Inaugural Session Speech by ADB Managing Director General Rajat M. Nag at the Outreach 2010--Financial Inclusion for the Common Indian on Access to Finance and Poverty Reduction in Asia on 12 June 2010 in Kolkata, India
Mr. Chairman, Honorable Finance Minister Mukherjee, Deputy Governor Thorat, Mr. Karmakar, Managing Director, NABARD (National Bank of Agriculture and Rural Development), distinguished guests, ladies and gentlemen, good morning.
It is my great pleasure to be in Kolkata. Asia's major role in driving the global economic recovery and the focus by you and your institutions on improving access to financial services — savings, credit, payment services and remittances, and insurance — signifies the central role of financial inclusion for inclusive development for poverty reduction. Financial inclusion is critically important to realize the 11th Five Year Plan (2007-2012) aim to bridge the various divides—including economic, social, geographic, and human resources—through opportunities for increasing incomes and employment. In this context, I would like to share my views on access to finance and poverty reduction along with some findings and experiences of the Asian Development Bank.
Status of Poverty Incidence and Access to Finance
While strong economic growth has benefited hundreds of millions of Asians and lifted many out of poverty, growth alone has not been enough. Across Asia today, over 900 million people live on less than $1.25 a day. Further, growing inequality accentuates poverty incidence. In Nepal, the poverty rate would have been about 13% had income distribution not worsened, instead of the actual rate of 24.7%. Likewise, Cambodia would have achieved a 9% poverty rate, instead of 18.5%. In India, the Gini index rose from 32.5 in 2000 to 36.8 in 2004.1
Millions of Asians do not have access to financial services. For instance, the percentage of adults in Indonesia, Vietnam, the Philippines and Papua New Guinea with access to a bank account is less than 40%.2 In India, 51.4% of farmer households are financially excluded from both formal and informal sources, and overall 73% of farmer households have no access to formal sources of credit.3 Further, only 14.2% of the registered and 3.09% of the unregistered small and medium enterprises availed of bank finance.4 In a country where nearly two–thirds of the labor force is engaged in agriculture and where nearly 13 million small and medium enterprises operate, these numbers indicate the magnitude of challenges and the concerted efforts needed for transforming exclusion into inclusion.
While not that much in India, the impact of the global crisis also impacted the poor and vulnerable populations through various channels and made financial inclusion all the more important. Remittances receipts from overseas workers declined sharply in the Philippines and Vietnam. In Bangladesh, where remittances were still growing, the growth slowed to 19% from 27% in the period June 2009–March 2010 compared to the same period in the previous year. The growth in remittances also moderated in Nepal from 42% in 2008 to 36% in 2009. At the same time, in some developing countries, tighter borrowing conditions, rising borrowing costs and increased risk aversion reduced availability of loans to vulnerable groups.
In this context of the significance of financial inclusion, the enormity of the challenges, and the need for concerted actions, let me thank the Bengal Chamber of Commerce for bringing leading thinkers and institutions to this conference. I also thank the NABARD and the Axis Bank for their sponsorship.
There has been a lively debate on the relationship between financial inclusiveness, economic growth and poverty reduction. Experts and literature preponderantly suggest that affordable access to financial services helps poor households plan for routine expenses, cope with sudden external shocks, and better cover unanticipated expenses, and also contribute to facilitate better access to more stable and productive activities.5 Importantly, access to finance has shown to be essential in containing the risk of pushing vulnerable populations more deeply into poverty as a result of economic crises, natural disasters or medical emergencies, as low income people have very limited or no assets to protect themselves. At the same time, enhancing the reach of the financial system to better serve excluded segments of the population also contributes to increase growth and social cohesion.
An ADB impact evaluation study on rural credit programs assessed 39 rural credit projects and 21 technical assistance grants provided to seven countries including Bangladesh, People's Republic of China, Indonesia, Nepal, Philippines, Sri Lanka, and Thailand. The study found that ADB's assistance for rural credit programs generated positive impacts in general, such as increased production, improved productivity, and upgraded technology, which raised income at the farm level. ADB support also helped enhance the quality of the participating financial institutions' loan portfolio, and improved deposit mobilization.
Ongoing Measures for Financial Inclusion
Governments across Asia have long made financial inclusion a policy priority. The Government of India has attempted to address the issue by promoting the spread of commercial banks, developing cooperative credit institutions, and establishing extensive networks of regional rural banks, while also enhancing the spread of insurance services for the poor as well as crop insurance. As a result, regional rural banks account now for 37% of total offices of all scheduled commercial banks, over 90% of their staff is posted in rural and semi-rural areas (as compared to 38% for other banks), and these rural banks have enhanced outreach to small depositors, more significantly in more backward regions. In parallel, microfinance institutions have complemented these initiatives.
