Vol XXIX No 03 l February 15, 2011

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FINANCIAL INCLUSIONGetting the unbanked into the financial system offers a massive business opportunity not only to banks but also to the technology providers

REACHING THE UNREACHED

E-WASTE: STOP Illegal Recycling!

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Given India’s size and population, there is no way of achieving financial inclusion without significant use of technology. So getting the unbanked into the financial system offers a massive business opportunity not only to banks but also to the technology providers

A Notoriously Unbanked Scenario

n 50% of India’s population does not still have bank accounts; 90% no access to credit or life insurance cover; 95% no general insurance; and 98% no participation in the capital marketn India has 64,000 bank branches, or one for every 16,000

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FinAnciAl inclUSionREAching ThE UnREAchED

people; and 80,000 ATMsn As per the report by Skotch Development Foundation, only 11%, of the 25 mn accounts opened between April 2007 and May 2009, were active as of end of 2009n Only 13% of Indians have debit cards, 10% life insurance and only 1% non-life insurance products.

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While India’s GDP in general and the bank-ing sector in particular has grown exponen-

tially in the last decade, the growth has barely reached vast segments of the population, especially the un-der-privileged sections of the society. Financial inclusion is one of the top priorities for the government today, which it is trying to achieve by lever-aging technology. The Reserve Bank of India (RBI) has dared to set a target of achieving inclusion by March 2012 of habitations with at least 2,000 peo-ple. Over ambitious? Maybe, especially as RBI’s very own deputy governor KC Chakrabarty admits, while speaking in a function recently: “50% of India’s population does not still have bank accounts, 90% no access to credit or life insurance cover, 95% no general insurance, and 98% has no participa-tion in the capital market.”

Nonchalant Banks and Under-cooked RoadmapsIn order to include the poor in the fi-nancial system, the government has no doubt embarked upon bold initiatives such as opening ‘no-frills’ accounts. But little did it work in the absence of a comprehensive multi-disciplinary ap-proach. Banks, until now, pressurized by RBI to offer ‘no-frills’, complain of receiving zero transactions in many such bank accounts. “The minimum

basic thing to include the poor into the financial system is money, which has to be there to keep an account functional. Even if you offer free no-frills accounts, it would hardly work unless poor have money to deposit,” says Subhas Gupta, chief executive, National Federation of Urban Co-operative Banks and Credit Societies (NAFCUB).

Economic viability is the biggest deterrent for banks to augment their footprints deeper into the rural regions. Banks are afraid of the high costs of setting up branches there. Besides, the rural banks which are already present in some parts are unorganized and ill-prepared to take financial inclusion in their agenda. India has 64,000 bank branches, or one for every 16,000 people, and 80,000 automated teller machines—a notoriously unbanked scenario when compared to European countries. “Over the years, several at-tempts have been made to develop low cost banking models, but they have only partially succeeded. As per report by Skotch Development Foundation, only 11% of 25 mn accounts opened between April 2007 and May 2009, were active as of end 2009. This raises questions on viability of models,” adds Hanuman Tripathi, group managing director, Infrasoft Technologies.

It’s evident that banks would not willingly move further unless a market is promised amongst the marginalized. “Paucity of business is what deters banks from taking the financial in-clusion agenda on their official radar. Banks, governments and other chan-nels have to join hands to make this mission successful. A comprehensive approach from banks, government and technology providers may bring fruitful results because all 3 can iden-tify a market amongst the unbanked.

“The minimum basic thing to include the poor into the financial system is money, which has to be there to keep an account functional...even if you offer free no-frills account”—Subhas gupta, chief executive, National Federation of Urban Co-operative Banks and Credit Societies (NAFCUB)

Outreach Measuresn The government injects `850 crore to part-finance the additional expenses borne by banks towards opening no-frills accountsn The government in its last budget set up 2 funds—the Financial Inclusion Fund and the Financial Inclusion Technology Fund, worth `1,000 croren NAFCUB plans to implement CBS in 300 UCBs of the 1,674 with 6,900 branches in the country by the year endn Trai considering regulations for financial inclusion via mobilen The inter-ministerial group (IMG) wants banks to pay the telcos a minimum of 2.25% per transaction or 1.4% of the

total amountn Telcos may get 3% per transaction or 2.25% for transactions done on their mini-ATMsn Plans to disburse payments and subsidies for schemes like NREGS and PDS (public distribution system) through no-frills accounts

n The government’s goal is to offer everyone at least 4 products: a savings account with access to an overdraft, a pure savings account, a remittance product, and entrepreneurial creditn The UID project to help achieve financial inclusion through the use of unique identification number

