tcs government whitepaper financial inclusion 09 2010

8/11/2019 TCS Government Whitepaper Financial Inclusion 09 2010

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The correlation between financial inclusion and economic growth has

long been widely recognized: low financial inclusion impedes

economic growth. Access to easy and affordable credit by the

disadvantaged social groups is acknowledged as a key criterion for

poverty alleviation and reducing social inequity. However despite

broad international consensus on the importance of access to finance

as a powerful poverty alleviation tool, it is estimated that over 2 billion

people globally continue to be excluded from the formal financialsector.

India with 135 million households is home to the second largest

financially excluded population, after China.

Given the size of the challenge and the heterogeneity of the

financially excluded segment, there cannot be an approach or model

which can be prescribed globally. Instead, models which are

contextual to the local consumer requirements are required. Each

stakeholder of the financial inclusion ecosystem including financial

institutions, regulatory agencies, technology service providers, NGOs

etc will need to play their part and more importantly collaborate with

each other to design and implement effective interventions.

ICT has a key role in enabling supply and demand side interventions

which can deliver affordable financial services at a scale and pace

which the problem demands.

Financial Inclusion From

Obligation to Opportunity


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Financial Inclusion From Obligation to Opportunity

About the Author

Rajdeep Sahrawat

Rajdeep is Senior General Manager and Head of Strategic Initiatives

at the Government Industry Solutions Unit. His work focuses on

creating technology enabled strategies and solutions which can

address the challenge of inclusive growth.

Prior to joining TCS, Rajdeep was Vice President at NASSCOM, the

premier trade body for the Indian IT-BPO industry in India.

Rajdeep has a Bachelor of Technology degree and a Master in

Business Administration.


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Table of Contents

1. The Financial Inclusion Imperative 3

2. Understanding The Consumer 8

3. The Supply Side Ecosystem 10

4. From Obligation To Opportunity 14

5. Summary 24


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The Financial Inclusion Imperative

The correlation between financial inclusion and economic growth has been long recognised: low financial inclusion

impedes economic growth. Access to easy and affordable mainstream financial services by disadvantaged social

groups is acknowledged as a key criterion for poverty alleviation and reducing social inequity. Such unfettered accessenables the financially excluded population to build savings, carry out investments, avail safe and low-cost credit and

perhaps most importantly it enables the poor to mitigate risks of income seasonality, illness and employment loss.

However despite broad international consensus on the importance of access to finance as a powerful social1

development instrument, it is estimated that over 2 billion people globally continue to be excluded from the formal

financial sector resulting in them languishing in an endless cycle of deprivation and segregation from the mainstream

economy. Financial exclusion relegates the poor to a subsistence livelihood and increases the probability of their being

dependant on social welfare schemes thereby increasing the burden on the economy. Difficulty in accessing credit

from formal financial institutions leads these disadvantaged groups to depend on non-formal sources including local

un-regulated credit providers especially for non-productive consumption oriented expenses e.g. medical

emergencies, social ceremonies and marriages etc.

Financial exclusion also has an adverse national economic impact as it precludes large sections of the population from

micro-entrepreneurship opportunities thereby restricting them from becoming economically productive and

increasing their contribution to the national GDP in a bigger way.

Financial inclusion has particular significance for developing economies as it helps in improving the effectiveness of

the social development initiatives by reducing leakages in welfare disbursements. It can also enable replacement of

goods based welfare schemes e.g. heavily subsidized food, into targeted cash subsidies which can be disbursed directly

to the beneficiaries.

While the largest concentration of the global financially excluded population resides in India, China and Brazil, huge

numbers of the financially excluded also populate Africa and other parts of Asia. It is estimated that China has 263

million financially excluded households followed by India with 135 million and Africa with 230 million financially

excluded households. The United Nations has estimated that in the least developed countries (LDCs), more than 90

percent of the population is excluded from access to the formal financial system.

Defining and Measuring Financial Inclusion

Given the impact of social, geographical and economic variables, it is not surprising that financial inclusion lacks a

universally accepted definition. Many definitions of financial inclusion are prevalent today ranging from defining2

financial inclusion in terms of geographical access to a more holistic definition covering unbiased awareness, access

and usage of financial products and services.

The scope of financial inclusion is also evolving from being limited to a bank account and simple saving products to

include remittances, savings, loans, financial counselling, insurance (life and non-life). Consequently a holistic financial

inclusion ecosystem will include banks, co-operatives, microfinance and insurance institutions.

3


1 (United Nations, 2006a)

2 Unbiased access refers to access without restrictions of caste, creed, religion, gender, social group etc


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The Reserve Bank of India (RBI) defines financial inclusion as the process of ensuring access to financial services and timely

and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable

cost.

However it needs to be emphasized that mere ownership of a financial product does not result in financial inclusion. It is

the usage of the financial product for economic self-reliance and growth which ultimately leads to financial inclusion.

For example, opening a bank account by an individual is often treated as an indicator of financial inclusion. However a

better indicator of financial inclusion would be the usage intensity of the bank account by the individual as it is

ultimately the quantum of transactions and interaction variety between the individual and the financial institutions(s)

which reflects the value derived by the individual from participating in the mainstream financial system.

Another relevant point regarding financial inclusion is that, even among the population who have access to formal

financial sector institutions, many are often poorly served both quantitatively and qualitatively from the perspective of

products and services. This leaves a majority of the low-income population dependant on non-performing,

unsustainable institutions, which in-turn are themselves dependant on Government subsidies. Figure 2 depicts the

extent of the challenges in accessing formal financial services by the poor.

Measuring the extent of financial inclusion is not a perfect science despite the increased focus on addressing financial

inclusion. Published financial inclusion literature does not provide a comprehensive set of lead and lag measures toindicate the extent of financial inclusion across nations and regions. Typical measures include number of bank

accounts, number of bank branches and credit disbursement to disadvantaged social groups. In more mature financial

systems, the measures may include usage of products like credit cards and life insurance, among others.

Unfortunately these indicators only provide limited information about the extent of financial inclusion. These

information gaps, result in partial understanding of the most vulnerable social groups, which products, services and

financial institutions are most suitable for access by the poor households and what are the elements of an enabling

regulatory framework etc. Not surprisingly, the quantitative and qualitative lack of information about the extent of

financial inclusion is more prevalent in developing nations where a majority of the global financially excludedpopulation resides.

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Figure 1: Scope of Financial Inclusion

3 Report of the RBI Committee on Financial Inclusion in India (2008)

Savings

Insurance

Payments /Remittances

AffordableCredit

FinancialCounseling

Bank Accounts

Financial Inclusion


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Financial Inclusion in India

With 135 million financially excluded households, India faces a severe financial inclusion crisis. Only 34 percent of the

Indian population is currently engaged with the formal financial sector. If usage intensity of a savings account is

considered as a true indicator of financial inclusion rather than mere ownership, then the financial inclusion percentage

will certainly be much lower.

