inclusive finance_sustainable development

8/2/2019 Inclusive Finance_Sustainable Development

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Inclusive Finance:

for sustainable development

Kanika Basu

HSMI

1.2.2012


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The stark reality is that most poor people in

the world still lack access to sustainablefinancial services, whether it is savings, credit

or insurance. The great challenge before us is

to address the constraints that exclude people

from full participation in the financial sector.

Together, we can and must build inclusive

financial sectors that help people improve

their lives.

Kofi Annan, 2003


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What is inclusive financial system?

Financial Inclusion is the delivery of

banking services at affordable costs

to vast sections of disadvantaged and

low income groups mainly thosecannot provide collateral.


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Are they part of the formal financial system?


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Financially Excluded People

Small farmers

Landless Labourers

Migrants

Self employed or unorganised sector enterprises

Slum dwellers

Socially excluded groups

Women

Senior citizens


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Consequences of Financial Exclusion

Losing opportunities to grow ,improve and or consolidate

improvements

Economic Exploitation

Overall retarded growth of the national economy

Benefits of Financial Inclusion

Poverty reduction

Growth with equity

Credit has done more to enrich nations than all the goldmines in the world put together.

The future lies with those companies who see the poor astheir customers


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Financial Inclusion: RBI Initiatives

Setting up of State Bank of IndiaNationalisation of banks

Co-operative Movement

Regional Rural Banks

Self Help Groups

2005onwards financial Inclusion has been explicitly made a policyobjective

Since 2006 banks are permitted to utilize the services of non-governmental organizations (NGOs/SHGs), micro-financeinstitutions and other civil society organizations as intermediaries inproviding financial and banking services through the use of businessfacilitator and business correspondent models.


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Some basic indices of financial inclusion

Country No. of bank

A/C (per 1000

adults)

No. of Bank

Branches (per

100,000 adults)

Domestic

credit (as %

of GDP)

Domestic

deposit (as %

of GDP

Argentina 503.3 13.7 10.3 23.2

Colombia 892.5 12.7 19.1 24.2

India 627.1 9.4 36.9 54.9

Lebanon 539.4 25.4 75.4 206.6

Malaysia 1858.8 14.6 117.9 123.9

Russia 2244.8 2.7 24.1 27.4

Thailand 1875.8 9.5 94.4 102.2

Sources: WDI (2006), World Bank; IFS (2006), IMF.


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Extent of Financial Exclusion in India

Only 17 Credit Accounts per 100 persons with all the

institutions (June 2007)

Only 54 Savings Accounts per 100 persons with all the

institutions (June 2007)

Only 13 per cent are availing loans from the banks in theincome bracket of less than Rs. 50,000

53 per cent people are taking loans from the institutional

and non-institutional sources only for emergency

purposesCritical Exclusion in terms of credit is manifest in 256

districts across 17 states and 1 UT (Dadra and Nagar

Haveli)

Source: Dr. K.C.Chakrabarty, Deputy Governor, RBI, 2009


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Why are people excluded?

Example: HOW TO GET A HOME LOAN ?

Identity Proof

Address Proof

Income Proof

Salary Statement Income Tax Returns

Bank Statement

Credible Guarantors

Other Tangible Collateral

Clear legal titles

Adequate loan Amount

HOW MANY POOR PEOPLE WOULD BE ELIGIBLE FOR A HOME LOAN FROM FORMAL

BANKING SYSTEM?


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Micro Finance: an effectivealternative?


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HistoryMicrofinance in India can trace its origins back to the early 1970s when the

Self Employed Womens Association (SEWA), Gujarat started the urban

cooperative bank, called the Shri Mahila SEWA Sahakari Bank, with the objectiveof providing banking services to poor women employed in the unorganised

sector in Ahmedabad City, Gujarat.

The microfinance sector went on to evolve in the 1980s around the concept of

SHGs, informal bodies that would provide their clients with much-needed savingsand credit services.

Got government support through specialized organizations like SIDBI Micro

Credit Fund, NABARD, RMK

Initially a public-people collaborative initiative to maximise benefits to thepoor, lately micro-finance in India evolved as a business initiative with poor as

clients.

Today, the top five private sector MFIs reach more than 20 million clients in

nearly every state in India and many Indian MFIs have been recognized as global

leaders in the industry.


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Microfinance in India: Various Models

1. Bank- SHG Linkage (Govt. Initiative)

2. Community based financial institutions

(mostly used by social developmentinitiatives)

3. Grameen style joint liability group bankingmodel (mostly used by private MFIs)

4. Co-operative bank


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Micro-finance Success in India

Unprecedented growth and stated impact in 90s to early 2000.

Govt. programme despite well in tentions had much lesser penetration with

the targeted clients compared to non-governmental outfits

Commercial microfinance lenders were able to attract clients and achieve a

better repayment rate, despite higher interest rates, by dint of their door-step

service and frequent small-value repayments. Significant achievement of the MFIs in India included not just outreach but an

efficient operating expense ratio of making then amongst the most cost-efficient

in the world (and their interest rates among the lowest).

Since around 2005 large sums of private equity began to flow into the

sector, and private MFIs grew rapidly, as microlending became a replicable,systematic, and profitable business.

the crisis followed!


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Micro finance in India: at crossroads

Krishna Crisis in 2005-06

Farmer suicides in the state of Andhra Pradesh that was connected to

inhuman loan recovery measures

Resulted in :Passing of Andhra Pradesh Microfinance Ordinance on the 15th of October,

2010.

Malegaon Committee Recommendations:

Loan limit to Rs. 25000

A cap on interest rates and margins

Provisioning norms.

Increased capital requirement


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Future of Microfinance in India?

The current demonization of the industry is

as much an oversimplification as the

earlier beatification.

The current situation is by no means comfortable

or promising either for MFIs or end-users.

The current crisis and the on-going churning can

well be the turning point for the micro-finance

industry in India leading to a balanced, better-

governed and better understood financial deliverysystem.

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