A practical agenda in financial inclusion: What RBI Governor Dr Rajan needs to do?

Dr Rajan’s first task would be to ensure that the RBI puts out a proper working definition of financial inclusion. Without proper baseline data, quoting facts and figures is meaningless as then, we would not be able to attribute whether financial inclusion occurred because of something we did consciously or it was simply an accident and/ or act of GOD

There is a lot that Reserve Bank of India (RBI) governor Raghuram Rajan can do to bring transparency to the financial inclusion process. I say this, notwithstanding the issues that I have already raised about composition of the Committee  and the conflicts of interest of its members.  Let me start with the definition of financial inclusion and data pertaining to the same, as my first article of a series that will look at measurement of financial inclusion and related aspects.
 

Without a clear definition of financial inclusion and good ground level data, much of what we say in terms of inclusiveness in the financial sector is analogous to writing on water. Additionally, without proper baseline data, quoting facts and figures is meaningless as then, we would not be able to attribute whether financial inclusion occurred because of something we did consciously or it was simply an accident and/or act of GOD. 
 

Having an internally consistent definition of financial inclusion is very critical. And generating data based on the same is even more important. Together, these can form the basis for our opinions and judgements, which in turn can shape policy and subsequent implementation appropriately.
 

It therefore follows that we first need a reliable and valid definition of financial inclusion in terms of type of products and services (for example, it could be loans, savings, insurance, remittance, literacy and financial education services, ombudsman services etc) accessed through different institutions (Banks, Insurance Companies, SHGs, MFIs, Business Correspondents, Cooperatives etc) by various kinds of mutually exclusive individuals/households from different segments of society (especially, low income and excluded groups).
 

Please note that some of these financial inclusion services could be one time services (like going to an ombudsman), others (like loans) may be repeat services and some others like savings accounts (or pension accounts) could even be continuous long-term services. Likewise, several institutions may combine to form a channel – for example, I could get a loan from an SHG that is linked to a bank which has been refinanced by a DFI like NABARD. I could also get a loan from an MFI that has borrowed from a DFI (SIDBI) and is on-lending to me. The permutations and combinations are endless here but please note that the above distinction between channels and institutions is very important for determining correct outreach of financial inclusion!
 

In fact, the real outreach of our financial inclusion services through the various channels and institutions is not transparently known today. This is because there is overstatement of outreach figures through double and triple counting as sometimes data of different institutions within a channel is added up to give an incorrect outreach figure.
Sometimes, people have genuinely accessed services through different channels as well. This again provides an exaggerated picture of total outreach and penetration with regard to financial inclusion.
 

Given the above, Dr Rajan’s first task would be to ensure that the RBI puts out a proper working definition of “financial inclusion” and ensures that all stakeholders promoting and/or looking at financial inclusion use the same consistent definition. Otherwise, outreach figures on financial inclusion would be meaningless and cannot be evaluated or compared in a serious manner.
 

A second important task for Dr Rajan is ensure that proper data (which can then become a baseline going forward) is available with regard to financial inclusion. Here, the priority task would be to know ASAP:

  1. How many mutually exclusive individuals and mutually exclusive households have been financial included in any given financial year?

And when we say financially included, we need to be able to disaggregate this figure in terms of services/products accessed by these mutually exclusive individuals/families through different channels (and their institutions) and across various regions/states in India. If this basic data becomes available, then, we can analyse the data to get better analytics about the rural-urban divide, demographics and so on
 

As someone who has worked in over 540 districts of India over the last 25 years, I can say that the data with regard to SHGs needs to be more transparently and accurately estimated. What is lacking is objectively verifiable data on the number of well functioning SHGs, their demographics with transactions on loans and savings, overlap of members across SHGs (many SHGs have dual membership or in some cases, I have even seen membership in three to four SHGs) and the like. Likewise, we lack transparent and accurate data with regard to MFIs and their clients as well. There is so much of overlap in clients across MFIs (as evident from the 2010 AP crisis). Similarly, clients appear to be shared significantly across the MFI, the SHG Bank linkage, Cooperative and other models. All of these lead to significant exaggeration in outreach data. Further, data on KYC, priority sector lending including to agriculture, BC models, insurance services and pensions also have their problems and thereby contribute to outreach exaggeration.
 

Thus, given that there is so much double and triple counting and exaggeration in the outreach data, it is imperative that we know the real outreach in terms of mutually exclusive individuals first and as mutually exclusive households next. I hope Dr Rajan will set in motion appropriate processes so that transparent data which can lend itself to objective field verification is publicly available. We need to know how many mutually exclusive individuals/households have been reached by various financial inclusion efforts and this would also entail significant coordination with other regulators like IRDA and PFRDA, which again, Dr Rajan would need to ensure through appropriate mechanisms. 

