L&T Finance Corporate Finance Construction Equipment Commercial Vehicle Rural Finance Micro Finance Distribution Financial Inclusion : A panacea for sustainable Economic Growth By N Sivaraman L&T Finance Holdings Limited October 5 th 2012

L&T Finance Corporate Finance Construction Equipment Commercial Vehicle Rural Finance Micro Finance Distribution What is Financial Inclusion It is not just about – Opening of no frill bank accounts – Providing micro-credit to the under privilieged It is about – Getting the underserved population to experience the benefit of broader financial services Savings Investments Credit Insurance Remittances

L&T Finance Corporate Finance Construction Equipment Commercial Vehicle Rural Finance Micro Finance Distribution Who needs to be covered in Financial Inclusion Under-privileged in urban areas Rural Households, which are underserved as bank branches are farther

L&T Finance Corporate Finance Construction Equipment Commercial Vehicle Rural Finance Micro Finance Distribution Poor reach of organised financial services Large part of Indias population do not have access to organised financial services: – More than 60% of Indias population is in the rural areas – 40% of population does not enjoy banking services – Only 30,000 of 600,000 habitations have bank accounts

L&T Finance Corporate Finance Construction Equipment Commercial Vehicle Rural Finance Micro Finance Distribution Impact is limiting rural economic growth Uncovered populations retains a large part of their earnings in cash – Cash remains outside the system, contributing to leakages – Economy deprived of capital – Cash holders lose an opportunity to earn on idle cash Lack of credit flows – Drives the populace to money lenders, at exorbhitant rates – Limits entrepreneurial ambition – Rural economic activity at a lower levels Saving not channelised into productive investments Assets and lives under covered by insurance

L&T Finance Corporate Finance Construction Equipment Commercial Vehicle Rural Finance Micro Finance Distribution Rural India.. The low productivity trap Sources- Census India 2011, Ministry of Statistics and Program Implementation, According to the 2011 Census, Rural India has a pop. of 833 million 70% of the Rural population is employed in Agri. & allied activities These activities however contribute to less than a fifth of the GDP This low productivity is the result of avicious trap It is imperative that for Rural India to grow sustainably, this cycle has to be broken Lack of Opportunities Lack of Skills Low Productivity Low Investment Low Savings Low Income

L&T Finance Corporate Finance Construction Equipment Commercial Vehicle Rural Finance Micro Finance Distribution Financial Inclusion: Boosting Growth Provide Credit Buy Productive Assets Income Generation Insurance Protection Additional Savings Savings Products Wealth Skill Enhancement Increase Consumption Working Capital for services Liquidity It is hoped that over time, this will help in Improving the productivity of people employed in agriculture and allied activities Shift people into more productive sectors and be gainfully employed

L&T Finance Corporate Finance Construction Equipment Commercial Vehicle Rural Finance Micro Finance Distribution Financial Inclusion: Channeling Savings According to a NCAER Survey*, about 45% of Rural Households do not use any saving or investment products The quantum of M3 stands at Rs.78 trillion as of Sept 2012 Out of this, Currency held accounts for Rs trillion. Tapping these cash assets can provide the system with a huge pool of low cost funds * - How Households Save and Invest- NCAER Survey ; Reasons for Not Saving Proximity of Institutions Lack of skills to evaluate products Lack of knowledge about products Concern on Safety of Capital

L&T Finance Corporate Finance Construction Equipment Commercial Vehicle Rural Finance Micro Finance Distribution This focus on Financial Inclusion has resulted in… An additional 60k BC and BC AgentsA 170% growth in Banking outletsA 2-fold increase in No Frills A/Cs Source : RBI But we are still behind the curve… PARAMETERINDIA (%)WORLD (%) % Adults with an account at a Formal Financial Institution3550 % Adults in the poorest 20% with an account at a Formal Institution2138 % Adults with a Credit Card215 % Adults with an Outstanding Mortgage Loan27 % Adults paying for a Health Insurance717 % Adults using Mobile Money in the past year177 Source : RBI

L&T Finance Corporate Finance Construction Equipment Commercial Vehicle Rural Finance Micro Finance Distribution Key Challenges for Financial Inclusion to succeed Reaching Out Product Design Business Risks Awareness Targeted beneficiaries are : Geographically dispersed ( Over 6.4 lakh villages) Have low Income Are under banked (Only 1.47 lakh villages have banking outlets) Product Design should be Be Simple to facilitate better understanding of risks Be Transparent to inspire trust and confidence Consider unique Cash flow and financing needs of target segments Lack of Awareness results in Low understanding of the benefits and risks of Financial products Risk of mis-selling of products to uninformed customers Ignorance about Grievance Redressal Mechanisms Key Business Risks : Credit Risk - Lack of adequate data on consumers Operational Risk on account of high reliance on Cash transactions Sustainability Financial Inclusion initiatives should Generate adequate returns to justify risks involved Constantly innovate to reduce Costs Look at new ways of Increasing Revenues

L&T Finance Corporate Finance Construction Equipment Commercial Vehicle Rural Finance Micro Finance Distribution Benefits of financial inclusion Preventing leakage of income and capital – Increases overall capital available in the economy Increases income levels of the underserved – Consumption increases, resulting in economic growth Large market drives innovation in products and services and delivery – Benefits other segments of society as well – Efficiency within the economy goes up

L&T Finance Corporate Finance Construction Equipment Commercial Vehicle Rural Finance Micro Finance Distribution Given these benefits, Financial Inclusion is a key focus area Financial Inclusion programmes should be implemented on commercial lines and not on a charity basis. It is important that banking with the poor is perceived and pursued as a sustainable and viable business model, KC Chakrabarty, RBI Deputy Governor "Financial inclusion should be separate from the idea of getting credit... It means that everybody should have bank accounts, should be able to transact through them and also receive other benefits through them, Montek Singh Ahluwalia, Dep. Chairman Planning Commission Financial inclusion is a key determinant of sustainable and inclusive growth, which in turn is essential for building an equitable society." Pranab Mukherjee, President of India and Former Finance Minister Source : Various news reports

L&T Finance Corporate Finance Construction Equipment Commercial Vehicle Rural Finance Micro Finance Distribution Developments in the country RBI has been pushing opening of new branches Use of BCs for extending banking services to rural areas NREGA remittances through banking channels Development of MFIs as a credit and services delivery Draft Micro-Finance bill Mobile payment services

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