Financial Literacy for Financial Inclusion

The majority of the working poor in India, especially those working in the informal sector like small and petty vendors, home-based workers, artisans, labourers, maid servants, desperately need financial services from formal financial institutions. The reason is that they are involved in economic activities in which they need working capital. They also need credit or term loans to buy business equipment like sewing machines or cutting machines or livestock or handlooms.

There is also a need for credit for improving their huts or houses, for adding water and drainage services in their living place, or for getting electric connections.

These are all their needs for running economic activities, mainly because they are self-employed or working on their own. Because of their nature of work (mostly manual labour), poor living and working conditions, and low income level, they are very vulnerable and susceptible to many types of risks, i.e., personal risks like sickness, accident death, or natural disasters like floods, cyclone and fire. They need to be protected under these risks. They also want to build little savings for their future needs. Women want to "save for rainy days". Vulnerability during their entire working life does not allow them to build or plan for their old age.

What we need is a two-step financial literacy programme — developing personal financial management skills and developing financial operation skills — to make financial inclusion successful

The poor need credit, insurance, savings and pension services. But because of lack of access to these financial services from formal sector, they have to depend on informal financial sources, i.e., private money lenders. Not only are these informal sources exploitative, they provide only credit services and do not provide other financial services like savings, insurance, pensions and remittances. As a result, the poor are caught in a debt trap; they borrow at very high interest rates for all types of life-cycle needs, whether it is a business need or a personal need like sickness or accident, or a social need like marriage. If our objective is to bring these economically active poor out of the vicious cycle of poverty and help them build their own capital assets and business, we need to ensure that they get access to integrated financial services, and that too from formal financial institutions at a reasonable price.

The current ‘financial inclusion’ policy has all the components that are required to ensure that poor get access to financial services. Most importantly, the policy does not talk about only credit service, but also about integrated financial services. It provides for "door-step" banking, which is needed by the poor. It talks about bank appointing business facilitators and banking correspondents. It seeks to allow the poor to open "no frills" accounts. Banks are given targets and they are strictly monitored. There is the necessary political will as well as positive response from the formal financial sector, especially banks.

Though targets are supposedly being achieved, it is yet to be seen that it is bringing a positive change in the life of the excluded population. Thus, while "no frills" accounts have been opened, few accounts are being meaningfully operated.

Probably the gap is at the demand side; may be the needy are not ready to avail of these services in a meaningful way; because this is the first generation of the population which we are trying to link with formal financial services. They are taking time to get used to such services. They are used to deal with informal financial service providers who provide 24-hour service at their doorstep with the simplest procedures. May be, they are reluctant because they are scared to follow procedures.

We need to ensure that the poor get access to integrated financial services, and that too from formal financial institutions at a reasonable price

For a few services like savings and insurance, there is a need which needs to be converted into demand. There is also a need to help them change their financial behaviour – they normally live on day-to-day basis and also think on a day-to-day basis. We need to build their awareness to help them think for long-term lifecycle needs. There is a need to help them to change their habit of making financial decisions like impulsive borrowing without thinking or understanding its terms and conditions, and their repaying capacity. There is need to teach them to differentiate between productive and consumptive use of money, specially borrowing.

What we need is a two-step "financial literacy" programme to make "financial inclusion" successful and meaningful. One is developing personal financial management skills and the other is developing financial operation skills for availing various financial services.

Personal financial management literacy includes the component of awareness building for financial planning and changing impulsive financial decisions, understanding importance of regular savings, borrowing only for productive purpose, minimising risks through availing insurance services and also understanding financial principles. These include the following:

· the principle of fungibility of money;

· principle of power of compounding;

· principle of productive versus unproductive use of money;

· principle of borrowed versus own capital; and,

· principle of insurance.

A proper understanding of the principle of power of compounding will make the provision of "no frills" accounts meaningful because poor will understand the importance of regular savings for the long term. Similarly, the principle of productive versus unproductive use of money will reduce the use of borrowed money for productive purpose and the principle of fungibility of money may help them to save and plan for different purposes or different life-cycle needs. Personal financial management literacy should be accompanied with financial operational literacy, like account opening procedure, explaining a nomination facility, types of saving accounts or how to avail credit from a bank.

The financial inclusion programme can become meaningful if parallel work is done on both the demand and supply side. Excluded population should be prepared to avail of financial services from formal financial institutions and financial literacy can play a very important role in bringing in the desired results. Of course, it will be too much for banks to play this role of preparing people for availing financial services or converting need into demand. Thus, a parallel financial literacy movement should be encouraged, may be through the media, even as we build a cadre of financial counsellors at the grassroots level to educate people by building financial awareness.

Jayshree Vyas is Managing Director,
Sewa Bank

Remittance: a step towards financial inclusion

Financial Inclusion is the buzzword doing the rounds in the social sector these days. Financial inclusion is an umbrella term used to represent access to various financial services by the poor (bottom of the pyramid!). One of these services is the transfer of money i.e. remittance; a field which is seeing a lot of developments lately.