The financially excluded population in India includes landless labourers, oral lessees, marginal farmers, unorganised

sector work-force, urban slum residents and socially excluded groups. With 82 percent of Indias poor households

located in rural locations, vast majority of rural India can be considered as financially excluded. Some key statistics

5regarding the extent of financial inclusion in India are as follows :

41% of the Indian population is unbanked (80 million households). Out of this, 40 % is unbanked in urban areas and

60 % in rural areas. Only 14% of adult population has credit accounts with formal financial institutions.

Out of the 203 million households in India, 147 million households are located in rural India. Out of these rural

households, 89.3 million households are famer households. 66 percent of farmer households are marginal farmer

households.

51.4 percent farmer households (45.9 million out of 89.3 million) are financially excluded from both formal and

informal financial sources.

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4 Asian Development Bank, 2007

5 RBI, NSSO Survey 59th Round

4Figure 2: Dimensions of Access Challenges

Low Income Households and theirmicro & small enterprises

Majority with no access to finance at all

Very large proportion is underserved Very small proportion with full access

Small minority with access to finance

Significantnumber depends

on services ofunsustainable

institutions

Many have access todeposit services of

state ownedfinancial institutions

and co-operatives

Significantproportion has

access only to creditfrom micro-credit

institutions

Proportion withaccess to banking

services is verylimited

Access to insuranceservice is very

limited

Clients have topay high

transaction costs

Withdrawingfunds is notalways easy

Transaction costsare high

Poor creditquality

Client transactioncosts are high

Long processing time High minimum loan

requirements Banks geared to

serve high incomegroups

High productincompatibility

Low transparency


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27 percent farmer households have access to formal sources of credit. Among non-cultivator households nearly 80

percent do not access credit from any source

North-East, Eastern and Central India account for 64 percent of all financially excluded farmer households in India.

Overall indebtedness to formal finance sources is 19.66 % in these three regions.

Geographically, 256 districts (out of 640 districts) representing 40 % of total districts in India, spread over 17 statesand 1 UT have critical credit exclusion thresholds in respect of access to formal credit.

The proportion of people having some form of life insurance cover stands at 10 percent and people with any form of

non-life insurance cover stands at less than 1 percent. There are only 3.1 policies per thousand people in India

(2007)

The following figure illustrates the geographical spread of financial exclusion in India:

As it exists for many things in India, the rural-urban divide also exists in financial inclusion. At 56 percent, the rate of6

financial inclusion of urban households is more than double that of rural households at 24 percent .

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Figure 3: Geographical spread of financial exclusion in India

6 BCG Report on The Next Billion Consumers in India

Jammu&

kashmir

Punjab

Haryana

Rajasthan Uttar Pradesh

Madhya Pradesh

Delhi

Maharashtra

Andhra Pradesh

Karnataka

Tamilnadu

Bihar

Jharkhand

West Bengal

Orissa

Assam

>75%

51-75%

25-50%

< 25%


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The case of the urban poor particularly the migrant work-force is particularly serious as they do not fit into any defined

category. Lack of any fixed household address due to the migratory nature of their livelihood and an absence of a

verifiable identity makes it almost impossible for this section of Indian society to become financially included under the

current ecosystem.

While the above statistics number may indicate otherwise, financial inclusion has been on the Governments agenda for

the last few decades.

The following is a summary of the key national financial inclusion initiatives over the last four decades.

While many public sector banks in India have launched financial inclusion initiatives, these are often due to RBI

mandates rather than a desire to seize a blue sky business opportunity. Unsurprisingly, most of these initiatives

continue to remain at a pilot stage with limited impact on the ground.

However the last five years have seen a renewed thrust on financial inclusion in India. Initiatives like the SHG-Bank

linkage program have resulted in millions of Indians participating in the formal financial ecosystem resulting in marked

improvements in their lives. There has been a huge upsurge in micro finance initiatives with some micro finance

institutions (MFI) acquiring national footprints.

Apart from poverty alleviation, increasing financial inclusion may have a multiplier effect on the Indian economy. It will

enable the Government to provide social development benefits and subsidies directly to the beneficiary bank accounts

thereby drastically reducing leakages and pilferages in social welfare schemes and leading to a reduction in the subsidy

burden. Greater financial inclusion often leads to an increase in economic prosperity which has a positive influence on

inclusive growth.

1960s, 70s

1980s,90s

2000s

Focus on increasing credit to the neglected economy sectors and weaker sections of society

Development of the rural banking ecosystem including RRBs, rural and semi-urban branches etc

Implementation of the social contract with banks

Lead bank scheme launched for rural lending

Branch licensing policy to focus on expansion of commercial bank branches in rural areas

Establishment of National Bank for agriculture and Rural Development (NABARD) to provide refinance tobanks providing credit to agriculture.

SHG-Bank linkage program launched by NABARD

The term 'Financial Inclusion' introduced for the first time in RBIs Annual Policy Statement for 2005-06.

Banks asked to offer 'no-frills account', General credit card facility at rural and semi-urban branches

Know Your Customer (KYC) norms simplified

Banking Correspondent and Banking Facilitator concept introduced to increase out-reach

100 percent financial inclusion drive launched

Restrictions on ATMs deployment removed


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Understanding The Consumer

While a majority of the challenges of FI are often viewed from the supply side perspective with a resultant thrust on

supply side interventions, it is equally if not more important to develop an understanding of the demand side

challenges. This will enable a more balanced set of interventions and also align the supply side interventions withconsumer needs.

Profile of the financially excluded consumer

The financially excluded consumers have certain unique characteristics which decouple them from the formal financial

system in its current form:

Financial illiteracy: The financially excluded consumer has more often than not, a low awareness and

understanding of the need for personal financial management and of the services and products provided by the

formal financial system. Majority of the interventions for building financial literacy are reliant on printed collateral

.i.e. brochures, manuals etc and have limited outreach which makes it difficult for the poor to update themselveson the available financial services.

Low and cyclical income: The consumers have a very cyclical and variable income pattern which is often linked to

the agriculture cycle in rural locations and availability of work in the urban areas which makes their adherence to

fixed schedules impractical.

Minimal collateral: A focus on consumption expenses and reluctance or inability to create fixed assets due to low

incomes and migrant lifestyles result in the financially excluded consumers often not possessing any assets which

can be accepted as viable collateral against credit.

Lack of credit history: Financial exclusion results in the poor having no verifiable credit history which makes it

difficult for banks and other financial institutions to authenticate their credentials while extending credit.

Absence of formal and verifiable identity: The financially excluded often have no means of proving their identity as

the conventional means like driver licenses, voter identity card, passport, ration card and utility bills are not

available to them.

General illiteracy: The high levels of illiteracy prevalent among the financially excluded especially amongst the

rural population make them unable to comply with the complex documentation requirements of formal financial

institutions.

Apprehension of bureaucracy: Their legacy of social oppression results in the financially excluded having an

apprehension and fear of dealing with bureaucracy. The inimical attitude often displayed by the staff of financialinstitutions further alienates the poor.

