Are Formal and Semi Formal Financial Institution Partnerships a Viable Option for Serving the Underserved in India

atomic number 18 formal and fishing tackle formal monetary institution partnerships a viable option for serving the underserved in India Xavier Institute of Management Bhubaneswar 10/6/2010 Indu Paramita Mahapatra and Malay Harsh The essay tries to identify the potential problems with monetary empyrean and does a gap epitome that leads to potential opportunities in the sector.It besides falls a look at the challenges faced by the different fiscal institutions, the goals achieved, the targets to be achieved and how the partnership between the different formal and semi formal institutions open fire create a synergy for serving the underserved of the country. Introduction The reach and approach pathibility of funds determine the growth and development of whatsoever enterprise. Then how could the development of a nation be some(prenominal) different from it?It must be duly noted that majority of the countrys populace is break through of the purview of the financial func tion which means much than half of our nation lacks access to savings and recognition facilities among other financial securities and services such as coronation options and policy policies. Where we the urban literati state ourselves to be heavily hassled by the innumerable calls and emails trying to sell us a loan or investment options, these very same options atomic number 18 visibly amiss in the large artless pockets, places where they might be actually be take.The fact is, there is a gap between the financial services needed and what is available. Problem With financial services in India Current scenario Indias Economy Growth rate has been near 8. 5% 9% (last 5 years). Our growth primarily has been in the industry & services sector which has grown by ab come out of the closet 16. 8 percent. Even though agriculture is the principal means of support for over 58. 4% ofIndias population, the growth in this sector is limited to around 2. 8%.Of the many factors that prope rty to poor growth in agriculture, a major reason is lack of access to proper finance. express access to savings, loans, remittance amp insurance in farming(prenominal)/ unorganized sector atomic number 18 major constraints to agricultural and SME growth. pecuniary access enlarges livelihood opportunity amp empowers the poor. And empowerment in turn aid socio-political stability. Financial inclusion pop the questions formal identity, access to payments remains amp deposit insurance.Types of Financial Exclusion (i) exclusion from payment system not having access to bank accounts (ii) exclusion from formal credit markets leading to plan of attack informal/ exploitative markets The marginal farmers, the landless labour, the self employed, the unorganized sector, urban slum dwellers, migrants, ethnic minorities, socially excluded stems, senior citizens and women atomic number 18 often not covered under the financial services. The North Eastern constituent and the eastern amp central regions be most excluded. Financial Inclusion and RBIs procedureFor the past few years one of the important new objectives of the deem patois ofIndiahas been financial inclusion. Financial inclusionis the delivery of financial services at affordable costs to vast sections of disadvantaged and scurvy income mathematical groups. Unrestrained access to public goods and services is the sine qua non of an open and efficient society. It is argued that as banking services are in the nature of public good, it is essential that availability of banking and payment services to the entire population without secretion is the prime objective of public policy.The movement towards financial inclusion rose to a crescendo in the current year, partly beca physical exertion of the Platinum Jubilee Celebration of RBI and partly because the demand for financial inclusion has give out a national and a governmental imperative. According to Annual Policy Statement of RBI, 2004-05 banks sho uld be oblige to provide banking services to all segments of population on equitable basis. In 2005 RBI advised banks to provide basic bank no frills accounts with low or minimum balance/ charges so as to overstate anking outreach to larger sections of society. KYC principles were simplified to open accounts for customers in rural amp urban areas for people intending to open accounts with yearbook deposits of less than Rs. 50,000. General purpose Credit Card (GCC) facility was available up to Rs. 25000 at rural amp urban branches . Revolving credit was encouraged and withdrawal up to limit sanctioned was based on household cash flows . No security or collateral was needed for the same. Interest place were deregulated.In January 2006 banks were allowed to use services of NGOs, SHGs, micro finance institutions, civil society organizations as business facilitators/ correspondents (BC) for hold uping banking services. BCs were allowed to do cash in-cash out operations at BC locat ions amp branchless banking. Pilots were set up to provide credit talk over and financial education. In June 2007, RBI launched multilingual website in 13 Indian languages providing information on banking services.For the financial inclusion drive, in identified districts, survey was conducted based on electoral rolls, public distribution system etc to identify households with no bank accounts. Banks were required to open at least one account per house. plenitude media was deployed for awareness/ publicity. Bank staff/ NGOs/ volunteers in additionk ration cards/ Electoral ID/ photos for fulfilling KYC norms amp possibleness accounts. The different financial institutions and their rolesThe government institutions fuelling the growth in the financial sector for the purpose of extending the banking services to the underserved in India are regional Rural Banks, Primary Agricultural Credit Societies, LAMPs, Commercial Credit Co-operative Societies, State Cooperative banks and Commerc ial banks. save then the entire system of lending must be self sustaining. Most of the above agencies are loss making units and need to be supported by the government with seed funds. The wide availability of such units extends the outreach of governments financial benefits to the large rural population.The commercial banks try and keep themselves distant from extending their financial services of credit, savings etc to the villages owe largely to the heavy cost of operation and servicing in the deep pockets and would earlier cough up the penalty imposed on them by the Reserve bank of India for not concourse credit targets set for Priority sector lending. The cost of reaching the customer unto itself is too full(prenominal) and added to that is the utmost cost of transaction and servicing of small ticket loans and to top it all there is a high