Financial Inclusion and its discontents, unaddressed issues and the way forward - Deepali Pant Joshi | SKOCH FinTech Forum & Award

Financial Inclusion and its discontents, unaddressed issues and the way forward
Deepali Pant Joshi

Financial Inclusion and its discontents, unaddressed issues and the way forward

Could Thou and I
With fate conspire,
To change this Sorry scheme of things entire
Would we not shatter it to bits
To build it closer to the hearts desire

Khayyam

Why is financial Inclusion not able to move beyond creating access? Why is access not translating to effective credit delivery and unleashing a virtuous cycle of economic growth and improved living standards. The well being of India’s people its economy and polity depend on a vigorous and effective system of credit delivery. In the ultimate analysis liquidity and flow of credit, mirrored in figures of the growth of credit are the life blood of any system, which is one of effective and real financial inclusion. Step into a Bank step out of Poverty becomes a meaningless string of words till Banks extend credit. Credit is the only means of effective economic empowerment which enables the poor to transcend their situation financial Inclusion thus becomes an anti poverty intervention.

The present Committee has been appointed to look into and review the totality of the Financial Inclusion System and recommend strategies and approaches to take it further. It’s findings and core suggestion remain the need to address impediments in effective credit delivery on the premise that credit remains the only valid means of poverty eradication and measure of the success of Financial Inclusion.

These are issues which the rural credit system has been grappling with for the last five decades or more and which led to the concept of the Priority Sector, Bank Nationalisation, the Lead Bank Scheme, the Service Area Approach, the growth of new institutions NBFCS RRBS Local Area Banks, Small Finance Banks and and Payment Banks and the RBI mandates to Banks as formal financial systems to lend to Agriculture small scale Industries and the weaker sections with the assignment of specific targets there against as also to a slew of sadly inefficient and largely ineffective Government sponsored schemes and anti poverty programmes.

Directed Credit did not succeed, the formal financial system was directed to lend as per mandate this led to a steep and swift deterioration to targeting credit from the macro national view point it was a costly failure.

Financial Inclusion which has successfully created access and is now at an inflection point must extend credit learning from the past it needs to avoid the pitfalls of quantitative targeting at the same time credit with adequate post disbursement supervision and in adequate measure Timely and Adequate credit must flow. The RBI in several reports including the two Narasimhan Committee reports commented ruefully on the inadequacies of the extant system and its deleterious impact on credit culture due to the subvention, subsidy and write off culture it spawned. There is a salience to bringing this into sharp relief as these are pitfalls to be skirted in the system of accelerating credit which this Committee would like to recommend as integral to financial Inclusion . The impact of directed credit and of the plethora of-government sponsored schemes, on the allocation of resources, remains uncertain the evidence is startling that in several countries directed credit has been a failure. Thus while the positive impact of such credit through government state and Centre sponsored schemes in particular, on production, or grounding small enterprises remains hypothetical the negative impacts are more tangible.

The objectives of Financial Inclusion with credit dispensation as an inalienable part of Financial Inclusion to combat Exclusion is not antithetical both objectives of a financial Inclusion and B Credit flow to the excluded, are best subserved if credit even if credit to directed segments and sectors were effected as a basis and bedrock of Financial Inclusion. “Supervised” credit calibrated closely to the needs of the borrower ie emphasising the nexus between credit and production measuring outlays against tangible outcomes on the ground is real. Financial Inclusion with an emphasis on credit penetration needs to ensure that credit is made available to needy borrowers and results ideally in the creation of sustainable, scalable, income generating projects this process would lead to sustainable and regular credit flow, as it would generate adequate returns making possible orderly repayments which in turn would naturally, over a period of time, institute Credit Discipline.

I begin this piece with extracts from the Annual Report of the RBI and intersperse these with brief comments and then move on to the unaddressed issues and suggestions on the way forward. I begin with the RBI report with the preparatory comment that the RBI has done commendable and extensive work in financial Inclusion over the last decade, it appears a “Sisyphesian“ endeavour but we move always in a zig zag manner to inevitable and incremental change, to that end the gaps that remain are highlighted, along with ways to address these. We owe this not only to ourselves but to the people we intend to serve - the need to ensure several laudable goals social justice, evidence based policy making with transparency and above all economic growth with equity without which economic growth really has no meaning. Financial stability rests on financial Inclusion and prosperity at the base of the pyramid linked with credit growth and consumer protection and financial literacy.There is a need to measure all outlays against actual outcomes.