  1. And once we have the above basic data, we can then get to understand whether people who were financial included in a given year continued to be included in the subsequent years?

Most people assume financial inclusion is a one time or static phenomenon. On the contrary, it is dynamic one where people float in and float out of the financial inclusion eco system. It is very similar to concept of floating population in big metros like Delhi or Mumbai!
 

Take the case of all the clients who had their loans waived off as part of the farmers’ loan waiver scheme some years ago! After the waiver, several of these clients were classified as defaulters by the respective banks and hence, they could not regain access to the formal financial services that they once had been able to access. Likewise, as a previous Moneylife article (Financial inclusion of sugarcane farmers in modern-day India) showed, many sugar cane farmers who were once included (by virtue of having got a bundled loan for sugarcane) were subsequently excluded for reasons mentioned in the article. The same is the case with the 2010 AP micro-finance crisis where most of the clients in AP who did not pay back at the height of the crisis are now classified as defaulters (both in general terms as well as in the credit bureau) – as a consequence, no formal or quasi formal financial system will touch them hereafter. In fact, the erstwhile IRDP (Integrated Rural development Program) had included millions of people way back in the 1980s but many of these people left the financial ecosystem for various only to be re-included through some other scheme/program later. While I could give many more examples, the key issue here is that anyone who is included financially need not stay included always.
 

The above also implies that the linkage cited between ‘financial inclusion’ and ‘inclusive growth’ is at best tenuous because of the following aspects:

  • Not all people who are financially included stay that way all the time. They float in and out of the financial eco system due to circumstances beyond their control and this is especially true of low income people in the urban informal sector and the rural poor 
  • Not all financially excluded people are poor and vulnerable. Fox example, a large number of medium sized traders and farmers in small shanty towns tend to be excluded for the formal financial system but they are not necessarily poor or vulnerable. And it is such people who have a better chance of staying financially included, once they have gained access to a formal financial service
     

 To summarise, the larger point that I am trying to make are the following:

  1. We are in urgent need of a proper working definition of financial inclusion that can lend itself to reliable and valid measurement,
  2. We require data on mutually exclusive individuals and households who have been financially included (in a given year),
  3. We also need to have data on how many such mutually exclusive individuals and households who were financially included in a given year stayed included in the subsequent years, and
  4. Lastly, we also need data on how many new mutually exclusive individuals and households enter the financial inclusion eco system in any given year?

And all of this data must be capable of disaggregation by products/services, channels (and their institutions), states/regions and so on. Only then will we be able to make meaningful analysis of all the hype surrounding financial inclusion.
 

(Ramesh S Arunachalam has over two decades of strong grass-roots and institutional experience in rural finance, MSME development, agriculture and rural livelihood systems, rural and urban development and urban poverty alleviation across Asia, Africa, North America and Europe. He has worked with national and state governments and multilateral agencies. His book—Indian Microfinance, The Way Forward—is the first authentic compendium on the history of microfinance in India and its possible future.)

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    COMMENTS

    SuchindranathAiyerS

    7 years ago

    "Inclusion" is a political Congress mantra like "secular" and "Garibi Hatao". From different laws for different folk based on vote banks to different entitlements for different folks based on vote banks. It all about divide and rule. Definitions, accurate statistics, dictionaries, indeed, any clarity would upset the Congress apple cart!

    Krishnaswami CVR

    7 years ago

    while agreeing with the author, the systematic error is abundant in all the areas of statistics. Thus he had raised a larger picture.

    when we say, financial inclusion, to me it is very simple as i have those low earners may not have bank accounts. Thus if those low earners are tabulated today, ( should be available in our General Census) and if we review after a gap of one year, we may reasonably conclude that inclusion has been there or not.

    Krishnaswami CVR

    7 years ago

    while agreeing with the author, the systematic error is abundant in all the areas of statistics. Thus he had raised a larger picture.

    when we say, financial inclusion, to me it is very simple as i have those low earners may not have bank accounts. Thus if those low earners are tabulated today, ( should be available in our General Census) and if we review after a gap of one year, we may reasonably conclude that inclusion has been there or not.

    REPLY

    Ramesh S Arunachalam

    In Reply to Krishnaswami CVR 7 years ago

    Thanks Sir

    Points well taken but Financial inclusion is not just bank accounts and it much more complex than that. That is why the RBI needs to put a proper definition of financial inclusion in terms of type of products and services (for example, it could be loans, savings, insurance, remittance, literacy and financial education services, ombudsman services etc) accessed through different institutions (Banks, Insurance Companies, SHGs, MFIs, Business Correspondents, Cooperatives etc) by various kinds of mutually exclusive individuals/households from different segments of society (especially, low income and excluded groups).

