IT Led Financial Inclusion in India

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Financial Inclusion is a very important initiative for the sustainable growth of a country. With a huge rural population, that is economically challenged, Government in India has rolled out many initiatives like Rural Employment Guarantee Scheme, Sarva Shiksha Abhiyan (Education for All), Bharat Nirman Programme. But to support the growth, a committee on Financial Inclusion (FI) was also formed in June 2006, with Dr. C Rangarajan as Chairman to recommend a strategy to achieve a higher Financial Inclusion in the country.

In this article, the authors have tried to come up with ways as to how IT can support different collaborative models to implement and sustain the Financial Inclusion initiatives.

Financial Inclusion

Financial Inclusion is delivery of basic banking services at an affordable cost to the vast sections of disadvantaged and low income groups. It includes access to formal financial system such as financial institutions, markets and instruments, like savings, loans, remittances and insurance services, at affordable prices.

The access to finance for the unbanked is not a new concept for the Indian market. Access to formal banking services has been available through the use of intermediaries such as Self Help Groups (SHGs) and Microfinance Institutions (MFIs).

SHGs are usually groups of women who get together and pool their savings and give loans to members. Usually  NGOs and National Bank for Agriculture and Rural Development (NABARD) promote and nurture these groups. The recovery experience has been very good from SHGs and there are currently 2.6 million SHGs linked to public sector banks reaching almost 40 million households through its members.

The foreign banks and private sector banks have also accessed the microfinance market by setting up relatively lower cost non-bank companies or by partnering with MFIs to provide small value retail loans or financial services to the relatively higher risk segments of the population. This has been a successful model to reach out, except that the interests are high in the range of 24-30 percent, chiefly due to the high transaction cost for the small sized loans.

The table below shows the kind of disadvantaged groups and the services they would require from the formal financial system.

India Still Lags in Financial Inclusion

In spite of all the current initiatives, large population is still financially excluded, unlike in the developed countries where only a small portion of the population needs to be included.

Even if one were to consider India’s status on Financial Inclusion within the South Asian region, the financial outreach leaves a lot to be desired. As one can see from the table on global statistics on financial exclusion, Sri Lanka seems to have a better position in the South Asian region. There are some initiatives taken, not only by Sri Lanka, but also in the South Asian region towards Financial Inclusion. By 2005, microfinance institutions covered at least 35 million of some 270 million people in the South Asian region and met around 15% of the overall credit requirements of low income families.

In Sri Lanka, the coverage is particularly high at 60%. The high outreach in Sri Lanka is based on an extensive network of community-based organisations that receive considerable government subsidies. Sri Lanka in particular has been very successful with microfinance reaching out to 63% of the poor families as compared to India’s 9%.

Challenges to Financial Inclusion

There are a number of reasons why Financial Inclusion is not taking place in India. These include coverage, cost of small value transactions, infrastructure, suitable products, flexibility, weak delivery model for community enterprise and financial management support. With the automation of core banking processes and the use of channels such as ATM, IVR based tele-banking, Internet banking, the banking industry has become lean and more profitable. Banks however, face an uphill task in reaching out to the mass customers in remote locations such as villages. Infrastructure cost, operating expenses, security, understanding of customer behaviour and risk associated with it, and low and slow Return-On-Investment (ROI) inhibit banks from expanding into the rural market.

IT Led e-Governance Models for Financial Inclusion

The solution to the problem of Financial Inclusion in India is IT. This is also supported by the Government of India, as is evident from the recent budget 2007-08, the Finance Minister has announced the setting up of two funds for FI; the first called Financial Inclusion Fund for Developmental and Promotional Interventions and the other called Financial Inclusion Technology Fund to meet cost of technology adoption of about USD 125 million each.