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“Co-operative banks can play a significant role in rural financial inclusion if they ably take advantage of the technology in place. The CBS system is available on the cloud”—g Srinivasa Raghavan, vice president and

country head, India Business, Tata Consultancy Services

“Use of biometrics based front end systems and full implementation of the UID program should go a long way in making payments to beneficiaries of the government programs”

—hanuman Tripathi, group managing director, Infrasoft Technologies

Technology in any form that has a mass appeal must not be ignored,” suggests Haragopal Mangipudi, global head, Finacle, Infosys Technologies.

Instead of being guided by RBI and the government, banks need to work with them from the beginning and take serious steps ahead. Of course the primary duty of setting up a mini-mal-risk platform lies with the gov-ernment. Hence the government has planned to further fund its no-frills movement with an amount of `850 crore, which will be used to part-fi-nance the additional expenses borne by banks towards opening no-frills ac-counts. Besides, it’s committed to em-power co-operative banks and extend low-cost business correspondents into rural areas, which are expected to con-tribute largely to financial inclusion.

Tech Empowering Co-op BanksThe challenge is to make the banking sector efficient in terms of both alloca-

tion and operation. While the former pertains to easy access to people, the latter is about harnessing technology rather than merely mechanizing to im-prove the functioning of banks. Large banks from both private and the pub-lic sector do own efficient technology infrastructure but have little reach in rural areas. On the other hand, co-op-eratives and rural banks have reach in some parts but lack infrastructure.It is with this in mind that the government and RBI have largely laid their focus on empowering co-operatives and ur-ban co-operative banks (UCBs).

Uma Shankar, Reserve Bank’s gen-eral manager of Urban Co-operative

Banks Department last year advocated the role of co-operative banks in the real last mile financial inclusion. Ac-cording to her, their support is required so as to help people participate active-ly in the financial inclusion program. She advised co-operative banks to use advanced technology and recruit more efficient people. For this purpose, the government has already set up 2 sepa-rate funds in the last Union Budget—the Financial Inclusion Fund and the Financial Inclusion Technology Fund, worth `1,000 crore—which are being extended through NABARD (Na-tional Bank For Agriculture and Rural Development) to banks.

“The co-operative banks, because of their geographic spread in the re-mote areas, need to be equipped with technology. NAFCUB has embarked on technology revolution in the urban co-operative banking sector. Realizing the need of core banking solutions in these banks, NAFCUB, in association with RBI, has shortlisted 4 technology

“There is a unanimous acceptability among all that alternate technology and the business correspondent model hold a great promise to realize this social mission”—Suneel gupta, CTO, FINO

“Agent banking is a good initiative, since it is the combination of both technology and convenience as it’s the locals who are engaged as business correspondents” —Suchin gupta, CEO, Mindmill Software

The rural banks which are already present in some parts are unorganized and ill-prepared to take financial inclusion in their agenda

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erative banks have to pay on a month-ly basis,” says G Srinivasa Raghavan, vice president and country head, India Business, Tata Consultancy Services.

Business Correspondent ModelTaking inclusion down to the poor was, and still is, a tough job. Banks, though in rural areas, should have a medium to touch base with the un-banked and under-banked because many village people would not dare to even enter a bank, even in the big cities, not to mention the ‘audacity’ it takes to speak to a bank manager about a loan.

To address this problem, the RBI, in January 2006, allowed banks to em-

ploy 2 categories of intermediaries viz, business correspondents and business facilitators (BF) who could approach the masses and carry out transactions on behalf of the bank as agents. The BFs can refer clients, pursue clients’ proposals and facilitate the bank to carry out its transactions, but finally the responsibility of putting through transactions rests with the bank staff. “Agent banking is a good initiative, since it is the combination of both technology as well as convenience as

vendors to offer their CBS solutions to UCBs,” says Gupta (NAFCUB). He also says that NAFCUB is constantly taking steps to help the relatively weak and smaller urban co-operative banks in adopting modern technology and interlinking through the Application Service Provider (ASP) system. The ASP based core banking solutions, Gupta says, are economical for small and co-operative banks. The 4 ven-dors shortlisted to offer CBS solutions include C-Edge Technology, Mindmill Software, Tata Consultancy Services and Theme Technologies.

