Financial Inclusion: Status

and ways to increase its scope

2010
Prepared for STATE BANK OF INDIA By VARUN KUMAR JAISIA Management Executive PF - 5842816

1|Financing Rural Indias Dreams

Contents
AKNOWLEDGEMENT ..................................................................................................... 3 Executive summary ............................................................................................................. 4 Financial exclusion .............................................................................................................. 6 Factors affecting access to financial service ....................................................................... 6 Consequences of Financial Exclusion ................................................................................ 7 Extent of Financial Exclusion ............................................................................................ 8 Most needed Services for Financially Excluded ............................................................... 10 Model for Financial exclusion ......................................................................................... 11 financial inclusion in india ................................................................................................ 12 Some Definitions of Financial Inclusion .......................................................................... 13 'Major Three Aspects Of Financial Inclusion' is to Make people to .................................. 13 How can scope of financial inclusion be expanded .......................................................... 14 Present Focus on Financial Inclusion in India .................................................................. 14 International experience in promoting financial inclusion ................................................ 14 model for financial inclusion ........................................................................................... 16 enablers for successful implementation of financial inclusion .......................................... 16 Some initiatives ............................................................................................................... 17 Insights into Indian Rural Market.................................................................................... 19 Features of Indian Rural Market ...................................................................................... 19 Potential in Rural India .................................................................................................... 19 Rural Consumer Insights ................................................................................................. 20 Value of Rural Market ..................................................................................................... 21 Key drivers for progress in rural India ............................................................................. 21 Predicted Changes in Wealth of Rural India, 1998 to 2006........................................... 22 Infrastructure is improving rapidly ............................................................................... 22 Social Indicators have improved a lot between 1981 and 2001 ..................................... 22 Marketers can make effective use of the widespread available infrastructure................ 22 Proliferation of Large format rural retail stores which have been successful also.......... 23 Case Studies ....................................................................................................................... 24 1. Indian Bank in Pondicherry....................................................................................... 24 2. M-PESA in Kenya .................................................................................................... 25 Sources of reference .......................................................................................................... 27 2|Financing Rural Indias Dreams

AKNOWLEDGEMENT
With an overwhelming sense of pride and obligation, I bestow gratitude to my project guide, Mr. M P ARYA (Chief Manager, SBLC Ajmer) for his able guidance, constant encouragement, constructive and critical appraisal, generous help and vital suggestions.

I extend my profound sense of gratitude to Mr.A.S.Chauhan (Asst. Gen. Manager, SBLC Ajmer.) for his valuable and timely suggestions during the course of this project.

VARUN KUMAR JAISIA Management Executive STATE BANK OF INDIA PF- 5842816

DATE :- 24/12/2010

EXECUTIVE SUMMARY
To understand financial inclusion we must first understand the concept of financial excl exclusion Financial Exclusion which is the lack of access by certain consumers to appropriate, low cost, fair and Financial Inclusion safe financial products and services from mainstream providers. The people who find . themselves financially excluded are basically Model for Financial from a poor background and that too mostly Inclusion are from rural areas. The factors whi result in ich people being excluded from the financial system are numerous and the primary reason Features of rural market for this is illiteracy and poverty. Due to this fact many of the people residing in the rural areas remain out of the financial mainstre mainstream and Case Studies they fall into the clutches of money lenders who then give finance at a much higher rate than the scheduled commercial banks. Now whats financial inclusion? According to C Rangarajan committee on financial inclusion it is "The process of ensuring access to financial services and access timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost." According to ccording RBI almost 60% of rural population in India doesnt have bank accounts , so this % is one of the major challenges faced by the banking sector to include these people into the financial mainstream. One of the reasons why the Banks and nto mainstream e other mainstream financial institutions do not come forward aggr l ressively to overcome is problem is d due to a misconception that theres not enough potential in rural India, but as we will see further in this report that its a huge , market and an untapped one. The major challenges are now to improve the rural infrastructure so as to help people in rural India to take benefits of the mainstream. We can also look at the way financial inclusion was done 100% in Pondicherry and the role of
4 | Financial Inclusion: S t a t u s a n d w a y s t o i n c r e a s e i t s s c o p e

Flow of Report

Indian Bank there. The challenges will be there in rural India but the bank or the entity which moves first into this sector will always remain etched in the hearts of the people and people would seldom like to move away from it. The onus is now on us, we the bankers to grab this opportunity for our growth as well as the growth of the nation.