Remittance in common parlance refers to the transfer of money by a person abroad to his family/friends in his/her home country. Various reports by World Bank, United Nations University show that remittances form the second largest source of international finance to many developing countries of the world, often surpassing the official development flows. International Fund for Agricultural Development (IFAD) 2006 estimates put the total flow of remittances to developing countries at $301 billion (including informal channels) while the World Bank estimates are $250 billion (excluding informal channels), which mirrors the huge market potential.

And we are not just talking about the rich or middle-class but the poor too. We have known through personal experience or news stories about the sheer no. of unskilled labour who have migrated to areas for e.g. Gulf (from Kerala) in search of livelihoods. And it is this section of migrants that the development sector needs to concentrate on by ‘introducing’ formal channels to them which can be better leveraged to promote economic development.

Remittances make a real difference to people, a difference that’s measured not in money but in its ultimate utilization for better food, medicines, education and healthcare. But what’s the connection between remittance flows and financial inclusion?

In countries like Ghana, remittances can account for up to half the household income. In Bangladesh, they can represent most of the household income. It is estimated that about 10% of the world’s households receive remittances (DFID). And while this money is used to support basic necessities like roti, kapada, makaan, it can have a multiplier effect. It is known that most often the excess money is further invested for genetrating profits for the family. The cumulative effect on the economy could be increased employments, increased money flow for investments, thereby stimulating growth. And it is this aspect that if encouraged, can help communities to come out of poverty.

Money is sent through formal channels like banking institutions or money transfer agencies or more frequently, as in case of poor migrants, through informal channels like friends, acquaintances or illegal Hawala channels. There a number of impediments faced in the informal fund transfer – higher charges, delivery issues, possibility of theft etc., which may not just mean reduced money to the beneficiary but may even further tax the family. On the other hand, the formal channels ensure easy transference of the entire amount in return for set charges. And as money transfers through formal channels often require the use of a bank account, remittances promote access to formal financial services for the sender as well as recipient.

However the problem lies in the fact that the penetration of the formal channels is much limited, due to the same demand and supply problems which are plaguing the banking sector - problems of availability and accessibility, identification, information gap, illiteracy, higher operational costs.

This situation if utilized efficiently can prove to be a win-win situation for all stakeholders. As Dilip Ratha(World Bank) points out, encouraging remittances through the banking channels (formal channel) can increase the development impact of remittances by encouraging more savings and furthering investment opportunities. Banks and other financial institutions can introduce their other products to its remittance customers thereby reducing their costs per customer. MFIs can make use of the history of the remittance receipts to map out the credit history of the potential customers.

Access to remittance services in rural and remote areas can be improved by encouraging the participation of the microfinance institutions, credit unions, and saving banks (including postal saving schemes) in the remittance market thereby effectively increasing the probability of usage of formal channels by the poor.

The opportunities are limitless; and if combined with initiatives by the financial institutions and policy and regulatory support by Governments have the potential to make a difference!

By Ms. Swati Vempati.

Need for sustainability in the quest for financial inclusion

A focus on “financial inclusion” has been there in India for quite some time now. If we look back we can see examples of policies aimed at financial inclusion at various instances in the past; most prominent amongst them being the policies that were enforced in the immediate aftermath of bank nationalization and in many subsequent policies even later. So if there existed policies for financial inclusion why it is that a vast segment of our population continue to remain outside the coverage of formal financial institutions and their products and services and continue to rely on informal sources of finances like moneylenders who charge exorbitant rates of interest.

Why it is that poverty characterizes vast tracts of rural India and people there aren’t able to use the ladder of access to alternative sources of finance to escape the clutches of poverty and the social and economic shackles that a poorly performing agricultural sector has imposed up on them. Why is it that large numbers of landless agricultural laborers AND farmers continue to be dependent on agriculture despite falling wages and incomes?

The answer to this is that though the architects of India’s poverty alleviation programs had their intentions right and realized that providing financial inclusion in the form of access to formal financial institutions and their services to the most impoverished segment of the population would help them to break away from their dependency on incomes from agriculture and also liberate them from the clutches of the moneylender (principally responsible for a large part of rural indebtedness); in implementation the “financial inclusion” did not go further than increasing the number of bank branches in rural India and emphasizing on credit requirements of the rural population; most of which again went to the land owning segments of the agricultural class who were able to muster sufficient collateral.

There was hardly any focus on providing the landless laborer with credit let alone other financial products and services including savings, insurance, etc. Thus the rural financial infrastructure that came about was quantitatively impressive but qualitatively poor.

What they forgot was that the approach towards making financial inclusion a reality needs to focus on perceiving the common man at the base of the pyramid not merely as a recipient of the financial services that institutions hand down but also as an important stake holder in the entire process; one for whom these products and services are a gateway to greater freedom from poverty and underdevelopment. The focus therefore needs to be not only on the quantitative but also on the qualitative. This poses interesting questions to us today. It forces us to ask ourselves are we providing the base of the pyramid with what they need or are we providing them with what we think they need? what difference is what we are doing making in terms of providing the base of the pyramid with a greater avenue of choices to escape the poverty and impoverishment that binds them?

