Speeches

Speech delivered by Kishori Udeshi, Chairman, Banking Codes and Standards Board of India at
the “Skoch Summit – Inclusive Growth 2.0” held at Hyatt Regency, Mumbai on July 16, 2009

Financial Inclusion for Urban Poor*

Generally, any talk of financial inclusion veers round to the integration of rural India into the banking fold. In the reported deliberations of a recent Round Table Conference for bankers and financial service sector professionals to discuss issues that confront banks in meeting the requirements of Gen Next, there was mention of the challenge of reaching out to the Gen Next customer in rural areas but not a word about the urban poor.

The India-Urban Poverty Report 2009 states that India’s urban population is increasing at a faster rate than its total population and that while presently 28 per cent of the population is urban (286 million), by 2030 India will have 41 per cent of its population living in cities and towns. With India becoming increasingly urban, there is also an increase in the number of urban poor and the latest National Sample Survey Organisation survey reports that there are over 80 million poor people living in the cities and towns of India. It is this large section of the population which lacks access to the most basic banking services - such as savings accounts, credit, remittances and payment services, financial advisory services etc.

When the concept of “financial inclusion” was first mooted by the RBI in its Annual Policy Statement of 2005-06 it was made clear to banks that while commercial considerations are important, banks are bestowed with special privileges and that they are, therefore, obliged to provide banking services to all segments of the population on equitable basis. Pursuant to this, the RBI advised all banks in November 2005 to make available a basic banking ‘no-frills’ account either with ‘nil’ or very low minimum balances as well as charges that would make such accounts accessible to vast sections of the population. The nature and number of transactions in such accounts could be restricted, but made known to the customer in advance in a transparent manner. All banks were also advised to give wide publicity to the facility of such ‘no-frills’ account including on their web sites indicating the facilities and charges in a transparent manner. Significant progress has been made in the opening of such accounts and it is estimated that as on March 31, 2009 over 33 million ‘no-frills’ bank accounts have been opened.

Regrettably, the statistics do not indicate how many of these accounts were opened in urban areas and there is a strong feeling among a large section of the population that banks in urban areas are reluctant to open ‘no-frills’ accounts for the urban poor. A sample study carried out by the Banking Codes and Standards Board of India through incognito visits to 44 branches of 26 banks across Mumbai in February this year confirmed this suspicion. It revealed poor awareness about ‘no-frills’ accounts and relaxed KYC norms amongst the bank staff itself; a general unwillingness by the bank staff to open ‘no-frills’ accounts for persons of small means; with the exception of three banks, the account opening forms of the others were not simplified and did not contain any information about the required documents under simplified KYC norms and at none of the branches visited the staff were in a position to offer any guidance as to the remedy in case the prospective customer was not in a position to produce required documents in proof of identity and address.

The first reaction would be to berate banks. But let us pause a moment. What is at the root of the problem where such significant progress is evident in the number of ‘no-frill’ accounts opened and such glaring evidence to the contrary in the urban areas. There are three issues involved.

(i) Basically, there is a difference between the rural poor and the urban poor as far as proof of identity and address are concerned. In a village, almost everyone knows about everyone in the village, whereas in the urban areas, one may not know who one’s neighbor is let alone be convinced of the identity and address of the urban poor. This, therefore, implies that if the instructions to banks are easy to apply in rural areas, they are not necessarily so in urban areas which brings us to the second issue.

(ii) Is proof of identity and address really necessary? All along banks have been made to focus on the KYC requirements and the risks involved in non-compliance thereto as a result of which the importance of being equitable and non-discriminatory in the rendering of banking services has been relegated to the background. When balances in all the accounts taken together by the ‘no-frills’ accounts holder shall not exceed Rs.50,000/- and the total credit in all the accounts taken together cannot exceed Rs.1,00,000/- in a year – what is the RISK involved to a bank? If there is no risk involved for the bank or the banking system in maintaining such ‘no-frills’ accounts, why can we not permit the opening of ‘no-frills’ accounts on the basis of a simple self-declaration form regarding identity and address with photograph.

