Independent Research and Policy Advocacy

Blue Print for Commercial Banks to Deepen Financial Access

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IFMR Finance Foundation has come out with a comprehensive manual with a detailed blueprint for commercial banks to deepen financial access in a viable manner using the Business Correspondents (BC) and Business Facilitators (BF).

The model, worked out for a full range of financial services, is simple, replicable and easily scalable. A ready reckoner, the manual also provides excerpts of all RBI provisions that facilitate financial deepening using the BC/BF model.

The manual was developed primarily to aid commercial banks in drafting an approach for the much-publicized financial inclusion plan that they have to work out by the end of March, 2010.

Deepening financial access has been a major challenge in India. The enormity of the problem is universally recognized. For instance, the Reserve Bank of India recently (December 2009) notified 292 districts as “underbanked” with poor microfinance penetration, meagre bank branch network, and a low credit deposit ratio.

The Rangarajan Committee on Financial Inclusion (January 2008) estimated that 111.5 million households have no access to formal credit; and 17 million households are in debt trap with money lenders. The data from the 59th Round of NSS (2008) showed that 73% of the 89 million farmer households have no access to formal source of credit. The Arjun Sengupta Report on Financing Enterprises in the Unorganized Sector (August 2007) estimated that 95.86% of the units (with investment of less than Rs. 25,000) have no access to credit from the formal system.

However, it is well documented that low-income households constantly engage in numerous complex financial transactions, mostly outside the formal financial system. Assuming each household needs four-five financial products to cover all its risk, this could constitute a market for virtually limitless number of financial products. Yet so many people and enterprises still remain without access to the formal system of financial services.

The Central Government and the Reserve Bank of India have been pursuing financial inclusion since the 1950s and the Commercial Banks have played a significant role in this, particularly in reaching the financially underdeveloped rural areas. These initiatives have paid off in terms of creating a large network of bank branches across the country – an eight-fold increase in the last three decades, with much of the expansion happening in the rural and semi-urban areas. Yet, out of the 600,000 habitations in the country, only about 30,000 have a commercial bank branch; and hardly 40 per cent of the population in the country has bank accounts; this ratio is much lower in the north-eastern parts of the country.  Thus, there is still a large unfinished agenda of financial inclusion.

To address this situation and to swiftly scale-up financial reach in a viable and sustained manner, the IFMR Finance Foundation has come out with this comprehensive manual.

To access the full document: Click here.

Asha Krishnakumar of Advocacy team, IFMR Trust (presently known as Dvara Holdings), contributed this post.

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