Abstract EMPOWERING FINANCIAL INCLUSION THROUGH FINANCIAL LITERACY The term financial inclusion means availability of banking services at an affordable cost to disadvantaged and low-income groups. The banking and financial services include savings, deposits, borrowing, payment and remittance facilities. 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 financial inclusion policy, Regional Rural Banks were set up. With the directive of Reserve Bank of India (RBI), Banks allow low income groups to open no frills accounts. These accounts either have a low minimum or nil balance with some restriction in transactions. RBI has further relaxed KYC norms and restrictions on mobile banking. NABARD has also contributed significantly by introducing SHG- Bank linkage programme, Kisan Credit Card (KCC) Scheme and has sanctioned Trainers training programme on financial literacy, farmers service, village knowledge, mobile credit counseling centres and promotion of farmer education. It also includes providing facilities of micro insurance and micro pension. Despite all the measures, banks are yet fighting to fulfill the financial inclusion dream. The main lacuna is due to the lack or spread of awareness. This gap can be briged through financial literacy. Financial literacy is a prerequisite for effective financial inclusion, which will ensure that financial services reach the under banked sections of the society, leading to consumer protection through self-regulation. In India, the need for financial literacy is even greater considering the low levels of literacy and financial capabilities, and the large section of the financially excluded population. In India, Reserve Bank of India (RBI), with the assistance of Organization of Economic Development (OECD) has issued a concept paper, promoted a financial literacy website, and set up credit counseling centers to provide advice on personal finance. RBI s Project Financial Literacy aims at disseminating information about the central
bank and basic banking concepts through various media like films, games, cartoons and comic books, and essay writing competitions, specifically target school and collegegoing students. Various corporate banking organizations have also promoted financial literacy drive, mostly as part of their Corporate Social Responsibility. A notable achievement has been made by Kerala by achieving total financial inclusion. At least one member of every household of the state has a bank account. Kerala now tops the Index of Financial Inclusion (IFI) prepared by RBI estimated on the basis of data on banking penetration, availability of banking services and usage of the banking system among States. 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. The author of this paper discusses the pertinent issues of financial inclusion comprising of narrower and broader aspect, the importance of the financial literacy and the schemes and policies introduced by the Government with the detailed perspective of the pros and cons and steps taken to improve the reach of financial and banking services at grassroots level.
EMPOWERING FINANCIAL INCLUSION THROUGH FINANCIAL LITERACY I. Introduction In the simplest terms, financial inclusion means providing access to basic financial services at affordable prices, a pre-requisite for ushering in inclusive growth. Growth needs to be sufficiently inclusive if its benefits have to be shared among all or else the growth process itself shall be jeopardized and derailed. Financial Inclusion has the potential to contribute substantially towards inclusive growth. Access to financial services allows the poor to save money outside the house safely, prevents concentration of economic power with a few individuals and helps in mitigating the risks that the poor face as a result of economic shocks. It is now widely acknowledged that financial exclusion leads to non-accessibility, non-affordability and non-availability of financial products. In other terms, financial inclusion is an explicit strategy for accelerated economic growth and is considered to be critical for achieving inclusive growth in the country. As per a World Bank report, 1 financial inclusion, or broad access to financial services, is defined as an absence of price or non price barriers in the use of financial services. It recognizes the fact that financial inclusion does not imply that all households and firms should be able to borrow unlimited amounts or transmit funds across the world for some fee. In India, this issue was addressed by the Committee on Financial Inclusion, chaired by Dr. C. Rangarajan, Government of India, 2008. 2 As per the committee, the essence of financial inclusion is in trying to ensure that a range of appropriate financial services is available to every individual and enabling them to understand and access those services. The committee provided a working definition which reads as follows: 1 Finance for All? Policies and Pitfalls in Expanding Access, World Bank Report, 2008 2 Government of India constituted a Committee to enhance financial inclusion in India on 22 June 2006. The Committee presented its report in January 2008.
