Extracts from Committee on Financial Sector Plan for NER : Flow of Credit, Financial inclusion, business correspondent and business facilitator and Linkage with SHGs

headed by Mrs. Usha Thorat, Dy. Governor, RBI, July, 2006

Impediments in the Flow of Credit

2.9   A number of impediments that constrain the smooth flow of credit in the NER have been identified by earlier Committees. Though there are some State specific factors, most of them are a common feature for the region. The following are some such identified factors:    

  1. The lack of basic infrastructure such as roads, communications and transport facilities, adequate power, is the major impediment in the region. There are no rail links to the States in the region except Assam and some parts of Nagaland. The lack of adequate infrastructural facilities has retarded the economic growth in the region, particularly the real sector and has led to reduction in the demand for credit. Resultantly, the economic structure of these States is lopsided with heavy dependence on public administration, while the per capita (deposit as well as credit) is lower than the national average.

  2. Industrial sector is underdeveloped with hardly any large-scale industry in the private sector. Entrepreneurship is yet to be adequately developed among the people of the region. Despite the various subsidies granted in the separate industrial policy for the region, the investment from outside entrepreneurs has not been forthcoming to the desired level due to infrastructure problems.  

  3. Agriculture is also still underdeveloped with production being mostly at subsistence level. There is hardly any generation of marketable surplus and use of modern inputs, resulting in reduction in demand for institutional credit. Inadequate post-harvest infrastructure (warehouses, etc.) also hinders the mobilization of crops to maintain parity in demand and supply of goods.  There is also dearth of organized market facilities for getting appropriate price for goods. Scattered producers producing limited volume of outputs individually in the hilly regions further compound this problem.  

  4. The topography of the region, which calls for a greater investment in infrastructure, has been a handicap in adopting the strategy of branch expansion for maximizing financial inclusion. The sparse population and low business prospects, coupled with increasing fixed/operating costs make branch expansion an unviable strategy.  

  5. Banks do not extend loans beyond certain sums without land collateral.  Many individuals have no pattas legalizing their ownership in the hill regions. The land tenure system prevalent in most of the States of the region except non-scheduled areas of Tripura, Manipur and Assam , restricts alienation of land from a tribal to a non-tribal. This, together with absence of legalised ownership rights, proper land records etc. makes it difficult for the banks to lend in the region.  

  6. There are various schemes available with banks from State and Central Government and local people can avail of the facilities of those schemes for capacity building and income generation. However, there are no conscious efforts on the part of lending agencies to spread awareness among people about the banking facilities available under various schemes.  To some extent, there is lack of enthusiasm on the part of people to raise a loan from the banks which points to absence of a matured credit culture and the transactions thrive on money economy through informal channels which are perceived to be trustworthy being deep-rooted and run through generations.  

  7. Poor performance in the issue of Kisan Credit Cards (KCC) by banks in the States such as Manipur and Nagaland is attributed mainly due to lack of awareness of the farmers. The poor off-take of funds under the Rural Infrastructure Development Fund (RIDF) in the region is also attributed to lack of awareness of the scheme, besides the inability to identify, formulate suitable project proposals and the delay in implementation of the sanctioned projects.  

  8. There are many NGOs operating in the region. Most of the NGOs are involved in social activities. They are not oriented towards rendering financial services in the region.  Further, absence of active NGOs in the region is another bottleneck in bringing more and more people in the banking net.  Absence of State level forum to provide interface between NGOs and bankers also creates bottleneck in providing micro-credit in the region.  

  9. Appropriate training modules are not available to impart training to NGOs.  Such untrained NGOs find it difficult to identify right people for creating SHGs  and imparting them necessary skills and motivation to further SHG movement in the region.    

