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Financial Inclusion :A panacea for sustainable Economic Growth

ByN Sivaraman

L&T Finance Holdings Limited

October 5th 2012

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What is Financial Inclusion

• It is not just about– Opening of no frill bank accounts

– Providing micro-credit to the under privilieged

• It is about– Getting the underserved population to experience the benefit of broader

financial services

• Savings

• Investments

• Credit

• Insurance

• Remittances

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Who needs to be covered in Financial Inclusion

• Under-privileged in urban areas

• Rural Households, which are underserved as bank branches are farther

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Poor reach of organised financial services

• Large part of India’s population do not have access to organised financial services:– More than 60% of India’s population is in the rural areas

– 40% of population does not enjoy banking services

– Only 30,000 of 600,000 habitations have bank accounts

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Impact is limiting rural economic growth

• Uncovered populations retains a large part of their earnings in cash– Cash remains outside the system, contributing to leakages

– Economy deprived of capital

– Cash holders lose an opportunity to earn on idle cash

• Lack of credit flows– Drives the populace to money lenders, at exorbhitant rates

– Limits entrepreneurial ambition

– Rural economic activity at a lower levels

• Saving not channelised into productive investments

• Assets and lives under covered by insurance

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Rural India.. The low productivity trap

Sources- Census India 2011, Ministry of Statistics and Program Implementation,

• According to the 2011 Census, Rural India has a pop. of 833 million

• 70% of the Rural population is employed in Agri. & allied activities

• These activities however contribute to less than a fifth of the GDP

This low productivity is the result of a vicious trap

It is imperative that for Rural India to grow sustainably, this cycle has to be broken

Lack of Opportunities

Lack of Skills

Low Productivity

Low Investment

Low Savings

Low Income

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Financial Inclusion: Boosting Growth

Provide Credit

Buy Productive

Assets

Income Generation

Insurance

Protection

Additional Savings

Savings Products

Wealth

Skill Enhancement

Increase Consumption

Working Capital for

services

Liquidity

It is hoped that over time, this will help in• Improving the productivity of people employed in agriculture and allied activities• Shift people into more productive sectors and be gainfully employed

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Financial Inclusion: Channeling Savings• According to a NCAER Survey*, about 45% of Rural Households do not use any saving or

investment products

• The quantum of M3 stands at Rs.78 trillion as of Sept 2012

• Out of this, Currency held accounts for Rs. 10.6 trillion.

• Tapping these cash assets can provide the system with a huge pool of low cost funds

* - How Households Save and Invest- NCAER Survey ;

Reasons for Not Saving

Proximity of Institutions

Lack of skills to evaluate products

Lack of knowledge about

products

Concern on Safety of Capital

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This focus on Financial Inclusion has resulted in…

An additional 60k BC and BC Agents A 170% growth in Banking outlets A 2-fold increase in No Frills A/Cs

Source : RBI

But we are still behind the curve…

PARAMETER INDIA (%) WORLD (%)

% Adults with an account at a Formal Financial Institution 35 50

% Adults in the poorest 20% with an account at a Formal Institution 21 38

% Adults with a Credit Card 2 15

% Adults with an Outstanding Mortgage Loan 2 7

% Adults paying for a Health Insurance 7 17

% Adults using Mobile Money in the past year 17 7Source : RBI

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Key Challenges for Financial Inclusion to succeedReaching Out

Product Design

Business Risks

Awareness

Targeted beneficiaries are :• Geographically dispersed ( Over 6.4 lakh villages)• Have low Income • Are under banked (Only 1.47 lakh villages have banking outlets)

Product Design should be• Be Simple to facilitate better understanding of risks • Be Transparent to inspire trust and confidence• Consider unique Cash flow and financing needs of target segments

Lack of Awareness results in

• Low understanding of the benefits and risks of Financial products• Risk of mis-selling of products to uninformed customers• Ignorance about Grievance Redressal Mechanisms

Key Business Risks :• Credit Risk - Lack of adequate data on consumers• Operational Risk on account of high reliance on Cash transactions

Sustainability

Financial Inclusion initiatives should

• Generate adequate returns to justify risks involved• Constantly innovate to reduce Costs• Look at new ways of Increasing Revenues

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Benefits of financial inclusion

• Preventing leakage of income and capital– Increases overall capital available in the economy

• Increases income levels of the underserved– Consumption increases, resulting in economic growth

• Large market drives innovation in products and services and delivery– Benefits other segments of society as well

– Efficiency within the economy goes up

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Given these benefits, Financial Inclusion is a key focus area

“Financial Inclusion programmes should be implemented on commercial lines and not on a charity basis. It is important that banking with the poor is perceived and pursued as a sustainable and viable business model,”

KC Chakrabarty, RBI Deputy Governor

"Financial inclusion should be separate from the idea of getting credit... It means that everybody should have bank accounts, should be able to transact through them and also receive other benefits through them,”

Montek Singh Ahluwalia, Dep. Chairman Planning Commission

“Financial inclusion is a key determinant of sustainable and inclusive growth, which in turn is essential for building an equitable society."

Pranab Mukherjee, President of India and Former Finance Minister

Source : Various news reports

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Developments in the country

• RBI has been pushing opening of new branches

• Use of BCs for extending banking services to rural areas

• NREGA remittances through banking channels

• Development of MFIs as a credit and services delivery

• Draft Micro-Finance bill

• Mobile payment services

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THANK YOU