It brings us to the realization that when we talk about financial inclusion we should not merely talk about the quantitative but also about the qualitative. There needs to be a focus on sustainability; on providing the base of the pyramid with access to financial services and products that are designed to help bring about transformational changes within the structure of rural society and economy that will help it escape from the clutches of poverty and grow while at the same time providing adequate protection to those making use of these products and services. The task of financial inclusion will be incomplete if the common man at the base of the pyramid, who is in a vulnerable position due to poverty and marginalization is not protected and is left even more vulnerable at the end of it.

it requires us to adapt and adopt newer systems and processes to cater to the demands of different geographical, economical and social environments with the purpose of breaking restraining forces that are inhibiting their economic development and hence fulfill the objective of achieving sustainable growth that is all inclusive

Posted By Vivek John Varghese. http://knowaboutvivek.blogspot.com

The nature of Financial Literacy

Ever since i have become familiar with the word "financial literacy" and the manner of its usage and the contexts in which it is used i have had reason to wonder whether it is actually necessary to differentiate between financial literacy for the rich, poor (and to do justice to what is a large segment of the Indian population) the middle class. The origins of this question is founded in the fact that today we live in an economic context where macro economic realities and happenings impact the lives of people, Rich and Poor with the same intensity (albeit in manners more dependant to their different contexts).

A classic example of this is the economic phenomenon called as inflation (or in common parlance "price rise") and the kind of different impacts it has on all segments of society. While on one hand it is necessary to rein in inflation (and often this reigning in is done through stricter monetary policy like raising interest rates) as it can make the life of the common man hell by pushing up the prices of most essentials like vegetables and fuel etc, the same stricter monetary policy can also force loss of confidence in equity markets and by making credit expensive push down industrial growth rates. Whose concern should the government address in such a situation is a question of choice and i believe that the only way this dillema can be addressed is democratically.

This is where the question that i posed earlier becomes of paramount importance. If financial literacy is provided tailor made depending upon what we feel should people be made aware of it can leave some people better informed and others ignorant; thereby giving the better informed a better chance at shifting the decision making towards themselves and in disfavour of the ignorant (mostly the poor and the middle classes) who constitute the greater number and who should have been the recipients of redressal.At the same time it is also necessary to inform people that many at times macro economic happenings over which they are not responsbile can also have severe and sometimes shocking impacts on their economic and financial contexts. Many of you might say that it would be unfair to think that all people; whether rich or the poor or whether educated or uneducated; have the same level of understanding and hence can be dealt with in the same manner. I say i agree with you too. All people might not have the same level of understanding but the differentiation should not be in what constitutes the curriculum for financial literacy programmes but the methodology of carrying out the financial literacy initiatives; which should differ according to the socio-economic contexts of the audiences involved; so that all people have some idea about the financial and economic issues that to greater or lesser degrees affect them and their lives.

Savings and loans and explaining them to people are absolutely important in the case of a country like India where the greatest segment of people remain outside the purview of formal financial services, products and institutions.but at the same time it is also important to realize that as greater numbers of people are coming into the fold of formal financal institutions they are increasingly going to be exposed to newer dangers and threats - many of which remain outside their control and under the influence of macro economic factors. It is time the common man was made more aware of these threats and informed about information assymetries so that he can claim his protection and what is due to him in the new socio-economic and financial context.

Posted by Vivek John Varghese

When techies turn teachers...

Some hundreds of children smile. Meet five city geeks who decided to lead by example when it came to giving lessons in kindness

Charity is one thing, and chapters in self-reliance, another. Thankfully, five young men in town know the difference. Ajit Kumar Singh, an employee of Adobe Systems, Hemant Roy, with BrickRed Technologies, Izhar Arman, with Pitney Bowes, Anindit Sinha, with BirlaSoft and Prashant Kumar Roy were determined to take up a challenge that most would only talk about and not tread on. All of them had a common mission quality education in rural India. This gave birth to their NGO Aarambh in June 2008. Now, their humble beginning has resulted in two full-fledged schools in otherwise backward areas of Bihar, with over 200 students.

Predictably, the journey wasn't easy. There were times when there was no money to pay to the teachers, when parents refused to send their kids, and a lack of basic amenities in study areas. But the five stood thick.

When their first school was set up in Derhgaon, a remote village in the Rohtas district of Bihar, it had 20 students and one teacher. Today, the same school boasts of 150 students and six teachers with classes I to VII, and operates in two shifts, in an open space provided by the villagers. Aarambh's second school was started in Maheshwara village, Begusarai (Bihar) in October 2008. Sixty students and three teachers make the rented place a temple of knowledge.

As all the founder members are working professionals, they make it a point that no matter how small their efforts are, the project is given the best in terms of time, money and ideas to help the under-privileged. Hailing from different places in Bihar and Jharkhand, they make it a point to visit both the schools once in every three months, turnwise. Teachers are given professional training so that they match up to optimum educational standards.