5 | Financial Inclusion: S t a t u s a n d w a y s t o i n c r e a s e i t s s c o p e

FINANCIAL EXCLUSION
Financial exclusion is the lack of access by certain consumers to appropriate, low cost, fair and safe financial products and services from mainstream providers. Financially Excluded People 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 Women The North East, Eastern and Central regions contain most of the financially excluded ast, population.

Percentage of households without essential financial instruments

FACTORS AFFECTING ACCESS TO FINANCIAL SERVICE

Legal Identity Place of living Limited Literacy

Psycholo gical and cultural barriers

Key factors to access financial services

Level of Income

Complicated procedures

Lack of awareness

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Legal identity : Lack of legal identity like voter id , driving license , birth certificates ,employment identity card etc Limited literacy : Particularly financial literacy and lack of basic education prevent people to have access from financial services . Level of income : Level of income decides to have financial access . Low income people generally have the attitude of thinking that banks are only for rich. Complicated procedures : Due to lack of financial literacy and basic education , it is very difficult for those people who lack both to read terms and conditions and account filling forms . Psychological and cultural barriers : Many people voluntarily excluded themselves due to psychological barriers and they think that they are excluded from accessing financial services . Place of living : As the name suggests that commercial banks operate only in commercially profitable areas and they set up branches and main offices only in that areas .People who lived in under developed areas find it very difficult to go to areas in which banks are generally residing . Lack of awareness: Finally, people who lack basic education do not know the importance of the financial products like Insurance, Finance, Bank Accounts, cheque facility, etc.

CONSEQUENCES OF FINANCIAL EXCLUSION

Losing opportunities to grow Country's growth will retard

Major consequences of Financial Exclusion

Exclusion from mainstream society

Employment barriers

Losing opportunities to grow: In the absence of finance, people who are not connected with formal financial system lack opportunities to grow. Country's growth will retard: Due to vast unutilized resources that is in the form of money in the hands of people who lack financial inclusive services. Business loss to banks: Banks will loss business if this condition persists for ever due to lack of opening of bank accounts. Exclusion from mainstream society: The people who lack financial services, presume that they are excluded from mainstream society.

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Loss of opportunities to thrift and borrow: Financially excluded people , may lose chances to save their some part of livelihood earnings and also to borrow loans . Employment barriers: Nowadays all salary and other financial benefits from various sources like Governments scholarships, any compensation, grants, reliefs , etc are paid through bank accounts. Loss due to theft: Banks provide various schemes of safety locker facility. It mitigates the risk due to thefts. Other allied financial services: People who do not have bank accounts may not go to bank as for as possible. So they lack basic financial auxiliary services like DD, Insurance cover and other emergency need loans Etc.

EXTENT OF FINANCIAL EXCLUSION

Coverage of Check in accounts 70% Credit Card 3% Insurance 10% Debit Card 5.66% Financial Assets 2% Small Overdrafts 3.65% Assets Insurance 2.53% Entrepreneurial credit 2.06% Health Insurance 0.20% Geographical coverage: 5% villages are having a bank branch SHG coverage: Out of around 400 million poor, 125 million poor are covered of which 113 million are women Farmers coverage Tenant farmers/share Out of 89.35 mill. SF/MF, croppers/oral lessees 34.70 mill. (46.30%) are covered. (House holds) Small and marginal farmers

Percentage of households who save and/or borrow The table below depicts sources of borrowing for households. Bank borrowing rates are lower than that of money lenders and if the poorer households depend more on the latter, then their precarious position is made worse when they take loans. Households without bank accounts, in general, borrow more from moneylenders and less from banks or even from cooperative banks. This is much more among the rural households than among the urban ones.

