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Banking on Inclusive Growth

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Gross Domestic Savings (GDS) play a vital role in the economic growth of a country as it facilitates to provide requisite financial resources to undertake various developmental and welfare programs. A high level of savings helps the economy to progress on a continuous growth path as the savings are the source for investment. GDS is one of the important economic indicators to measure financial regulation and soundness of the country. Absence of required savings rate may lead to external dependence, which may jeopardize the interests of the Nation.


Household Savings


Savings habit is an in-built culture of the Indian system and it has been growing consistently from 10% in 1950 to 33.70% in 2010, which is one of the highest globally.  It is interesting to note that while saving rate is on increase, marginal decline is observed under household sector i.e. 72% to 70% during 1950 to 2010. Corporate sector witnessed increase from 10% to 24% while the share of public sector has come down to 6% from 18% during the said period. The evolution of Household savings and its flow to Physical and Financial sectors over the years is as under:


Deployment of Household Savings (%)









I. Financial








II. Physical

















Despite the fact that the household savings have been gradually moving from physical assets to financial assets over the years, still 49.79% of household savings are wrapped in physical assets thereby desired capital formation has not been taking place, is a matter of serious concern. Unlocking physical assets is the need of the hour as substantial scarce financial resources are blocked in unproductive assets (Gold and Real Estate) at a time when the country is in dire need of funds to channelise into productive sectors to achieve desired GDP and economic growth. The deployment of Household Financial Savings across various major financial assets is as under:


Major components of Household Savings (%)






1. Currency





2. Deposits with Banks/NBCs





3. LIC/PF/Pension Funds





4. Small Savings (Govt.)





5. Shares & Debentures





6. Others










Source: Handbook of Statistics on the Indian Economy, RBI

Normally, public keep a portion of their savings in the form of currency to meet their day-to-day emergency requirements and the balance of savings will be held in the forms of investments. The last decade has witnessed increased adoption of Debit & Credit cards and electronic payments, expected significant shift in currency holdings. Contrary to the expectations, the currency holding with public has increased from 10.60% in 1990 to 13.30% in 2011 which calls for a detailed debate. The major reasons for high currency holdings may be on account of increased economic activity with limited access to banking (5.66 lakh unbanked villages) coupled with hoarding of unaccounted money in the form of cash to circumvent tax laws.

Historically, Bank deposits seemed to be the preferred choice as it has inbuilt Safety, Security and Liquidity features. The ownership of bank deposits data reveals interesting trends which are as under:

Ownership of Bank Deposits (%)






Var. over 1990








Corporate (Private)






Financial sector






Household (Ind./Trusts/Prop.)






Foreign sector





Source: RBI Reports

Traditionally, the Household sector has been playing a leading role in the landscape of bank deposits followed by Corporate and Government sectors. However, Household sector lost a share of 13.60% while Corporate and Government sectors gained by 8.60% and 6.70% respectively during the last two decades. This calls for indepth analysis as it is an indication for skewed distribution of income across various segments.




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The positive impact of India’s thrust on economic growth has so far been largely limited to the urban population and is yet to widely percolate to the rural population. It was stated in Human Development Report released by Planning Commission that The impressive economic growth of our country has brought smiles on the faces of the rich and the powerful even as the rest suffer in distress and drudgery”. The plight of the agricultural sector and inefficacy of the rural social safety net programs are the chief factors responsible for widening of the urban-rural divide. Despite augmented thrust by the government and RBI on Branch expansion over the years, the fruits of the banking have not reached to substantial population, which is evident from


Ø  Out of six lakh villages, around 34000 villages only have the presence of Bank Branch. Around 26% of country’s population (320 million) spread in 145 million house-holds have completely excluded from banking services.


Ø  Substantial portion of government’s subsidies and social spending is not being reached to the target group and majority of rural/urban poor are under the clutches of Money Lenders and deprived of financial independence.


As per the reports, the distribution of assets is extremely skewed with the top 5% of the households possessing 38% of the total assets and the bottom 60% of households owning a mere 13% assets. Predictably, asset accumulation is minimal among the rural households.


Financial Exclusion – Triggers


The major contributing reasons, on demand side, for exclusion of vast majority population from formal banking system are low literacy rate coupled with scant financial literacy, low income levels, absence of collateral/assets and social exclusion. At the same time, the supply side factors are distance, costs, timings, complicated procedures, sub-optimal attitude of staff and offering of inappropriate products etc.