Credit primarily for personal consumption: The typical credit requirements of the poor are mainly for consumption

kind of expenses e.g. marriages, celebrations, medical emergencies etc. which makes it difficult for them to avail

credit from formal sources.

Consumer expectations from the formal financial ecosystem

To transform the financially excluded population into customers of the formal financial institutions, it is important to

stimulate demand for financial products and services. Such products should not be stripped down versions of products

and services originally created for the more affluent consumer segments and should instead holistically address the

following expectations of the financially excluded consumers:


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Appropriate products: The products and services currently offered by the formal financial institutions are largely

unsuitable for the financially excluded consumer. The financial products are complex, assume regular income

profile, have large denominations, high fees and require strict procedural compliance e.g. minimum savings

account balance. These product characteristics make them unaffordable and unsuitable for the financially

excluded consumer. For example, a bank loan typically requires collateral, fixed repayment schedule, extensivedocumentation, minimum denomination and credit history etc. These requirements are completely at variance

with the profile of the typical financially excluded consumer explained in section 2.1.

Financial counselling: High financial illiteracy coupled with the complexity of the current financial products and

procedures, necessitates that the financially excluded consumers have access to counselling and advice in order

for them to select the most appropriate products for their needs. Without the counselling, adoption of financial

services may remain low, since the targeted groups may not fully appreciate the benefits of the services and

products on offer.

Increased accessibility: Typically the financial institution offices operate during fixed hours (.i.e. 1000 1400 hours)

on certain days of the week. The offices are likely to be located within large villages and towns. As the financiallyexcluded are highly likely to be daily wage workers, there is often a huge opportunity cost of lost daily wages for the

consumers if they have to visit these offices. Even if they are not daily wage workers, the excluded consumers will

often find it difficult to leave their daily activities to visit offices during working hours.

Contrast this rigidity of the formal sector with the flexible access provided by the informal financial system e.g.

money-lenders which the financially excluded are typically used to. The financial institutions need to remove the

physical access impediments to enable the financially excluded population to access the financial institutions as

per their life-style convenience.

Simplified procedures: The current procedures for availing products and services from the financial institutions are

complex and very intensive on documentation requirements including identity and address verification. A

consumer who suffers from a high degree of financial illiteracy and also has low literacy levels will find it extremely

challenging to deal with complex procedures and documentations and will either agree without comprehending

or not avail of the products at all.

An example of complex procedures is identity verification through conventional means .i.e. licenses, voters id,

passport, ration cards etc. These documents are often not available with the financially excluded especially the

migrant work-force and thus act as a steep entry barrier for financial inclusion. Alternative forms of identity

verification based on bio-metrics, personal introductions etc need to replace document based identity

verification.

Improved public interface: A less than welcoming attitude displayed by the staff of the formal financial institutions

towards the financially excluded creates a deep sense of alienation and makes them reluctant to approach the

formal financial institutions. The financially excluded consumers expect to be treated with respect and empathy by

the financial institution staff.

It must be pointed out that while being deprived of access to the formal financial sector, the financially excluded

consumers have active interactions with the informal financial sources, typically money-lenders, friends and family.

Unlike the formal financial sources, the informal financial sources overcome a number of the impediments of the formal

sector. The informal sector is operationally flexible, empathetic to the needs and easily accessible for the financially

excluded. Unfortunately, this comes at the price of usurious charges which often is a root of many social evils like farmersuicides, forced marriages, land grabbing etc.

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The Supply Side Ecosystem

While there is no doubt that there is a need to stimulate the demand for formal financial sector products among the

financially excluded consumers, appropriate and effective supply side interventions hold the key to increasing financial

inclusion, especially in the short term.

Supply side constraints

Some of the constraints impeding the scaling up of financial inclusion are as follows:

Products: Many of the products and services offered by the formal financial sector today are not suitable for the

financially excluded consumers resulting in slow uptake. This is because most of the currently available products

and services have been designed for a certain customer segment and either the same products or their stripped

down versions are being offered to the financially excluded segment. Continuing to see financial inclusion as a

social obligation rather than a viable business opportunity, the financial institutions are reluctant to invest in

developing products specifically for the financially excluded consumers and in undertaking market development

initiatives.

Processes: The rigidly enforced processes of the formal financial institutions are complex and documentation

intensive and deter the financially excluded consumers, many of whom are illiterate or semi-literate, from

approaching the formal financial sector. Stringent requirement of identity verification through documentary

evidence, requirement of credit history, fixed loan repayment schedules, operating timings are some examples of

processes acting as access barriers.

Technology: While many public sector banks have undertaken major technology adoption initiatives e.g. Core

Banking System implementation, other supply side stakeholders of the formal financial ecosystem including post

offices, Micro Finance Institutions (MFI), Regional Rural Banks (RRB), Primary Agricultural Co-operative Society

(PACS) continue to be seriously under invested in IT. Since these institutions have the primary responsibility to

provide financial services to rural India, their low IT capabilities often impedes their ability to provide services

efficiently and scale up their operations. Poor IT adoption also makes it difficult for these institutions to integrate

their operations with the other constituents of the financial ecosystem, both upstream and downstream.

People: A majority of the staff in rural branches of financial institutions are on temporary deputation from urban

branches and hence do not understand the unique requirements of the financially excluded consumer often

leading to an inimical interaction between the bank staff and the consumers. This also impedes financialcounselling by the bank staff leading to a detrimental impact on improving financial literacy of the financially

excluded consumers which is critical to remove the prevailing distrust of the formal financial institutions.

Outreach: While the density of bank branches is on the increase in the urban areas as banks find urban locations

more lucrative, the per capita density of the bank branches in the rural locations continues to be a concern. In India,7

currently the average population density per bank branch is 16,000 and the numbers for rural and urban locations

are 17,000 and 13,000 respectively.

7 2007 data from Basic Statistical Returns of SCBs in India.


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Current operational model for financial inclusion

The various operational models used for financial inclusion by the banks today converge on certain key processes and

technology components. Typically most of the models include a smart card issued to the beneficiary in which his

transaction history is maintained, a multi-function hand-held device used by the BC for enrolment and transactions and

a local computer which integrates the field transactions with the banks CBS. Some key elements of the current

operational model are as follows:

Banking Correspondent: During 2005, the RBI made a key policy decision by introducing the concept of Banking

Correspondent (BC) to increase the rural outreach of the banks especially in the areas where the brick-and-mortar

bank facilities are not available. A BC can either be a Section 25 company, NGO, MFI or an individual (retired bank

employees, ex-servicemen, retired government employees). A BC represents the bank to its customers and is not

allowed to charge fees from the customers for performing services and instead is remunerated by the bank.

Recently the RBI increased the categories of people who can act as BCs to include kirana/medical/fair price shop

owners, public call office (PCO) operators, agents of insurance firms, individuals who own petrol pumps, retired

teachers and SHG groups linked to banks.