  10. The region is mostly based on cash economy.  Currency in circulation to bank deposit ratio is very high as compared with the rest of the country. To maintain balance in quantitative and qualitative aspect of currency notes, huge treasure is being transported through air, helicopter and road depending upon the climate, weather conditions, police escorts etc.  Larger usage of physical currency by the local people is considered a hurdle to make it at par with the rest of the economy of the country which has graduated to more advanced stages of fund transfer.  

  11. Poor recovery of loans, especially those under Government sponsored schemes and default by borrowers act as a deterrent for granting fresh loans. 

  12. Micro credit linkages of the banks with SHGs leave much scope for improvement.  A status paper prepared in May 2006 by North Eastern Region Community Resource Management Project (NERCORMP), a project of International Fund for Agricultural Development (IFAD) and North Eastern Council (NEC), operating in six hill districts of Assam , Meghalaya and Manipur, throws much light on the constraints faced in this area.  Some of the constraints listed are:

·         Limited bank branches

·         Inadequate staff in branches

·         Insistence of banks on joint-rating with NGO, though bankers cannot spare time

·         Insistence of banks on regular transactions with SHG, which is not possible owing to distance problems (for instance farmers sometimes have to spend Rs.500 to Rs.800 for a single journey).

·         Bank managers not being adequately sensitized to appreciate the potential of SHG movement

·         Single member’s defaulting record preventing the whole SHG group to access credit linkage. Some bankers want SHG record to be maintained in English, which is difficult in the rural setting

·         Wide spread intolerance to even minor mistakes in record maintenance by SHG

·         Bankers’ feeling that SHG linkages are additional burden and therefore their remaining unenthusiastic  

Financial Inclusion

3.1           The role of financial intermediation in the process of economic growth began to get its attention since the late 1960s with some influential literature highlighting the positive correlation between financial development and economic growth (McKinnon, 1973; Shaw, 1973). The endogenous growth theories also argue that with positive marginal productivity of capital, development of financial markets induces economic growth, both in the short and long run (Bencivenga and Smith, 1991). More recent years have also seen further support on the greater role of financial intermediation in economic growth than the traditional determinants (Gorton, 2002; Boyreau-Debray, 2001; Levine, 1997: and Levine, et al 1999). In India , at the sub-national level, Sahoo and Patra (2006) also observe a positive relationship between finance and growth in Orissa.

3.2           The empirical evidence on the causal relationship between finance and growth is also weighted in favour of finance leading to growth i.e. financial development leads to growth in a supply-leading sequence (King and Levine, 1993; Benhabib and Spiegel, 2000). Therefore, strengthening financial institutions, increasing their outreach and ensuring efficient payment and settlement systems covering the maximum possible population in a region, can provide necessary impetus to growth. In this context, the argument for greater financial inclusion - delivery of basic banking services to all sections of the society at an affordable cost - in a country like India , not only derives from reasons of social inclusion but also on economic grounds based on theoretical and empirical research.

3.3           The low level of financial inclusion, which is generally considered to be the outcome of poverty, ignorance and environmental factors, is mostly related to supply related issues i.e. lack of appropriate financial services for those that are excluded by the traditional instruments. Empirical research in Asian and African countries has demonstrated that poor people do have demand for financial services and, in fact, they often bear the high costs charged by the informal financial markets for various types of services, apart from the risks involved in such products. Ignorance mostly arises due to lack of appropriate marketing of financial products by the formal financial institutions, limited outreach and cumbersome and “unfriendly” procedures.

3.4           Apart from the supply side reasons indicated above, the demand side constraints are also dominant viz., the low level of commercialization, difficult terrain, poor and costly transport, sparse population in the hilly areas, scattered villages, poor infrastructure, high level of grants per capita and traditional ethnic tribal culture where need for savings and credit is limited.  The State Governments need to have strategies in place to ensure growth in production and productivity, especially in agricultural and allied activities and promote genuine investment, focus attention on specific activities of comparative advantage and promote investment in these activities to catalyze overall development.

