In my last post, I introduced the idea of Financial Inclusion, traced the extent of financial exclusion in the country and had also outlined some of the first (largely unsuccessful) efforts of the Government of India (GOI) in creating equitable access to financial goods and services to its vast, mostly rural populace. This is the second part of my post on Financial Inclusion in India. In this post, I shall talk about some of the more recent initiatives of GOI and attempt to understand how successful these have been.

Over the last decade, Financial Inclusion has come into focus in the global policy and development discourse, given its irrefutable link with upward economic and social mobility. It was former UN Secretary General Kofi Annan’s statement to the General Assembly in 2003 that most notably brought the idea back into the fore of economic policy discussion. Annan stated, “The stark reality is that most poor people in the world still lack access to sustainable financial services, whether it is savings, credit or insurance. The great challenge before us is to address the constraints that exclude people from full participation in the financial sector. Together, we can and must build inclusive financial sectors that help people improve their lives.”¹ Out of the December 29, 2003, statement came four clear goals for financial inclusion. Those goals² include:

1. Access to general banking services such as credit, lease, mortgages, insurance, pensions, and money transfers.
2. Internal and external regulation of financial institutions that would ensure inclusion through policy.
3. Sustained investment in financial institutions in order to enable access to financial services in the future.
4. Encourage competition in the banking arena, so that banks may come up with economically viable products and services intended to foster financial inclusion – in order to provide for those excluded from traditional banking system.

In India, a revival of efforts towards financial inclusion, (post the first slew of reforms including bank nationalisation –that was initiated in the 1960’s) occurred in 2005. The Reserve Bank of India (RBI) in its Mid Term Monetary Policy review paper³ urged all national banks to include Financial Inclusion amongst their prime most objectives. This in turn, was in direct response to the several detailed recommendations proposed by the Report of the Committee on Financial Inclusion⁴, which was released in 2004.

In following with the recommendations, the GOI has since 2005 introduced a host of reforms and initiatives intended to foster financial inclusion. Some of the most important of these are:

1. Financial Inclusion Plan: In 2010, the RBI launched the Financial Inclusion Plan, with an aim to provide access to financial services to at least 50 per cent (50.77 million) excluded rural households by 2012 and the remaining by 2015. These FIPs contained self-set targets in respect of opening of rural brick and mortar branches, deployment of business correspondents (BCs), coverage of unbanked villages through various modes, opening of no-frills accounts, Kisan Credit Cards (KCCs) and General Credit Cards (GCCs) to be issued etc.(Read about the progress of the plan here)
2. Introduction of “No Frills Accounts”: Regional Rural Banks (RRB’s) and State and Central Co-operative Banks were advised in December 2005 to make available a basic banking ‘no-frills’ account either with ‘nil’ or very low minimum balance as well as charges that would make such accounts accessible to vast sections of population. While the 2012 annual report of the RBI does not feature the latest figures, the 2011 Annual Report states that as of March 2011, 74.4 million No Frill accounts have been opened by domestic commercial banks with outstanding balance of Rs. 6,566 crore.⁵
3. Simplification of Know Your Customer (KYC) norms: The RBI has also eased the ‘Know Your Customer’ (KYC) norms as of 2005 to keep the procedural and logistical hassles involved in opening a bank account to a minimum. This is to enable those belonging to low-income groups to open bank accounts without documents of identity and proof of residence.
4. Introduction of General Credit Cards: In December 2005, The RBI has also issued a directive to banks wherein General Credit Cards with a credit limit of Rs. 25,000 shall be issued in all rural and semi rural bank branches, with a view to extend basic credit facilities to the rural populace.
5. Swabhiman Scheme: In order to extend the reach of banking to the rural hinterland, Banks were advised in 2010-11 to provide appropriate banking facilities to habitations having a population in excess of 2000 (as per 2001 census) by March, 2012. The Banks were asked to formulate their road maps for Financial Inclusion through the mechanism of the State Level Bankers Committee – (SLBCs were formed under the RBI’s Lead Bank Scheme in the early 1960’s – they act as an inter institutional forum at State level ensuring co-ordination between government and banks. They facilitate the implementation of financial development programmes in the areas of poverty alleviation, employment, providing banking outlet in un-banked areas, training, financial literacy etc.). Under Swabhiman, approximately 73,000 habitations across the country having a population of over 2000 have been identified for providing banking facilities. These habitations have been allocated to Public Sector Banks, RRBs, Private Sector Banks and Cooperative Banks operating in different parts of the country.
6. National Pension Scheme Lite: Taking heed of suggestions made by the Project Oasis Report⁶ commissioned by the Ministry of Social Justice and Empowerment, the Indian government launched in 2009 the National Pension Scheme Lite, a micro pension program focused exclusively on individuals from the unorganized sector. The scheme has four key features. First, it ensures ultra-low administrative and transactional costs; Second, it is portable across the country and thereby suits the migration pattern of workers. Thirdly, its terms are simple to understand by the average rural individual. In addition to the above, the scheme has a strong incentive component, titled “Swavalamban”, wherein eligible individuals who are successful in creating annual savings, receive an annual co-contribution of Rs. 1000 to their corpus from the central government. The NPS Lite is designed to have a concerted focus on making small scale investments viable⁷.

