Steps taken by RBI for Financial Inclusion

Financial Inclusion – RBI Policy Initiatives

• Advised all banks to open Basic Saving Bank Deposit (BSBD) accounts with minimum common facilities such as no minimum balance, deposit and withdrawal of cash at bank branch and ATMs, receipt/ credit of money through electronic payment channels, facility of providing ATM card.

• Relaxed and simplified KYC norms to facilitate easy opening of bank accounts, especially for small accounts with balances not exceeding Rs. 50,000 and aggregate credits in the accounts not exceeding Rs. one lakh a year. Further, banks are advised not to insist on introduction for opening bank accounts of customers. In addition, banks are allowed to use Aadhar Card as a proof of both identity and address.

• Simplified Branch Authorization Policy, to address the issue of uneven spread bank branches, domestic SCBs are permitted to freely open branches in Tier 2 to Tier 6 centers with population of less than 1 lakh under general permission, subject to reporting. In North-Eastern Sates and Sikkim domestic SCBs can open branches without having any permission from RBI. With the objective of further liberalizing, general permission to domestic scheduled commercial banks (other than RRBs) for opening branches in Tier 1 centres, subject to certain conditions.

• Compulsory Requirement of Opening Branches in Un-banked Villages, banks are directed to allocate at least 25% of the total number of branches to be opened during the year in un-banked (Tier 5 and Tier 6) rural centers.

• Opening of intermediate brick and mortar structure, for effective cash management, documentation, redressal of customer grievances and close supervision of BC operations, banks have been advised to open intermediate structures between the present base branch and BC locations. This branch could be in the form of a low cost simple brick and mortar structure consisting of minimum infrastructure such core banking solution terminal linked to a pass book printer and a safe for cash retention for operating larger customer transactions.

• Public and private sector banks had been advised to submit board approved three year Financial Inclusion Plan (FIP) starting from April 2010. These policies aim at keeping self-set targets in respect of rural brick and mortar branches opened, BCs employed, coverage of un-banked villages with population above 2000 and as well as below 2000, BSBD accounts opened, KCCs, GCCs issued and others. RBI has been monitoring these plans on a monthly basis.

• Banks have been advised that their FIPs should be disaggregated and percolated down up to the branch level. This would ensure the involvement of all stakeholders in the financial inclusion efforts.

• In June 2012, revised guidelines on Financial Literacy Centres (FLCs). Accordingly, it was advised that FLCs and all the rural branches of scheduled commercial banks should scale up financial literacy efforts through conduct of outdoor Financial Literacy Camps at least once a month, to facilitate financial inclusion through provision of two essentials i.e. ‘Financial Literacy’ and easy ‘Financial Access’. Accordingly, 718 FLCs have been set up as at end of March 2013. A total of 2.2 million people have been educated through awareness camps / choupals, seminars and lectures during April 2012 to March 2013.

 Recent Measures –

• Licensing of New Banks: The present round of licensing new banks is essentially aimed at giving further fillip to financial inclusion efforts in our country. Innovative business models aimed at furthering financial inclusion efforts would be looked into closely in processing applications for banking license. Financial inclusion plan would be an important criterion for procuring new bank licenses.

Read http://www.rbi.org.in/scripts/BS_SpeechesView.aspx?Id=838

• Nachiket Mor Committee recommendations Feb 2014

ü  Each Low income household and small business should be able to access credit needs

ü  by January 1, 2016, each district would have a total deposits and investments to GDP ratio of at least 15 per cent

ü  providing a universal bank account to all Indians above the age of 18 years by Jan 1, 2016

ü  a vertically differentiated banking system with payments banks for deposits and payments and wholesale banks for credit outreach

•  committee proposes an adjusted 50 per cent priority sector lending target with adjustments for sectors and regions based on difficulty in lending.
•     advocates fewer NBFCs and substantial regulatory convergence for them with banks on non-performing assets and the extension of securitisation laws to certain NBFCs
•    A state-level regulatory commission will consolidate supervision of all non-governmental organisations and money service businesses.

Regional Rural Banks: Strategy, Performance and Challenges

Objective of setting up RRBs:
With the bank nationalisation in 1969 not giving the desired results in expanding rural base of banks, the Government came out with a new credit agency to operate in rural areas in the form of RRBs in 1975.

Regional Rural Banks (RRBs) were established in 1975 under the provisions of the Ordinance promulgated on the 26th September 1975 and followed by Regional Rural Banks Act, 1976 with a view to develop the rural economy and to create a supplementary channel to the 'Cooperative Credit Structure' with a view to enlarge institutional credit for the rural and agriculture sector.

The Government of India, the concerned State Government and the bank, which had sponsored the RRB contributed to the share capital of RRBs in the proportion of 50%, 15% and 35%, respectively.


1'st phase of amalgamation

Even as the number of RRBs grew to 196 in the initial 12 years, the government began a process of consolidation and amalgamation in 2005, bringing the number down to 82 in 2010.

2'nd phase of amalgamation

Starting 2012 amalgamation started to create state level RRBs. Up to January 7, 2012, 25 RRBs have been amalgamated into 10 RRBs in seven states. As a result, the number of RRBs has reduced from 82 as on April 2012 to 67 in the first week of January 2013.

Current performance details of RRBs:

RRBs have a network of about 16,000 branches spread across the rural and semi-urban centres of the country.

As part of growing amalgamation, number of RRBs has reduced from 82 as on April 2012 to 67 in the first week of January, 2013.

Large segment of credit provided by RRBs goes towards agriculture (about 54 per cent in 2010) as direct finance. About 16 per cent of the total RRB credit goes towards loans for personal purposes, like housing, consumer durables, vehicles, education and so on, while nine per cent is used for wholesale- and retail-trade activities. Overall, although agricultural credit of RRBs has been on the rise since 2006, it contributes only 11 per cent to the total agricultural credit disbursed by Scheduled Commercial Banks.

G Srinivasan Committee on Technology upgradation, Sep 2011:

The report, inter alia, set September 2011 as the target date for all RRBs to move towards CBS. It was also stipulated that all branches of RRBs opened after September 2009 to be CBS compliant from day one.

K.C. Chakrabarty Committee on Recapitalisation of RRBs Aug 2012

·         The Committee carried out an assessment of capital requirement for all 82 RRBs to enable them to have CRAR of at least 7% as on March 31, 2011 and at least 9% from March 31, 2012 onward. The recapitalisation requirement would be Rs. 2200 crore for 40 out of 82 RRBs. This amount may be released in two installments i.e., Rs. 1338 crore in 2010-11 and Rs. 863 crore 2011-12. The remaining 42 RRBs will not acquire any capital and will be able to maintain CRR of at least 9% as on March 31, 2012 and thereafter on their own.

Additional Rs 700 crore recapitalisation for RRBs of North East region, if required

Allowing change of sponsor bank

Making board of directors accountable for performance of banks

Problems:

1. Capitalisation deficit

2. CBS is costly, needs training of staff, power etc.

3. Amalgamation not yet complete

4. Low share in deposits and credit as compared to Scheduled commercial banks despite good geographical spread

5. low penetration in insurance etc i.e. non-savings portfolio