Funds ke funde

The youngsters are still battling with basic problems, standing strong in the face of each. "In summer, there are hot winds, and in monsoon, heavy downpours. Due to all this, school hours have to be cut short, and even shutters pulled down. A building is now a must, open spaces aren't enough. We haven't been able to manage the funds yet, and hope conscientious corporates will come forth," said Ajit Kumar Singh, the president of the organisation.

The evangelists feel that the biggest hurdle in their giant step is the finance. "We make it a point to save a certain percentage of our income every month for this cause. But this contribution is just not enough to run the school smoothly. We tried to gather some funds from the government and private organisations, but in vain," said Hemant Kumar Roy, secretary, Aarambh.

According to estimates, India will have the largest youth population in the world in the coming years, with a multiple increase in unskilled and/or illiterate unless proper education is facilitated. Experts have warned that if this young energy is not channelised properly, one can only imagine the danger looming large over the country.

Source:-

www.aarambh.net

Review of agricultural extension in India | International Food Policy Research Institute (IFPRI)

Are farmers’ information needs being met?

Despite a wide range of reform initiatives in agricultural extension in India in the past decades, the coverage of, access to, and quality of information provided to marginalized and poor farmers is uneven. This paper aims to ascertain why farmers are not accessing information and where information gaps exist, despite the variety of extension approaches in India. Using information provision and access as the basis for analysis, the paper reviews some of the major agricultural extension programs in India by considering their ability to provide information and facilitate information sharing and use in farming communities. The review gives a broad overview of the current extension scene in India while providing a synthesis of recent debates and the observations of various authors as well as working groups in the Ministry of Agriculture and the Planning Commission. The paper examines the challenges and constraints of each agricultural extension approach as it attempts to provide farmers with access to information that is relevant to th,eir farm enterprises. As a result of this analysis, opportunities are identified for increasing extension services’ effectiveness and efficiency in reaching smallholder farmers. Research gaps are also identified. The review concludes that there is an increasing need to work in partnership and to share knowledge and skills in order to provide locally relevant services that meet the information needs of marginal and smallholder farmers in India.

Source:-International Food Policy Research Institute (IFPRI)

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Published Date:-2010,

A bandhu they can bank on

The tiny drops promise to swell into an ocean of profit, as FINO handholds the poor to deposit their faith and money in the banking system..

Every pie counts: Sushma Devi deposits her husband's savings into her bank account using a smart card. - Rasheeda Bhagat

For many of us who effortlessly shop for things, transfer money or pay utility bills with a click of the mouse, it is virtually impossible to even imagine the trauma the illiterate, the rural and the lower middle-classes face in doing these simple tasks. Mind you, these are not the abjectly poor; they make a decent income.

So, at the office of FINO (Financial Information and Networks Organisation) Ltd at Dharavi, touted as Asia's biggest slum, in Mumbai, the sense of empowerment was palpable as Sushma Devi walked in with her month-old baby in her arms, and her three-year-old daughter clutching her finger.

She proceeded to the counter where Shahida, a FINO banking correspondent or bandhu, was seated with a small hand-held device into which went the woman's biometric or smart card bearing her bank account details. The machine confirmed her identity after she placed her index finger on the monitor, and she put Rs 300 into her account. The money came from her husband's earnings and it was great to note that it went into the wife's bank account!

The transaction took barely a minute. Sunita Singh, who runs a small business nearby, came in next to deposit Rs 5,000 in the Union Bank of India account of one of her workers. “This money will be withdrawn by his parents living in a small town in UP. He sends them Rs 5,000 every month like this,” she said.

Arvind, a fruit seller, followed. He sells cut fruits on his handcart; “it is Ramzan, and in the evenings there is brisk business. I'm making good money, so I'm putting this (Rs 1,000) into my account before I spend it,” he grinned. This month has been good and he has already saved Rs 6,000.

Manish Khera, FINO's CEO, who in 2006 quit his secure job as a joint general manager at ICICI Bank, Mumbai, to set up the organisation, watches with quiet pride the efficient working of the system where money is either put in or withdrawn.

“We saw that banking in general is concentrated on the urban middle-class and we were not really serving the masses. And it was not even a niche bank.” The bulk of the customers living in remote places and the expensive physical infrastructure to reach them were major obstacles preventing such customers from engaging with banks.

He looked around at global initiatives to solve this problem; the Brazilian model of business correspondent (BC) was just taking off, and there were initiatives happening in South Africa and Indonesia.

So he zeroed in on the idea of the BC (today FINO has over 10,000); “instead of banks setting up branches, the agent or bandhu goes to the doorstep of the client and with little or shared physical infrastructure the business model becomes feasible.”

Government payouts

Over 90 per cent of FINO's 18.5 million clients are in rural India, and “as we talk, 50,000 additional clients will come in today,” he says.

The biggest component of FINO, which operates in 23 States and 80 districts, comprises Government payouts, social security pensions, health insurance for the BPL (RSBY or Rashtriya Swasthiya Bima Yojana) and NREGA. “In rich States such as Haryana and Punjab, where NREGA hasn't really taken off as the private players pay more, we execute social security pensions in a big way,” says Khera. The Haryana government pays a monthly old-age pension of Rs 700 to the BPL, and FINO has over one million of these customers.

