Financial inclusion is only a part of inclusive growth, said S.A. Bhat, chairman and managing director, Indian Overseas Bank, who was speaking at Mint’s Clarity Through Debate event on Inclusion: Key to Growth for Banking and Industry. Other speakers at the debate, which included K.V. Eapen, joint secretary, Union finance ministry; T.T. Srinivasaraghavan, managing director, Sundaram Finance Ltd; J.M. Garg, chairman and managing director, Corporation Bank; M.S. Sundara Rajan, chairman and managing director, Indian Bank; A. Vellayan, chairman, Murugappa Group; Nachiket Mor, president, ICICI Foundation; and M.F. Farooqui, principal secretary, ministry of industries, Tamil Nadu government, tended to agree with this view. The discussion was moderated by deputy managing editor Tamal Bandyopadhyay:

Different angle: (from left) K.V. Eapen, joint secretary, Union finance ministry; T.T. Srinivasaraghavan, MD, Sundaram Finance; J.M. Garg, CMD, Corporation Bank; M.S. Sundara Rajan, CMD, Indian Bank; Tamal Bandyopadhyay, deputy managing editor, Mint; A. Vellayan, chairman, Murugappa Group; Nachiket Mor, president, ICICI Foundation (not seen in the picture); S.A. Bhat, CMD, Indian Overseas Bank; and M.F. Farooqui, principal secretary, government of Tamil Nadu, at Mint’s Clarity Through Debate event in Chennai on Monday. Ganesh Muthu / Mint

We have been talking about inclusive growth but actually there is neither growth nor inclusion. Why is this happening?

Eapen: Seriously, perhaps, we have started looking at financial inclusion only around three years back and the initiative has come in with the Rangarajan committee, which looked into this whole issue and it pointed out basically that a large number of Indians are not having access to any sources of informal sources of finance, forget about the formal sources of finance. So, when this happened, that was the catalyst really about three years back for the Reserve Bank of India to bring in certain guidelines about opening of accounts, which are what they called the no-frills variety or accounts where the balance could be close to zero or very low. But that, as has been mentioned in the opening remarks, is something which is not enough. Essentially, financial inclusion is a topic which goes beyond just bank accounts; it’s essentially access to financial instruments. Now that’s where India has been very poor. We seriously haven’t been looking at this issue for a long time and this is something that all of us here, represented here by the panel, which is the private sector as well as the banks and the government, have a major role. The short point that I want to end with any initiative in this area necessarily needs to be technologically driven. Technology is the key to financial inclusion. Right now, we have this talk where ….

Farooqui: I’ll quote Dr Amartya Sen who said that poverty must be seen as deprivation of basic capabilities rather than merely as lowness of income. I would only like to extend that basic concept. If you look at financial exclusion or lack of financial inclusion in isolation, we will be making a big mistake. It comes as a holistic package and unless you have all other kinds of inclusion, merely enabling somebody to open an account or giving little bit of access to loans is not really going to solve this problem. For example, agriculture credit share has risen from 12.9% to 17% in 1980s but then it fell again in 1990s. Percentage share of small loans, less than Rs25,000, increased from 68.2% in 1985 to 66.1% in 1990s, but again it has fallen to 8.9% by 2006. Same thing holds for the SSI (small scale industries) share. The share of the small-scale industries, the banks’ credit - it increased from 8.5% in 1969 to 12.2% in 1980s and again has fallen down to 7.8% in 2008. I would only say that the spurt, which was given by various steps which was focused entirely on the banking sector like bank nationalization, creating no-frills accounts, facilitating or easing the norms of know your customers so people can have access to banking. These initiatives were eventually not as useful as one was expecting them to be, because the eco-system, which is necessary for a person to take advantage of the financial inclusion, was not there. That requires social infrastructure, access to health, education, water, roads, establishment of industries… It is a whole set of things which must go together. If we talk of inclusiveness, isolation of banking sector, of financial sector, then we will really miss the larger picture.