In addition, the federation also plans to have CBS implemented in 300 UCBs, of the 1,674, with 6,900 branches in the country by the end of

this year. The introduction of the CBS system would, adds Gupta, modernize the UCBs across the country. Further, their six crore-odd account holders would have access to modern bank-ing, including the 80,000-odd ATMs of various banks across the country.

“Inclusion needs robust infrastruc-ture. Co-operative banks can play a significant role in rural financial inclu-sion if they ably take advantage of the technology in place. The CBS system is available on cloud, for which co-op-

“A comprehensive approach from banks, government and technology providers may bring fruitful results because all 3 can identify a market among the unbanked”—haragopal Mangipudi, global head, Finacle, Infosys Technologies

“It would, in fact, be almost impossible to make financial inclusion happen without extensive use of mobile technologies”—K Sree Kumar, CEO, Intellecap

it is the locals who are engaged or ap-pointed as business correspondents,” says Suchin Gupta, CEO, Mindmill Software.

“There is a unanimous acceptabil-ity among all stakeholders that alter-nate technology and the business cor-respondent model hold great promise to realize this social mission,” adds Suneel Gupta, CTO of FINO, a com-pany focussed on the BC model.

Many banks have utilized the scheme for expanding their opera-tions. The SBI among the public sec-tor banks has been recruiting as many BCs/BFs as possible. The banks have also enrolled Post Offices as BFs to offer several financial services to the post offices’ existing clients. Because the RBI has pushed and brought changes into its BC guidelines, private banks like ICICI Bank and HDFC have come forward in making use of the scheme. Mostly NGOs and MFIs of the eligible categories have been en-rolled as BC/BFs by banks.

“Business correspondents is a good move, since individuals such as village grocers, dealers in agricultural inputs and retired bank officials are being used as facilitators. These individuals are familiar with the local culture and language, thereby increasing the scope of success,” says Gupta of NAFCUB.

While all this holds potential, ex-periences suggest that the scheme didn’t take off in the way it was envi-sioned, due to insufficient flexibility for the BC system to be viable. To ad-dress this problem, RBI, in September 2010, announced revised guidelines to banks for engaging business cor-respondents for financial inclusion of the non-banking population through extension of banking services. RBI has now permitted to engage all regis-tered companies, except non-banking financial companies (NBFCs), as busi-ness correspondents (BCs) in addition to the individuals/entities permitted earlier.

The new guidelines have opened up avenues for even technology com-

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panies to engage with banks as busi-ness correspondents. “TCS is engaged on the business correspondent level with certain banks and is taking active part in field management platform. The new guidelines would address common issues such as physical con-straint of spacing and location,” says Raghavan.

Though the guidelines are ap-plicable to all scheduled commercial banks, including regional rural banks (RRBs) and local area banks (LABs), RBI wants banks to be selective in engaging individuals or entities as BCs. “The new guidelines even allow retired teachers, retired government employees and ex-servicemen, individ-ual owners of kirana shops, etc among others to be business correspondents. The approach, combined with appro-priate use of IT solutions, can work in

the right direction,” shares Gupta of NAFCUB.

“To further inclusion, the biggest challenge banks face is the identifica-tion of borrowers where BCs are going to play an active role. Their activities apart from this will also include collec-tion and preliminary processing of loan applications, creating awareness about savings and other products like advice

on managing money and debt counsel-ling, processing and submission of ap-plications to banks,” says Mangipudi of Infosys.

Until now, business correspondents appointed by institutions like FINO, SBI, and Eko, etc, have widely used a variety of customer-touched tech-nologies such as biometrics and POS (point of sale) devices. But the trans-actions done using them do not hap-pen in real time with the bank’s core banking system. BCs have to walk to the banks in order to update the trans-actions on the bank’s system. “In many cases, banks don’t have a standardized core banking system. For example, if someone has to transfer money from one account to another in the same village, many rural banks still lack a system that lets it happen in real time. The business correspondent model

Banking on Wheels

“The bank introduced ‘Banking on Wheels’ to connect with the unbanked

populace in the remote areas of Surat district...the mini van was equipped with a banking counter”—ic Mahida, managing director, The Surat District Central Co-operative Bank

Having implemented CBS, The Surat District Central Co-opera-tive Bank is supporting financial inclusion in Gujarat’s Suraj area. The bank started its financial inclusion drive in 2008 when it introduced an innovative model to extend its financial services to the common masses.

