Munna (45), a native of Lachurghat ( J h a n s i ), stares in the blank when you ask him whether he has a bank account. Question him about insurance, payments and capital market and he looks perplexed. Apparently he has never heard of these. A construction labourer who has migrated to Gurgaon, the millennium city bordering South Delhi, to repay the loan of Rs 90,000 he took from a moneylender to construct his own house in Lachurghat, he will have no recourse to pension. Munna’s immediate concern is repayment of the house loan. He frequently travels back home to repay the installments. Father of a son and a daughter who is of a marriageable age, Munna is a perfect example of how financial inclusion, despite being over five-year-old, is yet to reach a large proportion of the population in the country.
Munna is poor. But since he is in no way touched by the formal financial systems and nutrition intake of his family has never been calculated, it may not even be possible to guess how poor he is. Munna is not alone! There are a large number of Indians who like him are poor and not part of the financial mainstream. Planning Commission puts the number of such people at 32 per cent. N C Saxena committee and NCEAR on the other hand estimate that the number could be as high as 50 per cent and 62.9 per cent respectively. While the GDP continues to grow at 8 per cent plus and per capita income in next 10 to 15 years is expected to be in the range of $ 10,000, incidence of poverty among the marginalised sections has not declined much. On the contrary, the gap between the haves and have-nots has further widened.
According to India Chronic Poverty Report, 80 per cent of poor in the country now belong to socially disadvantaged groups like SC, ST and most backward castes amongst OBCs and other weaker sections. Nearly half of India’s population still does not have access to banking and banks are still hedging on getting into the rural sector. Skoch – a New Delhi based think-tank – says in its preliminary findings of State of the Sector Report, that out of a total of 5,165 new branches opened in 2011 only 21.86 per cent are rural branches. The report released in June this year in Mumbai also says that even banking correspondents are moving towards urban India as the pickings in rural sector are poor.
The urban Customer Service Points (CSPs) have grown at the rate of 700 per cent in urban sector. The report also says that out of 74.3 million nofrill accounts, only 3 to 20 per cent were being utilised. Only 0.18 per cent were over drafted and even out of this 81 per cent belonged to Bank of India. The average population that a bank branch caters to in the country is about 13,800.
Same story gets repeated in Self- Help Groups (SHGs), Micro-Finance Institutions (MFIs) and agricultural credit. The SHGs, considered the best vehicle for including women in financial mainstream, according to the State of the Sector Report, have registered a decline in growth. Cooperatives too have registered a negative growth in total loan issued by them. The agricultural credit growth has gone down from 22.9 per cent to 10.6 per cent in the current year. According to the report, the housing shortage in the country will be 47.43 million units next year with 90 per cent of the shortage being attributed to the Below Poverty Line (BPL) sections.
Not only will investment of pension funds into capital market allow the workers to share gains from the market but also counter the FII’s (Foreign Institutional Investors) money, which is driving the market now.
Gender biases are still prevalent with women comprising only 31.6 percent (Office of Registrar General of India, “Total workers in India – 2001 Census”) of all workers and earning 66 per cent of men’s salary for equal amount of work (World Economic Forum, “Global Gender Gap Report 2009”). Till 11th Five Year Plan (FYP) (2006-2011), the planners did not even recognise the need for looking at generation of employment and poverty reduction as goals along with achieving higher GDP growth rate. The 11th plan has first time sought to channel focus towards the ‘quality of employment’. But so far the quality of employment has been pegged back by the increase in casual sector, largely construction.
However, this is only half of the story. The flip side is that remittances are growing at a good pace with the transfers from urban India to rural India having clocked Rs 15 billion from January to March 2011. The central government has launched Swabhimaan, a mission mode scheme, to inform, educate and motivate people to open bank accounts. And the banking regulator, Reserve Bank of India, has unequivocally told the banks to allow over drafting facility in no frill accounts, pay interest to such accounts, not to look at banking correspondent model as a substitute of brick and mortar branches, allowed the banks to engage for profit entities as BCs with a view to facilitate appointment of mobile phone companies as BCs and treat the BC’s cash as their own cash.
By the end of the March 2011, the banks had covered 29,500 villages, 9,500 more than the target set for by Union Finance Minister Pranab Mukherjee. The RBI believes that since the ecosystem for banking services in the rural sector and no-frill accounts has already been created by the banks, they will be able to scale up their services from 99,000 villages to 348,283 villages by 2013. The number of no frill accounts is expected to grow to 153 million in 2013.
The imperative is that the government should allow investment of pension funds in the capital market. Not only will this allow the workers to share gains from the market but will also counter the FII’s (Foreign Institutional Investors) money, which is driving the market now. Though Union Ministry of Finance allowed investment of 15 per cent of pension and provident funds in 2005, it has not happened till now.