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Sources of borrowing for households (%)

It is interesting to look at why households borrow from the sources they do. An interesting point to observe is that both institutional and non institutional borrowers have the same reasons while looking for a loan provider. Interest rate was the top most reason for selecting a loan service provider, even with a non institutional source. One would expect that the interest rate from institutional sources would be lower than that of noninstitutional sources. The fact that borrowers use non-institutional sources more often strongly signals that the hidden costs of borrowing from institutional costs is simply too prohibitive; the simple interest rate calculations are not the effective costs faced by potential borrowers. In other words, if the cost of reaching the train station is high, no amount of subsidies on the train fare will suffice. Similarly, subsidizing credit cost or insurance premiums will not work towards financial inclusion if the poor are unable to handle the downside risk of failed projects or, unable to make regular payments (however small) on their premium. A casual labourer may save regularly in small amounts but the amount is too small compared to the transaction cost of dealing with the bank (for instance, the banks working hours clash with that of the daily labourers). Any solution must address these specific issues if we want to include the excluded population.

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Reasons for borrowing from a particular source (rural)

MOST NEEDED SERVICES FOR FINANCIALLY EXCLUDED

Access to Small loans or overdrafts Check in Accounts Small Savings Products Health Insurance Life Insurance Insurance against the failure of activity Financial Asset Credit Card Entrepreneurship credit

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MODEL FOR FINANCIAL EXCLUSION

FINANCIAL INCLUSION IN INDIA

The banking industry has shown tremendous growth in volume and complexity during the last few decades. Despite making significant improvements in all the areas relating to financial viability, profitability and competitiveness, there are concerns that banks have not been able to include vast segment of the population, especially the underprivileged sections of the society, into the fold of basic banking services. Internationally also efforts are being made to study the causes of financial exclusion and designing strategies to ensure financial inclusion of the poor and disadvantaged. The reasons may vary from country to country and hence the strategy could also vary but all out efforts are being made as financial inclusion can truly lift the financial condition and standards of life of the poor and the disadvantaged. The Reserve Bank of India has set up a commission (Khan Commission) in 2004 to look into financial inclusion and the recommendations of the commission were incorporated into the mid-term review of the policy (200506). In the report RBI exhorted the banks with a view of achieving greater financial inclusion to make available a basic "no-frills" banking account. In India, Financial Inclusion first featured in 2005, when it was introduced, that, too, from a pilot project in UT of Pondicherry, by K C Chakraborthy, the chairman of Indian Bank. Mangalam Village became the first village in India where all households were provided banking facilities. In addition to this KYC (Know your Customer) norms were relaxed for people intending to open accounts with annual deposits of less than Rs. 50,000. General Credit Cards (GCC) were issued to the poor and the disadvantaged with a view to help them access easy credit. In January 2006, the Reserve Bank permitted commercial banks to make use of the services of non-governmental organizations (NGOs/SHGs), micro-finance institutions and other civil society organizations as intermediaries for providing financial and banking services. These intermediaries could be used as business facilitators (BF) or business correspondents (BC) by commercial banks. The bank asked the commercial banks in different regions to start a 100% financial inclusion campaign on a pilot basis. As a result of the campaign states or U.T.s like Puducherry, Himachal Pradesh and Kerala have announced 100% financial inclusion in all their districts.
RBIs GOAL: Reserve Bank of Indias vision for 2020 is to open nearly 600 million new customers' accounts and service them through a variety of channels by leveraging on IT. However, illiteracy and the low income savings and lack of bank branches in rural areas continue to be a road block to financial inclusion in many states. Apart from this there are certain in Current model which is followed. There is inadequate legal and financial structure. India, being a mostly agrarian economy, hardly has schemes which lend for agriculture. Along with microfinance we need to focus on Microinsurance too. 12 | F i n a n c i a l I n c l u s i o n : S t a t u s a n d w a y s t o i n c r e a s e i t s s c o p e

In its platinum jubilee year, the Reserve Bank of India (RBI) wants to connect every Indian to the country s banking system. RBI is currently working on a three-year financial inclusion plan and is discussing this with each bank to see how to take this forward, KC Chakrabarty, deputy governor, RBI said. It was pointed out by Mr. Chakrabarty that nearly forty years after nationalization of banks, 60% of the country's population does not have bank accounts and nearly 90% do not get loans. Despite heightened focus on financial inclusion, Indian banks still somewhat failed to bring the under- and un-banked into the mainstream banking fold. India has currently the second-highest number of financially excluded households in the world. Approximately, 40% of India s population have bank accounts, and only about 10% have any kind of life insurance cover, while a meager 0.6% have non-life insurance cover.