Bhatt: I fully agree with Mr Farooqui. We are trying to make financial inclusion a word, which is synonymous to inclusive growth. I think inclusive growth is much more than financial inclusion. It doesn’t stop at financial inclusion only. Financial inclusion is only a part of the inclusive growth, it’s one of the components. There are other components of inclusive growth like provision of infrastructure, social inclusion, employment opportunities and a number of other avenues, which ultimately help for the inclusive growth that we are talking about. Today, by opening only a small number of accounts and declaring that a number of villages have become 100% financially included by opening of no-frills accounts and all, has not really not served the purpose. The study conducted by the Reserve Bank of India and by independent agencies through the Reserve Bank of India, has shown (that) almost 90-97% of the accounts become inoperative after the accounts are opened, which means financial inclusion has helped in no way as far as total inclusive growth is concerned because there are certain lack of other facilities which are absolutely needed for financial inclusion.

Our own experience in Indian Overseas Bank in Kanyakumari district, where we declared it to be 100% financially included, we found that almost 90% of the accounts were operative. It was conducted by an independent agency. One of the reasons for that was the people in Kanyakumari district were educated. They were literate. So, one of the keys for inclusion is literacy, which is very important. And, a majority of them had some kith or kin working in the Gulf countries. So, that’s obviously the local account opening really helped them in taking advantage of the financial inclusion and then subsequently taking it ahead of the inclusive growth. Unfortunately, though the banking industry has done a lot as far as financial inclusion is concerned, there are other areas in which inclusive growth is lacking. For example, talking about health facilities in all the rural areas in India, and this programme, if I am not wrong, started only about four years back whereas the health provision in all the rural areas started almost a decade back. Nothing has happened in that respect. So, how can we expect inclusive growth to happen when all the parameters, all the components of the inclusive growth go hand-in-hand today at the same pace at which the financial inclusion is taking place?

Eapen: Yes, there is no question that financial inclusion is only one part of the whole issue of inclusiveness. That is a given. We all know it. But where do we start? We start with something, and I think the idea of opening accounts actually gives the first access to the people in the setup.

Srinivasaraghavan: After endorsing heartily what Farooqui said, I think there are a couple of other things also that I would like to add. One of them is that, as the deputy governor said, I think there has been too much sound and not enough light because we have tended to get carried away with statistics. I think a whole set of statistics were bandied around. For a country, which nationalized its banks 40 years ago, I think we haven’t moved because I think 40 years ago, somebody recognized that this was one way to get closer to the people, to demystify banking, take it to whole of India but somewhere along the line, we lost the plot. Perhaps where we lost the plot, I believe is also somewhere in the 1990s, it became fashionable in this country to believe that anything to do with the world of finance or banking was made in America or made on Wall Street. And I think we completely ignored the fact India is not America and India needed a model, which was dramatically different because our challenges, our diversities were very different from anywhere else in the world. I hope the event of the last 12 months will finally make all of us sit up and think that ‘Made in America’ doesn’t necessarily work in India. I think what we need is quintessentially Indian model, which works for all Indians. And perhaps, the answer to this whole debate of inclusion lies in finding the key to that model.

