Monday, November 29, 2010

ఇనన్కిఅల్ ఈన్క్లుసిఒన్ ఓర ఇల్లుసిఒన్?


B. Yerram Raju

In a recent interview to the Financial Express (6th October 2010), C. Rangarajan, reiterated that Financial Inclusion is a necessity and no longer an option. With a view to increasing banking penetration and promoting financial inclusion, domestic commercial banks, both in the public and private sectors, were advised to take some specific actions. This article reviews the efforts of the financial sector in the coverage of the financially excluded in the light of the strategies that the RBI and GoI have been putting in place.

Commercial Banking:

As on March, 2010, there were 83,997 branches of scheduled commercial banks (SCBs) out of which 32,289 (37 per cent) branches were in the rural areas (with population up to 9,999), 20,358 branches (24 per cent) in semi-urban areas (with population of from 10,000 to 99,999 people), 46,047 (55 per cent) in urban areas (with population of 100,000 to 9,99,999) and 14,697 (17 per cent) are in metropolitan areas (with population of 1 million and more). The number of branches in semi-urban and rural areas, hence constitute around 61 per cent of the total bank branches. The Growth of Banking Industry during last decade(2000-2010) in various population segments presents not so comforting a picture of financial inclusion efforts during the last few years. Following snapshot analysis would unfold interesting inferences.

Growth of Banking Industry for last 10 years.
Geographical Segment No. of Branches Deposits
(Rs. in Crores) Credit
(Rs. in Crores) % of Growth over 10 yrs.
March 2000 March
2010 March 2000 March
2010 March 2000 March
2010 Depo-sits Credit
All India 67,061 83,997 8,21,419 46,01,926 4,60,080 33,45,619 460 627
Metro Centers 8,957 14,697 3,49,945 26,09,101 2,76,110 22,16,113 645 703
13% 17% 42% 57% 61% 66%

Top 100 Centers (inclusive of metro Centers) 14,346 22,377 4,85,117 31,93,906 3,50,454 26,10,275 558 645
22% 27% 59% 69% 75% 78%
Urban Centers inclusive of metro & other Centers 19,808 31,350 538,907 3,560,217 355,199 2,775443 561 681
29% 37% 66% 77% 78% 83%
Semi-Urban centre 14,850 20,358 1,61,972 6,18,207 56,127 3,20,372 282 471
22% 24% 20% 13% 11% 10%
Rural Centers 32,673 32,289 1,20,539 4,23,502 48,753 2,49,804 251 412
49% 37% 14.60% 9% 10.44% 7%
Source: Tables compiled from BSR returns of RBI for various years and Census of India, 2001.

It can be observed from the above that:

 the Deposits grew around 460% and Credit by 627% in the country where as the metro centers registered growth of 645% in deposits and 703% in advances with an increase of 5,740 branches over the last decade. The share of the metros in Deposits grew from 42% to 57% and in Credit from 61% to 66%.

 the deposits in Urban Centres grew by 561% and advances by 681%, but their share in Deposits grew from 66% to 77% and in Credit from 78% to 83% during the last decade.
 the deposits in Semi-urban Centres grew by 282% and credit by 471%, but their share had come down from 20% to 13% in Deposits and from 11% to 10% in Credit.
 the deposits in Rural centres grew by 251% and credit by 412%, but their share had come down from 14.6% to 9% in Deposits and from 10.44% to 7% in credit.

What can be inferred from the above is that, even though the Bank Deposits grew by 4.5 times and Credit by 6 times in the last decade, the percentage share of Deposits and Credit in Semi-urban and Rural Centres had declined markedly whereas the relative percentage in Metro and Urban centers had increased substantially. That means, in spite of robust overall growth of Banking Industry, there seems to be uneven levels of banking penetration in Semi-urban and Rural centers, with more focus taking place in Urban centers. Even within Urban area, this unequal banking growth seems to be taking place with top six metros taking dominance.

A Deeper Analysis:

Urban Banking.

