Taking Financial Inclusion and Financial Literacy 
To The Next Level


According to an estimate, India has the population of more than 1.3 billion people, 2nd largest  in the world only after China while geographical area of the country is the 7th largest in the world. Also, India is the 5th largest economy in the world measured by nominal GDP. It has 28 States and 9 Union Territories, 644 districts and more than 600,000 villages. India has multilingual and multiethnic society with literacy levels of 73% (men 81% and women 65%). Against all these odds, with the strenuous efforts made by the Government of  India (GoI), Reserve Bank of India (RBI) and Banks during the recent past, the number of financially excluded population in the country has come down       drastically, yet one of the major challenges before Banks in India today is to bring the remaining  financially excluded people to the banking fold so that the process of financial inclusion is full and complete. Financial inclusion, is a much cherished policy objective for Banks today because economic policy of India has been driven by an underlying    intent of a sustainable and inclusive growth.The policy makers had an early realisation about the implications of poverty for financial stability. They have therefore endeavoured to ensure that poverty is tackled in all its manifestations so the benefits of economic growth rehabs the poor and excluded sections of the society. 

Understanding Financial Inclusion
Financial Inclusion has been aptly defined by RBI as “the process of ensuring access to appropriate financial products and services needed by all sections of the society in     general and vulnerable groups such as weaker sections and low income groups in        particular at an affordable cost in a fair and transparent manner by mainstream             institutional players.”


Objectives of  Financial Inclusion 

Financial exclusion is a barrier in attaining high growth rate in any country. It should be endeavoured to bring the financially excluded people within the ambit of the mainstream financial world. It helps country to broaden its access to funds lying unutilized with     financially excluded populace. Also, in absence of financial inclusion, these people, while meeting their financial needs, are easily trapped into the clutches of money lenders.  Lower availability of funds at higher cost    results in fewer economic activities and hence lower economic growth. There are still a good number of people in our country, who are excluded from formal financial services. Potential entrepreneurs and small enterprises fail to grow and prosper due to capital constraints. Financial deepening is thus a necessity for economic growth. The  ultimate goal of the development process, therefore, is to bring every last member of the society, especially those at the margins, to the banking fold. It broadens the support base for development and strengthens the ability to achieve the   ultimate developmental goal. 

As such, financial inclusion is increasingly being recognised world over as a key driver of economic growth and poverty alleviation. Access to formal finance can boost job    creation, reduce vulnerability to economic shocks and increase investments in human capital. At a macro level, greater financial inclusion can support sustainable and inclusive socio-economic growth for all. The small and marginal farmers, share croppers, the low salary earners in unorganised sectors and micro and small industries, therefore, warrant special focus from inclusive growth point of view. These sections make a significant part of the population that needs enhancement in their financial capabilities, as they are      extremely important  contributors to the country’s GDP and labour force.



Steps Taken For Financial Inclusion  

India has been pursuing the goal of financial inclusion for quite long time now, but during the recent past the efforts have gained further momentum. Initially, the  focus was on channelizing credit to the neglected sectors of the economy and weaker sections of the society. As such, 14 Private Sector Banks were nationalised in 1969 and 6 more Banks in 1980, and priority sector lending norms were laid down for banks. Some more initiatives were taken like introduction of Lead Bank Scheme (LBS) in 1969, setting up of Regional Rural Banks (RRB) in 1976, implementation of Service Area Approach in 1989,          introduction of Self-Help Group - Bank Linkage Programme in 1992, setting up of Local Area Banks etc., all these initiatives were aimed at making available benefits of banking services to the masses. Further, the framework of Banking Correspondents (BC) was institutionalised as a major step towards enhancing access of banking services. 

A ‘Brick and Mortar’ model with ‘Mouse and Click’ technology was implemented for extending financial inclusion in geographically dispersed areas. Accordingly, Banks were mandated to open at least 25 per cent of their new branches in unbanked rural centers. The difficulties faced by common people in meeting the ‘Know Your Customer (KYC)’ guidelines for opening bank accounts, were eased out by RBI by allowing banks to     accept self-certification for opening of Basic Savings Bank Deposit Accounts (BSBDA). RBI encouraged banks to open Aadhaar Enabled Bank Accounts by linking Aadhaar numbers of individuals, wherever available, with BSBDA opened for them, so that their credit histories can also be built up over time. Banks were also encouraged to adopt a structured and planned approach to financial inclusion with commitment at the highest levels through preparation of Board approved Financial Inclusion Plans (FIP). Since Bank led model was adopted in our country, the unbanked villages having population of more than 2000 were covered through Brick and Mortar branches as well as by deployment of BCs. And, villages having population less than 2000  were covered through at least BCs. These branches and BCs opened BSBDA and issued Kisan Credit Cards (KCC) and General Credit Cards (GCC). 

