India’s Journey on the road to Financial Inclusion

Posted by Elets News Network (ENN)

With focus on inclusive growth, the Indian government has been encouraging opening of bank accounts for the nation’s huge unbanked population by providing government benefits through such accounts. ICT solutions have made such initiatives possible at relatively low cost


While the growth, that India has seen during the past decade has been impressive, there are some concerns about the dimensions related to financial services. Lot of work needs to be done  before the concerns of absolute poverty can be addressed. The low income households in India  have very little awareness of banking, credit and insurance related services through which  they can enhance and protect their financial resources during times when they are  unexpectedly struck by illness, natural disasters or death of the primary breadwinner.

The extent of Financial Exclusion in India

For the Government of India, inclusive growth has always been a priority. The agenda of  inclusive growth is reflected in the kind of policies and regulations that the policymaking  and regulating institutions, like Government of India, RBI, IRDA, PFRDA (for micro- pensions), have been developing over the past decade. The banking sector has taken a lead  role in promoting financial inclusion. There has been in multi-fold increase in the number  of back branches, especially in rural areas; the branch network was around 8,000 in 1969  and now it is more than 89,000, spread across the length and breadth of the country.
However, these initiatives for strengthening financial inclusion are yet to have a substantial impact on the lives of the excluded population. Over half the Indian population  is unbanked. Only about 55 percent of the population in the country has deposit account  and around 9 percent have credit accounts with banks. According to data from Reserve  Bank of India (RBI), India is the home to largest number of unbanked families (more than  145 million). There is only one bank branch per 14,000 people. The total number of villages  in the country is estimated to be around 6 lakhs, but the number of scheduled commercial banks (SCBs) and Regional Rural Banks (RRBs) stand at only 33,495.
A recent directive from Reserve Bank of India has acknowledged the need of stepping up opening of branches in rural areas so as to improve banking penetration and financial inclusion. Banks have been advised as part of risk management to adopt ICT solutions
including biometric identification of the customer. The domestic Scheduled Commercial Banks (SCBs) have been directed to allocate at least 25 percent of the total number of branches to be opened during a year to unbanked rural centres (Tier 5 & Tier 6 centres). When it comes to insurance, we have financial exclusion on an even larger scale. Less than 20 percent of the population has any kind of life insurance.


The Banking Mission Mode Project under NeGP covers the following services:

  1. Electronic Central Registry under Sarfaesi Act, 2002
  2. One India One Account-for Public Sector Banks
  3. Electronic Mass Payment System


What is
financial inclusion?

Dr K C ChakrabartyDr K C Chakrabarty, Deputy Governor, Reserve Bank of India, has defined Financial  Inclusion in these words, “Financial Inclusion is the process of ensuring access to appropriate financial products and services needed by all sections of the society in general and vulnerable groups such as weaker sections and low income groups in particular at an affordable cost in a fair and transparent manner by mainstream institutional players.”
In an emerging economy like India, financial inclusion becomes a question of both access to financial products and also the knowledge about their fairness and transparency. Many people who fall in the unbanked category are not adequately informed about the nature of  the financial services that might be available to them. Having proper delivery systems and information sharing mechanisms are important for promoting financial inclusion, but at the same time we can’t afford to ignore the demand side factors. Many regions, segments of the population and sub-sectors of the economy have a limited or weak demand for financial  services. Their level of inclusion can only be enhanced once issues related to demand side have been addressed.

The Scope of Financial Inclusion

V Leeladhar, renowned banker and former Deputy Governor, Reserve Bank of India, has said that “the scope of financial inclusion can be enhanced in two ways – (a) Through state- driven intervention by way of statutory enactments. (b) Through voluntary effort by the  banking community itself for evolving various strategies to bring within the ambit of the  banking sector the large strata of society.” The regulator has to step in only when the goal of  financial inclusion is not being achieved through normal banking mechanisms. That is  what RBI has been doing through its numerous policy decisions.
The overall strategy of the government of India for having an inclusion financial sector in the country is primarily based on the following:
• Effecting improvements within the existing formal credit delivery mechanism;
• Suggesting measures for improving credit absorption capacity especially amongst marginal and sub marginal farmers and poor non-cultivator households;
• Evolving new models for effective outreach, and
• Leveraging on technology based solutions.
Currently the focus of financial inclusion initiatives in India is to ensure that people have access to bare minimum or no frills savings accounts through which payments can be made or received. One significant area, where we found that regulation can pose as a challenge in achieving greater financial inclusion is in regard to Know Your Customer (KYC) norms.  Most of the low income and poor people do not have any document of identity or proof of  address and this makes it very difficult to have KYC norms that insist on such documents.
In order to ensure the integrity of financial transactions, while also making it possible for the marginalised sections of the population who do not possess complete set of KYC documents, RBI has mandated that in rural areas the account holders can be identified by local officials. In big towns and cities where there are a large number of migrants who do not have any documents, fulfilling KYC norms and opening a bank account continue to be a challenge. Hence, RBI has mandated simpler KYC norms for small value accounts in urban areas. The UIDAI initiative of the Government of India is going to play a major role in  enabling the banks to provide services to everyone in the country.