Financial inclusion may be defined as the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost. Therefore, financial inclusion is the process of ensuring access to appropriate financial products and services needed by vulnerable groups such as weaker sections and lowincome groups at an affordable cost in a fair and transparent manner by mainstream institutional players. Financial inclusion has become one of the most critical aspects in the context of inclusive growth and development. II. Growth, Development and Inclusion 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 bank s 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. 3 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. 3 As per Trends and Progress of Banking in India, RBI, 2009-10
In any financial system, there are five basic functions to be performed, they are as follows 4 : a) Facilitate trading, hedging, diversifying, and pooling of risks; b) Allocate resources; c) Monitor managers and exert corporate control; d) Mobilize savings; and e) Facilitate exchange of goods and services. It is important that these aspects are covered as they form an integral part of the inclusive approach as well. Another important aspect of financial inclusion is formation of Self Help Groups (SHGs). SHGs 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. As per the current data available, details of Scheduled Commercial Bank branches, as on 31 st March, 2011, are as under 5 : Rural Semi Urban Urban Branches Metropolitan Total Branches Branches Branches 33,495 22,631 17,712 15,784 89,622 (37.37%) (25.25%) (19.76%) (17.62%) 4 Financial Services and the means for its improvement (2009), Dr. G. Costanzo, Readings in Financial Economics 5 Financial Banking and allied services (2011), Vishwesh Pant, ICER
This is particularly very alarming as the rural population in India still needs lot more attention. As per census data, out of approximately 600,000 villages in India, there are only 33,495 rural bank branches. 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 show 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 norm is another milestone. 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. 6 The widening and deepening of financial system, especially the banking network, links development of real sector through opening of branches in relatively less banked or unbanked areas and transferring of funds from net savers to net borrowers and thereby 6 Fisher and Shriram (2010) Beyond Banking Services, Vistaar Publications
facilitating capital formation. Further, physical access to growth centres through development of a rural road network unleashes the productive capacity of the people living in rural areas and generates positive externalities. Rural roads, by themselves, can be considered a powerful instrument of financial inclusion. 7 Moreover, analysis of State level data has confirmed that increased banking network and per capita income enhanced savings as well as credit inclusion. The state has to play an important role in financial markets. The role itself is necessitated due to pervasive market failures which in the current globalised scenario are not a rare occurrence. In developing countries both market and government as institutions have their limitations, but it is necessary to design government policies that are attentive to those limitations. Financial Inclusion is one such intervention that seeks to overcome the frictions that hinder the functioning of the market mechanism to operate in favour of the poor and underprivileged. III. Financial Literacy Although the concept is defined usually at convenience by stakeholders, but its broad contours remain same, that is the ability to take informed deisions, make choices leading to empowerment. OECD defines financial literacy as 'the process by which financial consumers/investors improve their understanding of financial products, concepts and risks, and through information, instruction and/or objective advice, develop the skills and confidence to become more aware of financial risks and opportunities, to make informed choices, to know where to go for help, and to take other effective actions to improve their financial well-being'. There are good intentions and genuine concerns about vast groups of population still unaware of institutional banking concepts and the know-how to make informed decisions. This makes them vulnerable to exclusion from mainstream socio-economic 7 Lalitha (2008) Rural Women Empowerment and Development Banking, Kanishka Publication, New Delhi
framework. Financial literacy is an engine that will aid achieving comprehensive financial inclusion and hence financial freedom. 8 Access to financial services allows the poor to save money outside the house safely, prevents concentration of economic power with a few individuals and helps in mitigating the risks that poor face as a result of economic shocks. Hence, providing access to financial services is increasingly becoming an area of concern for the policymakers for the obvious reason that it has far reaching economic and social implications. There is a need to perceive financial inclusion as a quasi public good. IV. The Way Forward Finance has come a long way since the time when it wasn't recognized as a factor for growth and development. It is now attributed as the brain of an economic system and most economies strive to make their financial systems more efficient. It also keeps policymakers on their toes as any problem in this sector could freeze the entire economy and even lead to a contagion. The earlier research focused on how finance helps an economy. Now, research shows that financial inclusion is as important. The new avenue for research in finance is - making financial inclusion workable. It is not implied that financial inclusion alone has led to the development but is an important factor. The policymakers have set up their task force/committees to understand how financial inclusion can be achieved including advanced economies like United Kingdom. 9 India also set up a committee under the chairmanship of Mr. C. Rangarajan to suggest measures to increase financial inclusion. Following points will help in understanding why can't financial inclusion happen on its own: 8 Mahendra Dev S (2009) Financial Inclusion: Issues and Challenges, Economic and Political Weekly, Vol. No. 41 9 Sa Dhan Micro finance Resource Centre (2009), Indian Experience of Financial Inclusion