SOME DEFINITIONS OF FINANCIAL INCLUSION

According to UNITED NATIONS, Financial inclusion is delivery of banking services at an "A financial sector that affordable cost to the vast sections of disadvantaged and provides 'access to credit for all low income groups. Unrestrained access to public goods "bankable" people and firms and services is the sine qua non of an open and efficient and to savings and payments society. As banking services are in the nature of public services for everyone. Inclusive good, it is essential that availability of banking and finance does not require that payment services to the entire population without everyone who is eligible use discrimination is the prime objective of the public policy. each of the services, but they should be able to choose use them if desired. 2. REPORT OF THE COMMITTEE ON FINANCIAL INCLUSION IN INDIA (Chairperson: C. Rangarajan ) (2008) "The process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost." 3. As per " TREASURY COMMITTEE , HOUSE OF COMMONS , UK , (2005) " Ability of individuals to access appropriate financial products and services . "
1.

'MAJOR THREE ASPECTS OF FINANCIAL INCLUSION' IS TO MAKE PEOPLE TO

Access financial markets Access credit markets Learn financial matters (financial education )

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HOW CAN SCOPE OF FINANCIAL INCLUSION BE EXPANDED

The scope of financial inclusion can be expanded in two ways. (a) Through state-driven intervention by way of statutory enactments ( for instance the US example, the Community Reinvestment Act and making it a statutory right to have bank account in France). (b) Through voluntary effort by the banking community itself for evolving various strategies to bring within the ambit of the banking sector the large strata of society.

PRESENT FOCUS ON FINANCIAL INCLUSION IN INDIA

In India the focus of the financial inclusion at present is confined to ensuring a bare minimum access to a savings bank account without frills, to all. Internationally, the financial exclusion has been viewed in a much wider perspective. Having a current account / savings account on its own, is not regarded as an accurate indicator of financial inclusion. There could be multiple levels of financial inclusion and exclusion. At one extreme, it is possible to identify the super-included, i.e., those customers who are actively and persistently courted by the financial services industry, and who have at their disposal a wide range of financial services and products. At the other extreme, we may have the financially excluded, who are denied access to even the most basic of financial products. In between are those who use the banking services only for deposits and withdrawals of money. But these persons may have only restricted access to the financial system, and may not enjoy the flexibility of access offered to more affluent customers.

INTERNATIONAL EXPERIENCE IN PROMOTING FINANCIAL INCLUSION

An interesting feature which emerges from the international practice is that the more developed the society is, the greater the thrust on empowerment of the common person and low income groups. It may be worthwhile to have a look at the international experience in tackling the problem of financial exclusion so that we can learn from the international experience. The Financial Inclusion Task Force in UK has identified three priority areas for the purpose of financial inclusion, viz., access to banking, access to affordable credit and access to free face-to-face money advice. UK has established a Financial Inclusion Fund to promote financial inclusion and assigned responsibility to banks and credit unions in removing financial exclusion. Basic bank no frills accounts have been introduced. An enhanced legislative environment for credit unions has been established, accompanied by tighter regulations to ensure greater protection for investors. A Post Office Card Account (POCA) has been created for those who are unable or unwilling to access a basic bank account. The concept of a Savings Gateway has been piloted. This offers those on low-income employment 1 from the state for every 1 they invest, up to a maximum of 25 per month.