Financial Exclusion - Impact


Financial exclusion is the cause to flourish informal financial markets which suffer from several imperfections such as high cost of credit at exploitative

terms, loss of precious savings on account of fly-by-night operators, inordinate delays in effecting transfer of funds and settlement of accounts.


The savings of financial excluded segment is largely in the form of cash, jewellery or livestock, which offers little return and vulnerable to theft or loss. Further, they have little awareness and practically no access to insurance products that could protect their financial resources in unexpected circumstances such as illness, property damage or untimely death of bread-winner. The prevailing scenario is believed to be acting as one of the major constraints to the growth impetus of the country.


Financial Inclusion & Progress


Growth is inclusive only when it creates economic opportunities along with ensuring equal opportunities to all. Hence, Financial Inclusion is considered to be critical for accomplishment of Inclusive Growth. It envisages the accomplishment of three essential dimensions viz., outreach, availability and usage of basic banking services. However, operating a full-fledged branch in unbanked area is proved to be unviable considering the huge operational costs and limited business volumes.


The Business Correspondents model is one of the viable alternate models to ensure greater coverage in far-flung areas at reduced costs. The other initiatives in this direction are - introduction of new products, simplified account opening procedure and offering No-frill accounts with low minimum balance and charges.


The Financial Inclusion Plan (FIP) initiatives are well received by the banks which are evident from coverage of around 74200 unbanked villages with above 2000 population during the year 2011-12. The number of No-frills accounts crossed 99 million with an outstanding balance of above `87 billion. RBI directed the banks to provide basic banking services to the remaining villages in a time-bound manner. RBI made it mandatory for the banks to open at least 25% of new branches in un-banked rural centers. In this direction banks are advised to open Ultra Small Branches in all villages where Business Correspondent Agents is in operation. Bank staff visits these villages regularly at least once in a week which creates confidence among the masses in functioning of the new business model.


Financial Inclusion – Opportunities


Today, the banking has become imperative to all house-holds across the country irrespective of their social and financial status and expects minimum financial services from the banking system. As per PWC report, around 3 lakh crore government subsidies/welfare amounts will be routed through banks once UID project is in place. The FI initiatives may likely to add another 20 crore accounts to the banking system which definitely pave the way for increased flow of stable retail business both under deposits and advances.


The gradual phase-out of Joint Family system coupled with increasing life expectancy and insignificant presence of social security schemes is forcing the bread-earners to look for insurance/pension products. It is an opportunity for the banks to improve other income which is the need of the hour.


According Telecom Regulatory Authority of India (TRAI), April 2012 report, the rural subscriptions crossed 330 million as against total subscriber base of 950 million. Mobile is an ideal vehicle to extend banking services to rural and unbanked areas in a simple and most cost effective way. The IBA-FICCI-BCG report predicts that mobile banking would become the second largest channel of banking after ATMs. Mobile banking will drive the growth of banking industry exponentially in the future by increasing productivity and acquiring new customers.


Financial Inclusion - Challenges


The major challenges associated in implementation of Financial Inclusion are scalability and cost structures. It calls for greater involvement and cooperation between the public, private and social sectors. Many players are uncertain about the market size for their customer specific products and probably that may be the reason for subdued interest to enter the financial inclusion space. There is an imperative need remove the information roadblocks with the use of innovative products and alternative channels. Government should continue to look for ways to encourage innovations that spur growth while avoiding direct subsidies that might prevent commercial players from developing financially sustainable solutions.


i) Infrastructure &Technology issues


Absence of desired infrastructure facilities such as transportation, communication and power supply is causing hindrance for speedy implementation of FIP. Connectivity is another major challenge. Today, most of the banks have opted for the smart card platform where the Technology Service Provider (TSP) and the bank’s CBS vendors are different entities, resulting in to interface issues. There is an imperative need to move towards Universal FI Solutions, standardizing the interface with Core Banking platform to address technology issues.  FI solutions are expected to be interoperable across three technology platforms viz., Smart Cards, Mobile Phones and Micro ATMs where as mostly the existing solutions are confined to Smart Cards. In the present system, the residents are required to have two accounts viz., FI Bank & EBT implementing agency. There is an urgent need address this issue by setting up a repository of accounts for all EBT beneficiaries to route payments to single account.


