The following is the Summary of the
recommendations of the Committee on Financial Inclusion which were released
to the media by its Chairman, Dr. C. Rangarajan, in Mumbai today:
Access to
finance by the poor and vulnerable groups is a prerequisite for poverty
reduction and social cohesion. This has
to become an integral part of our efforts to promote inclusive growth. In fact, providing access to finance is a
form of empowerment of the vulnerable groups.
Financial inclusion denotes delivery of financial services at an
affordable cost to the vast sections of the disadvantaged and low-income
groups. The various financial services
include credit, savings, insurance and payments and remittance facilities. The objective of financial inclusion is to
extend the scope of activities of the organized financial system to include
within its ambit people with low incomes.
Through graduated credit, the attempt must be to lift the poor from one
level to another so that they come out of poverty.
Extent of Exclusion
NSSO data reveal that 45.9 million farmer households in the
country (51.4%), out of a total of 89.3 million households do not access
credit, either from institutional or non-institutional sources. Further,
despite the vast network of bank branches, only 27% of total farm households
are indebted to formal sources (of which one-third also borrow from informal
sources). Farm households
not accessing credit from formal sources as a proportion to total farm
households is especially high at 95.91%, 81.26% and 77.59% in the North
Eastern, Eastern and Central Regions respectively. Thus, apart from the fact
that exclusion in general is large, it also varies widely across regions,
social groups and asset holdings. The
poorer the group, the greater is the exclusion.
Demand Side Factors
While financial inclusion can be substantially enhanced by
improving the supply side or the delivery systems, it is also important to note
that many regions, segments of the population and sub-sectors of the economy
have a limited or weak demand for financial services. In order to improve their
level of inclusion, demand side efforts need to be undertaken including
improving human and physical resource endowments, enhancing productivity,
mitigating risk and strengthening market linkages. However, the primary focus
of the Committee has been on improving the delivery systems, both conventional
and innovative.
National Mission on Financial Inclusion
The Committee feels that the task of financial
inclusion must be taken up in a mission mode as a financial inclusion plan at
the national level. A National Mission on Financial Inclusion (NaMFI)
comprising representatives from all stakeholders may be constituted to aim at
achieving universal financial inclusion within a specific time frame. The Mission should be responsible for
suggesting the overall policy changes required for achieving the desired level
of financial inclusion, and for supporting a range of stakeholders – in the
domain of public, private and NGO sectors - in undertaking promotional
initiatives.
A National Rural Financial Inclusion Plan (NRFIP) may
be launched with a clear target to provide access to comprehensive financial
services, including credit, to atleast 50% of financially excluded households,
say 55.77 million by 2012 through rural/semi-urban branches of Commercial Banks
and Regional Rural Banks. The remaining households, with such
shifts as may occur in the rural/urban population, have to be covered by
2015. Semi-urban and rural branches of
commercial banks and RRBs may set
for themselves a minimum target of covering 250 new cultivator and
non-cultivator households per branch per annum, with an emphasis on financing
marginal farmers and poor non-cultivator households.
Development and Technology
Funds
There is a cost involved in this massive exercise of
extending financial services to hitherto excluded segments of population. Such costs may come down over a period of
time with the resultant business expansion. However, in the initial stages some
funding support is required for promotional and developmental initiatives that
will lead to better credit absorption capacity among the poor and vulnerable
sections and for application of technology for facilitating the mandated levels
of inclusion. The Committee has, therefore, proposed the constitution of two
funds with NABARD – the Financial Inclusion Promotion & Development Fund
and the Financial Inclusion Technology Fund with an initial corpus of Rs. 500
crore each to be contributed in equal proportion by GoI / RBI / NABARD. This recommendation has already been accepted
by GoI.
Business Correspondent Model
Extending outreach on a scale envisaged under NRFIP
would be possible only by leveraging technology to open up channels beyond
branch network. Adoption of appropriate
technology would enable the branches to go where the customer is present
instead of the other way round. This, however, is in addition to extending
traditional mode of banking by targeted branch expansion in identified
districts. The Business
Facilitator/Business Correspondent (BF/BC) models riding on appropriate
technology can deliver this outreach and should form the core of the strategy
for extending financial inclusion. The
Committee has made some recommendations for relaxation of norms for expanding
the coverage of BF/BC. Ultimately, banks
should endeavour to have a BC touch point in each of the 6,00,000
villages in the country.