In India, the banks typically engage an organisation as a BC in specific geographies and a bank can have multiple BC

partners across geographies. Each BC appoints agents who typically cover a few local villages within a defined

geographical boundary and provides services like customer enrolment, collecting deposits and small withdrawals

to the account holders. The BC has to upload the customer transactions to the banks CBS within a defined time-

period e.g. 48 hours.

Apart from the BCs, some of the other modes used by the banks to increase outreach are kiosks and bio-metricenabled ATMs. POS terminals have not really taken off due to poor connectivity infrastructure in rural areas.

Figure 4: Typical operational model for financial inclusion in India

FI Gateway

Base Branch CBS

CustomerAcquisition System

Kiosk Laptop POS POS

Delivery Channels

CardManagement System

File Upload

Customer Trxns

Customer Trxns (Online/Offline)

CIF&A/copeningdata


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Hand-held device: While there are many modes of addressing the last mile delivery of financial services including

kiosks, rural ATM etc, most of the current financial inclusion delivery models converge on the hand-held devices.

These devices have wireless connectivity, bio-metric readers for beneficiary authentication and micro-printers.

The account-holders authenticate themselves typically through bio-metric validation based on their personal data

captured during enrolment. The devices typically connect through wireless GPRS/CDMA/GSM protocols. Nearfield communication technology is also becoming popular.

Smart card: The smart card is used to record the recent transactions of the beneficiary and his identification details.

The capabilities of the cards in use today vary from the very basic to intelligent cards equipped with RFID chips with

cost often being the key determinant regarding the selection of the card technology by the bank.

Processes: The following are the key operational processes under the current FI operational model:

- Customer enrolment: The customer enrolment is done by the BC using bio-metrics (typically finger-prints) and

the recently simplified KYC norms. The BC uploads the customer details to the bank where the no frill account is

created subsequent to validation and processing by the bank. Once the account is opened, the beneficiary is

informed and the card is delivered to him.

- Customer transactions: The beneficiary conducts the transactions with the BC typically through the hand-held

device. The beneficiary identification is done using bio-metrics and the withdrawal and the deposit transaction

details are entered into the hand-held device which also generates transaction receipts for the beneficiary. The

card of the beneficiary is also updated with the recent transactions. The BC uploads the transactions to the

banks CBS either online through wireless connectivity or in an offline batch mode within 48 hours of the

transaction taking place. The field transactions are often initially uploaded to the BCs internal FI server and

subsequently transferred to the banks CBS.

- Cash Management: The net cash collected by the BC (net of deposit and withdrawal transactions) needs to be

submitted to the nearest bank branch within a defined time period. The remoteness of many locations makes

this process very challenging as it also involves the physical security of the BC. In some instances, the banks debit

the net cash position of the BC from the deposit which the BC maintains with the bank thereby eliminating the

need for physical cash deposit at the bank branch.

Challenges of the current operational model

High cost: The CAPEX and OPEX costs for the banks to develop the FI business continue to be high. The financial

institutions find it difficult to make a profit as the FI transactions are typically low value and the volumes continue to

stagnate due to the poor usage intensity of the products and services.

Economic viability of BC model: The current business model is not economically viable for the BC. This is because

firstly there are not enough products for distribution by the BC beyond savings and withdrawals and secondly they

cannot charge commission/fees from the beneficiaries and end up depending upon the bank for their

remuneration. The operational expenses including travel etc are also often not reimbursed. Additionally, the BCs

have to bear the cost of the hand-held devices and pay interest to banks on the over-draft provided to them. There

is also little incentive for BC to push any products as either he does not get a commission or the commission is very

low. The geographical restrictions on a BC have a negative impact especially in hilly districts where population

density is low and terrain inhospitable. Cash management is also a challenge as the BC has to deposit the cash with

the bank branch within a stipulated time period which is often not possible in remote areas. While ideally the cash

management should be outsourced to a specialised third party, the banks are reluctant to undertake the additional

expense.

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Lack of standards: The smart cards issued by the various banks are not interoperable across the banks/POS outlets

which inhibit the ability of the consumer to conduct transactions through the POS of other banks which is an

important requirement given the migrant lifestyle of many poor people. The smart cards themselves are not as per

any uniform technology standards approved by a national standard setting body. The beneficiary bio-metric data is

also not maintained in any standardised format.

Low technology adoption:The RRB, MFI, Post offices and PACS continue to severely lag behind in technology

adoption which adversely impacts their ability to increase efficiency and scalability of their operations cost

effectively.

Lack of products: Apart from small denomination deposits, withdrawals and some basic remittances, there are

hardly any products which are offered to the beneficiary currently. This has two major disadvantages. Firstly, there is

little value for the beneficiary to engage more vigorously with the formal financial sector and secondly, the lack of

products adversely impacts the BCs economic viability.

Lack of accountability: There are a large number of institutions involved in financial inclusion e.g. banks, BC firms

and technology providers etc. This result in a lack of accountability when it comes to addressing customer

grievances leading to an attitude of finger-pointing. For example, while the BC is the face-of-the-bank to the

beneficiary, he is actually not a bank employee and instead is often the employee of a firm proving BC services to

the bank.

Poor counselling capacity: The target beneficiaries are financially illiterate people who are unaware or mistrustful of

the formal banking sector. The Banking Correspondents and the Banking Facilitators are often not adequately

trained to provide financial counselling services to the beneficiaries and help them overcome their mistrust of the

formal financial institutions. This creates a drag effect on demand for services from the financial sector.

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From Obligation To Opportunity

Ensuring sustainable scalability for financial inclusion will require the supply side and demand side issues discussed

earlier to be addressed simultaneously through systemic solutions. Every stakeholder of the financial inclusion

ecosystem including financial institutions, regulatory agencies, technology service providers and civil societyorganisations will not only need to play their individual parts effectively but more importantly collaborate with each

other to architect and implement effective interventions.

The size and the heterogeneity of the financially excluded population preclude a single silver bullet approach or

model which can be prescribed globally. Instead, models which are contextual to the local consumer requirements are

required as has been demonstrated by the success of Grameen Bank in Bangladesh and MPESA in Kenya and Indias

own SHG-bank linkage initiative with each being specific to its local environment. Multiple and diverse approaches also

mitigate systemic risk, increase competition and improve efficiency.

Role of Financial Institutions

The financial institutions have perhaps the largest stake in the success of financial inclusion. However to realize this

opportunity, they will need to create an entirely new portfolio of products and services delivered through radically

different distribution structures which are aligned to the needs and lifestyles of the financially excluded consumer. The

following figure shows the typical financial institutional structure and the products and service offered through these

institutions today.