1) Postal Network: The government should consider tying up with private banks to deliver financial solutions to the un-banked, using its extensive postal network. The synergistic overlay of the existing postal system with banking functions is the answer to innovative channel required to penetrate the rural markets. The chart shows the strengths and weaknesses of the government owned postal system and the banking/financial services industry. Areas of collaboration are where one’s strengths can supplement the other’s weaknesses. The area of weakness of both the entities is also where both can collaborate based on the severity and need. Areas of conflict and negotiation are where both have their core strengths. Such collaborations to benefit the low income groups are not uncommon across the world and this is amply demonstrated by the Brazilian Government or M-Pesa in Kenya.

2) Mobile Banking: It can radically reduce transaction costs even in remote locations. The International Telecommunication Union (ITU) estimates that over half the people of Low Income Countries (LICs) are within reach of wireless service and aims to connect the world by 2015. Basic banking services are made available remotely through low cost wireless phones. The ultimate level of wireless penetration depends on the cost to consumers and the profitability of providers, creating the possibility that a digital divide could be exacerbated at a lower level.

 Every major Indian bank has been piloting multiple

m-Banking applications. While banks like ICICI and HDFC  have already started with m-Banking activities, if mobile service operators are to be believed, there is much more to come. Even the Reserve Bank of India, on its part, has underscored the need to formalise mobile-based banking and payments in this year’s annual monetary policy and it will be unveiling norms for the same by mid-June 2008.

For example, the scope of mobile banking (Micro financing for example) is immense if the communication network is available at all locations and the processes are standardised. A secured, hand held mobile device should be able to communicate to the central database, upload and download relevant application and data seamlessly and the link must be up all the time (through multi-modal connectivity like land line, satellite, and microwave connectivity, etc.). For user authentication, bio-recognition technology like finger print etc., will play an important role for user authentication and security.

3) Ubiquitous Technology: Rural banking requires extremely ubiquitous technology, that which has an innovative Geographical User Interface (GUI) to deliver an easy user experience. The use of IT solutions for providing banking facilities at doorstep holds the potential for scalability of the FI initiatives. Pilot projects have been initiated using smart cards for opening bank accounts with bio-metric identification. Link to mobile or hand held connectivity devices ensure that the transactions are recorded in the bank’s books on real time basis.

e-Governance Necessary for Successful Implementation

Success and evolution of the FI initiative is largely dependent on the successful collaboration among the private and public sector. A platform for these players to interact, driven by a progressive governance policy and framework is absolutely required. In today’s world, e-Governance is becoming absolutely important to set pace to the progress in a cost effective and efficient manner, reducing corruption and delays.

Typically the participants of an e-Governance system are:

Central government

  • Other governments
  • Local business (National players in host country)
  • Regional business (State level players in host country)
  • Global investors
  • Statutory bodies, and industry bodies
  • Individual citizens or consumers
  • As per McKinsey report, e-Governance is going to be the largest IT investment area after the manufacturing, retail and financial industry. From 2003, Government of India has already spent over INR 2 billion after hardware and infrastructure alone.


    High GDP growth in India, triggered by an open economy has created job opportunities in  urban and semi-urban India and it will go further into rural India, increasing the potential for growth to vast sections of disadvantaged and low income groups.

    Therefore, Financial Inclusion would help in bringing much needed access to the unbanked masses, who are the future growth engine of the economy. While government in India has already set up various initiatives to support FI, they also need to be backed by progressive policies. These can be effectively implemented only through private-public partnerships powered by ubiquitous technologies.


    1)Taking Banking Services to the Common Man – Financial Inclusion, IIBF, Speech by Mr V.Leeladhar, Deputy Governor of the Reserve Bank of India
    2) Financial Inclusion – the Indian experience – Usha Thorat, Deputy Governor RBI, June 2007
    3) Extending Banking to the poor in India” , Amit Singhal/ Bikram Duggal, ICICI Bank
    4) Speech by Dr Ranee Jayamaha, Deputy Governor of the Central Bank of Sri Lanka, at the Centre for Women’s Research (CENWOR), Colombo, 4 April 2008
    Source: Getting Finance in South Asia Phase IV-2008, World Bank.
    5) Ref: Financial exclusion: A new angle to urban poverty in Latin America, 2005)
    6) Source: OECD paper
    7) ITU,

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