“With core banking in place, the bank introduced ‘Banking on Wheels’ model to connect with the unbanked populace in the remote areas of Surat district. The mini-van is equipped with a banking coun-ter enabling customers to deposit cash in their Saving Account, Fixed Deposits and Recurring accounts; pay loan installments; and withdraw money. In short, it allows customers to perform most of the banking activities on wheels,” says IC Mahida, managing director, The Surat District Central Co-operative Bank.

Today, the mini-van covers 55 villages consisting of approximately 50,000 customers. The bus follows different planned routes over five days of the week. At the end of each day, the data from the mini-van is consolidated with the central server from the Mandvi branch. On just the ‘Banking on Wheels’ channel, in the last 1.5 years, the bank has attracted 6,000 new customers and generated a turnover of `7 crore. Additionally, the bank has tied up with the NGO called GRISFER, a branch of Bharatiya Agro Industries Foundation for providing credits/loans to self help groups and sakhi mandals.

In FY 2011-12, the bank plans to extend the ‘Banking on Wheels’ model in other Talukas. To extend the reach of our financial inclusion objectives, the bank plans to appoint PACS (Primary Agricultural Credit Societies) as their business correspondents,” says Mahida.

To enable real time integration from various channels and models, the bank also plans to implement connectivity on VSAT (Very Small Aperture Terminal), a two-way satellite ground station.

RBi has now permitted to engage all registered companies, except non-banking financial companies, as business correspondents in addition to the individuals/entities permitted earlier

Surat District

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have driven costs down, and the im-pact that the mobile phone has had on business and social practices, it would, in fact, be almost impossible to make financial inclusion happen without extensive use of mobile technologies,” says K Sree Kumar, CEO, Intellecap, an Indian social advisory firm.

At the same time, banks have to ensure that they do their reasonable bit to use the mobile platform. But then they can’t completely rely on mo-bile for financial inclusion. “Our expe-rience suggests that still customers are more comfortable doing transactions through agent-assisted models com-pared to self-assisted transactions on

can be successful, if banks do also focus on standard-ized solutions,” remarks Gupta (Mindmill).

Mobile Banking—a RescuerWhether it’s the question of adding co-operatives and rural banks in the financial inclusion drive or appoint-ing business correspond-ents, what will oil their financial machinery well is mobile technology. Industry peers bet big on connectiv-ity and the mobile revolution to make the financial inclusion initiatives suc-cessful. “A decade back mobiles were scarce in India, today they are every-where. Mobile has to be the focus to carry inclusion forward,” adds Gupta (Mindmill).

Mobile-based technology is ubiq-uitous in India; where among more than 600 mn mobile users about 20% do not have bank accounts. “Mobile Banking will help achieve what credit cards and debit cards achieved in the previous decade and hence implemen-tation of mobile banking, in the right way, will ensure that urban poor and rural populations would be able to realize their loan approvals and other cash benefits from merchant establish-ments all over, as if it were happen-ing through a credit card/debit card,” says Tripathi of Infrasoft. This was marginally addressed through Kisan Credit Cards and Rural ATMs, but the problems still remain unresolved. He further suggests, “Mobile platform services such as receiving credit, pay-ments and transfers, account opening and receiving loan approvals, etc, can be offered on cheaper mobile phones over a period of time.”

What makes mobile a potential tool to carry financial inclusion fur-ther is that mobiles have become an integral part of the rural social land-scape. “The skill with which Indian mobile communication companies

mobile. It is because literacy levels are at the bottom in rural areas. Mobile technol-ogy can foster realtime con-nectivity with a bank’s core banking system for real-time transactions,” says Gupta (FINO).

Mobile-based financial inclusion has also attracted Telecom Regulatory Au-thority of India’s attention after RBI moderated its poli-cies on m-banking. Trai will implement tariff regulations so that financial services are

offered at low cost to the masses. The regulator has, thus, proposed a frame-work for delivery of basic financial services including transfer of funds un-der various government schemes and programs targeted at poor people. In a recent statement, the regulator has said, “Tariff regulation would be cru-cial if adoption of mobile banking is to be encouraged, especially among the unbanked segments of the population. In such a situation, cost effectiveness of delivery of basic financial services through mobile phones becomes an important consideration.” The inter-ministerial group (IMG) constituted by the Cabinet Secretariat to frame rules for banking services on cellular handsets has said that banks in turn must pay the telcos a minimum of 2.25 per transaction or 1.4% of the total amount, while it has also added that the commission can be gradually re-duced to 1% over a period of five years. The IMG report also underlines that if telcos want to set up mini ATMs, and if the transactions are to happen through these, then banks must pay them a minimum of 3 per transaction or 2.25% of the amount.