Garg: From the banking perspective, let me talk about inclusive growth. …In 2005, when this financial inclusion concept was introduced, that, too, from a pilot project from Chennai itself, when Chakraborthy was chairman of Indian Bank, it was taken up. And, since then, we have traveled lot of distance. Banking sector has taken (it) up. But what has happened is every bank, as any other institution in the financial sector, they have taken it up independently and in their own manner. Today, financial inclusion is taking place, no doubt through SLPC (state level purchase committee) and through other structures, which are already inside the system. But, there is no coordinated effort and we find that today, out of 611 districts in the country, only 68 districts have so far been covered by so-called financial inclusion. As rightly said by deputy governor of Reserve Bank of India (Chakraborthy) that financial inclusion is the first step towards inclusive growth, if we really want to go forward, I propose that let us make it a national priority. This is the first point I want to make. Let’s make it a national priority and as far as banking sector is concerned and banks are concerned, it should not be treated or taken as a social obligation. It is not. It should be taken as a commercially viable activity because as C.K. Prahalad said that at the bottom of the pyramid, I think there is a huge opportunity available today to the entire financial sector, to make huge business out of this proposition in the future. And, it’s a huge challenge for the entire financial sector, especially the banking sector to make business out of this entire process. So what I would like to say is that in this particular project, all the players will have to play a very active role and come closer and make a coordinated effort so that we can achieve this entire process of financial inclusion first. Because when we are talking about inclusive growth, as other panel members had said that, there are so many other aspects to inclusive growth but as a banker, I would like to say that my major role will be towards financial inclusion as the first step. But, in that respect, I think there are so many challenges before us. First is, awareness and literacy. What I find is that even the staff working in the banking system have a mindset. I think we have a huge challenge there – as the CEO of the bank how to change the mindset of the people (staff) who are working at the field level on how to treat these people (those without any bank account), how to make them understand that these people are bankable, they are profitable ultimately for the bank as a business. And, similarly with people below poverty level (BPL)- how do we make them come to the banks or how do we connect them to the banking system. Today, whatever statistics are there or the data is there, I am really not sure what is the level of poverty that we are talking about. So many statistical figures are given, but have we done any serious exercise to determine who is actually below the poverty line and who is not. At Corporation Bank, we have a model where we are not dependent on any agency. We are doing this exercise ourselves. Each village where we have gone and introduced branchless banking, we found that the figures are different from what is given by the various agencies. With that process, we have done it in a small way so far in 400 plus villages. But, what I would like to say is that first of all, let us determine what is the level of the problem, as rightly said by the RBI deputy governor - ‘this’ is the problem and thereafter, create a structure. We have today a structure wherein various schemes are introduced by the governments to help the poor through the banking system. ..,as Srinivasaraghavan was telling that after 40 years of nationalization of banking, what have we achieved? To what level has the poverty been alleviated? Maybe yes, in terms of statistics. It has come down from 40% to 25%, but I do not know how far this is because in absolute numbers, it still remains at the same level. Can we have a re-look at the structure we have today to implement it?

Mor: My sense is while there is a fair amount of truth in the fact that you need multiple dimensions of inclusion, I think I would go with Eapen that we have to start with a core piece, which is everybody getting a right to a formal bank account where they are able to transact actively from it. As Chakraborty said many changes have things in the last several years, while some people are of the view that perhaps, we started only now. In the recent years, we have made several steps. My sense is I don’t see regulatory as a barrier. Some people argue, perhaps, cost is a barrier. I would say two things- one, how many of our urban products are actually making money? It’s not entirely obvious that the customers we serve – 80% actually we find are loss-making customers. Only 10-20% really contribute much to the profits. So, why this question about this issue? The business correspondents approach towards finding payment solutions to National Rural Employment Guarantee Scheme indeed has shown the way. It’s clearly a cost structure. My sense is one more product to be added to what is to be delivered to this takes care of the cost issues.

Technology is in place. We have found also that there are today commercial companies- Little World, FINO, that have gone out there and are now capable of rolling out extremely high levels of banking capabilities. Products are there. There is no real challenge on the product side. There are saving products, FDs (fixed deposits), insurance products- all actually in place. Whatever evidence we are finding is- IFMR Academic Institution in Chennai finished a randomized control trial in Hyderabad trying to understand what happens when people get access to credit. The view has been alcoholism will go up, something else will go up. What we find is completely the opposite. People who have taken micro-finance, unambiguously, reduce their consumption of temptation goods. Temptation goods meaning alcohol, smoking, tobacco. So what is the real problem? There is, in my view, serious lack of interest. There is a sense that we should do it, we talk about it, say that this is something that needs to be done but… I have been working for the last year along with one NGO that IFMR is associated- this organization called IFMR Trust, which is headquartered in Chennai- in Tanjore (Thanjavur) and Tiruvallur. In a state which is somewhat of an advanced stage related to the rest of the country, the situation in rural, remote areas of Tanjore, is that there is effectively no financial access, even of a basic kind… bank accounts are not there, transaction capabilities are not there. These are not necessarily very poor people. I mean they are poor but relative to what we see in Bihar, Chattisgarh, elsewhere, they are actually better off. Why is there no financial access? This group has been working for the last one year. I have been trying to work with them closely to get a handle on it. I don’t see any fundamental barrier. I don’t see any real reason why this cannot have been rolled out to every last person. I believe this basic access is almost a fundamental right now. We cannot say after 50 years of Independence that we cannot offer every citizen of ours basic service. It is true- health should be there, education should be there, but they are in some ways harder services to offer.