But its biggest customer-base — 9 million — comes in the RSBY category, where the Government provides cashless insurance to people in the BPL category. The Government pays the premium and servicing is by private or public insurance companies. The annual cover is up to Rs 30,000. “Our job is to issue cards to the customer, install devices in hospitals where customers can get healthcare facilities using their smart cards. We provide the technology and the insurance company pays us for the service.”

Next comes NREGA with 5 million customers; the bulk in Andhra Pradesh, where FINO works well with the State government, followed by Madhya Pradesh and Rajasthan. Those who earlier shunned NREGA work, either because of delayed payment or partial payment as the money was siphoned off, are getting into the FINO system as full payment is assured on the third day. With 1.5 million new NREGA customers every month, by the end of this financial year, the total will exceed 10 million.

Encouraging savings

So, is FINO encouraging the poor and the lower middle-classes to save?

Yes, “a subtle shift” is happening, he says. “With NREGA-like people being our larger customer base… earlier they used to get the money and spend it. Now, with a bank account they think they should retain a little money for times of need.”

On the recently started remittances model, mainly domestic and foreign on a pilot basis, he says that unlike in other money transfer systems, the advantage of a bank account is that beneficiaries don't have to withdraw all money at one go; some might even save a portion. Ultimately, when the banks see some money remaining in the account, they might offer them other financial products like loans. In domestic remittances, which average around Rs 5,000 a quarter, money goes from urban centres such as Mumbai, Delhi and Surat to villages in poorer States like Bihar, MP and Orissa which witness a lot of migration.

But are banks really interested in micro-customers dealing in tiny sums?

“Yes and no; today there is a systemic push on the banks to reach these people. Deputy RBI Governor Dr K.C. Chakraborty did a great thing by recently getting all banks to submit a formal financial inclusion plan approved by their boards. Having given something formally to the RBI which is being monitored, there is pressure on them to comply.”

He adds: “If you go into the maps of this business, it makes money. Only you have to be persistent, have a large base and the right products for the customers, so some banks are now also pursuing this as a profit motive, because though each customer brings very small sums, the aggregate value adds up.”

Like in Mumbai alone, FINO's daily cash collection is Rs 2 crore. The next step, says Khera, who hopes to come out with an IPO by 2013, is to convert his customers' smart card into “something like an India Card, which like Visa or MasterCard, can be used for purchases, paying utility bills etc. The possibilities are immense.”

FINO's first target is 25 million customers in five years. “We'll do that before the deadline, and our next milestone is 100 million in the following five years,” adds Khera.

Engaging the farm sector

The organisation, which recently won the Financial Times Sustainable Banking award in the ‘Achievement in Banking at Base of the Pyramid' category, is now forging a partnership with the farm sector. “We have opened bank accounts of all the farmers who supply milk to the NDDB. Along with a savings bank account they get bank loans and cattle insurance, all coupled in a single product.” It has started in Gujarat and UP and will expand to other States soon.

Verghese, a FINO client, runs a watch repair shop in Dharavi.

Verghese, who has a tiny watch repair shop in Dharavi, now banks on FINO to send his family in Kanyakumari a monthly allowance. “But I hope they will soon hel me get a loan to expand my business,” he says

At the FINO office, Arvind, the fruit seller, completes his transaction and says, “This is so much quicker than a bank, where you have to first fill a form, take a token and then wait for the sahibs to return from their coffee break! And then they'll tell us ‘ aaj computer me gadbad hei!' (Today the computer is not working.)”

I next watch Pervez withdraw the entire amount of Rs 17,400 from his SB account for expenses related to his brother's wedding. Arun Mandal, a civil works supervisor, comes in to send Rs 3,000 to his parents in Jharkhand.

But what brings tears to the eye is 16-year-old Pintu Kumar, who works as an electrician in Mumbai, sending Rs 2,000 to his parents at Satsena village in UP. “I left my school two years ago to come here; my boss taught me the work and I'm happy to send money regularly to my parents from here,” he says cheerfully.

Source:-FINO

Potential of financial literacy

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In India, financial literacy is seen as an adjunct to the financial inclusion exercise. However, its role in addressing the aspirations of an emerging economy deserves recognition.

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Tanushree Mazumdar

At a recently held workshop on financial literacy, organised by the Reserve Bank of India (RBI) and the Organisation for Economic Co-operation and Development (OECD), it was interesting to note that even developed countries were grappling with the issue.

There was, however, a difference in the thrust of financial literacy/education drives in these countries vis-à-vis developing countries like India. So far, in India, the emphasis has largely been on financially educating the rural poor and illiterate. Whether it is the business correspondent/business facilitator (BC/BF) model or the technology-driven banking model that the regulators and banks are currently encouraging, the main focus remains the rural poor.

These models have a two-pronged focus: include the financially excluded in the mainstream financial system and financially educate the rural masses about banks, their products, services, procedures, and so on.