Spread of Banking in various segments within Urban Centers for last 10 years.
Segment (population
in millions) No. of Branches Deposits
(Rs. in Crores) Credit
(Rs. in Crores) % of CD Ratio
March 2000 March
2010 March 2000 March
2010 March 2000 March
2010 Mar 2000 March
Urban Centers inclusive of metro & other centers
(350 millions) 19,808 31,350 538,907 3,560,217 355,199 2,775,443 66% 78%
Top six metros(60 millions)
5,698 8,531
291,582 2,120,945
251,639 1,864,627
86% 88%
(29%) (27%) (54%) (60%) (71%) (67%)
Remaining 29 metro
centers (55 millions) 2,627 6166

38207 351486
63% 72%
(13%) (20%) (11%) (14%) (11%) (13%)
Remaining top 65 centers excluding metros(70 millions) 6021 7680
132678 584,805
60,607 394,162
46% 67%

(30%) (24%)
(25%) (16%) (17%) (14%)
The remaining urban centers(165 millions) 5,462 8,973

4746 165168
9% 45%
(28%) (29%)
(10%) (10%) (1%) (6%)

Source: Tables compiled from BSR returns of RBI for various years and Census of India, 2001.

Uneven levels of banking penetration marked the growth of banking during the last decade. There are 35 metros in the country as per census 2001 with population of one million above. The population of the top six metros viz Delhi, Mumbai, Chennai, Kolkota, Bangalore and Hyderabad as per 2001 census is around 60 millions. These six metros within Urban Segment reflect a growth from 54 to 60 percent in Deposits and decline from 71% to 67% in credit. Thus the six metros have a share of around 63% of the total banking business in urban segment. The remaining 29 metros with population of 55millions, represent deposit growth from 11 to 14 percent and credit growth from 11 to 13 percent correspondingly. In the remaining 65 out of top 100 urban centres, their share in deposits fell from 25% to 16% and in credit from 14% to 11%. The overall picture shows that while there is marked growth in banking business in top 35 urban centres, the banking business in the remaining centres has declined calling for steps to remedying the uneven levels of banking penetration.

Semi Urban and Rural Centers

Spread of Banking in various segments within Semi-Urban and Rural Centers for last 10 years.
Segment (population
in millions) No. of Branches Deposits
(Rs. in Crores) Credit
(Rs. in Crores) % of CD Ratio
March 2000 March
2010 March 2000 March
2010 March 2000 March
2010 Mar 2000 March
All India
(population of 1100 millions) 67,061 83,997 821,420 4,601,926 460,081 3,345,619 56% 73%
Semi-urban centers 14,580 20,358
161,972 618,207
56,127 320,372
35% 52%
(21%) (24%) (20%) (13%) (12%) (10%)
Rural centers 32,673 31,289
120,539 423,502
48,753 249,804
40% 59%
(49%) (37%) (15%) (9%) (11%) (7%)
Semi-urban and Rural combined (Population of 750 millions) 47253 51,647
104,880 570,176 37% 54%
(70%) (61%) (35%) (22%) (23%) (17%)

Source: Tables compiled from BSR returns of RBI for various years and Census of India, 2001.

In Semi-Urban and Rural Centers (SURC) with about 750mn population, despite the addition of 4394 branches, their overall share in banking universe showed a decline from 70 to 61 percent with all the acclaimed Financial Inclusion efforts during the last decade. Rural centres’ Deposits declined from 15% to 9% and Credit from 11% to 7%. Similarly, the share of deposits in Semi-urban centers declined from 20% to 13% and the share of credit in these centers declined from 12% to 10%. The increasing population in the SURC is served with declining banking business. Improvement in the CD ratio of combined semi-urban and rural centers from 37% to 54% during the period is the silver lining.

This analysis clearly reflects the elitist trend in financial deepening and widening and all the claims of financial inclusion should keep the policy makers think of the pinching areas of the shoe. Depending on commercial banks solely for the financial inclusion effort would in the backdrop of the above analysis prove risky.