Procedural Changes
Procedural Changes like simplifying mortgage
requirements, exemption from Stamp Duty for loans to small and marginal farmers
and providing agricultural / business development services in the farm and
non-farm sectors respectively, will help in extending
financial inclusion.
Role of RRBs
RRBs, post-merger, represent a
powerful instrument for financial inclusion. Their outreach vis-à-vis other
scheduled commercial banks particularly in regions and across population groups
facing the brunt of financial exclusion is impressive. RRBs account for 37% of total rural offices
of all scheduled commercial banks and 91% of their workforce is posted in rural
and semi-urban areas. They account for 31% of deposit accounts and 37% of loan
accounts in rural areas. RRB’s have a
large presence in regions marked by financial exclusion of a high order. They account for 34% of all branches in
North-Eastern, 30% in Eastern and 32% in Central regions. Out of the total 22.38 lakh SHGs credit
linked by the banking industry as on 31st
March 2006, 33% of the linkages were by RRBs which is quite
impressive to say the least.
Significantly the more backward the region the greater is the share of
RRBs which is amply demonstrated by their 56% share in the North-Eastern, 48%
in Central and 40% in Eastern region.
RRBs are, thus, the best suited vehicles to widen and
deepen the process of financial inclusion. However, there has to be a firm
reinforcement of the rural orientation of these institutions with a specific
mandate on financial inclusion. With this end in view, the Committee has
recommended that the process of merger of RRBs should not proceed beyond the
level of sponsor bank in each State. The
Committee has also recommended the recapitalisation of RRBs with negative Net
Worth and widening of their network to cover all unbanked villages in
the districts where they are operating, either by opening a branch or through
the BF/BC model in a time bound manner.
Their area of operation may also be extended to cover the 87
districts, presently not covered by them.
SHG – Bank Linkage Scheme
The SHG - Bank Linkage Programme can be regarded as the most
potent initiative since Independence for delivering financial services
to the poor in a sustainable manner. The
programme has been growing rapidly and the number of SHGs financed increased to
29.25 lakhs on 31 March 2007.
The spread of the SHG - Bank Linkage Programme in different
regions has been uneven with Southern States accounting for the major chunk of
credit linkage. Many States with high
incidence of poverty have shown poor performance under the programme. NABARD
has identified 13 States with large population of the poor, but exhibiting low
performance in implementation of the programme. The ongoing efforts of NABARD
to upscale the programme in the identified States need to be given a fresh
impetus. The Committee has recommended that NABARD may open dedicated project
offices in these 13 States for upscaling the SHG - Bank Linkage Programme. The State Govts. and NABARD may set
aside specific funds out of the budgetary support and the Micro Finance
Development and Equity Fund (MFDEF) respectively for the purpose of promoting
SHGs in regions with high levels of exclusion. For the North-Eastern Region,
there is a need to evolve SHG models suited to the local context of such areas.
NGOs have played a commendable role
in promoting SHGs and linking them with banks. NGOs, being local initiators
with their low resources, are finding it difficult to expand in other areas and
regions. There is, therefore, a need to evolve an incentive package which
should motivate these NGOs to diversify into other backward areas.
The SHG - Bank Linkage Programme is now more than 15
years old. There are a large number of
SHGs in the country which are well established in their savings and credit
operations. The members of such groups want to expand and diversify their
activities with a view to attain economies of scale. Many of the groups are organising
themselves into federations and other higher level structures. To achieve this
effectively, resource centres can play a vital role. Federations of SHGs at
village and taluk levels have certain advantages. Federations, if they emerge
voluntarily from amongst SHGs, can be encouraged. However, the Committee feels that they cannot
be entrusted with the financial intermediation function.
Extending SHG – Bank Linkage
Scheme to Urban Areas
There are no clear estimates of the number of people in
urban areas with no access to organized financial
services. This may be attributed, in part at least, to the migratory nature of
the urban poor, comprising mostly of migrants from the rural areas. Even money
lenders often shy away from lending to urban poor. The Committee has recommended amendment to
NABARD Act to enable it to provide micro finance services to the urban poor.