Extract from the RBI Annual Report

To ensure a systematic approach towards increasing the level of financial inclusion in a sustainable manner, banks were advised to put in place Financial Inclusion Plans (FIPs). These FIPs capture banks’ achievements on parameters such as the number of banking outlets [branches and business correspondents (BCs)], basic savings bank deposit accounts (BSBDAs), overdraft (OD) facilities availed in these accounts, transactions in KCCs and general credit cards (GCCs) and transactions through the Business Correspondents - Information and Communication Technology (BC-ICT) channel. The progress made on these parameters as at the end of December 2021 is set out in Table 1.1 Financial Inclusion Index (FI-Index)

To capture the extent of financial inclusion across the country, the Reserve Bank has constructed a composite FI-Index with three sub-indices, viz., FI-Access, FI-Usage and FI-Quality, incorporating details of banking, investments, insurance, postal as well as the pension sector in consultation with the government and respective sectoral regulators. The FI-Index computed for end-March 2021 stood at 53.9 as against 43.4 for end-March 2017, registering a compound annual growth rate (CAGR) of 5.5 per cent. Of the three sub-indices, the sub-index for Access has increased over the same period, from 61.7 to 73.3. Although, the sub-index for Usage and Quality have risen in value from 30.8 to 43.0 and from 48.5 to 50.7, respectively, these have remained below the overall FI-Index. The index values indicate the scope for improvement under usage and quality dimensions of financial inclusion.

Financial Literacy

Inclusion of Financial Education in the School Curriculum

Developing financial literacy content for school children is one of the strategic goals of NSFE: 2020-25 Though 19 States have adopted this others are expected to follow suit

IV.25 As at the end of December 2021, there were 1,495 financial literacy centres (FLCs)3 in the country. A total of 73,900 financial literacy activities were conducted by the FLCs during 2021-22 (up to December 31, 2021). With a view to ensuring continued dissemination of financial education across the country during the pandemic, regional offices of the Reserve Bank undertook financial education programmes through virtual mode and leveraged local cable TV and community radio to spread financial awareness messages.

End-line Survey of Pilot CFL Project

IV.26 The end-line survey of the pilot CFL project across 80 blocks was conducted to assess its efficacy. The key findings were as follows:

  • Households that were exposed to the programme showed a statistically significant higher score for financial literacy than those who were not exposed to the programme.
  • Respondents who have had any exposure to the activities conducted under the CFL programme were more likely to use savings accounts in banks; this effect was stronger for individuals attending the CFL programme (i.e., having “active” exposure).
  • Households’ need for training is primarily in aspects that can be regarded as “first order” business – opening an account, filling forms, accessing bank services and government programmes and financial planning. By comparison, a very small number expressed a desire for training to use Automated Teller Machines (ATMs), online transactions, understanding investments, etc.

Expanding the Reach of CFL Project Across the Country

IV.27 Consequent to the implementation of the pilot CFL project in 100 blocks (including 20 CFLs in tribal blocks), steps were initiated during the year to expand the reach of CFLs to all blocks in the country in a phased manner (Box IV.1).

Observing Financial Literacy Week 2022

IV.28 The Financial Literacy Week (FLW) is an initiative of the Reserve Bank to promote awareness among the masses/various sections of the population on key topics through a focused campaign during the week every year. In 2021- 22, FLW was observed during February 14 -18, 2022 on the theme of “Go Digital, Go Secure”, with focus on convenience of digital transactions, security of digital transactions and protection of customers. During this week, banks were advised to disseminate information and create awareness amongst their customers and the general public. Further, the Reserve Bank also undertook a centralised mass media campaign during February 2022 to disseminate essential financial awareness messages on the theme to the general public. To understand the gaps in understanding and the increasing incidence of phishing,fishing and cyber crime the serial ‘“Jamtaara “which details the modes operandi of these crimes and the simplicity and cleverness with which the general public and the gullible middle classes can be duped should be made compulsory viewing.

Expanding the Reach of CFL Project Across the Country

The CFL pilot project on financial literacy was initiated by the Reserve Bank in 2017 in nine states across 80 blocks in collaboration with eight sponsor banks and six NGOs for a three-year period, with funding support from Financial Inclusion Fund (FIF) of NABARD and the respective sponsor banks. The objective was to adopt community led innovative and participatory approaches to financial literacy. The project was subsequently extended to 20 tribal/economically backward blocks in three states in 2019 with funding from the Depositor Education and Awareness (DEA) Fund and sponsor banks.