Furthermore, extending their foot-prints into country’s financial inclusion initiative, cellphone companies are also entering into tie-ups with banks. Bharti Airtel has formed a 49:51 joint venture with State Bank of India to provide mobile-banking and other fi-

Urban co-operative Banks can Use the cBS System

NAFCUB has shortlisted 4 CBS vendors for urban co-operative banks. Irrespective of their sizes, the banks can leverage the solution on affordable monthly rentals.n CBS is now within reach of all urban co-operative banks—even the smallestn CBS is compliant with updated RBI regulationsn Allows any branch and any time banking connectivityn Offers ATM networking compatibilityn CBS will be available at competitive monthly rental of `12,000 per branch

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nancial services, whereas Vodafone Essar has also entered into a joint ven-ture with ICICI Bank to offer similar services. “Operators’ participation in the financial inclusion is a step further and, if reaped properly, can cover a large chunk of the unbanked popula-tion in a short span,” says Gupta.

At Work at Last The basic purpose of any technology is that it should be able to address the need of the basic market. The role of one technology in silo is thus always denied. It is a combination of solu-

tions, from mobile operators, CBS pro-viders to hardware manufacturers who can create a massive business space for themselves along with banks in the financial inclusion mission. “In the relaxed regime, technology firms such as ours can also move on to be BCs. It would alleviate banks from training BCs for the paraphernalia they carry around. We can equip BCs with ap-propriate tools that allow real-time financial activities with a bank’s core banking system. In general, technolo-gies of all kinds will have a huge say in the financial inclusion drive, when it is coupled with a bank’s intent to do so,” says Suchin Gupta.

Similarly, the Unique Identification Number (UID) project is also in the limelight for the financial inclusion

program as the government expects a recognizable contribution from this. According to banks, the UID would be a cost-effective way of reaching out to customers at a time when banks are grappling with issues related to client identity. Nandan Nilekani, chief of the UID project has also taken up the matter with banks to discuss how they can help achieve financial inclusion through the use of UID.

Use of biometrics in the UID project has gained a lot of traction which, ex-perts say, will further financial inclu-sion in India. “Use of biometrics based

front end systems and full implemen-tation of the UID program should go a long way in making payments to the beneficiaries of various government programs,” believes Tripathi of Infra-soft. Along with UID that can help in authentication of a person making transactions, mobile will be a best fit in people-to-people remittances, adds Gupta (FINO).

A Small Step Towards Success If the financial inclusion steps have not succeeded completely, they haven’t failed either—which is the silver-lin-ing. The government is waking up to the fact that first it needs to disburse all payments and subsidies to the poor through its no-frills accounts. It will

not only bring the unbanked into the financial system but also ensure that the amount doesn’t land in corrupt hands. Some of the business corre-spondent efforts are being combined with government policy to process National Rural Employment Guaran-tee Scheme (NREGS) payments and extending PDS (public distribution system) subsidies to the under-privi-leged into their accounts.

Brisk service delivery will ensure sustainable financial inclusion. “Most challenges are at the services delivery end for achieving successful and sus-tainable financial inclusion objectives. These can be resolved only by using intelligent hardware, such as pre-load-ed cards, rural ATMs, kiosks, mobile solutions for agents and correspond-ents and mobile based transactions for purchase and sales,” says Tripathi.

Financial inclusion will propel, if there is appropriate financial aware-ness among the masses. The poor must become part of banking activities such as loans and insurance facilities. Financial inclusion thus comes second to financial literacy. “Financial literacy is a prerequisite for effective financial inclusion, which will ensure that fi-nancial services reach the under-privi-leged and under-banked sections of society,” says Raghavan.

Financial literacy at the bottom of pyramid is very important because only 13% Indians have debit cards, 10% life insurance, and only 1% have non-life insurance products. The government’s goal is to offer every-one at least 4 products: a savings ac-count with access to an overdraft, a pure savings account, a remittance product and entrepreneurial credit. To conclude, banks have to willingly see a business opportunity in the ru-ral inclusion. To compliment their mission, it would be crucial to work along with solution providers, service providers, telecom operators and gov-ernment, among others.

—onkar Sharmaonkars@cybermedia.co.in