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Why so many bankable people are left unbanked? United Nations 2006 Blue Book Building Inclusion Financial Sectors for Development

Policy makers / various stake holders across the globe increased attention if not millions of people bleak financial future 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, remittance facilities.pension,mutual funds etc. Even in developed countries concerns those excluded from the banking system Efforts by regulators - financial education, leveraging technology and generating awareness - markets become more open, more competitive, affordable and inclusive ex : RBI 1:4

Source: Rural planning and credit department, Reserve Bank of India


A state where individuals cannot access the financial products and services that they need. People experiencing financial exclusion typically exhibit one or more of the following characteristics Lack of key financial products such as a bank account, insurance, savings products and pensions and the financial services that come with them A reliance on alternative forms of credit such as doorstep lenders and pawnbrokers Major barriers for poor to access appropriate financial services include socioeconomic factors (e.g., education, gender and age, low and irregular income and geography), regulatory factors (e.g. provision of identity documentation) and product design factors (e.g., minimum account balances,kyc norms) People who are excluded includes Marginal Farmers, Landless Labourers, Self employed and unorganized sector enterprises, Urban slum dwellers, Migrants, ethnic minorities & socially excluded groups, Senior Citizens and Women

National Sample Survey Organization (NSSO) data

45.9 mn farmer households in the country (51.4%), out of a total of 89.3 mn households do not access credit, either from institutional or noninstitutional sources. 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. Exclusion in general is large-also varies widely across regions-social groups and asset holdings. The poorer the group, the greater is the exclusion.

Financial Inclusion is an area of key importance for the banking industry in the 21st Century G20 Pittsburgh Summit in September 2009 - financial stability, financial inclusion and consumer protection The United Nations (UN) declaring 2005 as the Year of Microfinance The Nobel Peace Prize was awarded to the founders of microfinance, Muhammad Yunus and the Grameen Bank, in 2006 1976-1983-March 2008 7.46 mn borrowers 97% women 2504 branches services 81574 villages (97% of total villages) The G20 Financial Inclusion Experts Group (FIEG} has formed a SubGroup known as Access Through Innovation which focuses on innovations that have the potential to reduce transaction costs and reach the excluded .

Mckinsey and Financial Access Initiative Research Journal of banking and finance 2008,Vol 32
2.5 billion adults, just over half of worlds adult population, do not use formal financial services to save or borrow. 2.2 billion of these unserved adults live in Africa, Asia, Latin America, and the Middle East. Of the 1.2 billion adults who use formal financial services in Africa, Asia, and the Middle East, at least two-thirds, a little more than 800 million, live on less than $5 per day. The key message from these analyses is that hundreds of millions of adults living on less than $5/day are already being reached with formal financial services. Serving these segments at scale is not only possible, but to a large extent, is already happening. The greatest number of unserved adults, almost 1.5 billion, reside in East and South Asia. In Sub-Saharan Africa 80% of the adult population, 325 million people, remains unserved, as compared to only 8% in high income OECD countries .

For example, India and Thailand appear to be countries with relatively low per capita income and a large rural population, but have greater use of financial services than many relatively richer and more urban countries.

Moreover, with the right financial education and support to make good choices, lower-income consumers will benefit from credit, savings, insurance, and payments products that help them invest in economic opportunities, better manage their money, reduce risks, and plan for the future.

KEY FINDINGS FROM THE PHILIPPINES Low-income Filipinos are primarily using mobile money to send and receive domestic remittance .One-half of active mobile money users are unbanked. 26% are poor, living on less than US$5 per day (the poverty line in the Philippines). Mobile money users have Average revenue per user (ARPUs) 40% higher than peers who dont use mobile money. Mobile money boosts loyalty towards the particular Mobile network operator. 1 in 10 unbanked users saves an average of US$31 (onequarter of their family savings) in a mobile wallet


The Thai government revolutionized the rural credit market by injecting 1 million Baht, or about 28,000 US Dollars to each of the 77,000 villages in Thailand. This program is one of the largest microfinance programs in the world, costing about 77 billion Baht or approximately 1.5 percent of GDP.

INSIGHT FROM AFRICA The poor save actively at home in cash and through informal mechanisms. For example, Rotating Savings and Credit Association (ROSCA) membership rates among the adult population have been estimated at over 50 percent of adults in The Democratic Republic of Congo, Cameroon, Gambia, villages in Liberia, Ivory Coast, Togo, and Nigeria and similar group savings schemes are widespread outside of Africa as well
INITIATIVES IN BRAZIL In Brazil, several banks have adopted a correspondent banking model that distributes credit, savings and insurance products through grocery stores, retailers and local centres. The correspondent model in Brazil has flourished through the use of technological and institutional innovation under the supervision of Central Bank of Brazil which provides clarity on which services could be delivered by the agents; the necessary guidelines on contracts between the institution and its agents; and the reporting requirements to the Central Bank of Brazil. Agents are indirectly supervised by the Central Bank of Brazil through the regulated institutions which are liable for the actions of their agents. In addition agents may be inspected by the Central Bank of Brazil if deemed necessary

The initiatives and policy measures. The Eleventh Five Year Plan (2007-12) envisions inclusive growth as a key objective. The Plan document notes that the economic growth has failed to be sufficiently inclusive particularly after the mid-1990s A committee on Financial Inclusion (FI) was also formed in June 2006, with Dr. C Rangarajan as Chairman to recommend a strategy to achieve a higher Financial Inclusion in the country. a) Setting up of a National Rural Financial Inclusion Plan with a target of providing access to financial services to at least 50 per cent (50.77 mn) of excluded rural households by 2012 and the remaining by 2015 b) Encouraging Self Help Groups (SHGs) in excluded regions, measures for urban micro-finance and separate category of Micro Finance Institutions (MFIs) c) Regional rural banks (RRBs) to extend banking services to unbanked areas and post merger they represent a powerful tool for financial inclusion