default rate on such loans issued.On the contrary the Non banking financial service companies operate on a much lean structure. The mode ls on which the financial service extension is operating these days is constantly evolving into more and more innovative structures. Un give care the banks, the MFIs may furnish loans without collaterals or security deposits as they have economic consumption a social obligation on the loan applicant to repay the loans on magazine. As the loans are issued only through SHGs or JLGs, the liability of each loan rests entirely on the shoulders of the entire group and not just the individual.Thus the ticket size of the loans increase in size and cost of servicing the loans in addition gets appropriated. The NBFCs and MFI overly sell out their loans to the Commercial banks who finance them thus ensuring that the commercial banks also end up meeting their target of priority sector loans that too at a profitable scale. The role compete by the NGOs is also worth mentioning when we talk to the highest degree the financial services in the rural pockets. thither has been a rise in the numbe r of SHGs owing to the capacity building and awareness activities taken up by the NGOs.The SHGs are informal bodies formed by the coming together of a homogenous group of people (preferably women) such groups actively promote mandatory savings among their members. From the funds collected loans are issued at nominal rates to its group members while loans can be sought for livelihood purposes largely, loans may also be sought for consumption needs. The SHGs are also trained for developing enterprises and businesses to fuel their growths. The other digressive benefits of womens SHGs are the increase of social status and say a woman has in the communityPartnership of banks with organisations like A Little World and FINO has been a groundbreaking innovation where the above organisations in partnership with the banks extend no frills bank accounts to the rural areas and their people. The benefit is two pronged. It must be noted that the cost per transaction incurred per transaction on a bank teller amounts to roughly $1. 07 USD, while the cost of transaction per ambiance transaction costs the bank around $0. 27 USD. The costs are prohibitively high for a commercial bank to operate on lower ticket size transactions and hence cant enter the rural market presently.The partnership models that FINO and ALW have adopted ensure that the underserved get access to the banking services by means of innovative rural ATMs that are all but turn held devices operated by either a village person or their own employee. The costs of such operations are low due to the absence of infrastructure needs. The above organisations take a cut from the account opening fee and a certain fee for operations costs. Goals achieved by the financial drive No frills accounts 6 million new no frills accounts were added between March 2006 amp 2007.About 45000 rural amp semi-urban branches of Regional rural banks (RRBs) amp Public Sector Banks (PSBs) showed highest performance after the drive. SHG-Ba nk linkage Access to banking system was provided through SHGs (groups pooling savings amp providing loans to members). National Bank for Agricultural and Rural Development (NABARD) extended support in group formation, linking with banks, and promoting best practices. As a result, the recovery was excellent 2. 6 million SHGs were linked to banks touching 40 million households. SHGs were given loans by banks against group guarantees (Joint liabilities).With smaller loan sizes and reasonable rates of interest, SHGs were encouraged to take loans for consumption and to set up smaller business initiatives. IT Solutions IT solutions were essential for doorstep banking. Pilot projects were started by SBI use smart cards for opening a/c with bio-metric identification. The smart cards were linked to mobile/ hand held connectivity devices to ensure transactions were recorded in banks books on real time basis. State governments started making bounty amp other payments under NREGS through sma rt cards. Other financial services (low cost remittances, insurance) were also provided through cards.IT solutions enabled large transactions like processing, credit scoring, credit record amp follow up etc. Role of Government Some state governments played a proactive role by issuing identity cards for a/c opening, through awareness campaigns by district/ stop consonant level officials. Financial literacy drives were conducted and India Post was roped in as BCs. FMs Budget Speech 2007-08 allocated a budget of $125 mn each to 2 funds (i) Financial Inclusion Fund for developmental/promotional work (ii) Financial Inclusion Technology Fund for technology adoption/innovation Challenges FacedWith the rates of interest being high the customer is sometimes still apprehensive in approaching for credit, as the poor do not have collateral to offer and are hence not always eligible to loans from govt. banks. The stronghold of the money lenders too is very strong as the loan servicing time of a money lender is very low and can be furnished at any hour of the day. Imposition of rate restrictions by the government may also render MFI businesses inefficient owing to high operations cost and defaults, the govt. Promotes defaulting each time there is a loan waiver issued by it.Such actions promote defaulting nature amongst the farmers. There is a disinterest of the rural population in taking insurance policies as there is no understanding of the same in the large rural pockets. The seasonality of the crops and harvest too impose a challenge to the lending and repayments to the financial institutions. Way forward Theres a need to link the impact of the financial institution to the 8 Millennium Development Goals (MDGs). The impact analysis can be done by evaluating how far the financial institutions have been effective in contributing, directly and indirectly, to all the eight MDGs.Microfinance contributes to improving income and reducing hunger (MDG 1), providing children scho ol education and training (MDG 2), and paying for wellness services (MDG 4 6). The main beneficiaries of microfinance services are women, so financial institutions contribution to womens empowerment and sex equality (MDG 3) can be studied. As for the environment (MDG 7), financial institutions are increasingly combining environmental programs with their financial services, although the contribution may be indirect.For MDG 8, since Target 12 calls for the development of open, rule-based, non-discriminatory financial systems, the expansion of financial programs themselves is the achievement of MDG 8. Hence the future of financial outreach lies on the synergy of formal and semiformal institutions to bring about a positive change. 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