RBI accorded permission for setting up “Small Finance Banks” and “Payments Banks” to further the cause of financial inclusion in the country. There is strong          Financial Institutional Framework in our country today i.e. GoI, RBI, Financial      Stability Development Council (FSDC), Separate Technical Group on Financial Inclusion and Financial Literacy, Financial Inclusion Advisory   Committee of RBI, 35 State Level Bankers Committees, 671 District Consultative Committees and more than 100,000 branches of various Banks.

With a view to strengthening payment system, National Payments Corporation of    India (NPCI) was set up as an umbrella organisation for retail payments.   Today, NEFT facilitates one to one funds transfer. RTGS facilitates real time fund transfer. Aadhaar Bridge Payment System (ABPS) was set up to facilitate credit transfers and Aadhaar Enabled Payment System was set up to facilitate withdrawal from accounts. There are more than 117 crore mobile subscribers in India. As such, mobile banking is a unique  opportunity to leverage the mobile platform to meet the objectives and challenges of   financial inclusion. Immediate Payment Service (IMPS), an instant payment inter-bank electronic funds transfer system was introduced in India. IMPS offers an inter-bank   electronic fund transfer service through mobile phones. The service is available 24/7 throughout the year including bank holidays. The new approach adopted by Banks today is to provide banking services with branchless modes of delivery with the help of latest technology. The focus today is on for inclusive growth as poor are also bankable.  Importance now is being given to sustainability, viability and scalability. 

Progress So Far 

The success of above said measures taken by the GoI and RBI together can be gauged by the fact that  - 

(i) The number of banking outlets in villages have gone up from 67,694 in March 2010 to 5,97,155 in March 2019 after RBI permitted appointment of BCs and laid out a roadmap for spreading banking services in rural India through a mix of bank branches and BC outlets. In addition, the number of urban locations covered through BCs has also surged from 447 in March 2010 to 4,47,170 in March 2019.

(ii) The number of BSBDA has gone up from 7.3 crore with deposits of Rs.5,500 crore in March 2010 to 57.4 crore with deposits of Rs.1,41,000 crore as on March 31, 2019. Under the Prime Minister Jan Dhan Yojana alone, until August 7, 2019, 36.55 crore     accounts have been opened with a balance of more than Rs.1,00,000 crore. 

(iii) There were 4.9 crore small farm sector credit accounts and 1.2 crore small non-farm sector credit accounts with an outstanding of Rs.6,68,000 crore  and Rs.1,74,500 crore outstanding respectively as on March 31, 2019. The number of small farm and non-farm sector credit accounts stood at 2.43 crore and 14 lakh  respectively in March 2010.

(iv) The total number of transactions in BC-ICT accounts which were around 2.7 crore amounting to Rs.700 crore as on March 31, 2010 have increased to 20.84 crore amounting to Rs.5,88,400 crore as on March 31, 2019.



Accelerating Financial Inclusion Process

As enumerated above, very recently though a big chunk of financially excluded people have been brought to the banking net, yet the financial inclusion plan can only be said to achieve when there is no financially excluded person in India. As such, in order to       motivate and nudge consumers to begin seeking formal financial services, there is need to focus on introducing products catering to the needs of these people. Many of             financially excluded people do not have continuous income stream. Income of these  people are generally seasonal and hence erratic. Secondly, these people may have a   meagre amount to save and their  financial needs are widely different as compared to those of regular consumers. This creates a need for customer centric product design. 

People in India can be categorised into three groups viz first, who generate adequate surpluses, second, who generate meagre surpluses, and third, who live on subsistence income and do not generate any meaningful  surpluses. There would be different types of products on offer for these three types of groups. People in the  first group may be      sensitised about different avenues to invest so as to reach their financial goals with ease. These people may be offered products like investing in the capital market through shares,    mutual funds, gold bonds etc. People in the second group may be offered    products like recurring deposits, SIPs etc. People in the third group may be encouraged to use the basic bouquet of financial products like BSBDA for  daily transactions as well as introduce them to electronic remittance channels, customised basic term insurance and pension products. GoI is presently offering all these products to the financially excluded people. 

