Rangarajan Committee Report on Financial Inclusion

The report of the Rangarajan Committee is summarized as follows:

Extent of Exclusion:

• As per the NSSO data, 45.9 million farmer households in the country (51.4%), out of a total of 89.3 million households do not accesses credit, either from institutional or non-institutional sources.
• Only 27% of total farm households are indebted to formal sources (of which one-third also borrow from informal sources).
• Farm households not accessing credit from formal sources as a proportion to total farm households is especially high at 95.91%, 81.26% and 77.59% in the North Eastern, Eastern and Central Regions respectively.
• Thus, apart from the fact that exclusion in general is large, it also varies widely across regions, social groups and asset holdings. The poorer the group, the greater is the exclusion.
  

Demand Side

• While financial inclusion can be substantially enhanced by improving the supply side or the delivery systems, it is also important to note that many regions, segments of the population and sub-sectors of the economy have a limited or weak demand for financial services.
• In order to improve their level of inclusion, demand side efforts need to be undertaken including improving human and physical resource endowments, enhancing productivity, mitigating risk and strengthening market linkages.
• However, the primary focus of the Committee has been on improving the delivery systems, both conventional and innovative.

National Mission on Financial Inclusion

• The Committee feels that the task of financial inclusion must be taken up in a mission mode as a financial inclusion plan at the national level.
• A National Mission on Financial Inclusion (NaMFI) comprising representatives from all stakeholders may be constituted to aim at achieving universal financial inclusion within a specific time frame.
• The Mission should be responsible for suggesting the overall policy changes required for achieving the desired level of financial inclusion, and for supporting a range of stakeholders – in the domain of public, private and NGO sectors – in undertaking promotional initiatives.

National Rural Financial Inclusion Plan (NRFIP)

• A National Rural Financial Inclusion Plan (NRFIP) may be launched with a clear target to provide access to comprehensive financial services, including credit, to at least 50% of financially excluded households, say 55.77 million by 2012 through rural/semi-urban branches of Commercial Banks and Regional Rural Banks.
• The remaining households, with such shifts as may occur in the rural/urban population, have to be covered by 2015.
• Semi-urban and rural branches of commercial banks and RRBs may set for themselves a minimum target of covering 250 new cultivator and non-cultivator households per branch per annum, with an emphasis on financing marginal farmers and poor non-cultivator households.

Handling Cost through Funds:

• There is a cost involved in this massive exercise of extending financial services to hitherto excluded segments of population. Such costs may come down over a period of time with the resultant business expansion.
• However, in the initial stages some funding support is required for promotional and developmental initiatives that will lead to better credit absorption capacity among the poor and vulnerable sections and for application of technology for facilitating the mandated levels of inclusion.
• The Committee has, therefore, proposed the constitution of two funds with NABARD – the Financial Inclusion Promotion & Development Fund and the Financial Inclusion Technology Fund with an initial corpus of Rs. 500 crore each to be contributed in equal proportion by GoI / RBI / NABARD. This recommendation has already been accepted by GoI.

Business Correspondent Model

• The Rangarajan Committee recommended that extending outreach on a scale envisaged under NRFIP would be possible only by leveraging technology to open up channels beyond branch network.
• Adoption of appropriate technology would enable the branches to go where the customer is present instead of the other way round. This, however, is in addition to extending traditional mode of banking by targeted branch expansion in identified districts.
• The Business Facilitator/Business Correspondent (BF/BC) models riding on appropriate technology can deliver this outreach and should form the core of the strategy for extending financial inclusion.
• The Committee has made some recommendations for relaxation of norms for expanding the coverage of BF/BC. Ultimately, banks should endeavour to have a BC touch point in each of the 6, 00,000 villages in the country.

Procedural Simplification:

• Procedural Changes like simplifying mortgage requirements, exemption from Stamp Duty for loans to small and marginal farmers and providing agricultural / business development services in the farm and non-farm sectors respectively will help in extending financial inclusion.
  