8Figure 5: Institutional structure and their products and services in India

8 Report on Currency & Finance 2006-08 - Vol. II

Insurance Firms Banks/RRB/ PACS

MFIs/NGO

Financial Advise

Insurance Loan/credit accounts

Saving Accounts

Small value credit/loans Remittance services

Remittance services Postal Saving Accounts

Financial Inclusion: Access toproducts/services from formal

financial system

Product/service Institution

Post Office


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Products: Products (deposits, loans, insurance, remittances etc) with the following features are required by the

financially excluded consumer:

- Small denominations as the financial needs of the poor are often small and predominantly for personal

consumption or for starting micro enterprises

- Flexible repayment schedule as the poor often have cyclical and unpredictable income tied to agricultural /

employment seasonality. The customer should be allowed to pay as per his capacity within a defined time-period

without attracting steep penalty charges. For example, a loan can have a repayment schedule of say Rs 100

during a quarter and the customer should have the flexibility to repay Rs 100 either as lump-sum or in smaller

instalments during the quarter.

- Collateral-less lending for small loans below a certain threshold. Physical collateral requirements can be replaced

by guarantors who have a well-established credit history.

- Given the extremely low uptake of insurance by the poor who are often the most vulnerable, the insurance firms

need to design appropriate products and create new distribution channels to reduce their costs, simplify

processes and increase outreach. Insurance firms need to balance their need for risk-aversion with the huge

market opportunity. Lack of historical data to calculate optimum premiums empirically often leads to high

premiums which is unaffordable. The partner-agent model is perhaps the best suited to address the outreach

challenge as it enables the insurance providers to collaborate with NGOs, MFIs, SHG etc to distribute the

insurance products without incurring huge costs to create distribution networks. Innovative products which

combine risk cover with savings will need to be created. Instead of individual insurance, group insurance

products can be offered to members of a SHG.

- Apart from traditional life insurance, other non-life risk covers which are needed by the rural population include

crop and weather insurance, livestock insurance and health insurance. New products will need to be designed as

the existing insurance products are often not suited to the needs of the poor e.g. crop insurance products are

often predicated on yield estimation based on samples.

Processes: The entire set processes deployed in the financial institutions needs to be simplified, made less

document intensive and aligned with the profile of the financially excluded customer. For example, financially

excluded consumers often do not have any credit history or traditional documents to prove identity. Biometric

based identity validation or letter of introductions from local citizens with good history with the bank can be used

to authenticate the beneficiary. Similarly the insurance providers will need to implement simplified processes and

systems to ensure expeditious claim settlement as this is one of biggest sources of dissatisfaction.

Outreach: The geographic dispersal of the financially excluded consumers and their challenge of accessing the

formal financial sector necessitate the accessibility challenge to be addressed on a war-footing. The cost and long

gestation period of establishing brick and mortar facilities necessitates new distribution models for increasing the

outreach rapidly and cost-effectively:

- Banking Correspondents: Deploying a well established network of trained BCs is perhaps the most cost-effective

way of addressing the accessibility challenge. The BC model has gained traction during the last few years, but it

still faces regulatory and economic constraints. While the RBI has recently added many more categories of

people who can be considered as BCs by banks, corporate entities with huge retail outreach like telecom

15



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operators cannot perform BC functions. The banks need to invest in training and certification of the BCs to

increase their effectiveness in the field. The remuneration structure of the BCs also needs to be made viable and

structured so as to encourage entrepreneurship.

- Self-Help Groups: The SHG-Bank linkage program launched in the 1980s in India has been a big success and it is

estimated that by 2007 nearly 3 million SHGs representing nearly 40 million households were linked with banks in

India. This program needs to be expanded further particularly in the backward districts of Central and North East

India where some of the poorest Indians reside. Apart from SHG, the initiative on Joint Liability Groups (JLG) also

needs to move beyond the pilot stage.

- Leverage existing distribution networks: The proliferation of smart cards in Indias financial inclusion drive should

stimulate the financial institutions to leverage the network of kirana (small grocery stores) and post offices to

provide POS based access for small value transactions.

Financial counselling: The extremely low levels of financial literacy of the financially excluded consumers will

require the financial institutions to invest in creating a capacity within their organisation which can offer financial

counselling and mentoring to the poor as part of basic banking services. The financial institutions should

collaborate to establish counselling centres around rural inhabitation clusters and ensure that they are operational

when the poor can access them e.g. in the evenings.

Market development: Market development activities targeting the financially excluded population need to be

stepped up through unconventional means. Typical approaches of using mainstream media e.g. TV / print,

websites or financial intermediaries e.g. brokers, to reach out to financially excluded population will not work

because many of whom do not own TV sets or have access to print media. Instead, vernacular FM radio channels,

mobile vans which travel to rural locations, local NGOs who have relationships with the local population, street

theatres/road shows etc are perhaps more suitable market development channels for this target population.

Ideally, this effort should be undertaken collectively by the formal financial sector as otherwise one-upmanship

among financial institutions may end up subverting the potential impact.

Internal staff: Instead of going the extra-mile, the staff of the financial institutions establishments located in the

rural locations often tends to be dismissive and rude in their interactions with the poor thereby reinforcing the

alienation. The financial institutions need to mentor their staff to empathize with the financially excluded

consumers and extend them the same courtesy as they would do to urban/affluent customers. Staff performance

incentives which take into account the progress on financial inclusion will also be a powerful tool to induce

behavioural change.

Role of Regulatory and Public Policy Agencies

The traditional role of the regulatory and public policy agencies has been largely prescriptive and supervisory in nature

which needs to transform into a more pro-active role towards creating an enabling policy and regulatory framework for

financial inclusion.

In India, the RBI has been the prime-mover towards the promotion of financial inclusion. However the need for a

systemic strategy for accelerating financial inclusion requires other regulatory agencies including IRDA, IDRBT, IBA, BISetc to participate more vigorously. Some recommendations for an enabling policy framework are elucidated below:


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A National Mission for Financial Inclusion should be established to provide the requisite national focus. A mission

oriented approach will enable a time-bound national actionable agenda being prepared with clearly articulated

policies and milestones. The Mission would be able to integrate the efforts of the various stakeholders of the

financial inclusion ecosystem, create an enabling policy framework and ultimately ensure that financial inclusion

efforts move beyond successful pilots. The efficacy of the mission mode approach has been well demonstrated inthe past in India across multiple sectors.

A National Financial Inclusion Plan (NFIP) should be created which is further disaggregated into State Financial

Inclusion plans which can be further disaggregated into district/block level implementation. The plan should

define milestones, deliverables and targets along-with roles and responsibilities of the various institutions (banks,

RRBs etc) involved in the on-ground implementation. As part of both the national and state level plan, initial focus

should be on districts which are high on financial exclusion. It will be useful to include the private sector

institutions including MFIs, technology providers and civil society organisations like NGOs into the

implementation of the plan.

The pivotal role of the RRBs in scaling up financial inclusion requires the RRBs to be made financially viable, have

specially trained staff and be allowed more operational autonomy. The RRBs should adopt the SHG-bank linkage

and the BC/BF models to scale up their operations.

Increasing the financial counselling capacity in RRBs and PACS will require training the staff of these institutions

through special courses and certification. To overcome the financial constraints of these institutions, the training

programs can be funded through nodal agencies like NABARD.

