India’s financial inclusion aims will be met only when made-for-the-poorest products get rolling. ICT is the key to it…
by Pratap Vikram Singh
Financial inclusion is high on the government’s agenda. With acts and schemes like Mahatma Gandhi Rural Employment Guarantee (MGREG), Right to Education and Right to Information in place, there is serious talk about providing access to financial services to the aam aadmi. Though there is clarity at the conceptual level in government policy making and also in the banks on including the financially excluded—around 60 percent of the country’s population—nothing substantial seems to have happened at the grass-root level. Assigning of UID numbers to both rural and urban citizens and a serious approach towards inclusive banking could bring out some concrete results.
It’s been 63 years since India got independence and more than 40 years since a number of banks got nationalised, yet a mere 5.2 percent of the country’s villages have access to banking centres. The unavailability of any kind of financial services in general and formal banking services in particular, is considered one of the important reasons for wide-scale persistence of poverty in many parts of rural and urban India.
In this context, financial inclusion can be seen as the availability of no-frills financial services and products including bank accounts, credits, micro loans, overdrafts and insurance for poorer sections of the society, to help them come out of the clutches of poverty, at very affordable costs.
A sorry state of exclusion
According to the National Sample Survey Organisation (NSSO) data, 45.9 million farmer households in the country, that is 51.4 percent, do not access credit, either from institutional or non-institutional sources. Moreover, despite the vast network of bank branches, only 27 percent of total farmer households are indebted to formal sources, of which one-third also borrow from informal sources.
These statistics are a reality, despite measures such as nationalisation of banks, incorporation of cooperative movement, promotion of regional rural banks, and nurturing of self-help groups in different states. The introduction of banking correspondent and facilitator model by the Reserve Bank of India for providing banking extension services to rural areas in 2006 yielded little for inclusive banking, thanks to the indifferent attitude of most of the bankers.
According to an estimate, though the banks in India have around 600 million accounts, many individuals have multiple accounts and so the actual number of people having bank accounts would be between 200 and 250 million.
Shankar Aggarwal, Joint Secretary, Department of IT, Government of India lamented on the poor state of financial inclusion, “Despite all our efforts in 60 years, we have not been able to provide financial services in rural areas. We did cajole banks, but despite all our efforts, not much progress has been made so far.”
The Reserve Bank of India has been a key driver of financial inclusion. In January 2006, it came up with the business correspondent and facilitator model, wherein banks could choose agents who could travel to the rural clients and enrol them for a no-frills bank account, using handheld biometric devices. The business correspondent should be a person belonging to an organisation under Section 25, which is strictly a non-profit organisation. The model was seen as one that could bring a revolution in the rural banking, which hitherto has been neglected.
In September 2010, RBI sanctioned that business correspondents could be from forprofit organisations too.
Union Finance Minister Pranab Mukherjee in his budget speech in Lok Sabha set March 2012 as deadline to provide basic banking and financial services to aam aadmi. This has furthered the hope that rural areas would no more be devoid of financial services.
Ajay Singh, CEO, Forbes Technosys views the commitment from the government as positive, “In recent days, we have seen a deep commitment from Government of India to provide financial cover for 60 percent of the population. The government has a clear focus on impacting and improving the service delivery mechanism which would lead to upliftment of the socially and economically deprived groups of our population. It is also persistent in providing multiple channels of delivery to citizens.”
Dr KT Arasu, Director at Alternative for India Development (AID), a non-profit organisation setting up Common Services Centres in the Palamu region—one of the most backward regions of the country, besides having the lowest penetration of banking services—in the state of Jharkhand, opined that there is huge gap between the policy and practice when it comes to financial inclusion.
ICT as an enabler
Technology can be a big enabler of financial inclusion. It is unarguable that opening of brickand- mortar bank branches in all the remote and country-side regions is not economically viable. Now, with the advancement made in information and communication technology, the extension of banking services is feasible even in places where the bank doesn’t have a physical branch
or can’t afford to have one.