In developed countries (OECD to be precise), there is greater focus on educating an average family — helping it balance its budget, build assets, save for children's education and retirement planning. Financial literacy there takes the form of guiding consumers through the maze of complex financial products, taking confident financial decisions and safeguarding their financial interests, and resisting marketing pitches of financial companies by asking the right questions.

There is another difference in the objectives of financial education programmes in the developed and developing countries. In the developed countries, financial literacy is linked to consumer protection.. Better information disclosure, they believe, would go a long way in strengthening regulatory standards for consumer protection.

In India, financial literacy is seen as a means to achieve financial inclusion. The thrust is on rural areas. This is not surprising, given that 5.7 lakh out of the six-lakh villages don't have a bank branch. There is, however, a strong case for extending the efforts of financial inclusion to urban areas as well. The Economic Survey 2009-10, quoting the NSS 61 {+s} {+t} Round, says that poverty ratio in urban areas is 25.7 per cent which is only somewhat lower than the 28.3 per cent poverty ratio in rural areas.

LIVELIHOOD NEEDS

What will help financial inclusion is not financial literacy per se but linking people's livelihood needs with banking services. For example, the Aryavrat Gramin Bank in Uttar Pradesh achieved 100 per cent financial inclusion in some hamlets in UP through its tie-up with a corporate to sell solar powered lamps. The Kisan Mitra Scheme of Punjab National Bank achieved 100 per cent financial inclusion in 40 villages by linking bank finance to farming needs.

There is also the example of a pilot project in Warangal district of Andhra Pradesh, where pension payments and payments under NREGS were made through direct credit to bank accounts.

If people need banks for saving or receiving income or for remittances or loans they will avail of such banking services. In such cases, financial literacy becomes only the catalyst and not the main driving force behind financial inclusion.

Financial literacy can achieve a larger goal: that of empowering the consumer to take financial decisions confidently. And it need not be restricted to rural areas.

Urban areas in India may not be too different from developed countries in terms of the aspirations of people and the challenges they face. Some lessons from OECD countries can then be drawn for our own financial literacy programme.

Countries such as Malaysia, Singapore, and the Philippines include financial education as a part of school education. Money sense (like civic sense) is best inculcated in people as early as possible. The pilot project in Karnataka where financial education is being implemented in schools is a good step, and the outcome of the project will help in the strategising of financial education and roll-out in other States.

LITERACY STRATEGIES

In New Zealand, as a part of its financial literacy strategy, topics have been classified into three levels: everyday (financial products, services, inflation, etc.), occasional (wills, mortgage, etc.) and specialist (derivatives, portfolio management, etc.). We could think of a financial literacy strategy along similar lines.

Delivery of financial literacy is going to be the greatest challenge in India, not the least because of its geographical spread and diversity in languages. Just as banks have started offering credit counselling services, some authority has to take the responsibility of offering financial counselling. This cannot be left to the banks or other financial institutions, because there could be a conflict of interest.

Besides, financial counselling would involve, among other things, providing at one place, information about products and their charges across all banks, mutual funds, insurance companies, and so on. A centralised/impartial authority has to take charge of this task to assure uniformity in delivery and credibility of content.

May be, this is something that the proposed Financial Stability and Development Council can think about. After all, lack of financial education is said to be at the bottom of the recent global crisis and financial instability.

(The author is a former Deputy Director, Academic Affairs, Indian Institute of Banking & Finance, Mumbai. The views are personal.)

Innovations in Rural India

This article presents the various rural innovations in the country. It further

points out the need to have more frequent innovations in the rural sector to

make India shine in the real sense.

Innovation is the key to survival in this fast-moving generation where nothing is static except change. It is applicable to each and every aspect of human life irrespective of where you reside and what you do on this globe. You have to innovate, i.e., make proper adjustments and changes according to the growing needs and demands of the environment to be a part of this environment.

Any development is not possible without taking the rural masses into account. This is all the more necessary in the case of India, a billionaire country—no not in terms of money, but in terms of its population. Thus innovations affecting the rural population are at the heart of any developmental process in India where the majority of the population lives in villages. Agriculture has been the mode of employment of over 70% of its population. The agricultural sector contributes around 30% of the country’s GDP. Hence, it is quite obvious that for India to shine, rural India must shine as well; otherwise the country’s overall growth would fall well short of its potential. It’s more than half a century since we gained independence, yet there has not been satisfactory improvement in the rural sector. Some of reasons behind this are natural like the inconsistent monsoons and diverse climatic conditions, but most of them are man-made reasons, such as the middlemen standing between the farmers and the market and making away with the profits.

Despite all these ills, there has been a silver lining in the rural sector in the form of Amul, ITC e-Choupal, Parry IndiaAgrline to name a few. Further, this article discusses the evolution of a few innovative processes that have centered on agricultural and allied activities in rural India. It discusses, at length, the evolution and structure of the Amul pattern of cooperative farming, ITC e-Choupal and Parry IndiaAgriline—three important innovations that have brought the rural economy closer to its target markets, also releasing its capacity for overall development.