Banking is a pure technology play; there is lots that can be done which is not possible to do in many other services. Not that I am saying it should not be there. I am not able to see actually a fundamental barrier other than the fact that we sitting here somehow are not saying ‘we will get it done’.

Sundararajan: It is too early to come to any conclusion. The problem is, we need to have what is called financial literacy and counseling centres. That is the need of the hour. We need to educate the people also. Yes, only 50% of the population has access to banks. There are some infrastructure problems also. The number of villages that are there vis-à-vis the number of banks’ branches, there is a, what you call, a disparity. Seven lakh villages and about 40,000-44,000 branches. There is going to be there. Now, the regulator is also appreciating the problem, they are also permitting what is called as the branchless banking. Instead of customer coming to the bank, the bank will go to the customer. Through the help of an internet connection and the PC, we are able to attract the customers and put through these. I won’t say that it has not happened, etc, and especially when you are in Chennai, Tamil Nadu, as early as 1989, the state government has introduced a form of financial inclusion in the form of self-help groups, which is doing very well, which has also been mentioned in current year’s budget also. The honourable finance minister has also said that he is going to bring at least 50% of the women population under the self-help groups.

What is important is we need to have a feeling, passion for this financial inclusion. What is the need of the hour is- it is not sympathy, (but) empathy. We have taken something from the society, what is it that we have given? That realization, once it comes, I can tell you, its going to be a runaway success. People are opening bank accounts; financial inclusion does not end with this, I agree. We need to give them loans. What is the common perception? Poor are not bankable. Poor are not trustworthy. But what is the experience? Experience clearly indicates that the poor are bankable… The experience of my bank is in the amount that we give to the self-help groups, who are all the poor, living below the poverty line, but the repayment rate is as high as 98.5%. On its own, it comes back. The remaining 1.5% also comes back, (though) delayed and you see the empowerment.

There needs to be a coordinated action; that is the need of the hour. Industries are there. We are starting a self employment training institute. We need to coordinate with the industries. Let them have the role of the mentor, let them also help in people coming above the poverty line. It is possible; it is feasible. What is required is all the efforts have to be done. You mentioned about the mutual fund, insurance, etc- we need to take it to them. Definitely, they will start using it.

Vellayan: I would like to bring a different perspective to this debate. When we talk of inclusive growth, we are talking of something that relates to rural India, largely. If you look at the government’s attempts, or the banks’ attempts or anybody’s attempts to do this, there have been three kinds of attempts. First attempt is financial inclusion, the second attempt is inclusion through development and the third attempt is inclusion via handouts.

Our company is closely involved with the fertilizers and sugar industry and we are present in nearly all the ‘mandals’ in Andhra Pradesh, in a number of taluks in Tamil Nadu and a few other states. And, if you look at India’s attempt to include rural India, what has happened? What is the reality? We have NREGA scheme, fertilizer is subsidized, water is free, loans are written off and there is no tax. Basically, what we have done is by trying to include the farmer, we have made him lazy and we have excluded him. So, what I would like to say is that I think emphasis should change. Inclusion should only be through development.

What is the real need of the farmer? The farmer needs to be educated about logistics, costing, marketing, mechanization, employability. These are the issues. I don’t know how many of us sitting in this room have ever been to a mandal headquarters. There is no soil testing done before something is applied. All the farms are fragmented; there is no attempt to do drip irrigation in an organized way because the farm sizes are so small. So, I think, inclusion has become a fancy… its become a buzzword, you know. But, if you go down to the reality, what we need is inclusion through development. And I think if the entire efforts of the industry, banking and government is geared towards this development, then we will have a lasting impression. We guys, we have to learn to make people to earn. Teach them fishing, don’t feed them fish.

The second and concluding part of the debate will be carried on Thursday.