“With ICT, the transaction cost would come down heavily. From a transaction cost of `50 with the manual systems, the technology has reduced the cost to a fraction of rupees,” Aggarwal said. Industry has come a long way in providing core banking solutions—enabling customers to operate their accounts from any branch in the country. Because of a ubiquitous Internet, customers can do the transactions without even physically going to the branch.
Banking technologies have been creating buzz for quite some time. Core banking solutions (CBS) have translated the dream of ‘anywhere, anytime banking’ into a reality. A back-end system that processes daily banking transactions and updates the accounts and other financial records, CBS has helped in improving operations, reducing costs and spurring growth. However, the application of CBS in enabling inclusive banking would be an area to be dwelt upon, since hosting of inclusivebanking applications will be involved.
Also, to ensure successful micro-transactions at the rate of 99.99 percent, the robustness and reliability of the hardware and software must be extremely high. When processing the transaction request of a small amount for a low-income group person, the system must not go down, since a tiny amount is all that the person would have in the account. While a middle- or high-income group customer can afford a failed transaction, a person belonging to low-income group just can’t.
UID and CSCs as propellers
While technology is an enabler, the UID project would accelerate the process of financial inclusion, given that UIDAI would be providing reliable and robust authentication of citizens, which could be leveraged by banks. With this, banks could save heavily on the customer acquisition cost. Additionally, UID would facilitate easy acquisition of more and more customers to the banks.
RS Sharma, Director General, Unique Identification Authority of India said, “If the bank account is linked with UID, the payments and transactions under employment schemes like MGREG, government social security schemes, micro-insurance and micro-credit could be easily managed by banks. Moreover, with the widening of the base for various payment flows, it would make a lot of business sense to the bankers.”
Also, the Common Service Centres (CSC), under the National eGovernance Plan (NeGP) offer a good platform for hosting these services. Almost 2.5 lakh CSCs are to be made operational and would cover six lakh villages in the country. Due to unavailability of government-to-citizen services and lack of innovation in business-to-consumer services, CSCs are struggling hard for financial viability.
With the RBI allowing for-profit organisations to be business correspondents, the path has been cleared for Village Level Entrepreneurs (VLEs) becoming business correspondents. CSCs in states like Madhya Pradesh, Chattisgarh and Sikkim are operational as banking kiosks and are offering various financial services to local residents.
Elaborating on the vitality of VLEs acting as business correspondents with CSC hosting the financial inclusion services, Aggarwal said the services of cash-in, cash-out, and transfer of money from one account to another can be provided. Ultimately, the CSCs would become catalysts of change. Moreover, by acting as the agents while providing the banking and financial services to rural residents, VLEs would be socially empowered and will enjoy goodwill among the local residents.
“We are trying to create to create entrepreneurship at the village level, which would result in better delivery of financial services and information, and create a conducive environment for development,” he added.
Some key challenges
While technology can be used in extending banking to remote and countryside regions, ensuring the needed reliability and robustness of the system is an issue. It will be a challenge for technology and service providers to support a myriad of micro transactions with high reliability and robustness.
Commenting on the significance of facilitating successful micro transactions below `100, say a `5 or `10 transaction, Vishnu Dusad, Managing Director and CEO, Nucleus Software said, “Making these humongous micro transactions reliable and robust is a challenge that the software industry needs to look into seriously. Solutions for facilitating inclusive banking have to have high robustness and reliability.”
Elaborating on the gap between advancements in hardware and software, Dusad said, “The hardware has come a long way in coping up with the current demand. The software is yet to gear up. The service-oriented architecture will take the software industry to the next level. What Henry Ford did to the automobile industry, by focusing on standardisation of automobile components and the processes, is what we will see 5-10 years down the line in the software industry.”