With a view to creating trust and confidence among the financially excluded people there should be transparency in communication about products, procedures, precesses, documentation and other formalities needed to be done while making a financial      transaction with them. 

Both the suitable products, and the transparent processes need to be complemented by committed people who are willing to listen keenly, empathize with the consumers and willing to walk that little extra to welcome the customers into the formal financial       system.

The ultimate goal of financial inclusion i.e. bringing all financially excluded people on the banking fold can be achieved only through synergistic efforts made by mainstream financial entities and other players like rural co-operatives, NBFCs, MFIs, credit          societies, NGOs, etc. All of them have to play a complementary role in championing the cause of financial inclusion. Time is ripe to weave a financial inclusion tapestry where all these institutions can fit in a manner which brings about their contribution in the most efficient manner. This is where the efforts of the Government and RBI are currently     focussed.

The challenge is to convert poverty into prosperity for the people, while at the same time, implementing it as a viable business opportunity for banks. For that purpose,                    a functional cluster based approach may be adopted, that is well suited to the specific needs of different segments like Household workers,    Construction workers, Weavers, Hawkers, Rickshaw pullers, Auto Drivers, etc. There has to be a multi-pronged, holistic approach that could include enhancing financial literacy to build up demand, capacity building and mindset changes of bank staff/ BCs, development of need based innovative products, alternate delivery channels through BCs and tie-ups with NGOs to ensure     socially responsible delivery of services with consumer protection.



Banks’ Perspective

If the financially excluded persons are living in remote areas or if they belong to      communities or segments of society that undertake economic activity informally or if they do not maintain records, Banks find themselves in difficult situation, while financing them. These people often do not own property and do not have regular established sources of income. As a result, a typical banker not from the local region, will have     difficulty in getting sufficient information about that person and as such will not offer  financial products. The banker should have confidence on the borrower about repayment of the loan in time. Hence legal system should be strong enough for creating pressure on the borrower for repayment of the loan in the scheduled time frame.

Land is often the single most valuable source of wealth in rural areas. The digitisation of land records, accompanied by a guarantee of certificates about final ownership from the state government will ease the use of land as collateral against which funds can be      borrowed. Even a formal recognition of share cropping agreements, could ease access to credit for share croppers. Money lenders in rural areas are providing credit to farmers almost instantly by just keeping their land papers along with other documents with them as he knows these people personally, and these farmers are reaching out to him despite he charges them exorbitantly high rate of interest just because he is providing them loans instantly and very easily. Banks also will have to follow this practice of   providing loans to them easily and instantly. Trust level has to be created.   Farmers should have trust on banks that if they repay/prepay their existing loans they will be provided another loan  instantly. 

The size of transactions by the poor, or by micro farmers or enterprises is small, while the fixed costs for serving these transactions are relatively high. A banker who is        conscious of the bottom line would naturally focus on the large client in preference to the tiny one. But, there are positive social benefits to  financial inclusion that are not       captured by Banks, such mandates are reasonable from a societal perspective. The bank cannot monetise the status benefits, but a government can decide about these benefits which are worth generating and should mandate them.



Some Recent Initiatives 
In the Budget speech 2019, it was announced to provide micro loans at an effective rate of 4 per cent per annum to women in SHG towards income generating activities in all 727 districts of the country. At present, under Deen Dayal Antyodaya Yojana (DAY) scheme, these ultra low interest loans were available only in some identified districts. It is proved through various researches that when credit is routed through women, the household as a whole experiences better outcomes in the form of increased consumption or investment on goods. These bank loans for amounts ranging from Rs.10,000 to Rs.50,000 have helped in demonstrably altering the lives of lakhs of women across the country. SHGs that have received credit support stood at 51.3 lakh as on March 31, 2019. As a result, the dependence on private money lenders has been reduced for groups that were earlier   credit-excluded from the formal banking channels. In a country that aspires to post real growth rates of 8 per cent and wants to become a $5 trillion economy by FY2025, formal credit linkages to these previously excluded groups is imperative. It is here that the   Budget announcement on interest subvention under DAY offers great possibilities for  income support to the marginalised. 