Currently the domestic institutional investors have about 8 per cent in the turnover of the market where FIIs have more than double (17 per cent). An argument that supports the demand for investment of pension in the capital market is that pension money is long term money and while there can be temporary setbacks or changes in the market, on a long term basis it is relatively stable and growth oriented.
U K Sinha, Chairman, Securities & Exchange Board of India (SEBI), cites the example of minor pension scheme whereby some workers who did not have any fixed income were asked to contribute Rs 100. “99 per cent of the workers who joined on day 1 are contributing month after month the same amount even five years later,” he claims.
There is also the example of Bihar Chief Minister Girl-child Security Plan under which the State Government deposits Rs 2,000 on behalf of every girl-child born in a BPL family. The scheme, where a part of the money is invested in the equity market, covers over a million girl children now. It has brought about a major difference in the way the girl-child was treated in the state. For one it has resulted in six times increase in immunisation of girl-child in three years and increased the hospital visits of expecting mothers by three to four times.
For employment, the immediate need would be upgradation of present educational and vocational training institutes like Industrial Training Institutes (ITIs) and Industrial Training Centres (ITCs).
“Almost 50 per cent of the savings in the country are in non-financial assets and within that about 55 per cent are in the banking sector, around 9.5 per cent in pensions and around 20 per cent in insurance and very small 2.6 per cent in the capital markets,” Sinha of SEBI points out making a strong case for investment of pensions and other savings into the market to give it a boost. The retail equity in the Indian market is about 8 per cent visà- vis China, South Korea and Brazil where it ranges between 20 and 33 per cent. Sinha demands increase in retail equity. He seeks participation of entire country particularly people from semi urban and rural areas in the market. “Look at the mutual funds. 75 per cent of the volumes are from 10 top cities and one particular city that is Mumbai contributes one third of that.”
There is a need to take measures to push growth in the farm sector and invest in physical infrastructure particularly power generation. The agriculture economy is constrained by low levels of yield in the major crops and pulses vis-à-vis China. It has grown at the rate of less than one per cent in the recent times, brought down the overall GDP growth rate and majorly contributed to the high inflation. The government would do well to make optimum use of the available irrigation resources, go for water harvesting to regenerate the water table and make proper use of science and technology establishment to invent what should be grown where. Unfortunately, the states have lagged behind in meeting power generation targets set under the 11th Five Year plan in the first four years of the plan.
Despite electricity being one of the most critical factors that decides production, profitability and competitiveness, India is believed to add in five years what China adds in one year. There are not many states in the country, which generate surplus power or are self-sufficient. There are states like Haryana, which are prosperous but power deficient. “To maintain a rate of 9 per cent per annum growth in a sustained way over the medium term, we need to pay special attention to power sector”, emphasises C Rangarajan, Chairman of Prime Minister’s Economic Advisory Council.
“I would say that we are on the right course (on banking unbanked rural habitations), may be the proper coordination is necessary for it to give better results” — Jayanta K Sinha, Chief General Manager (Rural Business), State Bank of India
The GDP growth must lead to poverty reduction and must not come at the cost of environment. Besides, it should generate and raise the quality of employment. We need to improve our social indicators because India still ranks 119th in the UNDP human development index. “We need to generate poverty reducing growth. The growth process should be such to which the poor can contribute and from which the poor can also benefit”, Rangarajan asserts.
For employment, the immediate need would be upgradation of present educational and vocational training institutes like Industrial Training Institutes (ITIs) and Industrial Training Centres (ITCs). There is also a need to take youth out of academic institutions, teach them skills and increase the work force. What is happening now is that more and more youth is being retained in the academic institutions. According to 66th round of NSSO survey on employment, the total number of young working-age (15-24) people who continued their education doubled between 2004-05 and 2009- 10. This has lead to deceleration in the labour force expansion. It is an open secret that there is huge shortage of skilled work force in the country.
IL&FS (Infrastructure Leasing & Financial Services Limited) is doing exemplary work on this front. The company that leads in infrastructure and financial services has skilled in last four years 100,000 people from BPL. It has signed an agreement with German Chamber of Commerce, which has one of the world’s best technical schools for skilling populations. India plans to open 100 such institutions. The government has set up Financial Stability and Development Council (FSDC), which would work with institutions like SEBI and other banks to further financial inclusion.
When it comes to infrastructure projects, there is a need to innovate, expand their relevance to the region in which it is being built and execute them after clustering small enterprises.
IL&FS has done the latter in textiles, agro, leather and four other sectors. “By clustering 100 to 200 of the small entrepreneurs, we were able to provide them the kind of infrastructure they required to be globally competitive while at the same time make it affordable and inclusive in the sense that it gave them the opportunity to actually play a level playing field with more competitive larger players,” informs Hari Sankaran, Vice Chairman & Managing Director, IL&FS.
Along with opening no-frill accounts and appointing business correspondents, the banks would do well to also open 25 per cent of their new branches in the unbanked rural centres. It is everybody’s case that the BCs can never have the kind of trust the bank branches enjoy. Even devices like mobiles, micro ATM branches, hand-held gadgets cannot substitute the bank branches. Besides, there must be somebody to train and supervise the BC, deliver cash, service micro ATMs and above all redress customer grievances.