Dusad further pointed out that user authentication has been a challenge, though with UID number assigned to every citizen, this may not be a problem in the times to come. He also underlined that the cost of delivery of FI services must be as low as feasible, so that banks could see inclusive banking as a sustainable model for doing business.
Besides technology, one of the biggest concerns has been inability of banks in seeing a business proposition in financial inclusion. They see it more from the corporate social responsibilityperspective. Banks do open no-frills accounts, but that is not what financial inclusion all about. In many rural areas, there are no financial products for people belonging to the low income groups, as per the local necessities.
Rajeev Arora, President, Projects and Implementation, Financial Inclusion Network and Operations says, “Banks don’t see financial inclusion as business proposition and it is a major hurdle which still persists despite much of the talks about providing access to banking to the aam aadmi.”
The insensitivity of branch managers at local branches is a major concern. The clarity which is seen at the top levels in policy making of financial institutions for complementing the government’s inclusive development agenda completely lacks in the lower hierarchy. At the macro level, the country’s Ministry of Rural Development struggled to convince banks for enrolling wage earners under the MGREG programme and route their payments through bank accounts.
The apprehensions about the sustainability of the whole inclusive banking programme and the subsequent risks involved calls for a viability gap funding from the government.
It would be significant to underline the contrasts in the approaches of telecom and banking industries in tapping the rural market. While telcos did a lot of customisation in their products and services for the rural market, providing these at extremely affordable prices, banks have fallen short in tapping this market.
Yet, there’s a way forward. Given the current state of FI, the target of covering aam aadmi by March 2012 may seem to be too ambitious. Banks being the major stakeholder in FI have to take the ownership. Besides, the rural areas don’t have the required financial literacy among the masses. The local banking staffs are also to be sensitised for being proactive in extending financial services to low-income groups, seeing financial inclusion as a poverty alleviation tool.
Putting forth his point firmly on the behalf of FINO, which has a customer base of more than 20 million and is acquiring over 50,000 customers per day, Arora said, “We strongly recommend one district, one bank model, giving singular ownership to a bank, rather than having a service area approach for driving financial inclusion to the grass-root level. Andhra Pradesh was the pioneer state to do the same. Inter alia, the Haryana government has adopted this model for electronic benefit transfers.”
Dr Arasu recommends, “Taking the responsibility, bankers should scale the number of business correspondents to cover as much population as possible.” It is also recommended that a high-level committee headed by the Chief Secretary should be formed at the state level which would do the regular stock taking of the work done. Another committee could be formed to bring all the stakeholders including banks, related government departments and technology providers on boards and discuss regularly on ways to work out the modalities for a complete financial inclusion in their respective states.
Suggesting a convergence of all related banking services like linkage of no-frills accounts with wage payments under various government employment schemes, social services and micro credit and insurance in an integrated framework, Dr Arasu strongly put forth the case for decentralised banking, in line with the government policy on financial inclusion and regulations.
Echoing Dr Arasu’s opinion, Singh of Forbes Technosys said that the basket of financial services needs to be enlarged. Categorising these services into three parts, he said the first could be providing banking services including micro finance, insurance and loans under the FI programme. The delivery of government services, wages and benefits would form the second basket of services. Finally, the third basket could be of non-governmental or business-to consumer services.
Making a strong case for including electronic benefit transfer (EBT) under the FI programme, Arora said, “To make the channel (of the extended banking services) sustainable, it is very important to broad base it with the convergence of various functions like remittance, credit, savings and micro-insurance. In fact, there must be a push to shift EBT under the financial inclusion programme, since it provides a firm base to the channel.”
Noticeably, providing access to banking and financial services is the supply side of the whole picture. A much bigger question that remains is how to raise the capacities of the rural and urban poor so that they may leverage financial services and uplift themselves out of the vicious circle of poverty. The Rangarajan Committee on Financial Inclusion (2008) in its report noted, “Unless some initiatives are taken on the demand side, or in the real sectors, mere supply side solutions from the financial sector will not work.”