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Assessing Indian financial markets on social inclusion and

environmental sustainability

Shiladitya Chatterjee

National Seminar on Contemporary Issues in Financial Markets

Department of Commerce, Calcutta University13 May 2016

ContentsI. Introduction II. How have Indian financial markets fared on

financial inclusion?III. How have financial markets served

sustainability? IV. Conclusions

Introduction

Financial markets must serve social objectives and not private profit

alone • Indian regulators have traditionally focused mainly on the

social objective of promoting growth and macroeconomic stability• But growth has been increasingly unequal in Asia and India,

calling for “inclusive growth” • Financial markets constituting a critical segment of the

economy have been required therefore to support social inclusion

—Genesis of concept of “financial inclusion” • With climate change and deteriorating environment, there

are calls for financial markets to serve environmental sustainability too

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All three – growth and macro-stability; social inclusion; and environmental sustainability –

are essential• The three are often in conflict if pursued independently• Pursuing growth alone has increased social inequity• Social inclusion ignoring environment is unsustainable • The Sustainable Development Goals recently adopted by

the international community therefore address all three

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The SDGs - growth, inclusion and sustainability

GOAL 1. End poverty in all its forms everywhere

GOAL 2. End hunger, achieve food security and improved nutrition and promote sustainable agriculture

GOAL 3. Ensure healthy lives and promote well-being for all at all ages

GOAL 4. Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all

GOAL 5. Achieve gender equality and empower all women and girls

GOAL 6. Ensure availability and sustainable management of water and sanitation for all

GOAL 7. Ensure access to affordable, reliable, sustainable and modern energy for all

GOAL 8. Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all

GOAL 9. Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation

GOAL 10. Reduce inequality within and among countries

GOAL 11. Make cities and human settlements inclusive, safe, resilient and sustainable

GOAL 12. Ensure sustainable consumption and production patterns

GOAL 13. Take urgent action to combat climate change and its impacts

GOAL 14. Conserve and sustainably use the oceans, seas and marine resources for sustainable development

GOAL 15. Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably manage forests, combat desertification, and halt and reverse land degradation and halt biodiversity loss

GOAL 16. Promote peaceful and inclusive societies for sustainable development, provide access to justice for all and build effective, accountable and inclusive institutions at all levels

GOAL 17. Strengthen the means of implementation and revitalize the global partnership for sustainable development

How have Indian financial markets fared on financial inclusion?

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Financial inclusion – definitions and purpose

• Rangarajan Committee on Financial Inclusion (2008) ―Process of ensuring access to financial services; and ―Providing adequate credit where needed to vulnerable groups

such as weaker sections and low income groups at affordable cost

• Raghuram Rajan Committee on Financial Sector Reforms (2014)

—Broadening of financial services to those who do not have access;

—Deepening of financial services for people who have minimal financial services; and

—Promoting financial literacy and consumer protection for clients to enable them make appropriate choices

• Latter definition has no special focus on poor and vulnerable which is a flaw

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Broadening access to credit - currently highly unequal

• In India, the top 20% income earners, earn 44% of total GDP• Access to credit is more

heavily skewed • Large borrowers

comprise about 20% of all borrowers but corner 90% of the total credit

• More equal access to credit will help reduce inequality in India Source: RBI

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Attempts to broaden access to credit: expansion of banking through business correspondents (BCs)

• In recent years phenomenal bank branch expansion has occurred• Mainly through BCs• But 43% of accounts lie dormant

according to World Bank• Deposits expanded, but remain low

by developing country standards; and credit availed even smaller

• Attempts to improve previous approach being made through Jan Dhan Yojana

―By combining account opening with other services such as Direct Benefit Transfer (DBT), credit, pensions, insurance