While the public sector scheduled banks have implemented Core Banking Systems (CBS) and made their processes

IT enabled, the IT adoption level in the RRBs, PACS and UCS is quite abysmal. This is counterproductive as it firstly

inhibits these institutions from scaling up their services efficiently and secondly it creates impediments in their

integration with other institutions and national level financial infrastructure e.g. payments and settlements

systems. The RBI should facilitate the creation of a special fund for the IT up-gradation of the RRBs, PACS and UCS.

Similar to the successful RAPDRP-II model implemented by the Ministry of Power in India, the fund can provide a

grant to an institution to implement an integrated end-to-end IT solution based on a prescribed model process

specifications. If the institution does not implement the IT solution based on the prescribed specifications in the

agreed timelines, the grant could get converted into a repayable loan.

Transaction costs can be reduced by waiving off stamp duty on small loans to the financially excluded consumers.

The service tax on insurance premium payments may also be waived off. The documentation requirements forcredit products needs to be simplified with identity validation based on bio-metrics and collateral-less lending

enabled by guarantors.

To make the BC model economically viable, the BCs should be incentivised based on outcomes achieved .i.e.

number of accounts opened, transactions executed etc instead of only a fixed salary. The scope of the services of

the BC can also be expanded to include selling other financial products including insurance instead of only

executing basic transactions. Banks should also reduce the risks and operational cost burden of the BCs by

reimbursing the costs of cash management by specialised security firms and insurance expenses etc. Impediments

like the geographical coverage restrictions should be removed especially in the hilly states where the population

density is low. BC operations should be allowed in urban locations and in places where a bank branch exists toovercome the financially excluded consumers deep rooted sense of alienation which inhibits them from

approaching the bank branch.


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To increase the effectiveness of the BCs and BFs, they need to be trained and certified. Ideally only trained and

certified BC/BF should be allowed to operate in the field. Nodal agencies including NABARD and IBA should create

courses in the vernacular which can be used to provide training at the district level under the aegis of the lead bank

in the district. The cost of the training including content creation can be met through a special fund created by

nodal institutions like NABARD.

The success of the SHG-Bank linkage model needs to be further scaled up by evolving the SHGs current focus from

micro-credit into micro-entrepreneurship. This will require a special thrust including increased funding support

and capacity building in entrepreneurship and basic financial management skills amongst the SHG members. The

capacity building can be augmented by counselling by dedicated resource centres established by NGOs, banks,

MFI etc. As the role of the NGOs in the SHG-Bank linkage initiative is critical, it will be worthwhile if financial

incentives can be given to such NGOs to further scale their activities. A special focus should be provided to push the

SHG-Bank linkage model in the backward districts in Central and North-east India where it has not yet taken off.

The rapid urbanisation and migration trends are creating a huge pool of urban financially excluded people. Current

financial inclusion policies have traditionally focused more on the rural financially excluded poor and many of the

institutions created to address the challenges of rural poor are not allowed to operate in urban/semi-urban

locations. These barriers need to be re-examined and streamlined as there is limited capacity in urban locations to

address the needs of the financially excluded population. BC/BF services are currently not allowed in urban

locations.

The role of micro-finance (MF) in addressing financial exclusion is widely recognised. In India, the MF movement

has gained wide popularity and it is estimated that there are about 1,000 NGO-MFIs and 20 company MFIs9

operational today . Currently the business and operational scope of the MFIs is limited to providing financial

assistance in small quantum. To further scale up the MF business in India, it is worth considering an increase in the

scope of the activities of MFI to include other financial services including small deposits, micro-insurance,

remittances etc. This increase in scope will need to be accompanied by a greater oversight and supervisory role by

regulators. The further scale up the MF initiatives and corporatize their operations, a special type of MF institution,

MF-NBFC (Non Banking Financial Company) can be allowed under the auspices of the current regulations

governing MFIs

The financially excluded population lives a high-risk life and is under constant threat of illness, weather and un-

employment etc. Ironically it has the least insurance protection. Micro-insurance has not really penetrated in India

partly due to requirement of huge upfront investments and partly due to low awareness. The entire insurance life-

cycle from customer acquisition to claims processing and settlement needs to be re-examined and re-designed forthe financially excluded consumers. IRDA should make efforts for capacity building for insurance servicing,

incentivising insurance providers to increase coverage in rural locations, increasing awareness of insurance among

the financially excluded and implementing consumer grievance redressal mechanisms. IRDA should also review

existing life and non-life schemes for their effectiveness and relevance.

To ensure empirical progress reviews and objective analysis of the various financial inclusion initiatives, systemic

and regular field research needs to be conducted nationally. Most of the data available on financial inclusion in

India is based on surveys conducted some years ago or from interpretation of disaggregated surveys. The NSSO (or

9 RBI Report of the Committee on Financial Inclusion


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similar organization) should conduct detailed field research on all aspects of financial inclusion every two years to

enable that reviews and decisions are based on data rather than anecdotal evidence. This data can be maintained

in a central national level repository which can be accessed by the various institutions engaged in financial

institution. A national census on financial inclusion is also required and should be conducted either as part of other

national census activities or separately.

The large number of institutions engaged in providing financial inclusion services makes it imperative to protect

the rights of the poor and ensure that their hard earned assets do not fall prey to the unscrupulous. The poor have

no recourse to the various consumer protection forums which are taken for granted by the more affluent sections

of society. A specific nodal consumer protection agency with a cross-sector mandate and a pan-India rural

coverage should be appointed to speedily address the grievances of the poor regarding their experiences with the

financial institutions. Unequivocal accountability norms and code of conduct should be published for all service

providers in the financial inclusion ecosystem and widely circulated.

Role of Government agencies

One of the key challenges of the financial inclusion is to create the demand pull .i.e. how to encourage the financially

excluded consumers to use the products and services of the formal financial sector. The usage aspect is important

because it has been often observed that many of the no-frill accounts opened by financially excluded consumers often

become dormant due to poor usage.

While ultimately the onus of scaling up financial inclusion lies with the financial institutions, the Government has a key

role in priming the pump to provide the necessary impetus for scaling up financial inclusion.

Locations with high density of financial exclusion require special attention and investments towards development ofprimary health, primary education and employability skills as these are pre-requisites for creating an economic

environment which creates a demand for financial products and services.

In India, there are currently a large number of social development schemes where the Central Government and State

Governments make financial payments to socially disadvantaged groups. While difficult to quantify, anecdotally it is

estimated that for every INR 1 spent by Government on social subsidies, only INR 0.16 (16 percent) reaches the actual

beneficiaries. One such flagship social scheme is NREGA (National Rural Employment Guarantee Act) which has scaled10

up from covering 21 million rural poor households in 200 districts in 2006-07 to over 60 million rural poor households

in 615 plus districts in 2008-09. Unfortunately there are increasing instances where targeted beneficiaries under NREGA

often do not receive their benefits mainly due to the corruption at various processing levels which includes falsifying

muster rolls, beneficiary impersonations or in many instances simply not making the payments. Apart from the

payments under the social development schemes, government-backed institutions make several other payments

including old age pensions, defence pensions and widow pensions etc. These payments are often manually disbursed

with the beneficiary having to visit a Government office to collect the payments resulting in substantial inconvenience

due to travel expenses incurred and lost wages.