Despite their many interventions, the RBI has seen mixed results with regard to enlisting the vast rural masses into the formal milieu of financial goods and services. While the Swabhiman scheme has seen resounding success (with over 74,000 habitations been identified and the scheme seeing an extension into several additional areas as of March 2012⁸) this cannot be said for each of the RBI’s interventions. The NPS Lite, for instance has faced challenges in its roll out. Even two years after its initial roll out the Standing Committee on Finance reported in July 2011 that only 51,000 voluntary subscribers from the unorganized sector had enrolled into the scheme. The question that poses itself then is why do these instruments, regardless of their many benefits, fail to capture the imagination of the rural masses? And more importantly, how can they be marketed better?

In 2011, the Report of the Committee to Review Implementation of Informal Sector Pension (CRIISP) suggested that financial products in India are only successful when strong marketing tactics are employed to promote them. In other words, they are essentially marketed by creating a strong, targeted “push” factor in their intended market. In a context where earnings are used to provide for immediate needs, complex financial products such as pensions and insurance don’t feature in the average individual’s common basket of purchases. The challenges with regard to creating equitable access to financial goods and services in the Indian context are complex.

Thus, while it is certainly true that financial inclusion can be substantially enhanced by improving the supply side or the delivery systems, it is also important to note that in order to improve their level of inclusion, demand side efforts need to be undertaken as well. These would include improving human and physical resource endowments and launching strong financial literacy campaigns ⁹( a case in point being the efforts of Invest India Micro Pension Services¹⁰ – that act as an intermediary to demystify, educate and market financial products in a simple and transparent manner to financially excluded populations).

Research contends¹¹ that since people do not choose to purchase financial products – governments could consider making mandatory the subscription to certain financial products (while reforming the regulatory systems governing these products) and continue to simplify the logistical procedures accompanying them. While India has so far stayed clear of making mandatory subscription to financial products, the failures of the many government co-contribution based insurance and pension schemes (NPS Lite – as mentioned earlier) point to a need for more creative ways to get more people to enlist themselves as benefactors of these products.

Financial Inclusion initiatives alone may not effect in the desired upward economic mobility unless accompanying social issues are tackled alongside. The marginalization of women in rural society, for instance could have a direct bearing on the extent to which we succeed in creating inclusion. Known to be better at savings and managing finances¹², women would typically make the ideal customer, but since they are often not allowed to own bank accounts, they are left out of formal banking. While community sensitisation initiatives might help, banks could do their bit by creating products that incentivizes women customers.

Banks have only recently acknowledged¹³ that the rural poor are indeed bankable, and are working towards creating strong business models that while creating financial inclusion amongst the excluded; also make strong business sense to the banks themselves. One can only gauge the extent to which they shall succeed after these plans pan out in communities they are designed to succeed in.

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1^ Statement by Kofi Annan on December 23, 2009, post the adoption of 2005 as the International Year of Micro Credit

2^ Building Inclusive Financial Sectors for Development, UNCDF, May 2006, Available online at bluebook.uncdf.org

3^ RBI Mid Term Monetary Review Paper, 2005-06, www.rbi.org.in/Upload/Notification/Pdfs/66901.pdf

4^ Report of the Committee on Financial Inclusion, January 2008, http://www.nabard.org/report_comfinancial.asp

5^ RBI Annual Report 2011-12, Ch 4, Credit Delivery and Financial Inclusion, http://www.rbi.org.in/scripts/AnnualReportPublications.aspx?Id=1001

6^ Project OASIS Report, 2000, Ministry of Social Justice and Empowerment, http://www.iief.com/Consulting/oasisreport.pdf

7^ National Pension Scheme Lite, Pension Fund and Regulatory Development Agency, http://www.pfrda.org.in/indexmain.asp?linkid=185

8^ Response to Lok Sabha unstarred question 4640, 04.05.2012, http://164.100.47.132/LssNew/psearch/QResult15.aspx?qref=122394

9^ Project OASIS Report, Ministry of Social Justice and Empowerment, January 1999, pfrda.org.in/writereaddata/linkimages/oasisreport6305547711.pdf

10^ Invest India Micro Pensions – http://www.micropensions.com/what-we-do/integrated-implementation

11^ Measures for Achieving Financial Inclusion in India, A Thought Paper by Infosys India, Rajesh Jeganathan

12^ Enabling Rural Women’s Economic Empowerment, UN Women, September 2011, www.un.org/womenwatch/…/Hill-BP-1-EGM-RW-Sep-2011_CH.pdf

13^ “Profitable Models for Financial Inclusion, BANCON 2011 iobbancon2011.com/uploads/CEDocuments/Compdm/Article16.pdf