Joint Liability Groups
SHG-bank linkage has
emerged as an effective credit delivery channel to the poor clients. However,
there are segments within the poor such as share croppers/oral lessees/tenant
farmers, whose loan requirements are much larger but who have no collaterals to
fit into the traditional financing approaches of the banking system. To service
such clients, Joint Liability Groups (JLGs), an upgradation of SHG model, could
be an effective way. NABARD had piloted
a project for formation and linking of JLGs during 2004-05 in 8 States of the
country through 13 RRBs. Based on the
encouraging response from the project, a scheme for financing JLGs of tenant
farmers and oral lessees has also been evolved. The Committee has recommended
that adoption of the JLGs concept could be another effective method for
purveying credit to mid-segment clients such as small farmers, marginal
farmers, tenant farmers, etc. and thereby reduce their dependence on informal
sources of credit.
Micro
Finance Institutions - NBFCs
Micro
Finance Institutions (MFIs) could play a significant role in facilitating
inclusion, as they are uniquely positioned in reaching out to the rural poor.
Many of them operate in a limited geographical area, have a greater
understanding of the issues specific to the rural poor, enjoy greater
acceptability amongst the rural poor and have flexibility in operations
providing a level of comfort to their clientele. The Committee has, therefore,
recommended that greater legitimacy, accountability and transparency will not
only enable MFIs to source adequate debt and equity funds, but also eventually
enable them to take and use savings as a low cost source for on-lending.
There is a need to recognize a
separate category of Micro finance – Non Banking Finance Companies (MF–NBFCs),
without any relaxation on start-up capital and subject to the regulatory
prescriptions applicable for NBFCs. Such MF-NBFCs could provide thrift, credit,
micro-insurance, remittances and other financial services up to a specified
amount to the poor in rural, semi-urban and urban areas. Such MF-NBFCs may also be recognized as Business
Correspondents of banks for providing only savings and remittance services and
also act as micro insurance agents.
The Micro Financial Sector (Development
and Regulation) Bill, 2007 has been introduced in Parliament in March 2007. The
Committee feels that the Bill, when enacted, would help in promoting orderly
growth of microfinance sector in India.
The Committee feels that MFIs registered under Section 25 of Companies Act,
1956 can be brought under the purview of this Bill while cooperative societies
can be taken out of the purview of the proposed Bill.
Revitalising
the Cooperative System
Though the network of commercial
banks and RRBs has spread rapidly and they now have nearly 50,000
rural/semi-urban branches, their reach in the countryside both in terms of the
number of clients and accessibility to the small and marginal farmers and other
poorer segments is far less than that of cooperatives. In terms of number of
agricultural credit accounts, the Short Term Cooperative Credit System (STCCS)
has 50% more accounts than the commercial banks and RRBs put together. On an
average, there is one PACS for every 6 villages; these societies have a total
membership of more than 120 million rural people making it one of the largest
rural financial systems in the world.
However, the health of a very large proportion of these rural credit
cooperatives has deteriorated significantly.
For the
revival of the STCCS, the Vaidyanathan Committee Report has suggested an
implementable Action Plan with substantial financial assistance. The
implementation of the Revival Package would result in the emergence of strong
and robust cooperatives with conducive legal and
institutional environment for it to prosper.
A financially sound cooperative structure can do wonders for financial
inclusion given its extensive outreach.
Micro
Insurance
Micro-insurance is a key element in
the financial services package for people at the bottom of the pyramid. The
poor face more risks than the well off.
It is becoming increasingly clear that micro-insurance needs a further
push and guidance from the Regulator as well as the Government. The Committee
concurs with the view that offering micro credit without micro-insurance is
self-defeating. There is, therefore, a need to emphasise linking of micro
credit with micro-insurance.
The country
has moved on to a higher growth trajectory. To sustain and accelerate the
growth momentum, we have to ensure increased participation of the economically
weak segments of population in the process of economic growth. Financial inclusion of hitherto excluded segments
of population is a critical part of this process of inclusion. We hope that the recommendations made in this
Report, if implemented, will accelerate the process of financial inclusion.
BSC/SS/DN-29/08
(Release ID :35141)