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In addition the Community Finance Learning Initiatives (CFLIs) were also introduced with a view to promoting basic financial literacy among housing association tenants. A civil rights law, namely Community Reinvestment Act (CRA) in the United States prohibits discrimination by banks against low and moderate income neighborhoods. The CRA imposes an affirmative and continuing obligations on banks to serve the needs for credit and banking services of all the communities in which they are chartered. In fact, numerous studies conducted by Federal Reserve and Harvard University demonstrated that CRA lending is a win-win proposition and profitable to banks. In this context, it is also interesting to know the other initiative taken by a state in the United States. Apart from the CRA experiment, armed with the sanction of Banking Law, the State of New York Banking Department, with the objective of making available the low cost banking services to consumers, made mandatory that each banking institution shall offer basic banking account and in case of credit unions the basic share draft account, which is in the nature of low cost account with minimum facilities. Some key features of the basic banking account are worth-mentioning here. Initial deposit amount required to open the account shall not exceed US $ 25 Minimum balance, including any average balance, required to maintain such account shall not exceed US $ 0.10 Charge for periodic cycle for the maintenance of such accounts to be declared up front Minimum number of withdrawal transactions which may be made during any periodic cycle at no charge to the account holder must at least be eight Withdrawal shall be deemed to be made when recorded on the books of the account holders banking institution Except, as provided below, an account holder shall not be restricted as to the number of deposits which may be made to the account without incurring any additional charge Banking institution may charge account holders for transactions at electronic facilities which are not operated by the account holders banking institution as well as other fees and charges for specific banking services which are not covered under the basic banking account scheme Every periodic statement issued for the basic banking account should invariably cover on it or by way of separate communiqu maximum number of withdrawals permitted during each periodic cycle without additional charge and the consequences of exceeding such maximum and the fee if any, for the use of electronic facilities which are not operated by the account holders banking institution. An interesting feature of basic banking account scheme is the element of transparency i.e. the banking institution should, prior to opening the account, furnish a written disclosure to the account holder describing the main features of the scheme i.e. the initial deposit amount required to open the account, minimum balance to be maintained, charge per periodic cycle for use of such account, maximum number of withdrawal transactions
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without any additional charge and other charges imposed on transactions for availing electronic facility not operated by the account holders banking institution, etc.
MODEL FOR FINANCIAL INCLUSION

ENABLERS FOR SUCCESSFUL IMPLEMENTATION OF FINANCIAL INCLUSION

Attitude and Will power Technology Delivery Mechanism Support Services Infrastructure Community Development Support Product Innovation Regulatory and Policy Interventions Involvement of all: Development/Administration at District/Block/Village level

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SOME INITIATIVES
Following are some initiatives in India aimed at financial inclusion
SEWA (Self-Employed Womens Association) SEWA began banking activities with the permission of RBI in the rural districts of Gujarat in 1993. This bank aimed at financial inclusion of self-employed women, mostly in the informal sector in rural Gujarat, by providing them with loans to enable them to buy assets, raw materials, finished goods for resale, redeem old debts, buy transportation means from their homes to markets or install infrastructure in their homes for things like electricity or water supply. This was necessary mainly because these workers have no fixed employer-employee relationship and barely own capital/assets for sustaining their economic activities. Moreover, the credit worthiness of these women is always viewed with suspicion by institutional credit agencies. In view of these specific problems, SEWA designed an effective loan disbursement procedure through their bank named Shri Mahila Sewa Sahakari Bank Ltd. which aimed at providing these women with affordable, reliable and sustainable credit streams.

Disbursed loans were of both the secured and unsecured type. The collateral for secured loan was gold/jewellery, which most of these women often owned and lost to moneylenders, even after they had paid their debt. These loans went up to INR 50,000 in case of an unsecured loan, of term 3- 5 years with an interest rate of up to 17 per cent per annum on a diminishing principal.
National Pilot on Financial Inclusion, Indian Bank (Dharavi (urban)) This project was launched to especially target the financially excluded migrant worker communities in large cities. This initiative also included initial door-to-door surveys and publicity. The basic concept was similar to that of the rural project, but a greater use of technology was observed. This enabled much larger volume of transactions.