Based on the experience gained from the pilot project, through feedback received from the stakeholders (banks and NGOs) and to promote financial literacy at grassroot level in a sustainable and participative manner, in line with NSFI: 2019-24, the project is being scaled up across the country in a phased manner to cover the entire country by 2024 with each CFL covering three blocks. Under Phase I of the scaled-up CFL project, 10 NGOs are associated with operationalisation with funding support from DEA Fund, FIF and 13 sponsor banks. As on March 31, 2022, a total of 1,107 CFLs were operationalised across the country.

Source: RBI.The broader questions which remain unanswered and need to be asked are do these grandiose paper projects have any utility at all at the grass roots level? Are they auditable? Is any feedback obtained from the Panchayats from Civil Society activist working in those areas or will they continue to impart a roseate glow to the papers they are printed on and subserve little other purpose leading to the larger question which begs to be addressed do Official statistics whether emanating from RBI or Government reflect grassroots reality.

3. Agenda for 2022-23

RBI will continue to flog the following goals it has set for itself and tom tommed in its Annual Report moving 1.Towards achieving greater financial inclusion and credit delivery:

  • Implementation of milestones under NSFI: 2019-24 by leveraging on the developments in the FinTech space to encourage financial service providers to adopt innovative approaches for strengthening outreach (Utkarsh);
  • Implementation of the milestones under NSFE: 2020-25 by undertaking capacity building of intermediaries involved in dissemination of financial education; and
  • Scaling up of CFLs to cover the entire country (Utkarsh).

Conclusion

IV.30 In sum, during the year, the Reserve Bank continued with its focus towards financial inclusion by scaling up the CFL project across the country and taking forward the NSFI goals by working in close coordination with the stakeholders concerned. The FI-Index was developed as a metric to measure progress on financial inclusion. Going ahead, the implementation of the various milestones under NSFI and NSFE would continue to be pursued to sustain the momentum of financial inclusion.

Table IV.6: Financial Inclusion Plan: A Progress Report

Particulars Mar 2010 Dec 2020 Dec 2021$
1 2 3 4
Banking Outlets in Villages- Branches 33,378 55,073 53,249
Banking Outlets in Villages & 2000*-BCs 25,784 3,44,685 3,26,236
Total Banking Outlets in Villages – BCs 34,174 11,94,640 18,44,732^
Banking Outlets in Villages - Other Modes 142 3,464 2,542
Banking Outlets in Villages -Total 67,694 12,53,177 19,00,523
Urban Locations Covered Through BCs 447 3,24,507 14,12,529^
BSBDA - Through Branches (No. in lakh) 600 2,712 2,712
BSBDA - Through Branches (Amt. in crore) 4,400 1,21,219 1,18,625
BSBDA - Through BCs (No. in lakh) 130 3,672 3,919
BSBDA - Through BCs (Amt. in crore) 1,100 78,284 95,021
BSBDA - Total (No. in lakh) 735 6,384 6,631
BSBDA - Total (Amt. in crore) 5,500 1,99,503 2,13,646
OD Facility Availed in BSBDAs (No. in lakh) 2 59 64
OD Facility Availed in BSBDAs (Amt. in crore) 10 505 556
KCC - Total (No. in lakh) 240 490 473
KCC - Total (Amt. in crore) 1,24,000 6,79,064 6,93,596
GCC - Total (No. in lakh) 10 198 87
GCC - Total (Amt. in crore) 3,500 1,75,053 1,99,145
ICT-A/Cs-BC-Total Transactions (No. in lakh)# 270 23,289 21,095
ICT-A/Cs-BC-Total Transactions (Amt. in crore)# 700 6,14,987 6,62,211
*: Village population. #: Transactions during the year.
$: Provisional data.
^: There is a significant increase in data reported by few private sector banks.
Source: FIP returns submitted by public sector banks, private sector banks and regional rural banks.

All data comes with a question mark, due to the difficulty of collection from up country and far flung branches despite the centralised core banking solution, put in place at great expense and costs by the banks. Is the data accurate and verifiable if yes why is there a divergence in data for the same time series and period furnished by different agencies, having hazarded that remark to hedge the central argument that even based on the admissions of the RBI Annual Report while Financial Inclusion efforts have succeeded to the extent of improvement in access the lacunae in quality and usage remains glaring.