According to the guidelines formulated by the RBI, the BC model is as follows:

• While an organisation can be a BC for more than one bank, at the point of customer interface, a retail outlet or a sub-agent of a BC or Customer Service Point (CSP) shall represent and provide banking services of only one bank.
• The terms and conditions governing the contract between the bank and the BC should be carefully defined in written agreements and subjected to a thorough legal vetting.
• While drawing up agreements, banks should strictly adhere to instructions contained in the guidelines on managing risks and code of conduct in outsourcing of financial services by banks, issued by Reserve Bank of India on November 3, 2006.
• The banks will be fully responsible for the actions of the BCs and their retail outlets /
sub agents.


The Financial Inclusion ecosystem

Several outreach activities have been undertaken by Government of India at remote unbanked areas. Some of these steps are:
• Facilitation of no-frills accounts
• Business Correspondent (BC) Model based on solutions from ICT to encourage low cost doorstep banking services in remote villages
• Board approved Financial Inclusion Plans (FIPs) of banks for 3 years, starting April 2010
• Roadmap to cover villages of above 2000 population by march 2012
• Issuing of General Credit Cards (GCCs) and Kisan Credit Cards (KCCs) for small deposits and credit
• Availability of minimum four banking products through ICT model has been ensured
• Mandatory opening of 25 percent of new branches in unbanked rural centres
• KYC documentation requirements significantly simplified for small accounts
• Guidelines for convergence between Electronic Benefit Transfer and FIP have been
issued
• Pricing for banks totally freed. Banks have been given the freedom to price their advances.
The Financial Inclusion ecosystemInterest rates on advances totally deregulated “RBI in its latest report states that more than 103 million No Frills Accounts were opened till March 2012; FINO opened 40 percent of these accounts,” says Shweta Aprameya, VP – Business Management Group, FINO. The  disbursement of NREGA payments and social security pensions to beneficiaries, pension in  remote locations is already being done through the BCs in many cases. The FINO platform  has been sized for 12-50 million customers at the moment, but can be expanded if the needs are larger.
Founded in year 2006, FINO has emerged as a leading implementer of integrated  technology solutions for financial institutions to enable financial inclusion environment for the micro customers.
FINO’s solutions, developed from cutting edge ICT, encompass Core banking solutions, which  is built as a shared back end banking engine that provides accounting, MIS,  reporting and monitoring facility for all asset and liability products. There is a distribution  component that enables ‘online’ data capture from end user. This is specific unique, biometric enabled hybrid multi-application Smart Cards. These smart cards can hold up to  15 different types of end consumer financial and nonfinancial relationships on a single card.

Banking Correspondents

On September 28, 2010, Reserve Bank of India (RBI), as part of its Financial Inclusion  mandate, announced in the Annual Policy Statement for the year 2010-11, that it has  decided to permit banks to engage companies registered under the Indian Companies Act,  1956, excluding Non Banking Financial Companies (NBFCs), as Business Correspondents (BCs) in addition to the individuals/entities permitted earlier, subject to compliance with its existing guidelines for engaging BCs.
According to the guidelines formulated by the RBI, the BC model is as follows:
• While an organisation can be a BC for more than one bank, at the point of customer interface, a retail outlet or a sub-agent of a BC or Customer Service Point (CSP) shall represent and provide banking services of only one bank.
• The terms and conditions governing the contract between the bank and the BC should be carefully defined in written agreements and subjected to a thorough legal vetting.
• While drawing up agreements, banks should strictly adhere to instructions contained in the guidelines on managing risks and code of conduct in outsourcing of financial services by banks, issued by Reserve Bank of India on November 3, 2006.
• The banks will be fully responsible for the actions of the BCs and their retail outlets / sub agents.
The list of eligible individuals and entities that can be engaged as BCs is being widened from time to time. Currently the list of individuals and entities allowed to be appointed as Business Correspondents (BCs) for banks in rural and semi-urban areas include:
• Individual kirana/medical/fair price shop owners, Individual Public Call Office (PCO) operators
• Agents of Small Savings Schemes of Government of India/Insurance
• Companies
• Individuals who own petrol pumps
• Retired teachers
• Authorised functionaries of well run Self Help Groups (SHGs) linked to banks
• Non deposit taking NBFCs (non-banking finance companies) in the nature of loan  companies whose micro finance portfolio is not less than 80 per cent of their loan  outstanding in the financially excluded districts as identified by the Committee on Financial Inclusion.
“The business correspondent model has emerged as the most successful way of branchless banking for the poor globally. FINO has been able to source and service millions of micro transacting customers through a tech enabled agent assisted model. Established in 2006,  FINO has setup over 27,000 transaction points catering to 50 Million customers across 419  districts and 26 states (estimated 50,000 villages). We have a deep presence in the  hinterlands of India and complement the conventional brick and mortar model, thus  working to achieve the objective of complete financial inclusion. Knowing well the challenges and ground realities of doing business, our philosophy is built on three pillars  namely financial literacy, reach to customer and bouquet of product offering,” says Shweta Aprameya, VP – Business Management Group, FINO.
“Today BASIX runs one of the top 5 Business Correspondent (BC) network called Sub-K. It uses mobile phones, fingerprint authentication and a small printer for giving receipts, all costing less than Rs 10,000,” says Vijay Mahajan, BASIX Group CEO and Chairman.
“BASIX is not just a national, but an international pioneer in financial inclusion. The UNCDF selected BASIX as among the top 10 MFIs in the world and invited us to work in  several developing countries. So far, we are working in Papua New Guinea, Timor Leste,  Bhutan and Ethiopia and we are about to start in three other African countries –  Mozambique, Rwanda and Cameroon,” Vijay Mahajan adds.