ii) Operational issues


The beneficiaries of BC services are mostly illiterate/semi literate and are susceptible to misguidance. The success of the model crucially depend on the trust levels among customers, banks and BCs, which is possible through spread of financial awareness by conducting financial literacy programs on an ongoing basis.  BC transactions are cash-based, which is one of the biggest issue and it is more so with North Eastern regions due to higher security risks, vast and difficult terrain and poor connectivity. There is a need to have uniform code of conduct for Grievance redressal mechanism. Periodical reconciliation process to tally balances is a must. 


iii) BC Viability issues


It is becoming difficult for BCs to continue operations due to mismatch of revenues earned and costs incurred on account of low business volumes. It warrants the attention of the government, regulator and the bankers to re-look into compensation policy of BCs or initiate steps to augment their income level by entrusting them to market insurance products of LIC/GIC in rural

unbanked areas. It improves the viability of BC model besides enhancing access to wide range of insurance products to rural population.


iv) Manpower issues


Trained manpower is very important for the last mile delivery of financial products to the excluded. The concept of Ultra Small branches is going to stay to achieve desired financial inclusion and these branches are to be manned by bank staff only. Banking industry need to deploy additional manpower around 1.50 lakh to cover 5.66 lakh unbanked villages for the said purpose. Whether banks to go for a separate recruitment to handle this segment or make use of the existing staff with specialized training – invites broader debate. Achieving full scale financial inclusion invites many challenges as the number of Business Correspondent Agents will increase manifolds and they need to be adequately trained both on technology platform and banking domain knowledge. Banks, NGOs and other organizations are to be roped in to strengthen the training infrastructure.


v) Regulatory issues


It is mandatory for BCs to settle cash with bank branches on the same day or next working day. Due to erratic power supply and connectivity issues, it becomes difficult to complete settlements within the prescribed timeframe especially in the North Eastern Region. There should be a separate institutional set up to have pool of Technology Service Providers (TSP). Price restrictions, whether in the form of interest rate caps or limits on fees, often impede the scaling of financial inclusion. Regulators should allow players to cover their costs of funding and operations.


Financial Inclusion – Way forward


Though, Branchless Banking models are gaining momentum on account of cost effective solutions, banks may have to continue to adopt multi-pronged approach focusing attention on all delivery channels viz., Physical Branch Network including Ultra Small Branches and Satellite Branches, Micro and Mobile ATMs, Business Correspondents and Mobile Banking, to accomplish financial inclusion. In the present scenario, no single channel is to be treated as substitute to other channel; rather they are to be viewed as supplementary

to each other. The products and services should be in sync with the characteristics and needs of the target audience.


Financial inclusion needs a holistic approach to make it more effective and sustainable. The Public, Private and Social sectors have to all come together to create an entire ecosystem. It casts higher responsibility on the banking industry in creating awareness about financial products, education, advice on money management, credit counseling, savings and affordable credit.


Capacity building of the target group (financially excluded) is the need of the hour. Rural Self Employment Training Institutes (RSETIs) need to be further strengthened to promote micro entrepreneurs across the country.


The envisaged country’s 8% GDP growth target requires harnessing resources and fortune at the bottom of the pyramid. In this context, Prof. C K Prahalad view on small customers is worth noting “The future lies with those companies who see the poor as their customers.” Financial Inclusion is to be treated as Business Opportunity instead a regulatory prescription. Banks need to revisit their approach towards low value accounts of vast neglected population and adopt “High Volume & Low Margin” business model.


Banks, Government, Regulators, Technology Service Providers, other agencies and the community at large need to work together in tandem to accomplish the task of total financial inclusion as it strengthens financial deepening and paves the way for economic development and Inclusive Growth.




*[Mr NSN Reddy, who is working as Chief Manager, in Andhra Bank has B,Com, CAIIB, PGDBM (NIBM) qualifications to his credit and has over 32 years of Banking experience]


Important Notice :  [The articles written by authors contains only the academic view of the writer and purely for discussions and updation of the knowledge of the bankers.   The views expressed in the articles may not at all be subscribed by the organisation where the author is working and / or]



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