Laptops with banking software were again used for opening accounts at the clients doorsteps. Additionally, technology was used to incorporate rural and semi-urban account holder details into the core banking system, so that technology infrastructure requirements for individual banks located near these areas do not increase greatly, given the large volume of accounts that the banks in these areas have to operate. Smart cards made by FINO (Financial Information, Networks and Operations) specifically for financial inclusion were used extensively. These cards have advantages like being usable while in offline mode and not requiring a digital signature. These cards were issued to customers after collecting relevant details. The cards store all information of the customer including a photograph and finger prints of all ten fingers. These cards can be used to make deposits/withdrawals merely at the swipe of the card in a hand held device. The information of these transactions is saved in the hand held device and is then uploaded on to the main servers, so that the devices can be continually used and account holder data is collated in the core banking system. Roving agents of the bank carry these hand held devices and collect deposits/withdrawals from door-to-door. They verify the identity of the person
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holding the smart card and carry out the transaction. They provide receipts for each transaction so that the process is transparent. This smart card also serves as an identity proof. To overcome the barrier of digital recognition, the bank has set up voice guided, bio-metric enabled ATMs in target areas. The Dharavi model was extended to Guntur town in Andhra Pradesh and Tharamani in Chennai for inclusion of their urban poor under the financial umbrella.
OxiCash OxiCash is a first of its kind prepaid service in India. that enables you to do a lot more than just recharge your mobile phone. It is a virtual prepaid card attached to a mobile number that can be used to deliver a host of services like prepaid mobile recharges, bill payments, travel, online games and other utilities. It works like a Mobile Wallet. For a majority of consumers not having net access, OxiCash enables services delivery through mobile phone using GPRS/SMS. For large section of consumers who do not have a bank account or credit card account, but have a valid mobile number, OxiCash can provide the means to avail of a number of services. It is accessible through all mediums, i.e., PC or mobile enabled through SMS, GPRS, WAP, Wifi, WiMax, Dial-up internet, DSL or even through 3G services.

To load a bank account, or credit card account, the OxiCash Customer uses Authorised Internet Banking/Credit Card/EFT payment Gateway to buy the OxiCash payment instrument. With authorization of payment from the payment gateway, Oxigen issues OxiCash a payment instrument of INR 1,000 and assigns a value to INR 1,000 to the customers OxiCash payment instrument. Simultaneously, Oxigen assigns INR 1,000 from its bank account to a non-interest bearing escrow in favour of the customer. All transactions and the movement of escrow funds are settled at the end of the day. For loading from retail, the OxiCash distributor deposits INR 100,000 in Oxigens bank account through Cash/Cheque/DD/EFT. Oxigen assigns a limit of INR 100,000 for the distributor for issuance of OxiCash payment instruments limits to OxiCash retailers. The distributor collects cash from the OxiCash retailer via Cash/Cheque/DD/EFT. Oxigen debits OxiCash distributors limit by the amount paid by the retailer and credits the retailers account by the same amount. The customer can purchase the OxiCash payment instrument worth INR 1,000 from the OxiCash retailer by paying cash/cheque. OxiCash retailer uses its Point of Sale terminal to issue OxiCash payment instrument worth INR 1,000. Oxigen debits OxiCash retailers limit by INR 1,000, assigns this to the customer as semi-closed OxiCash payment instrument. Simultaneously, it assigns INR 1,000 from its bank account to non-interest bearing escrow in favour of the customer. Finally, at the end of the day, all such transaction would determine the movement of bank funds to escrow.

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INSIGHTS INTO INDIAN RURAL MARKET

FEATURES OF INDIAN RURAL MARKET

Large & Scattered market

Major income from agriculture

Low standard of living

Traditional Outlook

Diverse socioeconomic backwardness

Infrastructure Facilities

Large and Scattered market: The rural market of India is large and scattered in the

sense that it consists of over 63 crore consumers from 5,70,000 villages spread throughout the country.
Major income from agriculture: Nearly 60 % of the rural income is from agriculture.

Hence rural prosperity is tied with agricultural prosperity. agricultur

Low standard of living: The consumer in the village area do have a low standard of

living because of low literacy, low per capita income, social backwardness, low savings, etc.
Traditional Outlook: The rural consumer values old customs and tradition. They do

not prefer changes.

Diverse socio-economic backwardness: Rural consumers have diverse socioeconomic socio

economic backwardness. This is different in different parts of the country.

Infrastructure Facilities: The Infrastructure Facilities like roads, warehouses, ,

communication system, financial facilities are inadequate in rural areas. Hence physical distribution becomes costly due to inadequate Infrastructure facilities.

