A summary of the Inaugural Address delivered by Mr M S Sundara Rajan, Chairman & Managing Director, Indian Bank at the Inaugural Session of 6th MMA All India Management Students’ Convention held on 21 September 2007 at Chennai.

I thank the Madras Management Association in organising this convention and inviting me as the Chief Guest. I must congratulate the Association again for taking the topic of the convention as “Strategies for the Bottom of the Pyramid”’.

We all will agree that we should have a vision for the development of India for the new century – a vision where the development of the poorest and of all sectors will take place, where the helpless would have freedom and enabling opportunities of choice.

For years our planners have tried out different growth models so that the benefit of growth reaches all sections of people and not only to the selected few. ‘Fortune at the Bottom of the Pyramid’ by Sri. C.K Prahlad (from which this terminology has become very common) brought into focus the glaring issues relating to the underprivileged and brought to fore that not only the Government should be concerned about these people but it is also the responsibility of the society at large. It is not that this was not thought about previously but it was the issues relating high growth in the economy and the equitable distribution of the same. The economic landscape of India has undergone tremendous change with visible signs of growth momentum in all sectors. The Indian economy is growing at a steady rate of 8.5 % to 9% in the last five years or so. Most of the growth is from industry and services sector. Agriculture is growing at a little over 2%. However, growth per se, is not sustainable unless the benefits of the growth are widespread. The benefits of growth have not equitably percolated to the different segments of our society especially to those in the lower rungs of the socio-economic ladder thus negating the trickle down theory of growth.

Moving to the next level of economic development requires our growth model to bring in inclusive growth so that the world becomes a better place to live in. This has been reiterated by the Approach Paper to the Eleventh Plan with a vision of broad based and inclusive growth. World wide, inclusive growth has received recognition with the Nobel Peace Prize being conferred to Prof. Mohd. Yunus and Grameen Bank of Bangladesh for enabling large population groups to find ways to break out of poverty.

India still suffers from substantial poverty with 34.7% of population subsists on less than US$1 a day; 79.9% live on US$2 per day. 75% of the poor are in rural areas (27.1% of the total rural population) with most of them comprising daily wagers, self-employed households and landless labourers. A staggering 214 million people are chronically food insecure. About 50% of children (mostly tribal and rural) are undernourished and 68 out of 1000 die before the age of one year.

Scarce resources and lack of proper institutional and legal support have resulted in the underprivileged section being pushed out of the mainstream and deprived of the benefits of the growth.

Attaining the objective of inclusive growth has to necessarily encompass the social, economic and political inclusion. As far as political inclusion is concerned, it is a right in the democratic set up and this has already been imbibed in the Constitution of India. However, the major issue, which necessitates urgent action, is social and economic inclusion. Social exclusion has in many instances led to their economic exclusion.

Economic exclusion can be offset partly with financial inclusion- taking Banking services to the common man.

As a banker, it would be appropriate to speak about financial inclusion within the broad context of economic growth and throw open the subject for views from all participants.

More than 70% of the India’s little more than one billion population lives in the villages of which about 40 million people live below the poverty line. A recent World Bank-NCAER survey on rural access to finance indicates that 70% of the rural poor do not have a bank account and 87% have no access to credit from a formal source.

Access to financial services will empower the poor to take charge of their lives. Such empowerment aids social and political stability. Hence FI is considered to be critical for achieving inclusive growth; which itself is required for ensuring overall sustainable overall growth in the country. Of course, this aspect of financial inclusion of the people at the bottom of the pyramid is prevalent in all countries and possible exception to our Country is that we are looking at the majority who are excluded, whereas in other developed countries, the excluded people are relatively minority.
After nationalisation of major banks in India in 1969, there was a significant expansion of branch network to unbanked areas and stepping up of lending to agriculture, small industry and business. But the truth is, inspite of such large scale expansion, the banks were not able to bring the entire population within their fold. Hence the recent focus is on establishing the basic right of every person to have access to affordable basic banking services.

Going by the available data on the number of savings bank accounts and assuming that one person has only one account, (which assumption may not be correct as many persons could have more than one bank account) we find that on an all India basis 59 per cent of adult population in the country have bank accounts – in other words 41 per cent of the population is unbanked. In rural areas the coverage is 39 per cent against 60 per cent in urban areas. The unbanked population is higher in the North Eastern and Eastern regions.