GOVERNMENT OF INDIA In order to deepen the financial system and widen the reach of financial inclusion a nationwide programme on financial inclusion, Swabhimaan was launched in February, 2011 by the Government. Objectives - basic banking services to 73,000 unbanked villages with a population of 2,000 and above by March, 2012 - at least 5 crore new accounts will be opened. Banking facilities like Savings Bank, recurring Deposits, Fixed deposits, Remittances, Overdraft facility, Kisan Credit Card (KCCs), General Credit Cards (GCC) and collection of cheques will be provided

Reserve Bank of India With a view to enhance the financial inclusion the Reserve Bank of India (RBI) urged banks to review their existing practices to align them with the objective of financial inclusion. 1. Simplify KYC (Know Your Customer) norms. 2. Opening of No Frill accounts. 3. Introduction of General Purpose Credit Cards. 4. State Level Banking Committee {SLBC) project of 100% Financial Inclusion. 5. Engaging Business Correspondents/ Facilitators. 6. Financial Inclusion Fund / Financial Inclusion Technology Fund. 7. Financial Literacy- Credit Counseling Centres.

Banking Correspondent

ACHIEVEMENTS: Number of No-Frill Accounts 28.23 million (as on Dec31, 2008) Number of rural bank branches 31,727 constituting 39.7% of total bank branches (as on June. 31, 2009) Number of ATMs 44,857 (as on May 31, 2009) Number of POS 4,70,237 (as on May 31, 2009) Number of Cards 167.09 million (as on May 31, 2009) Number of Kisan Credit cards 76 million (Source: CMIE publication 2007-08) Employment increase by 18% in post SHG period Number of Mobile phones403 million (as on Apr.30, 2009) out of which 187 million (46%) do not have a bank account (Source: Cellular Operators Association of India)


STATE BANK OF INDIA (SBI): Bank on Bike initiative by SBI. State Bank of India (SBI), and India post are coming together to organize a basic banking services platform Hindustan Unilever (HUL), Indias leading consumer goods company, has joined hands with SBI to promote financial inclusion in the rural areas through 'Shakti Ammas', HUL's network of self-help groups.

SBI and Bharti Airtel announced that they have entered into a Joint Venture (JV) agreement to make available banking services to Indias unbanked millions

IDBI BANK: The Bank has launched the FI drive, Aarthik Vikas Kee Ore in unbanked villages of Maharashtra.The bank also launched the Urban Financial Inclusion program at Ambedkar Nagar, Cuffe Parade in Mumbai. IDBI Ltd has launched its no frills 'Sabka' savings account, the average balance requirement has been considerably reduced to Rs. 250 in rural/ semi-urban branches enabling the customers to access IDBI ATMs and branches and give them the comfort of banking 24 x 7 through phone banking and mobile banking. With a view to providing impetus for rural growth and financial inclusion IDBI launched a Mobile Branch, the first of its kind in Maharashtra, at Satara. The Mobile Branch consists of a Kisan ATM operated on a biometric system HDFC BANK: The Bank has approximately 33% of its branches in rural and under banked Locations. Till date the Bank has lent to over 45,000 self help groups covering approximately 7 lakh households supporting their income generation activities.

AXIS BANK: $ Full production rollout of its Urban FI Initiative in Bangalore with possibility of future scalability in the other Urban Centers of the country. $ Janalakshmi a well known name in Microfinance has been appointed as the Business Correspondent to cater to the unbanked and under banked population in the urban areas through its field executives acting as mobile Customer Service Points (CSPs). The Point of Sale (POS) model has been used wherein the CSPs are equipped with POS machines on which customers can carry out cash deposit and withdrawal transactions through swipe of a debit card. $ The bank has joined hands with IDEA Cellular for mobile based branchless banking initiative where the mobile platform is being used to facilitate basic banking and remittance transactions and Ideas retail outlets are being used as CSPs The retail outlets of IDEA act as transaction points for the customers, where he deposits cash with the retailer and transfers the remittance amount into the No Frills Savings account of the recipient through a mobile phone. The transaction is authenticated through an M-PIN number provided to the customer


The banks are faced with high operating cost in extending the financial services to the remote areas. High maintenance cost of these accounts as well as small ticket size of the transactions is also adding to the problem. Reaching out to the illiterate people or people who can handle only the regional languages is also difficult without developing a suitable communication mode.

Informal access to financial services and credit are highly costlier, riskier and less reliable. Hence, making formal and affordable financial services available for the unbanked would definitely have positive consequences on the lives of these people. Banks should pioneer new models for delivering financial services, to customize products that meet the needs of rural customers, to bridge gaps wherever there are missing markets and to support the development of new technologies that enable more Indians to participate in and benefit from Indias growth. In order to achieve that banks should work with key stakeholders including agri-based industries, government authorities and existing rural financial intermediaries.

The banks should develop a comprehensive programme for those who are financially excluded in the urban areas.
The banking technology initiatives meant for financial inclusion should be collaborative and innovative with an objective to reduce the transaction costs.

Coupling government assistance with formal banking system may increase financial inclusion better than just offering people accounts While banks are not reaching the unbanked half of the worlds population with traditional distribution channels of branches and ATMs, mobile phones are penetrating to the unserved. But to fully exploit it, Mobile operators banks, and technology providers must enhance their understanding of how unbanked (potential) consumers behave. Analyzing the needs of the unbanked can shine a light on more effective marketing, pricing that recognizes the variable income of low-income people, the critical nature of building out a network of cash-handling agents, and demand for service offerings beyond remittances.

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