Banking on Rural India

“Maharashtra is one of the pioneers in the promotion of ICT and e-Governance…”

Anurag Jain

Anurag Jain
Joint Secretary, Department of Financial Services, Ministry of Finance

In your opinion what are the broad challenges to financial inclusion?

When it comes to financial inclusion, the most  important thing is to  ensure that financial services should reach each and every person.  Currently we are attempting to bring every village with a population of  over 2000 under the ambit of financial services. Once this target is  achieved, we will attempt to cover those villages that have a population  of over 1000. The special focus areas are the North Eastern  regions, the tribal areas, the hilly areas, and also Jammu & Kashmir, where the reach of  the banking services is meagre, mainly because the population density is small and the  cost of delivery is quite high. Another major challenge to financial inclusion is that banks  typically ask for lot of information from the customer. At times the rural population is  unable to furnish all the information that is required. We are planning to implement  General Credit Card (GCC) and Kisan Credit Card (KCC) schemes. If a person has a credit limit of, let’s say `5000, he will be able to simply walk up to the ATM and withdraw money directly. After that he can pay back in instalments. We are trying to ensure that every family has access to GCC and KCC.

What kind of role can ICT play in improving the scope of financial inclusion?

The costs of providing financial services to all citizens can be brought down by enabling  financial institutions in the country with innovative solutions from ICT. We have come up  with the innovative model called the Ultra Small Finance Model. The Business  Correspondent (BC) model is already in place to enable banks to provide financial services  in rural areas. The attempt is also being made to use Common Services Centres (CSCs) for  financial services. The people from village could go to the CSC on any appointed date  and interact with bank officials who would also be present there. Eventually the ultra small  operations could be upgraded to full-fledged branches for providing larger number of services in designated areas. We are also having the system, where a bank official with a laptop can visit the office of the BC and provide the rural population with facilities for applying for a loan and other banking services. Large numbers of new ATMs are expected to be installed in rural areas in times to come.


“The costs of providing financial services to all citizens can be brought down by enabling  financial institutions in the country with innovative solutions from ICT”



What can be done to enable people without kyc
documents to open bank accounts?

The KYC norms for bank accounts with smaller sums of money have already been relaxed. In rural areas we have a system where the new account holders can be introduced by local citizens. Aadhaar can also be very useful for financial inclusion, as it provides all the citizens of the country a rather foolproof way of proving their identity in an easy and     seamless manner.

What kind of initiatives is the finance ministry taking to facilitate payment through electronic means in rural areas?

In case of NREGA, many workers are already being paid through electronic means. In  almost every scheme from the government,we are ensuring that there is large-scale usage of technology to electronically transfer funds to the beneficiaries. Electronic transfer of benefits brings down the cost of transaction to a large extent, and it also ensures that the benefits are actually reaching the deserving beneficiaries. These days all the banks are deploying some kind of Core Banking technology, and this is conducive for enabling electronic transfers to a very large extent.

What steps are being taken to
increase the number of bank branches in rural areas?

The authorisation policy of the RBI for opening new bank branches in rural areas has become quite liberal. Banks, excluding foreign and rural regional ones, are free to open branches in tier 3 to tier 6 centres without prior permission. There is also the provision     where after opening certain number of branches in smaller towns, the bank gets the permission to open a branch in a bigger city. We are having large number of such policies to encourage banks to move into the rural areas. We are also looking into the issue of converting the Business Correspondent (BC) operations in rural areas into ultra small bank branches. So far, Business Correspondents – agents appointed by banks to provide banking services to the financially excluded in rural India – reached out to individuals on their own and operated from home. As per the present data, the banks have appointed more than 1 lakh business correspondents covering over 70,000 villages.

 What kind of initiatives is the finance ministry taking to facilitate microfinance segment?

We have already introduced the Microfinance Institutions (Development and Regulation) Bill  in the Parliament. It aims to bring micro-lenders under the RBI’s oversight. The broad framework will facilitate and encourage micro lending in rural areas and this will lead to  improvements in financial inclusion. All Microfinance Institutions (MFIs) will have to register  themselves with the RBI. The central bank can specify lending rates and margins that can  be charged by an MFI, the recovery methods to be followed, the processing fees, the tenure  and ceiling of the loan.  

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