The customer can not be expected to travel 20 kilometres to complain. “Who will manage the cash? Who will sanction his loan application? If the customer wants a passbook, it has to be printed. You cannot cover the entire thing with the BC. You need to have some low-cost brick and mortar structure”, claims RBI Deputy Governor K C Chakrabarty. The banks need to realise that it may take several years to replace the cash economy with plastic money and technology. The pressing need is for an amalgamation of digital and physical infrastructure. “Both the digital and physical connectivity are necessary if we are talking of banking connectivity,” he emphasises.
It would also help if the banks issue add-on cards to account holders’ relatives so that they can take out cash whenever they want and there is no need to remit money. The example of Corporation Bank which has over 1.4 million no-frill accounts and which issues add-on cards for relatives of migrant labours, needs to be extended to all banks. The bank currently provides automated overdraft facility of up to Rs 2,000 on such accounts and plans to increase the amount to Rs 10,000 soon. The bank has covered all 2,050 villages which have a population of more than 2,000 and which were assigned to it by Finance Ministry for providing banking access in 2011-12. Considering 70 to 80 per cent of its banking correspondents are women entrepreneurs, the bank is not just promoting financial inclusion but also inclusion of gender in the mainstream.
“We’re not doing financial inclusion as a fashion. We don’t treat it as a regulation. For me poor is bankable and honest. If the direction (on providing banking access to 73,000 villages in the current financial year) is implemented in letter and spirit it will be a boom in banking industry. (In fact) all banks should treat financial inclusion as a business obligation,” says Ramanath Pradeep, Chairman and Managing Director, Corporation Bank. Ramanath wishes the banks could use sponsored ATMs or partner with Post Offices to install cash dispensers in rural areas to cut down their costs. He also demands subsidisation of banking services for the unbanked.
Fortunately, like the Corporation Bank, other banks and government agencies are insincere in planning banking access to the unbanked villages that Union finance Minister Pranab Mukherjee aimed at in his budget for 2011-12. These have been listed, checked and allocated to different public sector banks, regional rural banks, private rural banks and cooperative banks and are being closely monitored by Department of Financial Services. The banks and the department have strategised on addressing the financial literacy awareness generation and financial counseling needs of the unbanked, says R Gopalan, Secretary, Economic Affairs. The RBI has set up four committees to formulate standard specifications for micro-ATMs, which can enable future interoperability, uniform standards for offsite cash management by BCs and formulate regulatory standards required for branchless banking model. “All these efforts have resulted in bringing the various parts of the financial inclusion campaign into a coherent whole,” R Gopalan. “I would say that we are on the right course, may be the proper coordination is necessary for it to give better results”, adds Jayanta K Sinha, Chief General Manager (Rural Business), State Bank of India.
The GDP growth must lead to poverty reduction and must not come at the cost of environment. Besides, it should generate and raise the quality of employment.
The proposed transfer of subsidies in cash to the beneficiaries of PDS (Public Distribution System), LPG and fertilisers is expected to facilitate inclusion of more people in the banking fold and banks are gearing up for this. Union Bank of India which has appointed Business Correspondents in 7,000 villages under the banking access scheme and which is working with Nokia to develop mobile base for remittances, has identified Varanasi as the district where it can transfer the subsidies at a short notice. According to M V Nair, Chairman & Managing Director, Union Bank of India, all the households in the district have bank accounts. Since brick and mortar plays most crucial role in financial inclusion, the bank is opening 100 branches purely for the purpose of financial inclusion this year. “The 100 branches will purely be devoted to financial inclusion. They will act as centres where people can get their passbooks updated (something the BCs can’t do) and draw cash,” claims Nair.
Innovate & Replicate
Innovation is the name of the game as far as financial inclusion is concerned. No wonder, Rashtriya Swasthya Bima Yojana (RSBY) which provides cashless in-patient health cover to around 80 million poor persons in 24 states through a smart card, has been chosen as one of the 19 schemes worldwide for its publication ‘Sharing Innovative Experience: Social Protection Floor Success Stories.’ About 20 million smart cards, which have been provided to the RSBY beneficiaries, ensure that the beneficiary can go to any empanelled hospital across the country and get cashless treatment up to Rs 30,000. The need is to see whether the smart cards can also be used to provide subsidised food and non-food products to the BPL families. The card would not only ensure audit trail of the delivery of the subsidised products but also take care of many lacunae, which plague the system at present.
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Inclusion is the first magazine dedicated to exploring issues at the intersection of development agendas and digital, financial and social inclusion. The magazine makes complex policy analyses accessible for a diverse audience of policymakers, administrators, civil society and academicians. Grassroots-focused, outcome-oriented analysis is the cornerstone of the work done at Inclusion.