Amul

In the 1950s, the life of farmers in the Kaira district of Gujarat was as miserable as that of its counterparts in other parts of India. These farmers were frustrated with the erratic climatic conditions, lack of proper infrastructure and the continuous exploitation of strong middlemen who reaped the benefits of their hard toil. Though they had the resources of making additional income from milk and other dairy products, due to the absence of a proper distribution network, farmers were forced to sell these products at throwaway prices to the usual traders and the strong middlemen who controlled the marketing channels. The continuous exploitation by these traders led these farmers to a win-lose situation. Then, the farmers realized that this exploitation cannot be stopped until and unless they pooled in their resources and marketed their own products. This led to the formation of Amul.

Today, Amul has become a household name. With the support of professional organizations and other NGO’s, what started with a cooperative movement in Anand in the 1940s has grown from one village to around 10,755 villages; from a few liters of milk to 6 million liters of milk a day and various other milk products; and the most important point, from a few farmers to more than two million farmers spreading all across Gujarat. It has become a firm which is collectively owned and controlled by the farmers. The logistics adopted by Amul in collecting more than 6 million liters of milk per day from 10,755 village cooperative societies spread throughout Gujarat and then processing it to produce the final packaged milk and milk products have set new standards in logistics management in the country. Amul is a pattern of cooperative farming which is collectively owned, operated and controlled by the farmers.

ITC e-Choupal

E-choupal is an innovative way of applying new technologies for the poor farmers by ITC—one of India’s leading corporate houses which had a diversified product portfolio encompassing cigarettes and tobacco, packaging, specialty papers, paperboards, hotel, retailing, IT and agri-exports. ITC’s e-Choupal helps the farmers to take decisions regarding when and whom to sell their products in order to gain more profits with the help of the Internet by analyzing the ratings of different mandis. The echoupal initiative was aimed at network villages through the Internet in order to procure agricultural products from the farmers for export purposes in an efficient and effective manner. E-choupal has enabled farmers to sell their produce more conveniently and at

much better prices than what they used to sell to the private traders and the middlemen. Starting with just six e-choupals in Madhya Pradesh in June 2000, ITC has successfully managed to establish over 1,200 echoupal centers in almost 6,500 villages in India by December 2002. It has educated the poor and uneducated farmers on how to conduct e-commerce transactions with ease and to get themselves out of the clutches the middleman. Echoupal has helped farmers in pricing their crops and taking decisions on when and where to sell their produce to get more profits. Similarly, ITC in its e-Choupal initiative offers additional services like selling seeds, fertilizers and crops insurance to support its profitability.

Parry IndiaAgriline

In order to bridge the structural void of the villagers of the Cuddalore district of Tamil Nadu, EID Parry, an agricultural company in Tamil Nadu, set up a first-of-its-kind portal—indiaagriline.com— through which farmers can access both personalized and general information on a host of topics related to agriculture and allied activities. The portal provided detailed information on six crops which included sugar, banana, cashew, tapioca and groundnut. The exhaustive and detailed information ranged from farm practices and farm advisory services to pricing details for different crops in the nearby markets, weather forecasts, etc. Personalized information like the payment details of a sugar company to farmers could also be accessed on the system once a farmer registered himself with the kiosk. Bridging the digital gap not only eased the flow of information of all kinds but also facilitated market transactions, industry competitiveness, new innovations and positive social transformations. The credit for this technological breakthrough can be attributed to the joint efforts of EID Parry and n-Logue Technologies.

Parry IndiaAgriline is devoted at improving the life of the farmer by bringing technology to his doorstep and acquainting him with information that would help him increase productivity and enhance his lifestyle. Experts are convinced that this new value addition in supply chain management of agriculture products will have a great impact on the growth of the rural economy

Conclusion

It’s true that India lives in her villages. Rural India holds great potential for development as it is the source of livelihood for more than two-third of the country’s population. Exploitation by the private traders and middlemen accompanied with the farmers’ lack of information on issues pertaining to their livelihood are serious obstacles on the path of rural development. There is a need to take strong steps so that the primary producers in agriculture could break the shackles of the middlemen and become self-dependent and strong. Slowly, but steadily, the farmers are realizing the importance and potential of technology in their farming process.

Undoubtedly, the story of Amul, ITC E-choupal and Parry IndiaAgriline are phenomenal and mind-blasting. But such a large country with only a couple of attempts in innovating the rural sector seems like an , ‘oasis in a vast

desert’. Now it is the role of government and social organizations to make farmers aware of the need and potential of technology in agriculture. If the farmers of Gujarat, Madhya Pradesh and Tamil Nadu can do it, then there is no reason why the farmers of other places cannot.

In this dynamic and ever-changing market environment, farmers in India should be abreast of the latest information for their agricultural inputs. One or two successful stories won’t solve the purpose for you. It needs a revolution in the rural sector. Greater transparency in the farming process is the need of the hour. The faster the government and farmers understand and realize it, the better for them and more importantly for India to shine properly

Financial inclusion can only be brought about through literacy

The year 1969 was a turning point in the Indian banking history as thrust on nationalization was given so that strategy of social development and economic growth could take place simultaneously thereby enabling the country as diversified as India, wellknitted and connected.