    The issues with data are therefore much more complex and also, all the models of financial inclusion have tended to shroud the data as well. Besides, there have been many frauds like ghost clients etc and data mis-representation has also occurred - in fact past moneylife articles cover these aspects and I will provide the citations tomo. Therefore, it is time that the RBI offers a comprehensive definition and backs the same with a transparent process to get the data. In fact, the priority sector lending data supplied by banks has so many problems and I will writing about all of these in a series of articles. thanks again for your comments sir and I have taken note of the points and will use them as appropriate in my future writings

    Protection against credit card frauds: Should we adopt provisions of Regulation E?

    With expected increase in card-based transactions and movement towards paperless transactions, we need to adopt a new piece of legislation, similar to the Regulation E of the US

    It is a praiseworthy move that the Reserve Bank of India (RBI) has decided not to grant any further extension to banks for complying with security norms with respect to card transactions. RBI has said that banks will have to bear the cost of fraudulent credit card transaction through point of sales (PoS) terminals that do not have prescribed security features. As a customer friendly measure, the RBI has directed banks to follow the course of action, if a fraudulent transaction is reported by a customer on a credit card through any PoS terminal.

     

    As per RBI circular, banks are expected to comply with the following course of action:

    • The issuing bank would ascertain, within three working days from the date of the cardholder approaching the bank, whether the respective PoS terminal/s where the said transaction/s occurred is/are compliant with Terminal Line Encryption (TLE) and Unique Key Per Terminal (UKPT) or Derived Unique Key Per Transaction (DUKPT) as mandated.
    • In the event it is found that the PoS terminals are non-compliant as mandated, the issuing bank shall pay the disputed amount to the customer within seven working days, failing which a compensation of Rs100 per day will be payable to the customer from the 8th working day.
    • The issuing bank shall claim the amount paid by it to the customer from the respective bank/s which have acquired the PoS transaction/s in question.
    • The acquiring banks have to pay the amount paid by the issuing bank without demur within three working days of the issuing bank raising the claim, failing which the RBI would be constrained to compensate the issuing bank by debiting the account of the acquiring bank maintained with the Bank.

     

    While this is one good move by RBI, after it decided to ban zero equated monthly instalments (EMI) scheme, it still does not solve the problem of the credit card and debit card holders. Card- related frauds are very common and customers face several problems with respect to the security of the card and potential threat that arises from misuse of cards. Customers holding credit card or that matter any electronic device need better protection against frauds. In order to provide better protection to the customers, there is a need to carry out comprehensive changes in the card industry. The famous US regulation called “Regulation-E” can act as the guide in implementation of preventative measures against credit card frauds.

     

    What is Regulation E?

    Regulation E popularly known as REG-E outlines the rules and procedures for electronic funds transfers (EFTs) and outlines guidelines for those who sell and issue electronic debit cards. Regulation E establishes certain types of protection for consumers that employ electronic transfer systems.

     

    How does Regulation E protects card holders?

    Regulation E provides protection to the card holders by defining the maximum liability of a card holder. As per the regulation, “A consumer shall be liable for any unauthorised electronic fund transfer involving the account of such consumer only if the card or other means of access utilised for such transfer was an accepted card or other means of access and if the issuer of such card, code, or other means of access has provided a means whereby the user of such card, code, or other means of access can be identified as the person authorized to use it, such as by signature, photograph, or fingerprint or by electronic or mechanical confirmation.” 

     

    This statement clearly indicates that unless it is established that the card was accepted by the customer, the liability of the customer does not arise. While identifying the consumer’s liability, the act says that in no case the liability of the customer would exceed $50.

     

    In the worst case scenario, when the customer fails to notify the fraudulent transaction to the issuer of the card, the limit of penalty has been defined as $500.

     

    Burden of Proof

    Another favourable aspect of the regulation is that the burden of proof in the event of a fraud is with the financial institution. As per the Act, the burden of proof lies with the financial institution, “In any action which involves a consumer's liability for an unauthorized electronic fund transfer, the burden of proof is upon the financial institution to show that the electronic fund transfer was authorized or, if the electronic fund transfer was unauthorized, then the burden of proof is upon the financial institution to establish that the conditions of liability.”

     

    This kind of regulation requires support of insurance on a large scale. Additionally, the technology needs to be advanced for implementation of a regulation at the scale of REG-E. However, with expected increase in card based transaction and movement towards paperless transactions we need to adopt a new piece of legislation, which should be extremely customer friendly that in turn would encourage faster transactions and make transaction system more efficient.

     

    (Vivek Sharma has worked for 17 years in the stock market, debt market and banking. He is a post-graduate in Economics and MBA in Finance. He writes on personal finance and economics and is invited as an expert on personal finance shows.)

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    Banking Service Charges: Our online survey results

    A Moneylife online survey on banking service charges shows a growing sense of frustration among customers about the constant and stealthy increase in charges. But many respondents don’t even know about these charges!