While many interventions will be needed to eliminate the leakages from Government social development schemes, a

major remedial step will be to make the Government welfare payments directly to the beneficiaries through the EBT

10 Government of India NREGA website


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(Electronic Benefit Transfer) approach. Under this approach, the beneficiary has to open a no-frill account with a bank.

Once the bank account has been opened, the beneficiary/bank notifies the relevant Government agencies from where

payments are expected. Upon verification of the details, the payments can be made directly to the beneficiarys bank

account thereby circumventing several manual processing layers which often spawn corruption and harass the

beneficiary. The beneficiary can access the bank account either by visiting the bank branch or through the businesscorrespondents etc. Apart from reduction in corruption, EBT will also have a positive impact on reducing administrative

costs and improving efficiency which are large given the huge quantum of social welfare payments in India. Over time,

the Government can replace subsidies currently distributed in form of goods e.g. subsidised rice, by direct cash

subsidies sent directly to the beneficiarys bank account through EBT.

Pushing social development scheme payments and other Government payments through EBT can be a major enabler

for inducing the financially excluded to interact with the formal financial sector. Reduction in corruption is a huge

complementary benefit. In an environment where large numbers of payments are made via state government

agencies, RBI mandates can help in accelerating the adoption of EBT in the country. Shared technology initiatives like

the National Financial Inclusion Switch can provide the required supply side stimulus.

Role of Information Technology

Information Technology (IT) ubiquity coupled with the rapid increase in the telecommunication network and service

quality has the potential being the force-multiplier for scaling up financial inclusion. ICT enabled interventions can

impact financial inclusion on the following dimensions:

Reduce operating cost of providing services: Perhaps the most significant impact of ICT on financial inclusion will

be on reducing the operating cost of providing financial services because the high cost of servicing low value

transactions is often cited as the major impediment for the financial institutions to provide services to the poor.

Typically, operating cost includes staff salaries, travelling expenses, commissions, marketing and promotion

expenses, rentals and other overheads. For banks the operating cost ranges between 3-4 percent to service average

borrowers. In India, a large PSU bank has estimated the cost of opening a no-frills account as approximately INR 48

and the cost of each transaction (deposit/remittance) as INR 10. While the same bank requires a balance of INR 2,000

in a no-frill account for it to be economically viable, the actual average balance in the no-frill accounts of the bank

was INR 528 which highlights the non-viability.

Conventional technologies available in banks including CBS when seamlessly coupled with new technology

paradigms including mobile and wireless connectivity can bring about a step change in the cost and outreach offinancial services. Peer-to-peer fund transfer & payments, account balance enquiry, remittances, bill payments,

mobile wallets, merchant transactions can be performed through mobile phones. The falling costs of increasingly

sophisticated mobile handsets and the proliferation of wire-less broadband can provide a further impetus to

provision of services through mobiles. The success of the branchless banking through the BC model is itself

predicated on technology including bio-metric enabled hand-held devices and mobile connectivity. Interoperable

smart cards and POS can enable the migrant work-force to execute financial transactions securely wherever they

are.

A good example of technology leverage is the SBIs Tiny Card Accounts initiative delivers financial services through

BCs equipped with mobile phones with near field communication technology, fingerprint recognition software


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and integrated printer. The Tiny card allows transaction of funds for multiple purposes including micro-savings,

cash deposits and withdrawals, micro-credit, money transfer, micro-insurance, cashless merchant transactions,

and disbursements of Government social welfare benefits including NREGA payments, EMI payments etc.

Enable product innovation: Many of the innovative products being created for the financially excluded consumer

would not have been possible without the usage of technologies like mobile, wireless connectivity, bio-metrics

etc. ICT also enables rapid market testing and reduction in the time-to-market. Smart and Globe Telecom are two

telecom firms in the Philippines who are using the mobile phone platform to offer products like electronic wallet to

conduct transactions including money transfer, purchases and utility payments. A product called Text-A-Tap (TAP)

from Globe Telecom uses SMS technology to make loan repayments of micro-loan borrowers, enable remote

deposit taking, cash withdrawal, remittances and bill payment. The Celpay service of Celtel, a telecom company in

Zambia, enables consumers to perform transactions like fund transfer, pay bills and make purchases. It is estimated11

that transactions worth 2 percent of Zambias GDP were executed through Celpay in 2006 . The success of

products like Kenyas M-PESA further underscores the role of technology in product innovation.

Improve service efficiency: High financial illiteracy and inability to travel away from work result in simplified

procedures and quick-turnaround time as two attributes valued by the financially excluded in their interactions

with the financial institutions. Increased ICT enablement of internal procedures can address these customer

expectations. Complicated document intensive beneficiary authentication can be replaced by bio-metric enabled

verification, pass-books can be replaced by smart cards which store account and transaction history, account

balances inquiries through mobile phones and mobile phones alerts in vernacular etc are some examples where

technology enablement can bring about a step increase in the service quality and efficiency and reduce the

alienation between the financially excluded and the financial institutions.

Increase outreach: Central, East and North-East India have some of the largest concentrations of the financially

excluded population in India due to lack of infrastructure including roads and power and dense forestation have

had a detrimental impact on the development of the financial sector in these regions. The population of these

regions often have to travel large distances over inhospitable terrain to access a financial institution. The

continuing slow pace of infrastructure development coupled with the long gestation period of the brick and

mortar banking model will obstruct any meaningful impact in these regions. The proliferation of mobile services in

these sub-par infrastructure regions can result in an increased outreach of financial services at a faster pace

through technology enabled service delivery. Many of the financial services discussed above can be provisioned

on the current technology and available connectivity infrastructure in these regions thereby fulfilling a significant

proportion of the financial needs of the poor.

While the positive impact of ICT on financial inclusion is proven by several successful pilots in India and other countries,

the following issues need to be addressed to enable the ICT impact to be fully realised:

The low level of IT adoption in RRBs, PACS, MF etc institutions is a major concern as it restricts them from providing

services efficiently affordably and constraints them to scale up their operations. Without leveraging technology,

these institutions will find it almost impossible to achieve their objectives.

Keeping in mind that these institutions do not have the capabilities and capacity to invest in IT apart from piece-

meal applications, there is a need look at alternative models which can standardise applications, reduce11

BCG Report ' The Next Billion Consumers'


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implementation cost and schedules and keep operating costs low. Main-streaming of technology paradigms like

cloud computing and web 2.0 can help realise these objectives. The relative similarity of business processes across

these institutions also makes these institutions suitable for the ICT services delivered through the cloud. Agencies

like IBA and IDRBT can play an important role in defining the model business processes, security protocols, data

privacy requirements and application and network architecture frameworks to enable the technology industry todevelop standardised applications and business models.