To bring the financially excluded population within the fold of the formal banking system, the government and the Reserve Bank of India have taken several steps to ease the entry of the rural population and the urban slum population into the banking system. Based on the recommendations of the C Rangarajan Committee Report on Financial Sector Reform, the government created the Financial Inclusion Fund (FIF) for meeting the cost of developmental and promotional interventions for ensuring financial inclusion, and the “Financial Inclusion Technology Fund (FITF)” to meet the cost of technology adoption with an overall corpus of Rs 5000cr each. To address the problem of high transaction cost and outreach, the banks were advised to migrate all their branches to the computer-based core banking solutions that allow real-time transactions, as also to increase use of information technology based solutions, such as smart cards, mobile phones and hand-held devices to extend the reach. Measures were taken to simplify account opening; these included banks being mandated to offer basic banking ‘no-frill’ accounts, with low or zero minimum balance, and simpler ‘Know Your Customer’ (KYC) norms for the low income groups in urban and rural areas for accounts with balances not exceeding Rs 50,000. The RBI liberalized its branch authorization policy for the rural areas as well as the policy for location of ATMs. The recent change in bank branch policy of RBI allows scheduled commercial banks, other than regional rural banks, to open branches in towns and villages with population below 50,000 without seeking its permission. To expand the branch network in the North-East, the RBI is working with state governments and the banks on a viability gap funding model by providing the capital and the running cost of branches for the first five years to the States, which provide premises and security. Commercial Banks under specific directives submitted Board-approved Financial Inclusion Plans by the end of March 2010 and they are being subject therefore for Board Review of the Banks on one side and regulator on the other.

Policy-makers and regulators also face the challenge of putting in place enabling regulations and provisions that guide the banks and other market players to come forward and willingly take part in financial inclusion efforts, while still retaining the ability to monitor and supervise the facilities that shall be provided to millions of new customers in distant places.

To further the reach of the banking network, the RBI in 2006, took an important initiative by introducing the Business Correspondent (BC) model. The BC model provides the means for ensuring a closer relationship between the poor people and the organized financial system. Banks were permitted to use the services of non-governmental organizations, not-for-profit micro-finance organizations, retired bank employees, ex-servicemen, retired government employees, Section 25 companies, and other civil society organizations as business correspondents. This list has been further extended recently. This model allows banks to reach banking to the poor without creating new brick and mortar branches. However, to take advantage of this model, the banks have been urged to rapidly scale up IT initiatives that can help in reaching banking to the poor, these technologies include biometric or simple smart cards and mobile hand-held electronic devices that read these cards and facilitate banking transactions through banking correspondents without the client having to physically go to a branch. These hand-held devices can also remotely transfer banking transactions’ data from rural areas to the bank’s central server. To ensure uniformity in standards, the RBI has also issued the required security standards and customer protection guidelines to banks under KYC norms. To further the reach of banking while ensuring that the government social security payments reach the rural beneficiaries on time, at low cost and without leakages, the government and the RBI are encouraging state governments and banks to disburse such benefits through bank transfers into the beneficiaries’ accounts. Presently, RBI is giving an incentive of Rs 50 per smart card account opened by banks under this scheme to partly meet the cost.

The Indian Banks Association has also constituted technology committees in order to formulate uniform open standards for the technologies at play so as to ensure interoperability between banks and other service providers for the benefit of the customers. Presently, the lack of common technical standards has impaired the pace of ICT deployment and has led to vendor dependence for technology components. This has made the solutions deployed by even a particular bank for financial inclusion, solution provider specific, thus not allowing the bank customer the ability to interoperate across all outlets of the same bank.

Thus, the way ahead clearly requires the banking technologies to become inter-operable while having the ability to scale up to reach the millions who still await banking facilities. These inter-operable systems will also facilitate the transfer of domestic and international remittances to the villagers in a seamless manner. The Trend and Progress of Banking in India, an authentic Report of RBI lauds the penetration of Financial Inclusion efforts of Banks measured by the ATMs and rural branch expansion, which as we saw in the foregoing analysis clouds the reality.

Urban Co-operative Banks
Establishment of New Urban Co-operative Banks

As a result of series of steps taken by the RBI including regular monitoring through the Task Force on UCBs their systemic financial health has improved and the State Governments, because of the MoUs that the RBI entered into, are ensuring that these Banks perform to the desired level of efficiency and they are also foraying into new areas of business. There is commendable growth and consolidation of Urban Cooperative Banks in the country and have improved in their asset acquisition and the reach. With a view to increasing the coverage of banking services amongst local communities, it is proposed to set up a Committee comprising all stakeholders for studying the advisability of granting new urban co-operative banking licenses under Section 22 of the Banking Regulation Act, 1949 [as applicable to co-operative societies (AACS)].