Realizing the magnitude of the task and the enormous social and economic benefits from financial inclusion, the Government of India constituted the Committee on Financial Inclusion6, and based on its recommendations, set up the Financial Inclusion Fund and the Financial Inclusion Technology Fund. NABARD, which is the coordinating agency for financial inclusion initiatives, established a Financial Inclusion Department as the nodal department.
These initiatives are commendable, but challenges remain. Significant segments of the population still have no or limited access to finance, and the sustainability of rural financial institutions is not secure, While state–owned banks have achieved substantial broadening in branch outreach, their effectiveness has been constrained by high cost and inefficiencies, excessive intervention in their operations, inadequate incentive structures, limited staff capability and inadequate technology use. While cooperative credit structures and microfinance institutions demonstrate proximity to client and ability to customize services, their ability to scale up and effectively manage risks remains weak. Capacity constraints and weak linkages with infrastructure are bottlenecks.
Consensus is emerging on lessons learned and opportunities for accelerating progress towards financial inclusion. Let me highlight some of the core aspects that ADB supports in its partnership with countries for enhancing financial inclusion, including in India.
- Reforms in policy, regulatory environment, and institutional strengthening need to be pursued further to enhance performance and efficiency of financial institutions. Focus should be on enhancing the scale, quality and sustainability of service delivery. In this context, I commend the Reserve Bank of India to have used regulation to facilitate financial inclusion without compromising on prudential and financial integrity norms. I note and fully agree with a recent speech of the Deputy Governor that ensuring consumer protection is an overarching objective of financial regulation in the context of financial inclusion.
- A variety of strong and dynamic institutions both in the public and private sector are needed to accelerate the delivery of financial services to marginalized and low-income groups and to help secure livelihoods in the face of slower labor absorption resulting from reduced global output potential following the global crisis. These institutions are all critical, especially in countries or regions still facing galloping demographic pressure and where the poor are particularly vulnerable to the impact of natural disasters and where further employment potential in agriculture is limited, as in India.
- Technological changes are opening new grounds for optimism in the fight against poverty through financial inclusion. New technologies such as increasing capability to rely on electronic format for receivable claims have enabled private actors to increasingly view financial service outreach to those at the bottom of the pyramid.7 Correspondent banking schemes also open up new avenues for cost effective outreach, even in remote regions. The application of information technology among others will significantly aid the self–help group–bank linkage program, facilitate the provision of diversified financial services through microfinance institutions and cooperative banks, and enable farmers to manage price risks through warehouse receipts and commodity derivatives. In fact, the scope is immense. The spread of mobile phones, where India has the second largest consumer base in the world, and the ongoing efforts for a nationwide roll out of unique identification8 provide unprecedented potential for financial inclusion. India is well placed to benefit from these opportunities because of its strong information technology base. I commend the efforts of NABARD in mainstreaming the use of technology for financial inclusion.
- Adopting an integrated approach is critical to the effectiveness of measures and the sustainability of results. While improving access to finance helps mitigate the incidence of poverty, this can only be effective and sustained when integrated with efforts to overcome the multiple constraints to livelihood security –– for instance through infrastructure development for facilitating market linkages, enhancing agriculture productivity, and value addition of agriculture produce. Introducing adaptation mechanisms to contain the impact of climate change which affects the poor particularly, will complement and multiply the potential benefits of access to finance. The ongoing efforts to coordinate financial inclusion measures with the ongoing development programs in India will improve the absorption capacity of clients, and in the process, strengthen the demand side of financial inclusion.
Financial inclusion and its contribution to poverty reduction is a central element of the Asian Development Bank's strategic priorities under our "Strategy 2020"– particularly in the context of inclusive growth. Let me share with you some of the ongoing ADB projects in India that support financial inclusion, particularly for the poor.
- The Rural Cooperative Credit Restructuring and Development Program approved in 2006 aims to reform the short–term cooperative credit structure in Andhra Pradesh, Bihar, Madhya Pradesh, Maharashtra, and Rajasthan — based on the recommendations of the Vaidaynathan Committee. This program has three components: (i) establishing a policy reform and implementation framework; (ii) building a facilitating legal, regulatory, and governance framework; and (iii) institutional reforms for sustainability. These reforms could potentially benefit 41 million members of the cooperatives in these five states with timely, affordable and adequate credit. Two tranches amounting to $500 million of the $1 billion loan have been released.