    Bank customers are frustrated at the ever increasing charges being passed on to them, sometimes with the knowledge, or sometimes keeping them in the dark. In addition to high inflation, escalating costs of health and education, the friendly neighbourhood bank, which promised ease, convenience and efficiency, is quietly springing ever-increasing charges on discerning bank customers. The findings of Moneylife’s survey on banking service charges explained exactly why banks get away with it.

     

    We received 1,579 responses to the survey. About 93% of the respondents have more than one bank account; 40% have more than three bank accounts. A significant majority (67%) have an account in private banks and 57% in nationalised banks. This means that the respondents are educated, tech- and social-media-savvy persons, in the higher income brackets. About 8% have a foreign bank account and 8.5% have an account in a co-operative bank. Around 69% have regular savings accounts, while 31% are high-end, priority customers. Only 25% of the respondents have salary accounts with banks. Surprisingly, 1.2% said they have a no-frills account as well, while 14.6% operate a current account.
     


    The demography of the survey is heavily skewed against the female customers, with 92.6% of the respondents being male. Also, most of the respondents who avail the banking facility are between twenty and sixty years of age.
     


    A third of our respondents (32%) are in the 20 to 35 age group; 26.6% are between 36-45 years, another 26.3% are between 46 to 60 years. Senior citizens, aged between 61-70 years and 71 years and above, constitute 11.5% and 3.6% of the respondents, respectively.

     

    While a large discerning group is aware and angry about the slew of new charges, a shocking 60% of respondents were unaware of various charges and have never checked if their bank announces them transparently. Over 71% of account-holders do not want to change their bank for various reasons—and this is the answer to why banks are able to hike bank charges with such impunity.

     

    We found that customers of private banks and nationalised banks were more aware of costs and charges, while a majority of customers in the two extremes—foreign banks and cooperative banks—responded with a ‘don’t know’ on most cost-related queries. Clearly, account-holders in foreign banks do not bother to check, while those of co-operative banks probably don’t avail of many of these services. Our own research shows that all three categories of banks (foreign, nationalised and private banks) are not very forthcoming about the entire spectrum of bank service charges such as the annual debit card fee, automatic teller machine (ATM) transaction charges, national electronic fund transfer (NEFT), real time gross settlement (RTGS) charges, SMS alert fees, minimum balance requirement and penalties.
     


    Banks levy a slew of service charges on the customers like annual fee for debit card or ATM card, and for a duplicate pin number for the debit card or ATM card number, or for a new card in case of loss or damage. About 43.6% of the customers in nationalised banks reportedly pay between Rs100 to Rs500 annually for the debit card and ATM card. The figure is 17.55% and 14.56% in case of the foreign banks and co-operative banks respectively. Our survey has revealed that often people do overlook, or ignore certain charges, which are slyly introduced by the banks: for example, charges levied after the sixth transaction at ATMs. More than 50% of the respondents were simply unaware of the amount charged in these cases.

     

    There are a plethora of charges that banks levy on various issues. But the most startling insight of the survey is the fact that in spite of not being fully satisfied with the services of their individual banks, majority of our respondents refused to change the bank. Our survey shows that about 36% of our respondents do not consider changing their banks because they have their salary linked with the bank and a whooping majority of 49% consider it as too much trouble to change the bank account.

     

    In the cases of returned cheques, 48.8% of the customers in foreign banks and 46.5% of the customers in cooperative banks do not know that they are charged. Anywhere between Rs50 to Rs500, with the exception of IDBI Bank. The story is the same with the Electronic Clearance Service (ECS) and National Electronic Money Transfer, where the customers are unaware of the amount charged from them. Taking a cue from the strong campaign by Moneylife magazine, along with bank unions, the RBI assured us that it would facilitate electronic transfers as prescribed by the Damodaran Committee. An astounding majority of 65% of the respondents in our survey never knew the banks have account closing charges, especially if the account is deactivated within a year.

     

    In the recent past, Moneylife has written about various charges levied on the customers by the banks.

     

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    COMMENTS

    Yash Verma

    7 years ago

    You have done yeoman's service by conducting this survey but am afraid it is not going to help the common man because he is too lazy to change the bank fearing hassles. It is not a big deal to change the bank, believe me. Yash Verma, Pune

    kaushik shukla

    7 years ago

    the outcome of survey is an eye opener for common man , however this will not change the mindset of people, they still will continue with same bank.

    pawan agrawal

    7 years ago

    we must take up this issues in the criminal court

    Vaibhav Dhoka

    7 years ago

    Most of banks levy one or other charges silently.In case of Bank of Maharashtra Bhawani peth,Pune branch where I have savings account ,bank charges me Rs 6 on two occasion one while applying for United India's bank assurance on 27/6/2013 and another by paying Rs 10000=00 by payslip to other savings account 24/9/2013.No where these charges are listed on banks website.As amount is small customer overlooks same.

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