POTENTIAL IN RURAL INDIA

Rural Population: 742

million people

In 2001-02, LIC sold 55 % of its policies in rural India. old Of two million BSNL mobile connections, 50% in small towns/villages. Of the six lakh villages, 5.22 lakh have a Village Public Telephone (VPT)
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41 million Kisan Credit Cards issued (against 22 million credit-plus-debit cards in

urban) with Cumulative credit of Rs 977 billion resulting in tremendous liquidity Of 20 million Rediff mail signups, 60 % are from small towns. 50% transactions from these towns on Rediff online shopping site Investment in formal savings instruments: 6.6 million HHs in rural and 6.7 million in urban From 55 to 58 per cent of the average urban income in 1994-95, the average rural
income has gone up to 63 to 64 per cent by 2001-02 and touched almost 66 per cent

in 2004-05.
42 million rural HHs availing banking services in comparison to 27 million urban HHs.
No. of middle and high income households (in millions)
120 100 80 60 40 20 0 2001 2007 Rural Urban

The absolute size of rural India is expected to be double that of urban India!!

Source: NCAER

Figure 1: Number of middle and high income households

RURAL CONSUMER INSIGHTS

Rural India buys Products more often (mostly weekly). They prefer low unit price more

than the product being economical. In rural India, brands rarely fight with each other; they just have to be present at the
right place.

Though brand choices are few for rural India, many brands are building strong rural base without much advertising support. For example: Chik shampoo, second largest shampoo brand. Ghadi detergent, third largest brand.

The conclusion is that rural Indian buys value for money & not cheap
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VALUE OF RURAL MARKET

Rural market for FMCG is worth $14.4 billion Market for tractors and agri-inputs is estimated at $10 billion agri It Accounts for sales of $1.7 billion for cars, scooters and bikes Over $1 billion dollars of durables. In total, that represents a market worth a whopping $27 billion

KEY DRIVERS FOR PROGRESS IN RURAL INDIA

Changes in wealth of rural India

Proliferation of Large format rural retail stores

Improvement in Infrastructure

Key Drivers

Effective usuage of infra by marketers

Improvement in Social Indicators

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Predicted Changes in Wealth of Rural India, 1998 to 2006

Predicted Changes in Wealth, 1998 to 2006

Upper Class Upper Middle Class Middle Class Lower Middle Class Lower Class 2006-07 1998-99

10

20

30

40

50
Source: NCAER

Figure 2: Predicted changes in wealth in Indian citizens

Infrastructure is improving rapidly In 60 years almost 70% villages connected by road

More than 90 % villages electrified, with almost 45% rural homes have electric connections Rural telephone density has gone up by 300% in the last 10 years; every 1000+ population is connected by STD. Between the 8th (1992-97) and the 10th (2002-07) Five Year Plans, successive governments have Tripled the spending on rural development from $6.82 billion to $20.2 billion.

Social Indicators have improved a lot between 1981 and 2001

Rural Literacy level improved from 36% to 59% Number of pucca houses doubled from 22% to 41% & kuccha houses halved (41 to 23%) Percentage of Below Poverty Line (BPL) families declined from 46% to 27%
Marketers can make effective use of the widespread available infrastructure Post offices: 1,38,000 Haats (periodic markets): 42,000 Melas (exhibitions): 25,000 Mandis (agri markets): 7,000 Public distribution shops: 3,80,000 Bank branches: 32,000

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Proliferation of Large format rural retail stores which have been successful also

DSCL Haryali stores M & M Shubh Labh stores TATA/Rallis Kisan Kendras
Escorts rural stores Warnabazaar, Maharashtra (annual sale Rs 40 crore)