- A recently approved Micro, Small and Medium Enterprise (MSME) Development Project ($300 million) will remove constraints to micro and small and medium enterprise development and enhance their employment generation potential and sustainability. Around 30,000 micro and small and medium enterprises are expected to benefit from this project, many of them employing women living in slums and other poor and isolated communities. Accompanying this project is a technical assistance to help women entrepreneurs in the states of Madhya Pradesh, Maharashtra, Orissa, Rajasthan and Uttar Pradesh access financial resources and market opportunities to augment their incomes.
- To increase the asset base, improve livelihoods, enhance access to finance and integrate the poor with the rural economy, a Khadi Reform and Development Program ($150 million) supported by ADB is currently under implementation. This program is strengthening khadi institutions at the grassroots level through capital and technology infusion as well as better design and marketing of products. Nearly 300 khadi institutions will be selected for support, including some from West Bengal. The program could potentially benefit about 1 million spinners and weavers, 79.5% of whom are women.
- The ADB has been assisting the Government of India in mainstreaming public private partnerships (PPP) to bridge large infrastructure gaps. Six ongoing technical assistance projects provide sequenced capacity building, PPP institutionalization, and pilot project development in 16 states and 7 line ministries. This support also includes the Government's flagship program for the Provision of Urban Amenities in Rural Areas or PURA.
- ADB projects supporting financial inclusion are being implemented in all our South Asian member countries. For example, in Nepal, increased access to finance is being realized through the Rural Micro finance Project and Rural Finance Sector Development Program along with projects for infrastructure and strengthening local governance. Similarly, ADB is supporting Sri Lanka both for enhancing access to finance and improving infrastructure in the north and the east.
Ladies and gentlemen, the financial sector in India has undergone a decade of systemic, calibrated, and substantial reforms. Liberalization of the financial sector has been accompanied with parallel steps to strengthen regulation and supervision. These reforms have led to a deep and well diversified financial market, which has stood India in the testing times of the global financial crisis.
These credentials along with one of the world's largest retail financial networks,9 India's renowned IT proficiency, the coordination efforts of NABARD, and the Reserve Bank of India's oversight bode well for a structured and coordinated path to financial inclusion. In this context, India can and should play a leadership role in the G20 Financial Inclusion Experts Group in identifying lessons learned on innovative approaches to providing financial services, promoting successful10 regulatory and policy approaches, and elaborating standards on financial access, financial literacy and consumer protection. Sharing the richness of India's experiences and her future initiatives will benefit all countries in tackling the challenge of financial inclusion and reducing poverty.
Thank you very much.
1 Human Development Report 2006 and 2009. While Gini index shows growing inequality, the overall incidence of poverty in India has declined from 36% in FY1994 to 27.5% in FY2005 (Press Information Bureau. Planning Commission, Government of India. 2007).
2 Half of the world's population is "unbanked", i.e., 2.9 billion adults do not have the opportunity to save, get loans, manage their finances for the future or grow their businesses.
3 National Sample Survey Organization, 59th Round (2003).
4Third All-India Small-Scale Industries Census (FY2001).
5 Asian Development Bank Institute. 2005. "Serving the Poorest of the Poor: The Poverty Impact of the Khushhali Bank's Microfinance Lending in Pakistan (Heather Montgomery)." The empirical analysis 2,000 rural and urban households across Pakistan demonstrates that participation in the Khushhali Bank's microcredit program has positive impacts on both economic and social indicators of welfare, as well as income-generating activities, especially for the very poorest participants in the program. Particularly encouraging is the fact that Khushhali Bank' generated these impacts while remaining focused on the goal of financial sustainability.
6 Chaired by Shri C. Rangarajan, former Governor, Reserve Bank of India. In addition, The Committee on Financial Sector Reforms (chaired by Shri Raghuram G. Rajan, Professor, Graduate School of Business, University of Chicago) also emphasized the need for expeditious financial inclusion.
7 C.K. Prahalad, Professor, Stephen M. Ross School of Business in the University of Michigan introduced the concept of fortune at the bottom of the pyramid.
8The Unique Identification Authority of India implementing the Multipurpose National Identity Card or Unique Identification card project. Mr. Nandan Nilekani, a former co-chairman of Infosys Technologies, is the first Chairman of the authority.
9Nearly, 70,000 bank branches, 100,000 outlets of cooperatives, and 150,000 post-offices, and 800 microfinance institutions.
10The draft principles (as of 22 April 2010) comprise leadership (by government), diversity (through incentives and use of broad range of services such as savings, credit, payments and transfers, insurance), innovation (technological and institutional), protection (consumer), empowerment (strengthening of financial literacy and user capability), cooperation, proportionality (vis-à-vis risks) and knowledge (evidence-based policy and incremental "test and learn" approach for regulator and service provider).