It was a big leap by the Government at that point of time as banks were the medium which people interfaced on a day-to-day basis and also Government could reach out to the poorest of the poor. This was exactly what nationalization of banks would have wished for but LPG (liberalization, privatization and globalization) revolution in 1991 gave a tryst with destiny to those laudable dreams of bank nationalization.

In consequence of the revolution, banks have more or less become more urban centric and as a result 'finance' a tasteful subject to every human being is denied to the majority and catered to prolific minority only. Taking note of the seriousness and concern for expansiveness of banking industry which is the back bone of Indian economy, the current Finance Minister of India recently stressed upon the need and felt that fresh licenses to the banks must be given only if they could show their mapping in rural India, which is vital for 'inclusive growth' of India.

A look at the statistics shows how commercial banks are really 'commercial'. 72.2 per cent of country's population is catered by 30 per cent of the bank branches, 51.4 per cent of farmer households are excluded from financial services, geographically only 5.2 per cent of the six lakh villages have bank branches, 80 per cent of Indian population do not have life or health insurance and above majority of population in India are either financially at risk or not exposed to finance.

There is prosperity at one end with too much exposure to risk and on the other there is poverty with all risks. Unless social development takes place, there cannot be economic growth and these twin aspects are the two sides of a coin and have to be transacted at the same time in far-flung , remote areas of the country.

Financial inclusion is not something new; it is a worldwide phenomenon and gained its momentum in India in early 2000's. Banks in India were earlier adopting villages for rural development but the exercise was not an enthusiastic success. The private sector banks are also more urban customer oriented and targeted on I-banking to tap more clienteles.

Financial inclusion is provisioning accessibility of financial services to the poorest of the poor at an affordable cost. The question is who shall provide? What shall be provided? How shall it be done? And more important who will be the service provider? The 20th Skoch Summit held in July, 2009 at Mumbai on its finding on "National study on speeding Financial Inclusion" is interesting and worth emulating.

What is hampering the fostering of financial inclusion? Financial inclusion is not just multiplying bank accounts, where accounts remain inactive or having a minimum balance of Rs 176! What is most important is inculcating the sense or awareness of financial literacy among the rural masses and extending the affordable financial products or services to them at a subsidy or at an affordable cost.

The cost has to ultimately be borne either by the banks or by the State but the fact that should be highlighted is that it is not provided just like freemeal scheme or any other scheme of the Government. Reaching out to masses in the remote corners of the country, extending technology banking, enabling cash to reach the bank accounts of such masses, marketing, educating rural customers and seeing a viable business model in the future should be the mission and vision of fostering financial inclusion in the country.

However, easier said, the more are the practical difficulties. The banking industry cannot see it as a viable model unless it is profitable and therefore, the 'financial inclusion' should be made as the national agenda.

The practical problem in this agenda is how to create 'demand and supply' effect to the accounts through which those who have been 'excluded' can be 'included'. Most of the output (if at all) generated by the rural masses is mostly farm products or services, where marketing facilities and price are not competitive or in most of the cases it is a mis-match.

Therefore, efforts should be made to take the commodity market to the rural people and logistics should be made for the distribution system all across the country and the cash output so generated by the marketing system should be tapped by the banks through tech-bank and minimum amount savings generated out of such transaction should be enabled to flow into the capital market preferably though mutual funds. This will pave way for those who have been excluded from the financial exclusion, promoting saving thrift, scope for wealth creation and above all financial literacy.

The participation of the population in the retail capital market is just 2 per cent and therefore the main stream including the ruralurban population are either isolated or at a financial risk because of poor saving or alarming spending habits. Banks through their correspondents should therefore start campaign educating the rural and poor masses not just for opening bank accounts to meet their targets, but help them grow by diverting such surpluses to other expanded investible sectors of the economy.

It is a holistic exercise where banks have to rope in other agencies functioning in direct liaison with the people in rural areas particularly post offices which serve as connecting link. The use of 'UID' should facilitate the faster exercises as data can easily be populated and cumbersome banking procedures can be dispensed with in the process of financial inclusion.

Mobile banking , bio-metric banking, commodity banking, cash vouchers , etc., are those viable channels that can add sizeable population to the financial inclusion. Technology is rapidly changing and mindset of man is a thing of the past. When mobile population could rise in geometric proportions all across the world, at least working models should be developed to increase rural banking in mathematical proportions as well.

The year 1969 is remembered for yet another remarkable achievement in the history for the mankind. It looks strange to relate two events, but facts tell. In the same year when bank nationalization process started, there was yet another small step to connect to the mankind. Neil Armstrong landed on the moon. His words were, 'That one small step for man, one giant leap for mankind'.

Forty years later, change is fast happening in space technology. Man is trying to reach Mars, but banking is yet to penetrate into masses. It is not just a Government's endeavour for after all Government is for, by and the people. Let us all join together to make 'Farm India' as 'Finance India'.

(The writer, Dr P T Giridharan, is Joint Director, Institute of Chartered Accountants of India)