―Through focus on financial literacy―Better remuneration for BCs

1-Jan-10 1-Jan-11 1-Jan-12 1-Jan-13 1-Jan-140

50000100000150000200000250000300000350000400000450000

Expansion in number of bank branches, total and through BCs 2010-2014

BankingOutletsinVillages—Total BankingOutletsinVillages—BranchlessMode

1-Jan-10 1-Jan-11 1-Jan-12 1-Jan-13 1-Jan-140

50

100

150

200

250

300

350

Deposit and credit expansion 2010-2014

Deposits (Rs. billion) OD facility availed in BSBDAs (Rs. billion)

Rs. b

illio

ns

Source: RBI quoted in Nair and Tanka, Inclusive Finance Report, Oxford University Press, 2014

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Deepening of access by poor and vulnerable:

the microfinance test• Self help groups (SHGs) serve 63% of

microfinance clients ― But SHGs account for only 3.4% of total

agricultural credit ― There is wide variation in microfinance penetration

through SHGs in India― Causes are

― High risk (and NPAs) despite group lending― High transactions costs― Poor capacities

― Greater role of SHGs needed with scaling up of successful models

• Microfinance institutions (MFIs) serve 37% of microfinance clients

― After Andhra microfinance crisis, MFIs being blamed although only 11% of Andhra household debt was from MFIs

— However, MFI model not sustainable as— Their borrowing rates leave little margins requiring

high volumes and higher on-lending rates— Over-regulation may hurt industry even more— Deposits can solve problem – Bandhan example

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

0500

100015002000250030003500400045005000

Credit to total agriculture and SHGs by SCBs, RRBs and Cooperatives 2011-12

SHG Lending Total credit to agriculture

Lend

ing

₹ bi

llion

s

Andhra Prad

eshKera

laGoa

Tripura

Uttarakhan

d

Mahara

shtra

Haryana

PunjabBihar

Meghalay

a

Gujarat

Madhya

Pradesh

Uttar Prad

esh

Arunach

al

Mizoram

0

1

2

3

4

5

6

7

8

Microfinance Poverty Penetration Index (2014)(MPPI=share of state in SHG clients/share in poor)

Source: RBI, Nair and Tankha (2014)

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Expanding agricultural credit as a measure of financial inclusion

• Share of agriculture in SCB lending low (13%) and stagnating

• Share of marginal farmers in SCB lending is low (30%) compared to share in holdings (67%)

• Problem is of risk and high transactions costs

• Risks can be tackled better by specialized institutions (such as RRBs and cooperatives)

— But lending by RRBs and cooperatives to agriculture still minor (33%)

— Vaidyanathan Committee recommendations on cooperatives not fully implemented

— Loan waiver has also affected health

• Costs can be lowered by technology e.g. mobile banking – but currently only 1% by volume

2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-150

10000

20000

30000

40000

50000

60000

70000

Non-food credit outstanding by scheduled commercial banks total, and to agriculture

Total non-food credit outstandingTotal credit outstanding to agriculture

₹ Bi

llion

)

Source: RBI, Agricultural Census 2010-11

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Financial inclusion through SME lending

• SME lending is small compared to need

―Getting just 18% of total lending to industry

—Although its share in industry employments is about 75%

—Challenges of lending to the “Bottom of the pyramid”

―Financiers not convinced of viability

―Need capacity support to develop viable business models

―Infrastructure, policy and institutional support needed to expand SME sector

Source: RBI

Allocation of outstanding non-food credit (March 2015)

Other important areas of financial inclusion have had limited success

too• Credit limited for expanding opportunities for poor

—Education loans with state guarantees for poor students is minimal

• Insurance for poor inadequate—No life insurance for poor

— In 2015 about 10% of population covered by life insurance, mainly non-poor—Health insurance for poor (RSBY) ineffective and insignificant

• Equity markets not inclusive• Do not protect small investors

— Retail investors have significant share in capital market: 21% for NSE and 16% for BSE

— But mutual funds remain unimportant - 5% of BSE - although these provide better protection

• Play only small role in inclusive financing — Equity finance for SMEs needs to grow— SME Exchanges (inaugurated in 2012) still insignificant

How have financial markets served sustainability?