Look at the Post Offices. They accept savings of the poor or rich for that matter, on the basis of a simple account opening form – no documents whatsoever – only one introducer from that particular post office is required. Photograph is optional. The account holder has cheque facility and can withdraw money. How is it that there are no KYC concerns or terrorist funding fears here?

(iii) This brings me to the third issue and that is that the KYC formalities are only used as a convenient tool to block access to banking services to the urban poor. The real problem lies elsewhere. It is not the fear of risk involved but the fear of additional work involved. It lies in the unwillingness on the part of banks in urban areas to provide such services as it means more footfalls, more record-keeping, more work in general. This is just not acceptable. Firstly, there has to be a top-down approach in each bank to bring about an attitudinal change in this regard. Secondly, there has to be greater publicity and awareness among this section of the urban population about the availability of banking services.

Both, banks and the regulator, therefore, need to have a rethink on the above three issues if they are at all serious about providing access to banking services to the urban poor.

If acceptance of deposits and opening a bank account is difficult for the urban poor you can imagine what it would be on the credit side.

The Rangarajan Committee Report on Financial Inclusion (2008) states, inter-alia, (i) that there are no clear estimates of the number of people in urban areas with no access to organized financial services, (ii) that even money lenders often shy away from lending to urban poor and (iii) that urban branches of banks, even though having manpower and technology support are not attuned to SHG lending or micro-finance.

With the strong emphasis of the Government in the Budget 2009-10 and in the 100-day agenda of the Government on amelioration of the urban poor, the banks have a two-fold challenge before them. (i) One is to meet the existing micro-credit needs of the urban poor for meeting consumption needs and reduce their dependence on informal and costly sources of credit and (ii) to move from micro credit to credit to micro enterprises or the self-employed or casual workers such as cobblers, rickshaw drivers, carpenters, hand-cart vendors, hawkers, plumbers, mechanics, dabba-wallas etc. These are the ones who also keep the life cycle of a metropolis ticking.

The Reserve Bank has effective April 30, 2007 enlarged the base of the priority sector lending so as to include micro-credit and direct and indirect finance to micro and small manufacturing and service enterprises including small business, retail trade, professional and self-employed persons.

The BCSBI has evolved a Code of Bank’s Commitment to MSEs to provide easy, speedy and transparent access to banking services in their day-to-day operations and in times of financial difficulty. These actions on the part of the RBI and BCSBI may take the horse to the water but how do we make it drink?

Data on lending to micro-enterprises is not available as it is presently clubbed together with small enterprises. To begin with, the RBI should insist on and obtain data on lending to micro-enterprises in rural/semi-urban and urban areas, separately especially, in the light of the Government’s emphasis on urban renewal. This will provide some evidence of the progress or lack of it in lending to micro-enterprises in urban areas.

Through the several workshops conducted by the BCSBI, after the launch of the CBC to MSEs, we received anecdotal evidence to show that banks were reluctant to lend without collateral even when the amount was less than Rs.5 lakh and the urban poor can hardly be expected to be in a position to provide suitable collateral. All lending involves some risk. Banks need to recognise the huge economic activity among the self-employed poor who are daily producing ready-made garments, leather goods, pottery, etc. in single rooms in slum, recycling plastic etc. and be sensitive to their need for bank finance which will enable them to reduce their cost of operation tremendously and turn uncertain cash flows into stable revenues. Being sensitive to the credit needs of the poor is also a part of banks’ social responsibility. SEWA Bank is a prime example of how flexibility and sensitivity to the needs of poor clients can enable an organization to successfully deliver financial services in the urban context.

For increasing bank finance to the urban poor, firstly, it may be necessary for banks to revise their system of fixing targets for lending. Presently, the branch-wise targets are on value basis and are consolidated for the SME sector as a whole. Hence, micro-enterprises can be safely ignored by the branch in achieving the targets. This must change. Banks must fix specific branch-wise targets for lending to micro-enterprises in terms of number of units, which will reveal how efficient the branch is in lending to this sector.

Secondly, bank staff would need to get out of the comfort zone and play a pro-active role in lending to micro-enterprises for which again a top-down approach will give the required impetus.

It is hoped that this discussion today on Financial Inclusion for Urban Poor will not remain only a discussion and that this will get transmitted into an Action Plan by all concerned.

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