Liberalization of Off-site ATMs by UCBs

Under the extant policy of branch authorization, UCBs, which are well-managed and meet the regulatory criteria, are required to submit annual business plans, based on which centers are allotted to them according to their choice for opening of branches. Centers where UCBs desire to open off-site ATMs are also required to be included in their annual business plan. In order to further improve the banking infrastructure, it has been decided to liberalize the approach to setting up of off-site ATMs by UCBs. Accordingly, it is proposed: to allow well-managed UCBs to set up off-site ATMs without seeking approval through the annual business plans.

Since, as per the 2001 census there are approximately 100,000 habitations with a population of over 2,000, the government proposes to advise the banks to reach all such village by March 2012. The RBI has directed banks to draw up a road-map by March 2010 to provide banking services through a banking outlet, not necessarily a bank branch, in this regard. Given the scale of this task, achieving this goal will require multiple channels and technology driven solutions.

Rural Cooperative Credit Structure:

Rural Cooperatives occupy nearly 7.5 percent of the financial space according the Financial Stability Report of the RBI and have the potential to take the central stage in financial inclusion if the legacy and governance issues are resolved with strong political will. It is the strong political will that needs hard bargaining which is worth the effort on the part of Government of India and the RBI.

Under Vaidyanathan package, PACSs and DCCBs are under technological transformation, though slow. They have legacy issues that are being sorted out by the Government – both State and Central – through appropriate legislative corrections. They are on the threshold of change but would become ephemeral if the HR issues are not sorted out. The supervisory role for co-operative credit system assumes greater significance than any other intervention. It took a little over twenty years to realize that the Cooperative Banking should have compatible accounting system!! They were in a single entry book keeping for decades while the banks were moving into GAAP. A weak supervisor cannot be expected to usher in a strong financial system.

Though Government of India announced the Vaidyanathan rehabilitation package of nearly Rs.14000crs in 2004, all the states did not fall in line for carrying out the needed legal amendments nor did they adopt a financial discipline required. The package where released was in 2007 for the financial position of 2004 and therefore the imbalances between 2004 and 2007 left the gap unattended. Professional approach to rehabilitation effort was found wanting. While it is expedient that the cooperative credit system should be insisted on moving into stringent financial discipline, well developed and carefully monitored business development plans, it is imperative that they should be assisted with one more dose of well calibrated recapitalization – this time with a repayment plan following a three year moratorium when their existing structural and technological reform agenda should start yielding results. The MoUs with the State Governments should move in this direction. When well regulated public sector banks received Rs.138000 cr. as recapitalization effort ever since financial sector reforms commenced, rural cooperative credit structure that suffered excessive political interference in their day to day operations cannot be expected to come out of their deep-seated problems with a meager one-time capitalization of Rs.15000cr. But, remember, ignoring them would never take the financial inclusion effort closer. The UID synchronizing with the PACSs computerization would be a great opportunity to turn the later around and extend their reach to the millions who were excluded from the financial inclusion effort. NABARD’s 2009-10 Annual Report mentions the results of Central Cooperative Banks as at the end of 2008-09 which shows that 50 (108 in 2007-08) out of 370 reporting banks were incurring losses and the actual loss figure came down from Rs.926cr to 327cr and their recoveries also improved substantially from 55.6% to 72% as at the end of 30th June during the year. NPAs, however, slided down by a marginal 1percent and odd. All the State Cooperative Banks have been running on profits and the profitability has been on the rise. Broadly the sector has been scaling up in performance. Better governance, more transparency and strong policy support should improve the contribution of the sector to financial inclusion agenda.

Mobile banking carry huge technology risks: Several mobile manufacturers provide the battery energy to last for five to six years; these instruments would only have to be replaced latter; it is the illiterate who operate them and therefore, pass word manipulations cannot be ruled out. The excitement and enthusiasm in this technology requires slow transition and careful calibration. Poor have to be reached more in person and more in comfort and not at the risk of slumber in the system. Cooperatives that still have a wider reach than commercial banks – nearly a lakh of them is not a small number – therefore, still offer a more dependable solution for the financial inclusion provided some more clean-up is done.

Substantial slice of the Financial Inclusion Technology Fund could be earmarked for the technology initiatives in the Cooperative Sector. Commercial banks icing on profits could invest incrementally in technology required for financial inclusion at their own cost as they have the prospect of heavy cross-subsidisation of their efforts. On the other hand Cooperative Credit System carries heavy concentration risk – both in terms of lending for agriculture and rural development, government sponsored programmes etc at a price that is also invariably dictated by the government. Restricted resources and shrinking confidence need to be tackled with strong resolve and specific strategies. Physical presence of nearly 109000 PACSs is a formidable credit infrastructure in the villages and any effort to strengthen them would be worth the while.