The Nachiket Mor Committee has recommended to alter priority sector norms so that the objectives of credit to priority sectors are achieved. For example, banks that are good at rural lending should do more of it, while banks that are good at lending to micro and small enterprises should be free to specialize in this area.  The Committee has advocated attaching weights to performance on different norms and adding performance up. So one bank may achieve its priority sector target by lending predominantly to agriculture, while another may lend only to MSMEs in meeting its target. The weights may be adjusted so that overall targets are met by the system. So if agricultural lending is inadequate while we are getting over-performance on MSME loans, the weight on the former will be      increased while the weight on the latter will be reduced. These are interesting ideas, and may be explored in greater detail. 

Reserve Bank of India has prepared the National Strategy for Financial Inclusion (NSFI) 2019-24 under the aegis of the Financial Inclusion Advisory Committee (FIAC), to      ensure access to financial services to all the citizens in a safe and transparent manner. The primary objective is to enable the financially excluded to have an access to financial   services from the financial institutions. 

Contribution of agriculture sector in the GDP of India is around 18 per cent while      population living in rural areas is around 69 per cent hence financial exclusion is        witnessed in  large quantity in rural areas. As such, agriculture segment has been one of the focus areas of the NDA Government since 2014 and various reforms have been      initiated to bring the rural populace to the banking fold by providing them financial help through their Savings Bank Accounts. While presenting the budget for FY 2020-21 on 1st  February 2020, the Finance Minister has proposed to allocate funds of Rs.2.83 lakh crore for 16 different steps. The breakup of this amount indicates that Agriculture, Irrigation and Allied activities have been allocated Rs.1.60 lakh crore and Rural Development and Panchayati Raj have been allocated Rs.1.23 lakh crore.  At the same time Agriculture credit target for the year 2020-21 has been set at Rs.15 lakh crore and all eligible        beneficiaries of PM-KISAN will be covered under the KCC scheme. Under PM-KISAN, Government has announced to provide Rs 6000 per annum to 14.5 crore farmers. The above said proactive steps of the Central Government will make the remaining lot of   financially excluded people as financially included. 


Financial Literacy As Precursor To Financial Inclusion 
Some people think that the financial crisis that had occurred in 2008-09 was chiefly    owing to many of the NINJA borrowers in USA were not aware of the terms of the      adjusted rate mortgage contracts they were signing. This financial crisis had resulted into the global economic crisis and this has led to serious  concerns on the need for financial education, financial inclusion, consumer empowerment. Ben Bernanke, Chairman, Board of Governors of the Federal  Reserve System, had also remarked that, in the light of the problems that had arisen in the subprime mortgage market, we are reminded of how    critically important it is for individuals to become financially literate at an early age so that they are better prepared to make decisions and navigate an increasingly complex   financial  market place.
Organisation for Economic Cooperation and Development (OECD) defines financial   literacy as a combination of financial awareness, knowledge, skills, attitude and           behaviours necessary to make sound financial decisions and ultimately achieve individual financial wellbeing. Financial literacy is expected to impart the wherewithal to make   ordinary individuals into informed and questioning users of financial services. It is not just about markets and investing, but also about saving, budgeting, financial planning, basics for banking and most importantly, about being Financially Smart.
As such, financial education is an important tool to help consumers both, accept and use the products to which they increasingly have access. Because it can  facilitate  effective product use, financial education is critical to financial inclusion. It can help clients to both, develop the skills to compare and select the best products for their needs and      empower them to exercise their rights and responsibilities in the consumer protection equation. When we speak about financial education as a lay person, we are usually      referring to a set of skills that allow people to manage their money wisely, some          understanding of essential financial concepts and an appreciation of the trade-off between risk and return.
The most fundamental reason why people should strive to become financially  literate is to help them reach their personal financial goals. Whatever the specific goal, the payoff from financial literacy is an improved standard of living and a sense of confidence about the future. Financially literate individuals are more likely to engage in sound financial planning early in their lives. This enables them to plan for retirement, fund the education of their children, and accumulate more assets. From a national perspective, the payoff is large. 
In nut shell, financial literacy means, to create awareness among customers about        following questions - Why to Save, Why to save regularly and consistently, Why to save with banks, Why to borrow within Limits, Why to borrow from banks, Why to borrow for income generating purposes, Why to repay loans, Why to repay loans in time, Why one needs insurance, Why one needs regular stream of income (pension) post working life, Why one should keep money aside regularly and consistently during earning life for   pension in old age, What is interest rate, How moneylenders charge very high interest rates. 