SCRIPT was a formulation of my own making the laddered graduation of the borrower through the process of Savings,Credit, Remittances, Insurance, Pensions and the penultimate test, the increase in remittances. This still needs to happen.

Why have we not moved beyond access ,how can we do so what should we be focusing on

There are clearly no Pan India solutions .Ina country of subcontinental proportions India’s large size,its geographic expanse and the large numbers of its people make it difficult to decide on a “One size fits all “ solution

  • Poor infrastructure in many parts of the country largely inhibits the development process’
  • Availability of financial products that cater to the needs of the poorer strata of society will help resolve the problem of under penetration of credit ,specially to the poorest segments of the society and to tiny , micro enterprises.
  • Credit alone is not enough and a tremendous amount of handholding support is also required especially for the first time users of credit who are going beyond the pale of availing credit from their friends and relatives and community support structures availing credit from formal financial institutions they need support to build sustainable ,scalable enterprises which will generate sufficient income to pay for themselves.
  • Successfull delivery models workable business models for Financial Inclusion need to be devised and grounded firmly in place.Inclusion metrics need to focus more on the number of transactions in the PMJDY accounts opened. JAM /DBT are natural enablers of this process.Graduated upscaling is necessary and is not happening.The FI Index needs a re look on these simple parameters it does not need to be a jumble sale ,which higgledy piggledy includes everything from Kisan Credit Crads to General Credit Cards issued - a catch all bag ,(double counting be damned) which still manages to throw up the elephant in the room we have not moved beyond Access clearly there is a governance deficit the need for effective governance implies that the underpinning of all processes through norms that define actions,allocate power and prescribe a matrix against which performance is calibrated .Lack of effective governance has been one of the major reasons for slow progress in implementation and upscaling on the ground at grass roots level.

Ownership and Accountability are the missing pieces of this puzzle. Why is the pace and progress of Inclusion slow it is it not happening even though the infrastructure is in place.

The formal financial system for extension of institutional credit has still not developed an appropriate cost effective model for financial Inclusion,the extension of credit to the bottom of the pyramid is not perceived as a profitable business opportunity.It is a social/regulatory diktat to be obeyed .It is Not perceived as a business opportunity with positive externalities.The inadequacy of the Management Information System creates further complications.The cost of setting up intermediate brick and mortar structures and developing the business correspondent and Financial Literacy network has to be seen as a future investment ,it cannot be revenue accretive instantly.Even so the basic maths reflects that keeping the fixed and variable costs in view the BC model and the intermediate structures are much more cost effective and financially viable in the medium and long term .Governance ownership and accountability flowing from the top through the rank and file are the watch words for translating the dream of financial inclusion to reality at the ground level rather than the dinosaur brick and mortar models of yester year.The weakness in the earlier system of Priority Sector lending,Government Sponsored schemes ,Directed credit in sum arose from the breakdown in the nexus between the dispensation of credit and its application and the confusion between priority sectors and concessional write-off eventually.

What was needed then. and what is most needed now ,is the extension of credit on the basis of an accurate assessment of the ability of the borrower to bear the amount of credit extended to be able to repay the same and to get further loan. This is the crux of the matter which is the core of credit penetration the “Credit Worthiness” of the borrower.The intermediation costs of administering credit will be arrested by the creation of demand for credit.The reasons for high intermediation costs in Public Sector Banks varied and diverse and widely discussed and accepted are largely a result of clumsy targeting efforts and unremunerative branches(despite the commercial transfer pricing of deposits from the concerned branches) due to high overheads ,overmanning and arcane ,slow,tedious and lugubrious methods of operationThese moulds have to be broken .For Financial Inclusion to be true Inclusion which goes beyond access , the existing paradigm has to be broken ,quick credit extension is necessitated to be extended on an objective basis, at reasonable rates, in congruence with and sympathetic to the vagaries of nature,credit should be linked to a multiple of savings which the Financial Inclusion Index should more accurately measure .Credit growth should be linked to GDP even a 5% incremental growth in credit would have unimaginable positive externalities there needs to be in place as the first building block of credit linked savings a friendly supporting system for encouraging savings and for mainstreaming the marginalised For true Financial Inclusion the FI index should reflect the extent of a wide range of easy to access banking and payment services that are being availed at the grass roots .Exclusion from formal institutional finance translates to exclusion from the payment system, and carries its own set of problems and hazards.

