India may be `the world's second-fastest growing economy'. But that may mean nothing to nearly half of India's 1.1 billion, because they `have no access to loans and insurance,' notes

in a report dated November 6.

It cites the Reserve Bank of India Governor, Dr Y. V. Reddy, from his address at the recent Bancon 2006 Bankers' Conference, thus: "Financial inclusion is not a matter of philosophy but can lead to a win-win situation for the banks and the customers... Treat financial inclusion as an investment for business. It's the mass movies that make money."

What is `financial inclusion'? To those who have this question, because they feel excluded from discussions on the catch phrase, here is a zero base to help.

Let's begin with a letter that the RBI wrote to all banks on December 13, 2005, on the subject. It referred to paragraph 96 of an October 25, 2005 document, the Mid-Term Review of Annual Policy Statement for 2005-06, which in turn, had spoken of the Annual Policy Statement of April 28, 2005.

An after-thought?

Nothing earth-shaking it was at that time, because one finds `inclusion' only in Paragraph 98 of the 124-paragraph Statement, after the Governor had devoted attention to issues such as M&A (merger and amalgamation) of banks, supervision of financial conglomerates, and interests of the depositors.

Ironically, the paragraph of relevance was titled, matter-of-factly, as `financial exclusion', in the April 2005 document.

It noted that there was `expansion, greater competition and diversification of ownership of banks leading to both enhanced efficiency and systemic resilience in the banking sector'.

It also conceded that there are `legitimate concerns in regard to the banking practices that tend to exclude rather than attract vast sections of population, in particular pensioners, self-employed and those employed in unorganised sector.'

Privileges for Bankers

Commercial considerations are important, yet the banks should provide banking services to all segments of the population, on equitable basis, said the Governor.

He reminded banks about `several privileges' they have been bestowed with `especially of seeking public deposits on a highly leveraged basis'. Dr Reddy included the following three points in the paragraph, as antidotes to `exclusion':

Policies to

encourage banks that provide extensive services, and `disincentivising' those that are `not responsive to the banking needs of the community, including the underprivileged'.

Monitoring the

nature, scope and cost of services, `to assess whether there is any denial, implicit or explicit, of basic banking services to the common person'.

Review of

existing practices to align the same with the objective of financial inclusion.

Strong cautions, these were, but the progress was apparently not very encouraging. "In many banks, the requirement of minimum balance and charges levied, although accompanied by a number of free facilities, deter a sizeable section of population from opening/maintaining bank accounts," noted the RBI, six months later, in its Mid-Term Review, of October 2005.

And, so, the bankers' bank wielded the stick to achieve `greater financial inclusion'. All banks should make available "a basic banking `no frills' account either with `nil' or very low minimum balances as well as charges that would make such accounts accessible to vast sections of population," said the RBI. "The nature and number of transactions in such accounts could be restricted, but made known to the customer in advance in a transparent manner. All banks are urged to give wide publicity to the facility of such a `no-frills' account so as to ensure greater financial inclusion."

In Paragraph 57, too, there was mention of financial inclusion, `in the context of entrenching financial stability in India'. The RBI accorded `high priority' to `a comprehensive framework to revive the co-operative credit system, revitalise the regional rural banks (RRBs) and reorient commercial banking towards the credit-disadvantaged sections of society'. That the theme has assumed importance is evident on

, the home page of the RBI. `What's New' has `Financial inclusion for sustainable development: Role of IT and intermediaries' as a top entry.

It is the text of the address of Ms Usha Thorat, RBI Deputy Governor, at the Bankers' Conference 2006, on November 4. `Financial inclusion has become a buzzword internationally,' she begins, and lists common barriers to access to formal banking system as those relating to `culture, education (especially financial literacy), gender, income and assets, proof of identity, remoteness of residence, and so on.'

The number of mobile phones currently is more than the number of borrowers from the banking system, she rues.

Expanding access

Ms Thorat's write-up has useful references, such as how only last week the US' FDIC (Federal Deposit Insurance. Corporation) had thought of `economic inclusion' to focus on, for `expanding access to banking services for underserved populations'.

Another instructive initiative that Ms Thorat mentions is Mzansi, South Africa's low-cost national bank account (NBA). "Launched in October 2004, it extends banking to low-income earners and those living beyond the reach of banking services - and has already proved to be a hit," reads a September 2005 posting on "It was envisaged that NBA will attract 4 million potential customers over period of 5 years. In its first year of operation itself, it garnered nearly two million accounts," says Thorat.

No mean record

Our record isn't mean, in comparison. "About five lakh no-frill accounts have been opened until March 31, 2006, of which about two-third are with the public sector and one-third with the private sector banks," mentioned Dr Rakesh Mohan, Deputy Governor, RBI, in his speech titled `Economic Growth, Financial Deepening and Financial Inclusion', at the Bancon on November 3.

He mentioned about `committee on financial inclusion' constituted by the Government in June 2006, with C. Rangarajan as Chairman. And about the dismal findings that the All-India Debt and Investment Survey (AIDIS), 2002 revealed.

For the avid, there is a wealth of information in his speech on `country experiences' in `policy response to financial exclusion', apart from educative tables of data.

There is every possibility that banks may grudgingly take to financial inclusion, to comply with the diktat from the Mint Street.

However, if, as C.K. Prahalad says, fortune does lie at the bottom of the pyramid, financial inclusion has to be seen, not patronisingly but as a survival strategy for banks.


(This article was published in the Business Line print edition dated November 8, 2006)
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