New Role of RRBs:

• RRBs, post-merger, represent a powerful instrument for financial inclusion. Their outreach vis-à-vis other scheduled commercial banks particularly in regions and across population groups facing the brunt of financial exclusion is impressive.
• RRBs account for 37% of total rural offices of all scheduled commercial banks and 91% of their workforce is posted in rural and semi-urban areas.
• They account for 31% of deposit accounts and 37% of loan accounts in rural areas.
• RRB’s have a large presence in regions marked by financial exclusion of a high order.
• They account for 34% of all branches in North-Eastern, 30% in Eastern and 32% in Central regions.
• Out of the total 22.38 lakh SHGs credit linked by the banking industry as on 31st March 2006, 33% of the linkages were by RRBs which is quite impressive to say the least.
• Significantly the more backward the region the greater is the share of RRBs which is amply demonstrated by their 56% share in the North-Eastern, 48% in Central and 40% in Eastern region.
• RRBs are, thus, the best suited vehicles to widen and deepen the process of financial inclusion. However, there has to be a firm reinforcement of the rural orientation of these institutions with a specific mandate on financial inclusion.

With this end in view, the Committee recommended that the process of merger of RRBs should not proceed beyond the level of sponsor bank in each State. The Committee has also recommended the recapitalization of RRBs with negative Net Worth and widening of their network to cover all unbanked villages in the districts where they are operating, either by opening a branch or through the BF/BC model in a time bound manner. Their area of operation may also be extended to cover the 87 districts, presently not covered by them.

SHG – Bank Linkage Scheme

There are a large number of SHGs in the country which are well established in their savings and credit operations. The members of such groups want to expand and diversify their activities with a view to attain economies of scale. Many of the groups are organising themselves into federations and other higher level structures. To achieve this effectively, resource centres can play a vital role. Federations of SHGs at village and taluk levels have certain advantages. Federations, if they emerge voluntarily from amongst SHGs, can be encouraged. However, the Committee felt that they cannot be entrusted with the financial intermediation function.

• The Committee has recommended amendment to NABARD Act to enable it to provide micro finance services to the urban poor.

Joint Liability Groups

• SHG-bank linkage has emerged as an effective credit delivery channel to the poor clients. However, there are segments within the poor such as share croppers/oral lessees/tenant farmers, whose loan requirements are much larger but who have no collaterals to fit into the traditional financing approaches of the banking system.
• To service such clients, Joint Liability Groups (JLGs), an upgradation of SHG model, could be an effective way. NABARD had piloted a project for formation and linking of JLGs during 2004-05 in 8 States of the country through 13 RRBs.

Based on the encouraging response from the project, a scheme for financing JLGs of tenant farmers and oral lessees has also been evolved. The Committee has recommended that adoption of the JLGs concept could be another effective method for purveying credit to mid-segment clients such as small farmers, marginal farmers, tenant farmers, etc. and thereby reduce their dependence on informal sources of credit.

Micro Finance Institutions – NBFCs

• The committee recommended a greater legitimacy, accountability and transparency for MFI which only enable MFIs to source adequate debt and equity funds, but also eventually enable them to take and use savings as a low cost source for on-lending.
• The committee also recommended that there was a need to recognize a separate category of Micro finance – Non Banking Finance Companies (MF–NBFCs), without any relaxation on start-up capital and subject to the regulatory prescriptions applicable for NBFCs. Such MF-NBFCs could provide thrift, credit, micro-insurance, remittances and other financial services up to a specified amount to the poor in rural, semi-urban and urban areas.
• Such MF-NBFCs may also be recognized as Business Correspondents of banks for providing only savings and remittance services and also act as micro insurance agents.

Cooperative System:

In terms of number of agricultural credit accounts, the Short Term Cooperative Credit System (STCCS) has 50% more accounts than the commercial banks and RRBs put together.

• On an average, there is one PACS for every 6 villages; these societies have a total membership of more than 120 million rural people making it one of the largest rural financial systems in the world.
• However, the health of a very large proportion of these rural credit cooperatives has deteriorated significantly.

For this segment, the Rangarajan Committee reiterated the need to implement the recommendation of the Vaidyanathan Committee Report, which had suggested an implementable Action Plan with substantial financial assistance.

Micro Insurance

The Rangarajan Committee recommended the linking of micro credit with micro-insurance, which is the key element in the financial services package for people at the bottom of the pyramid.