The extent of exclusion from credit markets is still more baffling. Out of 203 million households in the country, 147 million are in rural areas – 89 million are farmer households. 51.4 per cent of farm households have no access to formal or informal sources of credit while 73 per cent have no access to formal sources of credit. Similar data are not available for non farm and urban households.

Who are the excluded?
The financially excluded sections largely comprise marginal farmers, landless labourers, oral lessees, self employed and unorganised sector enterprises, urban slum dwellers, migrants, ethnic minorities and socially excluded groups, senior citizens and women. While there are pockets of large excluded population in all parts of the country, the North East, Eastern and Central regions contain most of the financially excluded population.We need not go so much into the reasons for the reasons for exclusion. We will look into what can be done for their inclusion.

Measures already taken:
Since the second half of 1960s, the commercial banks have been playing an important role in the socio-economic transformation of rural India. The banking system was made to reorient its approach to rural lending.

Historically, the Reserve Bank and the Government of India have been making efforts to increase banking penetration in the country. Some of these measures include the creation of State Bank of India in 1955; nationalisation of commercial banks in 1969 and 1980; initiating the Lead Bank Scheme in 1970; establishing regional rural banks (RRBs) in 1975.

More recently, the Reserve Bank has undertaken a number of measures with the objective of attracting the financially excluded population into the structured financial system.

Ø Banks are advised to make available a basic banking ‘no-frills’ account with low or nil minimum balances as well as charges to expand the outreach of such accounts to vast sections of the population.
Ø Banks are required to make available all printed material used by retail customers in the concerned regional language.
Ø In order to ensure that persons belonging to low income group, both in urban and rural areas do not encounter difficulties in opening bank accounts, the know your customer (KYC) procedures for opening accounts has been simplified for those persons with balances not exceeding Rs 50000/- and credits in the accounts not exceeding Rs.100000/- in a year. The simplified procedure allows introduction by a customer on whom full KYC drill has been followed.
Ø Banks have been asked to consider introduction of a General purpose Credit Card (GCC) facility up to Rs. 25000/- at their rural and semi urban branches. The credit facility is in the nature of revolving credit entitling the holder to withdraw upto the limit sanctioned. Based on assessment of household cash flows, the limits are sanctioned without insistence on security or purpose. Interest rate on the facility is completely deregulated.
Ø A simplified mechanism for one-time settlement of overdue loans up to Rs.25,000/- has been suggested for adoption. Banks have been specifically advised that borrowers with loans settled under the one time settlement scheme will be eligible to re-access the formal financial system for fresh credit.
Ø In January 2006, banks were permitted to utilise the services of non-governmental organisations (NGOs/SHGs), micro-finance institutions and other civil society organisations as intermediaries in providing financial and banking services through the use of business facilitator and business correspondent (BC) models. The BC model allows banks to do ‘cash in - cash out’ transactions at the location of the BC and allows branchless banking.
Ø Other measures include setting up pilots for credit counselling and financial education. A multilingual website in 13 Indian languages on all matters concerning banking and the common person has been launched by the Reserve Bank on 18 June 2007.

The outcome of the efforts made is reflected in the increase of 6 million new ‘no frills’ bank accounts opened between March 2006 and 2007. In view of their vast branch network (45000 rural and semi urban branches) public sector banks and the regional rural banks have been able to scale up their efforts by merely leveraging on the existing capacity.

Opening of Bank account is a basic and first step in financial inclusion and providing credit is the bottom of the financial inclusion pyramid. Financial services like Check-in-accounts, small overdraft facilities for consumption, micro enterprise credit and other financial services like appropriate health and life insurance products should simultaneously involve capacity building activities like input delivery, technology, rural infrastructure etc to the deprived sections of the society.

Developing Micro entre-preneurship with organizational and community based support is one way of strengthening inclusive growth. Capacity building among the micro enterprises needs to be developed for effective absorption of credit. This can be done through training and technical assistance in coordination with promotional agencies specializing in training and technical assistance.