Financial exclusion of large sections a wide swathe of the population particularly in rural areas and slums in urban areas is attributable to both supply and demand side factors

From the supply side perspective

Large numbers of the poor who hold Jan Dhan accounts and are the recipients of DBT benefits (as the women who received Rs 500 in their accounts extended by the Government through direct benefit transfers in their accounts are still unbankable in the eyes of the formal Institutional System Managers ,the bankers still have attitudinal blocks in credit extension to the bottom of the pyramid.

  1. The deposits in the account are meagre few Banks are extending overdrafts as the RBI FI index reveals.
  2. The person may be considered bankable but distances to be traversed are too long and supporting the account for loan servicing .Expanding branch network in the interior villages is not feasible or viable.
  3. The cost of administering credit through multiple small loans,is prohibitively expensive and transaction costs are very high.
  4. Inability to maintain and evaluate cash flow cycles due to lack of basic data base and absence of credit history of those with uncertain incomes essentially people of small means unable to offer collateral security for small loans.
  5. Lack of banking habit and culture
  6. Inadequacy of extension services,poor Infrastructures roads,communication facilities ,adverse law and order security situation in certain parts of India

From the demand side exclusion of the rural and urban poor stems from

  1. High cost of transactions at the clients end, due to expenses as travel cost, wage loss, incidental expenses
  2. Lack of awareness and financial literacy.
  3. High Volume, low value transactions not viewed with favour by the formal financial system and its Managers.
  4. Difficulties and apprehensions surrounding the paperwork, documentation and procedures.
  5. Gender Issues access to credit is limited for women who do not hold title to lend, have no collateral to offer they have to seek male guarantee to borrow. Bankers do not like to give even education loans to unmarried women who will marry and move away from their addresses as stated on the loan forms.
  6. Age factor Financial Institutions target the middle of the economically active population, there are no products either for the old or the young customers at either end of the age spectrum they are shortchanges.
  7. Legal Identity,is no longer the issue it used to be but Aadhar cards are essential and often the destitute and migrant labour do not have the necessary cards Ration Aadhar cards and are unable to access financial services. The Asian Development Bank and the World Bank also identify other factors.
  8. Geography density of population for instance sparse population’s especially in the hilly area, mobility migrant population, Banjara wandering tribes, impact financial inclusion as also low levels of financial literacy.

Eventually these lead to self exclusion.

Easy availability of doorstep services from money lenders,family,informal sources of institutional finance relatives deepen the psychological and cultural barriers around entering a Bank,cultural and in some Muslim communities even religious barriers lead to avoidance of Banks leading to dependence on their own resources or informal finance at prohibitive costs.

All these barriers need to be addressed with immediacy.Banks must build the capability to evaluate loan proposals of small borrowers and extend credit to them.The four basic products Overdraft in the savings accounts,credit, payment services and Insurance life,health,livestock must be designed and marketed to the last mile customer.Grievance redress must be robust to reinforce faith in the Banking System.

The Committee agrees that Credit is the missing piece has four major recommendations.

  1. Enactment of a law on credit access to extend the frontiers of formal finance and a set of regulations for the right to access to credit for low income borrowers.
  2. Financial Inclusion to be measured by incremental growth in credit.
  3. Incremental Growth in credit flow to the excluded to be measured as a percentage of GDP.
  4. Beefing up existing Infrastructure, Innovating and customising bespoke products, reforms in the credit delivery mechanism meshing outlays with outcomes. Ultimately Financial Inclusion will increase opportunities and freedom of choice and the well being of the entire nation securing exponential economic growth with opportunity

It is time to rise and thrive India and her peoples moment to rise and thrive is near we have to move relentlessly towards the goal. To listen to the hope of a new Dawn.

Chaley Chalo ki voh Manzil
Abhi Nahin Aayi

Submission by Deepali Pant Joshi
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Dr Deepali Pant Joshi is a career banker and has served the Reserve Bank of India for more than three and a half decades. She headed various departments in RBI including Departments of Rural Planning and Credit and Financial Inclusion Department and Customer Services & Financial Education Department. During her long career with the Regulator, she also held some key positions like Banking Ombudsman for the State of Andhra Pradesh, Regional Director at RBI, Jaipur, heading RBI Banking operations in Rajasthan, Principal of Bankers Training College, Mumbai, etc. View full profile
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