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CASE STUDIES
1. INDIAN BANK IN PONDICHERRY
Indian Bank (IB) was the first Bank to implement the Financial Inclusion Project on a pilot basis in UT of Pondicherry where the Bank has lead responsibility. IB implemented the concept first in Mangalam Village of Pondicherry on 30.12.05 which became Village the first village in India, where all the households in the village were provided Banking facilities. Indian Bank spearheaded the project and involved all the 144 bank branches of 37 Banks operating in UT of Pondicherry. Participants of the project are: All Banks, Govt.Depts, Insurance Cos, NGOs, Facilitators etc.
The Objective Financial Inclusion is delivering Banking facilities/ financial services to all the people in a transparent and equitable manner at affordable cost. Union Minister of Finance budget speech 2005 06 The financial inclusion provides business opportunity for the financial institutions at the bottom of the pyramid to expand the volume of business. Profitability can be increased only by finding newer avenues for deployment of funds RBI Governor in Annual Policy Statement 2005 06 urged the banks to align themselves with the objectives of Financial Inclusion. 2005Economically and socially empower poor and low income people leading to overall development of the Households, Villages, States and finally the Nation. Achievements in Pondicherry

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RBI in the 2006 07 Annual Policy Statement highlighted about Financial inclusion project implemented by the bank in UT of Pondicherry, and advised SLBC convenors in all State / UTs to identify at least one district in their area for achieving 100 percent financial inclusion on the lines of the initiative taken in Pondicherry. As a follow up, the project was launched in TN in Cuddalore Dist, where again IB is the Lead Bank involving all the banks covering 877 villages. The Bank also extended the project to All the other 12 Lead Districts in TN,AP, Kerala Other states where each of our circle has taken up implementation in three villages.
The Process Allocation of villages to the Banks Village/House hold survey Assessment of the need for Financial Inclusion Products Financial Inclusion Products Offered No Frills SB account Small Over Draft facility for general consumption facilityGeneral Credit Card for income based activity CardMicro Insurance Life and disability cover InsuranceHealth Insurance Cover Mutual Funds (proposed) Overview of the achievement of IB across the country Total number of villages covered so far covered far: 372 Total number of No frills SB a/cs opened: 120198* OD accounts opened: 13227 GCC accounts opened: 660
*In addition, 16706 women have been linked *through SHGs

2. M-PESA IN KENYA
This project helps in understanding the importance of technology solutions in reaching financial services to the hitherto excluded groups and the regulatory implications of developing such technology platforms. Using the mobile phone, M-PESA allows one to deposit cash into ones account, send or transfer money, withdraw money using ATMs and, of course, pay bills and to manage ones M-PESA account. This has, in particular, helped people working away from home to send in money to their families back home. M-PESA has had a huge impact on the ability of people to obtain some basic financial services at low rates and whenever they wanted to. The network of M-PESA agents are many times more numerous and their counters operate well beyond the usual banking hours.

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While it has definitely helped the users, it has also raised alarm among many who see the whole process as a disaster waiting to happen. Of course, its most ardent critics are the banks in Kenya and they have an interest in seeing it closed down as it has taken much of the business away from the banks. Nevertheless, the use of M-PESA type instruments in a regulatory vacuum can, indeed, have serious consequences. However, the response of the regulator should not be to close them down, or ban them, but to bring them under regulatory scrutiny without diminishing, in any way, the opportunity they provide for financial inclusion. Much of the focus of regulation, as it must be, is on maintaining the credibility of the payment system. Adhering to regulation is costly and it raises the cost of transaction. Transaction costs tend to be independent of the amount transacted. The poor undertake small transactions and their costs of transaction through regulated institutional mechanisms, therefore, become too high compared to the amounts they transact. This keeps them away from institutional finance and more dependent on informal systems like money-lenders and family. Regulation, therefore, seems to go against the banks developmental role wherein they must make special efforts to reach out to those who are poor and in remote areas. Any institution is easier to regulate if it carries out well-defined transactions within established premises and within well-defined hours of business. The poor, however, do not have regular incomes from established sources and do not have one place of employment. Since they are often self-employed or daily wage earners, any time spent accessing financial services within stipulated business hours means loss of income for them. Consequently, anything that requires frequent and regular visits to exclusive service providers becomes prohibitively costly for them.

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SOURCES OF REFERENCE
1. 2. 3. 4. http://www.iiss.org/ http://indiamicrofinance.com/financial-inclusion-india-opinion-280o729o.html http://www.indiapost.gov.in/Pdf/IIEF-IndiaPostReport.pdf http://www.idrbt.ac.in/newsroom/news/10_year_celebtrations/IndianBank%20%20KC%20Chakravathy.pdf

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