1. Financial exclusion: It has been found that financial services are used only by a section of the population. There is demand for these services but it has not been provided. The excluded regions are rural, poor regions and also those living in harsh climatic conditions where it is difficult to provide these financial services. The excluded population then has to rely on informal sector (moneylenders etc.) for availing finance that is usually at exorbitant rates. These leads to a vicious cycle. First, high cost of finance implies that first poor person has to earn much more than someone who has access to lower cost finance. Second, the major portion of the earnings is paid to the moneylender and the person can never come out of the poverty. 2. High cost: It has also been seen that poor living in urban areas don't utilize the financial services as they find financial services are costly and thus are unaffordable. Hence, even if financial services are available, the high costs deter the poor from accessing them. For example, to open a checking account in Cameroon, the minimum deposit requirement is over 700 dollars, an amount higher than the average GDP per capita of that country, while no minimum amounts are required in South Africa or Swaziland. 10 Annual fees to maintain a checking account exceed 25 percent of GDP per capita in Sierra Leone, while there are no such fees in the Philippines. In Bangladesh 11, Pakistan, Philippines, to get a small business loan processed requires more than a month, while the wait is only a day in Denmark. The fees for transferring 250 dollars internationally are 50 dollars in the Dominican Republic, but only 30 cents in Belgium. 3. Non-price barriers: Access to formal financial services also requires documents of proof regarding a persons' identity, income etc. The poor people do not have these documents and thus are excluded from these services. They may also subscribe to the services initially but may not use them as actively as others because of high distance between the bank and residence, poor infrastructure etc. 10 Rana Mitra (2011), Financial Inclusion: Meeting the Challenge, People s Democracy, Vol. XXXI II, No. 17, April 2011 11 Shahidur R. Khandker, (2008), Fighting poverty with micro credit: Experience in Bangladesh, Oxford University Press, New York
4. Behavioral aspects: Research in behavioral economics has shown that many people are not comfortable using formal financial services. The reasons are difficulty in understanding language, various documents and conditions that come with financial services etc. Some of the initiative taken by Reserve Bank of India (RBI) includes: No-Frill accounts: In November 2005, RBI asked banks to offer no-frills savings account which enables excluded people to open a savings account. Normally, the savings account requires people to maintain a minimum balance and most banks now even offer various facilities with the same. No-frills account requires no (or negligible) balance and is without any other facilities leading to lower costs both for the bank and the individual. The number of no-frills account has increased mainly in public sector banks from about 0.4 million to 6 million between March 2006 and March 2007. The number of No-frill accounts in private sector banks also increased from 0.2 million to 1 million in the same period. No significant increases were there in foreign banks. This is understandably so as majority of rural and sub-urban bank offices are in public sector banks. Usage of Regional language: The Banks were required to provide all the material related to opening accounts, disclosures etc in the regional languages. Simple KYC Norms: In order to ensure that persons belonging to low income group both in urban and rural areas do not face difficulty in opening the bank accounts due to the procedural hassles, the KYC procedure for opening accounts has been simplified for those persons who intend to keep balances not exceeding rupees fifty thousand (Rs. 50,000/-) in all their accounts taken together and the total credit in all the accounts taken together is not expected to exceed rupees one lakh (Rs.1,00,000/-) in a year. Easier Credit facilities: Banks have been asked to consider introducing General purpose Credit Card (GCC) facility up to Rs. 25,000/- at their rural and semi urban branches. GCC is in the nature of revolving credit entitling the holder to withdraw upto the limit sanctioned. The limit for the purpose can be set Based on assessment of household cash flows, the limits are sanctioned without insistence
on security or purpose. The Interest rate on the facility is completely deregulated. A simplified mechanism for one-time settlement of overdue loans up to Rs.25,000/- has been suggested for adoption. Banks have been specifically advised that borrowers with loans settled under the one time settlement scheme will be eligible to re-access the formal financial system for fresh credit. Other rural intermediaries: Banks were permitted in January 2006, to use other rural organisations like Non- governmental organizations, self-help groups, micro-finance institutions etc for furthering the cause of financial inclusion. Using Information Technology: A few Pilot projects have been initiated to test how technology can be used to increase financial inclusion. Few important measures are: Smart cards for opening bank accounts with biometric identification; Link to mobile or hand held connectivity devices ensure that the transactions are recorded in the bank's books on real time basis. Some State Governments are routing social security payments as also payments under the National Rural Employment Guarantee Scheme through such smart cards. The same delivery channel can be used to provide other financial services like low cost remittances and insurance. The use of IT also enables banks to handle the enormous increase in the volume of transactions for millions of households for processing, credit scoring, credit record and follow up. Financial Education: RBI has taken number of measures to increase financial literacy in the country. It has set up a multilingual website in 13 languages explaining about banking, money etc. It has started putting up comic strips to explain various difficult subjects like importance of saving, RBI's functions etc. These comics explain myriad and complex concepts in an entertaining manner. RBI in collaboration with Organization of Economic Development (OECD) has issued a concept paper, promoted a financial literacy website, and set up credit counseling centers to provide advice on personal finance. RBI s Project Financial Literacy aims at disseminating information about the central bank and basic banking concepts through various media like films, games, cartoons and comic books, and essay writing
competitions, specifically target school and college-going students. Various corporate banking organizations have also promoted financial literacy drive, mostly as part of their Corporate Social Responsibility. A notable achievement has been made by Kerala by achieving total financial inclusion. At least one member of every household of the state has a bank account. Kerala now tops the Index of Financial Inclusion (IFI) prepared by RBI. V. Conclusion India has, for a long time, recognized the social and economic imperatives for broader financial inclusion and has made an enormous contribution to economic development by finding innovative ways to empower the poor. Starting with the nationalization of banks, priority sector lending requirements for banks, lead bank scheme, establishment of regional rural banks (RRBs), service area approach, self-help group-bank linkage programme, etc., multiple steps have been taken by the Reserve Bank of India (RBI) over the years to increase access to the poorer segments of society. 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. The author of this paper discusses the pertinent issues of financial inclusion comprising of narrower and broader aspect, the importance of the financial literacy and the schemes and policies introduced by the Government with the detailed perspective of the pros and cons and steps taken to improve the reach of financial and banking services at grassroots level. Financial inclusion is the road that India needs to travel toward becoming a global player. Financial access will attract global market players to our country and that will result in increasing employment and business opportunities. Inclusive growth will act as a source of empowerment and allow people to participate more effectively in the economic and social process.