Financial Education - Efforts Made In India
National Strategy for Financial Education was prepared under aegis of FSDC      Technical Group. National Centre on Financial Education was set up to focus on   promoting financial education across the country for all section of population and to    ensure coordination among all financial sector regulators. With a view to developing standard contents, Financial Literacy Material was developed. Nation wide Survey was conducted to assess the Current Status and it was suggested to include Financial          Education in the School Curriculum of Class VI to Class X.
Financial literacy material on basic concepts for unbanked audience is available on RBI website http://www.rbi.org.in/financialeducation/FinancialLiteracyGuide.aspx. A set of 16 posters, pictorial communication is also available with RBI.
Mass scale awareness programmes are being organised and literacy camps are being conducted by Public and Private Sector Banks, RRBs, CLBCs, Lead Districts. Banks in India have been mandated to set up Financial Literacy Centres (FLC) for extending financial literacy. As at end-March 2019, 1483 FLCs across India are functional which adopt a tailored approach in conducting camps.  During 2018-19, 145,427 financial     literacy related activities were conducted by FLCs as against 129,280 activities during 2017-18. The Rural Self Employment Training Institutes (RSETI) have been set up by various banks all over the country at the district level. The key objective of RSETI is “Short term training and long term hand holding with assistance to credit linkage for trainees”.
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References Used

(i) Annual Report of Reserve Bank of India for the year 2018-19.
(ii) Keynote Address delivered by Shri S. S. Mundra, Deputy Governor, Reserve Bank of  India at the BRICS Workshop on Financial Inclusion in Mumbai on September 19, 2016.

(iii) Keynote Address by Dr. Raghuram Rajan, Governor at the National Seminar on  “Equity, Access, and Inclusion - Transforming Rural India through Financial Inclusion” organised by National Institute of Rural Development and Panchayat Raj in Hyderabad on July 18, 2016. 

(iv) Tenth D. R. Gadgil Memorial Lecture on the topic “Inclusive Growth and the Role Technology Can Play in It” delivered by Dr. Raghuram Rajan, Governor,  Reserve Bank of India on February 13, 2014 in Mumbai. 

(v) Intervention by Dr. Deepali Pant Joshi, Executive Director, Reserve Bank of India at the 10th Anniversary of the Citi-FT Financial Education Summit at Hong Kong on      December 7, 2013. 

(vi) Keynote Address of Dr. Deepali Pant Joshi, Executive Director, Reserve Bank of  India at National Seminar on Consumer Protection Agenda for Inclusive Growth, in New Delhi on July 24, 2013.

(vii) Keynote Address on the topic “Revving up the Growth Engine through Financial Inclusion” delivered by Dr. K. C. Chakrabarty, Deputy Governor,  Reserve Bank of India at the 32nd SKOCH Summit held in Mumbai on June 6, 2013.

(viii) Speech on the topic “Indian Rural Banking Sector: Big Challenges and the Road Ahead” delivered by Dr Deepali Pant Joshi, Executive Director, Reserve Bank of India at MITE Mangalore on May 04, 2013.

(ix) Keynote Address by Dr. K. C. Chakrabarty, Deputy Governor, Reserve Bank of India at the Stakeholders’ Workshop on Financial Literacy organized jointly by the UNDP, NABARD and MicroSave at Mumbai on February 4, 2013.

(x) Keynote Address by Dr. K. C. Chakrabarty, Deputy Governor, Reserve Bank of India at the Annual National Seminar titled “Financial Inclusion of Urban Poor” conducted by the American India Foundation at New Delhi, on January 28, 2013.

(xi) Shri V. Narayanan Memorial Lecture on the topic “Financial Inclusion: A  Consumer Centric View” delivered by Dr. Subir Gokarn, Deputy Governor, Reserve Bank of India at Sastra University, Kumbakonam on March 21, 2010.

(xii) Keynote Address by Dr Deepali Pant Joshi at the College of Agricultural Banking (Pune) Conference on “Financial Education Key to promoting Financial Inclusion and Customer Protection”. 
(xiii) Speech delivered by Dr. Deepali Pant Joshi, Executive Director, Reserve Bank of India at the Vth Dun & Bradstreet Conclave on Financial Inclusion in Kolkata.

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