Short answer – not well at all

• Idea that financial markets have a role in promoting environmental sustainability still to gain ground in India• Regulator – RBI has made only a beginning • In 2015 it placed renewable energy under priority sector

lending

• Globally large strides are being made, however• For example, the adoption of the Equator Principles

The “Equator Principles (EPs)”

• These principles are environment and social safeguard standards established by the World Bank Group and the Asian Development Bank • In October 2002, ABNAmro, Barclays, Citibank and

WestLB voluntarily agreed to adopt them• The EPs were launched formally in 2003 in Washington• Currently 82 EP financial institutions in 36 countries

have adopted them, covering over 70% of international project finance debt in emerging markets • They have established a benchmark for responsible

lending by financial institutions worldwide

India must make credit markets work for sustainability

• Indian banks must integrate sustainability considerations into operations

―By employing environmental audits in their own interest to avoid risk of lending to entities violating environmental laws

―By voluntarily adopting the standards like equator principles ―Only one Indian bank (IDFC) has adopted the EPs so far

• The process can be aided by incentives―In 2015 RBI placed renewable energy under priority sector

lending ―But other “green” sectors such as clean technology or pollution reduction

measures do not yet qualify―Lending for CDM businesses that generate carbon credits could

also can provide powerful incentives

India must develop insurance products to combat climate change

• Climate change will raise Indian economy’s vulnerability ―Droughts, floods and climatic hazards are likely to increase

• Indian agriculture likely to face increasing risks• Crop insurance essential to cope with climate change

—Pradhan Mantri Fasal Bima Yojana (PMFBY) 2016—Previous schemes failed as compensation inadequate and high

premiums—Low premiums under PMFBY and actual losses compensated—Huge premium subsidy cost to Government although with wider

coverage the cost will fall which is likely with climate change —Needs to be in parallel with R&D on drought resistant crops and dry-

land farming techniques (such as Israel)

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India’s equity markets must support environmental sustainability and

social inclusion

• Both NSE and BSE require listed companies to comply with social responsibility guidelines

―These guidelines were established in 2011 (National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business)

—However compliance is voluntary and no real “teeth” to this requirement

• The concept of “Social Stock Exchange” needs consideration—SSEs connect social minded investors to companies promoting

social and environmental objectives—CSR funds of companies can be used to support this—Under consideration at present.

Conclusions• India’s financial market regulators have become

increasingly concerned with both social inclusion and environmental sustainability• But various efforts at financial inclusion are yet to be

effective and financial markets continue to be narrow, serving mainly larger businesses and high income households• The idea of promoting environmental sustainability

through financial markets is still to gain ground although the needs are becoming urgent and critical

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BibliographyAbhijit Banerjee, Pranab Bardhan, Esther Duflo, Erica Field, Dean Karlan, Asim Khwaja, Dilip Mookherjee, Rohini Pande, Raghuram Rajan. Help Microfinance Don’t Kill It. The Indian Express Posted online: Fri Nov 26 2010

Bandini Chhichhia. The Rise of Social Stock Exchanges. A new, innovative platform is helping more investors support social enterprises. Stanford Social Innovation Review. January 2015.

Equator Principles Association website: http://www.equator-principles.com

Mandira Sarma, Rajiv Kumar. Rural Short-term Cooperative Credit Structure. EPW March 1, 2008

Ministry of Corporate Affairs. National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business. New Delhi 2011

Rajaram Dasgupta. Microfinance in India - Empirical Evidence, Alternative Models and Policy Imperatives. EPW March 19, 2005

S. Malu, R. Agarwal, D. Jajoo. Sustainable Banking in India. Available at http://tmu.ac.in/gallery/viewpointsdcip2013/pdf/track3/T-323.pdf

Shailender Kumar Hooda. Health Insurance, Health Access and Financial Risk Protection. EPW December 12, 2015.

Tara S Nair. Microfinance: Lessons from a Crisis. EPW February 5, 2011.

Tara S. Nair and Ajay Tankha. Inclusive Finance India Report 2014. Oxford University Press 2014.

Thank Youshilochatterjee@gmail.com