Savings & Deposit Accounts, Remittance, Credit, Insurance, Pension in an affordable manner. It is run by Department of Financial Services, Ministry of Finance. Till 1 February 2017, over 27 crore bank accounts were opened and almost Rs. 665 billion was deposited under the scheme.
Under the scheme:
- Account holders will be provided bank accounts with no minimum balance.
- RuPay debit cards will be issued.
- Accidental insurance cover of Rs.1 lakh.
- After six months of opening of the bank account, holders will be eligible for Rs.5,000 overdraft from the bank.
- With the introduction of new technology introduced by National Payments Corporation of India (NPCI), a person can transfer funds, check balance through a normal phone which was earlier limited only to smart phones.
- Mobile banking for the poor would be available through National Unified USSD Platform (NUUF) for which all banks and mobile companies have come together.
- Basic Savings Bank Deposit Account (BSBDA)
The aim of introducing BSBDA is part of the efforts of RBI for furthering financial inclusion. The Basic Savings Bank Deposit Account allows you to bank with a zero minimum balance requirement.
All the existing 'No-frills' accounts opened by the banks are now converted into BSBDA in compliance with the guidelines issued in 2012 by the Reserve Bank of India as well as fresh accounts opened under the said circular should be treated as BSBDA.
- Basic Savings Bank Deposit Account should be considered as a normal banking service available to all customers (Any individual, including poor or those from weaker section of the society), through branches.
- BSBDA guidelines are applicable to "all scheduled commercial banks in India, including foreign banks having branches in India".
- The services available in the account will include deposit and withdrawal of cash at bank branch as well as Free ATM-cum- Debit Card, Receipt/credit of money through electronic payment channels or by means of deposit/collection of cheques drawn by Central/State Government agencies and departments.
- There will be no limit on the number of deposits that can be made in a month; account holders will be allowed a maximum of four withdrawals in a month, including ATM withdrawals.
- No charge will be levied for nonoperation / activation of inoperative 'Basic Bank Deposit Account'.
- Holders of 'Basic Savings Bank Deposit Account' will not be eligible for opening any other savings bank deposit account in that bank. If a customer has any other existing savings bank deposit account in that bank, he/she will be required to close it within 30 days from the date of opening a 'Basic Bank Deposit Account'.
- One can have Term/Fixed Deposit, Recurring Deposit etc. and accounts in the bank where one holds 'Basic Savings Bank Deposit Account'.
COMMITTEES ON FINANCIAL INCLUSION
RBI set up a commission (Khan Commission) in 2004 to look into FINANCIAL INCLUSION and the recommendations of the commission were incorporated into the mid-term review of the policy (2005-06) and urged banks to review their existing practices to align them with the objective of FINANCIAL inclusion. RBI also exhorted the banks and stressed the need to make available a basic banking 'no frills' account either with 'NIL' or very minimum balances as well as charges that would make such accounts accessible to vast sections of the population.
Rangarajan Committee Report on Financial Inclusion
In 2006, Government of India constituted a "Committee on Financial Inclusion" which was headed by Dr C Rangarajan, the then Chairman, and Economic Advisory Council to the Prime Minister.
- National Mission on Financial Inclusion - The Committee feels that the task of financial inclusion must be taken up in a mission mode as a financial inclusion plan at the national level. A National Mission on Financial Inclusion (NaMFI) comprising representatives from all stakeholders may be constituted to aim at achieving universal financial inclusion within a specific time frame. The Mission should be responsible for suggesting the overall policy changes required for achieving the desired level of financial inclusion, and for supporting a range of stakeholders - in the domain of public, private and NGO sectors - in undertaking promotional initiatives.
- National Rural Financial Inclusion Plan (NRFIP) - A National Rural Financial Inclusion Plan (NRFIP) was launched/ during the 12th five year plan with a clear target to provide access to comprehensive financial services, including credit, to at least 50% of financially excluded households, say 55.77 million by 2012 through rural/semi-urban branches of Commercial Banks and Regional Rural Banks. The remaining households, with such shifts as may occur in the rural/ urban population, had to be covered by 2015. Semi-urban and rural branches of commercial banks and RRBs may set for themselves a minimum target of covering 250 new cultivator and non- cultivator households per branch per annum, with an emphasis on financing marginal farmers and poor non-cultivator households.
4 major reasons for lack of financial inclusion
- Inability to provide collateral security
- Poor credit absorption capacity,
- Inadequate reach of the institutions
- Weak community network
There is a need to organize Urban/peri-Urban poor people into Neighbourhood Groups (NHGs) on the same pattern as has been adopted for the rural poor. (Need to extend the mandate of NABARD to cover beyond rural areas)
To alter the emphasis somewhat from the large Bank led, public sector dominated, mandate ridden and branch-expansion- focused strategy to Micro Banks.
Nachiket Mor Committee
Committee on Comprehensive Financial Services for Small Businesses and Low Income Households was set up by the RBI in Sep 2013 under the chairmanship of Nachiket Mor, an RBI board member.
- Providing a universal bank account to all Indians above the age of 18 years by January 1, 2016. To achieve this, a vertically differentiated banking system with payments banks for deposits and payments
- Wholesale banks for credit outreach - These banks need to have Rs.50 crore by way of capital, which is a tenth of what is applicable for new banks that are to be licensed.
- Aadhaar will be the prime driver towards rapid expansion in the number of bank accounts. Monitoring at the district level such as deposits and advances as a percentage of gross domestic product (GDP).
- Adjusted 50 per cent priority sector lending target with adjustments for sectors and regions based on difficulty in lending.
- Increase the Priority Sector Lending Mandate - The Mor committee has recommended that the priority sector lending mandate for banks should be raised from the current 40 per cent to 50 per cent. At the same time, the banks must be freed from all pricing and other restrictions.
- Allow differentiated Licenses – The committee has taken ahead the case of differentiated banking licences. It has proposed that three new categories of banks viz. payment, wholesale investment and wholesale consumer should be allowed. At the same time, the regulations for non-banking financial companies, or NBFCs should be streamlined. The biggest problem here would be the business viability of such banks. One example of differentiated banking license is Regional Rural Banks, which were started off with great promises but ultimately broke down.
- Meaningful Financial Inclusion – The Nachiket Mor committee has suggested two specific district-level penetration metrics viz. the credit-GDP and life cover- GDP ratios to monitor the meaningful financial inclusion. This is a slight departure from the number of accounts formula of financial inclusion. It is a meaningful recommendation and must be taken ahead.
DEEPAK MOHANTY COMMITTEE
The Reserve Bank of India (RBI) on 15 July 2015 constituted a committee to work out a five-year (medium-term) action plan for financial inclusion. The 14-member panel is headed by RBI executive director Deepak Mohanty.
- The Committee will work to spread the reach of financial services to unbanked population.
- To review the existing policy of financial inclusion including supportive payment system and customer protection framework taking into account the recommendations made by various committees set up earlier.
- To study cross country experiences in financial inclusion to identify key learnings, particularly in the area of technology-based delivery models, that could inform our policies and practices.
- To articulate the underlying policy and institutional framework, also covering consumer protection and financial literacy, as well as delivery mechanism of financial inclusion encompassing both households and small businesses, with particular emphasis on rural inclusion including group-based credit delivery mechanisms.
- To suggest a monitorable medium-term action plan for financial inclusion in terms of its various components like payments, deposit, credit, social security transfers, pension and insurance.