Formal mechanisms to provide financial support to the micro and small industrial sectors are quite limited to agriculture and manufacturing activities. These traditional sectors offer almost no possibility for generating surpluses, savings for investments to improve productivity for better income opportunities. Banks have to leverage the opportunities available for micro enterprises in trade and services sectors. Technology centric delivery models will alone be able to cater to the financial needs of the people in rural areas in view of the prohibitive cost involved.

One of the ways in which access to formal banking services has been provided very successfully since the early 90s is through the linkage of Self Help Groups (SHGs) with banks. SHGs are groups of usually women who get together and pool their savings and give loans to members. Usually there is a NGO that promotes and nurture these groups.
“The people who are affected the most will decide what is to be done for their betterment” has been rightly said by the Robert Chambers and perfectly fit to the formation of Self Help Group. A SHG is a registered or unregisterd group of micro enterpreneurs having homogenous social and economic background, generally not exceeding 20 members voluntarily coming together to save small amount regularly to mutually agree to contribute to a common fund, have collective decision making, to solve conflicts through collective leadership.

In fact, providing micro finance services through the SHG approach has been the best and one of the sensible ways to help the poor in rural and semi urban areas to raise their standard of living in the long. In view of the inherent advantages in lending through the SHGs, such lending has now emerged as a strong mainstream business proposition and the micro finance sector has attained a momentum of its own.

We are happy to inform you that Indian Bank is the pioneer in the SHG movement in Tamilnadu.

On a broader plane, the Reserve Bank has been adopting a two-pronged strategy to generate greater awareness and expand the reach of banking services – which can be termed as empowerment and protection. As regards the former, financial inclusion is the first stage of the process. This is strengthened by inculcating awareness among the masses through financial education. Concurrently, an advisory mechanism in the form of credit counselling is being encouraged to help distressed borrowers and bring them within the fold of formal finance. As regards protection, a Banking Codes and Standards Board of India have been established recently to ensure a comprehensive code of conduct for minimum standards of banking services to be offered by banks. The revised Banking Ombudsman Scheme has been put in place to redress deficiencies in customer service by banks.

The Finance Minister in his budget for 2007-08 has announced the setting up of two funds for FI; the first called Financial Inclusion Fund for developmental and promotional interventions and the other called Financial Inclusion Technology Fund to meet cost of technology adoption of about $125 million each. The scope of these funds is being worked out. Setting up of financial literacy centres and credit counselling on a pilot basis, launching a national financial literacy campaign, forging linkages with informal sources with suitable safeguards through appropriate legislation, evolving industry wide standards for IT solutions, facilitating low cost remittance products are some of the initiatives currently under way for furthering FI.

The economy is presently in a phase of rapidly rising incomes, rural and urban, arising from an expansion of extant economic activities as well as the creation of new activities. At present our financial depth is much lower than that of other Asian countries, though it has picked up in the recent past. While there is evidence of an increase in financial deepening, particularly during the present decade, the increase in the breadth and coverage of formal finance has been less than adequate.

Deepening the financial system and widening its reach is crucial for both accelerating growth and for equitable distribution, given the present stage of development of our country.

The importance of ‘no-frills’ account and expanding the range of identity documents that is acceptable to open an account without sacrificing objectivity of the process in this milieu can never be over-emphasised. Banks will need to go to their customers, rather than the other way around. The micro-credit and the Self Help Group movements are picking up. More innovation in the form of business facilitators and correspondents will be needed for banks to increase their outreach for banks to ensure financial inclusion.

With a view to providing banking facilities to the financially excluded, Indian Bank, in arrangement with other Banks and Financial Institutions, pioneered the National Pilot Project on Financial Inclusion in the Union Territory of Puducherry and the same has been completed. Similar experiment is also taking place in other parts of the country. Inclusive growth will be reality only with the active support of Banks, Financial Institutions, NGOs, Policy makers and regulatory authorities for providing Banking facilities including credit, insurance coverage and capacity building.

To conclude, I wish to stress that with increasing liberalisation and higher economic growth, the role of banking sector is poised to increase in the financing pattern of economic activities within the country. The Financial inclusion will strengthen financial deepening and provide resources to the banks to expand credit delivery. Thus, financial inclusion will lead to financial development in our country which will help to accelerate economic growth.