The role of technology in scaling financial inclusion necessitates that standards for the core technology

components in a financial inclusion solution are defined, published and adhered to by the solution providers.

Standards not only ensure interoperability but also reduce cost of solution development and most importantly

allow secure systems which are essential to protect the hard earned assets of the poor.

A majority of the financial inclusion solutions being deployed are predicated on bio-metrics e.g. fingerprints and

smart cards for identity validation and accessibility respectively. Unfortunately, there is a lack of standards for the

smart cards with many of the smart cards just being basic swipe cards instead of having dynamic data storage

capabilities. Cards working on different protocol standards results in beneficiaries getting locked to financial

institutions and also inhibit usage across different POS devices thereby restricting outreach which is essential

feature for the migrant population. To ensure interoperability, open standards for smart cards need to be

prescribed.

Standards for encryption, security e.g. 3-DES and for capturing, storage and transmission of bio-metric data must

be defined and published. This is critical so that the beneficiary data can be re-used across applications and

institutions.

All financial inclusion technology solutions must undergo periodic audit and certification for standard compliance

by conformity assessment bodies.

Even for the larger banks, the upfront investment for financial inclusion is often a challenge. Creating centralized

financial infrastructure like National Financial Inclusion Switch similar to the National Financial Switch (NFS) can

reduce transaction costs and increase interoperability. Similarly a national remittance system can reduce

remittance transaction costs and enable seamless anywhere and anytime remittances.

Role of inter-sector Collaboration

While the financial sector has the primary responsibility for addressing financial exclusion, the scale of the challenge willrequire financial institutions to actively collaborate with their peers in other sectors in order to create the required

products and distribution innovations. Some typical inter-industry collaboration opportunities which can be leveraged

are elucidated below:

Telecom: It is highly likely that while many of the rural poor do not have bank accounts, they have mobile phones. This

ubiquity of the mobile phone and wide reach of the mobile networks presents a tremendous opportunity to firstly

deliver financial services at low price points and secondly create products with low transaction costs and wide access.

This collaboration between the telecom and financial industry firms is mutually self-serving. For the financial

institutions, this collaboration offers a low cost delivery channel and for the telecom firms this collaboration offers a

medium to offer value added services (VAS) to their subscribers and boost their ARPU (Average revenue per user).


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Some of the products and services which can be deployed through this collaboration are as follows;

Remittances

Balance inquiry

Bill payment

Payment transactions at POSMobile wallets

Peer-to-peer payments

Alerts

The security aspect of mobile banking transactions can be managed through encryption and operator portability can

be ensured by using the phone instead of the SIM card to host the applications and the data.

Telecom firms have developed a close relationship with their subscribers through regular interactions including bill

payments and selling add-on services etc. This relationship between a telecom firm and its subscribers can be

leveraged by the financial institutions to firstly offer financial products and secondly use the mobile phone distributionnetwork to provide simple financial services like collections and small denomination cash withdrawals. In essence, a

telecom firms can discharge all the typical functions of a BC and do much more. Unfortunately, telecom firms are not

allowed to offer BC services by the RBI.

The strict background checks and identity validation conducted by the telecom firms before granting connections can

also be used by financial industry firms as a viable background check. Additionally, bill payment history of a telecom

subscriber can act as a surrogate credit history of the individual.

Post Offices: Many developing countries have reasonably well functioning postal networks. Not only do the post-

offices have a large outreach including remote areas, they are also trusted by the general population. The postal staff

including postmen often belong to the local communities and hence enjoy a high degree of acceptability.

India with 155,516 functional post-offices at end of March 200512 has a well established postal network. The Indian

postal department is the only organization apart from banks that can open bank accounts in India. Apart from providing

postal services, post offices in India also offer basic financial services including saving accounts, simple saving products,

basic life-insurance etc.

Post offices do not have the core competence to develop financial products beyond the basic and thus will not be able

to offer the full gamut of financial services including non-life insurance (health, livestock, crop and weather etc.), credit

products, financial counselling etc.

Through collaboration, the post offices can become a low cost distribution channel for the products and services of the

financial institutions. Post offices can also host POS machines in a secure environment which can be accessed by the

poor through smart cards. If the financial sector can also help in increasing the IT adoption in the post-offices, it will

further increase the efficiencies of the post-office based distribution channel.

FMCG and Retail: The FMCG sector has created a very stable distribution channel which reaches some of the most

remote regions of India. Even in small rural hamlets, FMCG products are available in tiny retail outlets. This distribution

channel operates efficiently through well established delivery tiers.

12 RBI Report on Currency & Finance 2006-08 - Vol. II


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The FMCG distribution network offers a low cost channel for offering simple financial industry products and services

including POS based access to beneficiary bank accounts.

NGOs and social organizations: Local NGOs and social organizations can play a vital role in promoting financial literacy

and providing financial counselling services to the financially excluded population. These organizations have deeproots in the local communities and enjoy the trust of the local population which the staff of the financial institutions will

take a long time to develop.

The financial institutions should develop formal relationship with NGOs and invest in training the NGO staff in

providing financial counselling, providing collateral and also meeting basic expenses. Institutions like NABARD can

also provide small grants to NGOs who are engaged in capacity building.

Financial exclusion is often described as a scourge which perpetuates poverty and leads to several social ills. With over 2

billion financially excluded people globally, addressing the complex and deep-seated challenge of financial exclusion

does not lend itself to simple solutions.

Achieving sustainable financial inclusion will require a systemic effort which leverages technology, regulatory

framework and appropriate business models cohesively. It is not a preserve or responsibility of one sector and will

instead require game-changing innovations which more often than not occur at the intersection of different sectors

e.g. banking and telecom.

However the financial sector will have to lead the way as many of the current issues exist because of the reluctance of

the financial sector to embrace change and innovation. Financial sector institutions which address financial inclusion

as an opportunity instead of a social obligation and commit themselves to creating innovative products and services

will find themselves ahead of the curve competitively.

The growing ubiquity of IT and proliferation of wireless communication coupled with falling hardware and mobile

phone costs provides a unique opportunity to deliver mainstream financial services to the poor at the required scale

and affordability by leveraging ICT.

Appropriate and affordable technology accompanied by the right business model can make financial inclusion

economically viable for the formal financial sector and transform it from an obligation to an opportunity.

Summary


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About TCS Government IndustrySolutions Unit

TCS' Government Industry Solutions Unit is primarily engaged in

helping national and state governments to align their services with the

changing needs of citizens and stakeholders. With the rapid pace of

change in the IT industry, there has been a shift in focus from the

traditional inputs of a production process to the processes involved in

the creation, storage, dissemination and use of information. An IT-

driven system of Government works better, costs less, and is capable ofservicing citizens' needs as never before. Analogous to e-commerce,

which allows businesses to transact with each other more efficiently

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ISU aims to make the interaction between government and citizens

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