3.5           In the NER, the level of financial inclusion is not related to the poor alone. Gauged by any measure, financial penetration and financial inclusion is very low.  Many indicators could be used to measure banking penetration and financial inclusion.

3.8.2 Appointment of business correspondent and business facilitator

Reserve Bank has issued guidelines in January 2006 enabling banks to use registered societies, trusts, section 25 companies and post offices as agents to act as business correspondents and carry out minimum banking transactions at their place of business so that banking facilities can be offered closer to the customer at a lower transaction cost. In the NER, considering the time, distance and cost for a customer to reach a bank branch, especially in remote areas, the Committee believes that banks can use this model effectively for increasing their outreach.  The local institutions identified as business correspondent can be used for educating, sourcing customers sensitizing them about the bank’s requirements and facilitate the recovery of loans. Ideally, for the NER, local CBOs like VDBs, Anchal Samitis may be used as business correspondents. The State level task forces have identified some organizations that could be used as business correspondents.  Where a local organization/association not falling under any of the forms of organization listed in the Reserve Bank guidelines referred to above is proposed by a bank after due diligence and is recommended by DLCC for being approved as business correspondent, the Committee recommends that regional office of the Reserve Bank may be given powers to grant suitable exemption from the Reserve Bank guidelines.  

The Committee believes that having regard to the trusted relationship that the people have with post offices and postmen, banks could gainfully appoint post offices as their business correspondent. There are about 8000 post offices in the region as against 2000 odd bank branches and these offices can be used for achieving the ultimate target of 100 per cent financial inclusion. The model agreement prepared by the IBA for adoption of such a model in Maharashtra could be used by banks in the region by entering into a similar agreement with the Post Master Generals in Guwahati and Shillong.  

It may not be feasible to ensure that surplus cash with the institutions used as business correspondent reaches the bank branch the same day or even the next day in view of the distance from bank branches is some parts of the region.   The Committee recognises that there is some risk that banks would face in entrusting the cash with the correspondent for more than a day. While there are IT solutions and devices that would enable the bank to keep track of the receipts and payments made by the ultimate customer, the business correspondent model can work only on principles of local knowledge, vigilance and awareness of customers, and sufficient incentives/disincentives for the business correspondent to ensure safety of the bank’s cash. Relaxation in the requirement of deposit of cash latest by next day could be considered by Reserve Bank where post offices are used as business correspondents.  

Banks could also identify well-respected local persons like a school teacher, postman, primary health worker or retired official to act as business facilitators or relationship managers. These facilitators can handle all aspects of sourcing clients, marketing the bank’s products and helping recovery but cannot undertake any cash transactions.   

3.8.3 Linkage with SHGs

The deposit and credit linkage program of NABARD has had proven success throughout the country. However, in the NER except for a few States like Assam , the program has not taken off. The challenge, therefore, before the banks is to make the shift to a new model of banking which relies on partnerships and relationship building. This requires change in the mindset of banks to a more intelligent interpretation of traditional concepts of credit assessment, credit utilization, due diligence, asset verification, inspection, security, etc. While banks may pursue the well proven SHG/bank linkage model of the NABARD for widening credit coverage, there is a need to upscale the operations through SHGs, especially for providing working capital and investment credit. The Committee suggests that banks together with NABARD may actively engage themselves with facilitation of group formation and group linkage for savings and deposits as also for providing other financial services like insurance.  NABARD may review its guidelines for this purpose if required and also allow refinance for banks financing MFIs in the NER. The performance of banks in this regard will be monitored through a performance measurement as indicated under paragraph 3.8.5 below. There are enough innovative practices across the country that could be adapted and adopted by the banks for the region. The Committee has suggested in Chapter 7 that  extensive training and sensitisation workshops for financial inclusion starting at the apex level and going down to district level may be launched by Reserve Bank and NABARD anchored by IIBM.  The Microfinance Development and Equity Fund at NABARD may be earmarked and utilized for the purpose.