The Gaps Still:
The car driver hailing from Mahabubnagar but working with me in Hyderabad does not have a bank account but has a chit running for a lakh of rupees in his village. My servant maid’ daughter studying 9th class does not have a student account – for that matter her mother as well. She also is a member of informal chit fund group in her neighbourhood. The vegetable dealer in Punjagutta, Hyderabad – a busy shopping locality adjacent to a posh residential locality with a public sector bank within a distance of 250meters operates with a private money lender who lends him in the early hours and collects back his principal and interest in the evening. I asked each of them: ‘how trustworthy are these informal sources of savings and credit?’ They have only one line reply: ‘we trust the operation and we were not deceived during the last 5-10years and so are many who are in our group.’

Financial Inclusion has not been picking up despite best of intentions and efforts from the authorities. The reasons can be:1. the general apprehension among the people that they get noticed or there can be some harassment or their secrets get shared with official agencies which may lead to some embarrassment in their perception which has no basis.2. Illiteracy to understand and comply with the formalities is the other reason which keeps the people away from formal institutions.3. The products banks offer do not suit their immediate requirements. What they require is some confidence that they will be able to get some loans as and when they want without much of formalities. 4. The timing is the essence of their problem to come to the banks’ fold. Most of these people are some small retailers / vendors, labourers, some technically skilled workers like plumbers, electricians, auto mechanics, house maids, drivers, bullock cart owners, rickshaw pullers, iron scrap collectors and dealers etc,etc, and their work starts early in the morning and the bank timings do not at all suit them. In villages generally, they have weekly fairs, morning and evening markets where as banks have their own timings which do not suit the people. Any survey in these fairs and of people engaged in different activities will easily reveal that they have their own methods of saving and raising of loans and this goes on with perfect understanding and confidence although exploitation will be there viewed purely from an official perception. One notable method of saving by these people is to subscribe to what is known as chit fund or kuri on a daily basis which enables them to save as well as raise loans against these savings. In good old days some banks particularly from Kerala were thriving only on these types of deposits and I do not understand in the wisdom of the Reserve Bank and the Government Perhaps, this was banned in early 1980s. This is one product familiar to all categories of masses including businessmen every where through out the country and there is nothing wrong if banks reintroduce this to initially attract the people to the banks. Banks like the Syndicate Bank – pigmy deposits, State Bank – Janata Deposits, which pioneered into the new nomenclature of Business Correspondents, had burnt their fingers badly. The present generation of bankers have to turn the leaf and learn the lessons when they appoint the Business Correspondents.

Banks have to have their business correspondents to take care of the people as per their timings both in the morning and late in the evening. Further banks have to do lot of marketing among these people through financial literacy and canvassing highlighting the advantages of having a bank account and disadvantages of dealings in unofficial markets. They need to be enticed and the fear of having to deal with the official system has to be completely erased. The whole approach to financial inclusion needs a rethinking and a revised planning. It is worth introducing some incentives to bank officials and business correspondents based on achievements. The money lenders need to be completely eliminated and for that all their methods of dealings minus the wrong doings, have to be imitated by the banks for a few years. This campaign for financial inclusion although an exciting and challenging opportunity for the banks to access rural savings, create innovative financial products while expanding into new markets in the rural hinterlands, have to devise new products with altogether a different mindset. It is an opportunity for the technology providers to take up the challenge to bridge the digital divide for larger public good. It is an opportunity for the rural poor, the marginal and small farmers to break away from the shackles of the moneylenders and have the option to make informed financial decisions. Intensification of the efforts in the right direction and appropriate policy support should enable the inclusion agenda move closer to the target. When Y.V.Reddy, the former Governor, a visionary in Indian Banking Diaspora innovated into Financial Inclusion and the Business Correspondent instrument to achieve the former, he would have fondly hoped that the Banks would take the initiative forward with honest efforts. I would only end up quoting Oliver Goldsmith: “Let not thy winged days be spent in vain; where gone, no gold can try them back again.”

* Yerram Raju is Regional Director of PRMIA, Hyderabad Chapter and Member of the Expert Committee on Cooperative Banking, Government of Andhra Pradesh. The views are personal.