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Vol XXIX No 03 l February 15, 2011
FINANCIAL INCLUSION
REACHING THE UNREACHED Getting the unbanked into the financial system offers a massive business opportunity not only to banks but also to the technology providers
102 pages including cover
Special subscription offer on Page-88
Image Courtesy: FINO
Cover Story
Financial Inclusion
Reaching the Unreached
Given India’s size and population, there is no way of achieving financial inclusion without significant use of technology. So getting the unbanked into the financial system offers a massive business opportunity not only to banks but also to the technology providers A Notoriously Unbanked Scenario 50% of India’s population does not still have bank accounts; 90% no access to credit or life insurance cover; 95% no general insurance; and 98% no participation in the capital market n India has 64,000 bank branches, or one for every 16,000 n
16 | February 15, 2011
people; and 80,000 ATMs n As per the report by Skotch Development Foundation, only 11%, of the 25 mn accounts opened between April 2007 and May 2009, were active as of end of 2009 n Only 13% of Indians have debit cards, 10% life insurance and only 1% non-life insurance products.
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Cover Story Outreach Measures The government injects `850 crore to part-finance the additional expenses borne by banks towards opening nofrills accounts n The government in its last budget set up 2 funds—the Financial Inclusion Fund and the Financial Inclusion Technology Fund, worth `1,000 crore n NAFCUB plans to implement CBS in 300 UCBs of the 1,674 with 6,900 branches in the country by the year end n Trai considering regulations for financial inclusion via mobile n The inter-ministerial group (IMG) wants banks to pay the telcos a minimum of 2.25% per transaction or 1.4% of the n
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hile India’s GDP in general and the banking sector in particular has grown exponentially in the last decade, the growth has barely reached vast segments of the population, especially the under-privileged sections of the society. Financial inclusion is one of the top priorities for the government today, which it is trying to achieve by leveraging technology. The Reserve Bank of India (RBI) has dared to set a target of achieving inclusion by March 2012 of habitations with at least 2,000 people. Over ambitious? Maybe, especially as RBI’s very own deputy governor KC Chakrabarty admits, while speaking in a function recently: “50% of India’s population does not still have bank accounts, 90% no access to credit or life insurance cover, 95% no general insurance, and 98% has no participation in the capital market.”
Nonchalant Banks and Under-cooked Roadmaps
In order to include the poor in the financial system, the government has no doubt embarked upon bold initiatives such as opening ‘no-frills’ accounts. But little did it work in the absence of a comprehensive multi-disciplinary approach. Banks, until now, pressurized by RBI to offer ‘no-frills’, complain of receiving zero transactions in many such bank accounts. “The minimum 18 | February 15, 2011
total amount n Telcos may get 3% per transaction or 2.25% for transactions done on their mini-ATMs n Plans to disburse payments and subsidies for schemes like NREGS and PDS (public distribution system) through no-frills accounts n The government’s goal is to offer everyone at least 4 products: a savings account with access to an overdraft, a pure savings account, a remittance product, and entrepreneurial credit n The UID project to help achieve financial inclusion through the use of unique identification number
basic thing to include the poor into the financial system is money, which has to be there to keep an account functional. Even if you offer free nofrills accounts, it would hardly work unless poor have money to deposit,” says Subhas Gupta, chief executive, National Federation of Urban Cooperative Banks and Credit Societies (NAFCUB).
“The minimum basic thing to include the poor into the financial system is money, which has to be there to keep an account functional... even if you offer free nofrills account” —Subhas Gupta, chief executive, National Federation of Urban Co-operative Banks and Credit Societies (NAFCUB)
Economic viability is the biggest deterrent for banks to augment their footprints deeper into the rural regions. Banks are afraid of the high costs of setting up branches there. Besides, the rural banks which are already present in some parts are unorganized and illprepared to take financial inclusion in their agenda. India has 64,000 bank branches, or one for every 16,000 people, and 80,000 automated teller machines—a notoriously unbanked scenario when compared to European countries. “Over the years, several attempts have been made to develop low cost banking models, but they have only partially succeeded. As per report by Skotch Development Foundation, only 11% of 25 mn accounts opened between April 2007 and May 2009, were active as of end 2009. This raises questions on viability of models,” adds Hanuman Tripathi, group managing director, Infrasoft Technologies. It’s evident that banks would not willingly move further unless a market is promised amongst the marginalized. “Paucity of business is what deters banks from taking the financial inclusion agenda on their official radar. Banks, governments and other channels have to join hands to make this mission successful. A comprehensive approach from banks, government and technology providers may bring fruitful results because all 3 can identify a market amongst the unbanked.
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“Use of biometrics based front end systems and full implementation of the UID program should go a long way in making payments to beneficiaries of the government programs” —Hanuman Tripathi, group managing director, Infrasoft Technologies
“Co-operative banks can play a significant role in rural financial inclusion if they ably take advantage of the technology in place. The CBS system is available on the cloud” —G Srinivasa Raghavan, vice president and country head, India Business, Tata Consultancy Services
“There is a unanimous acceptability among all that alternate technology and the business correspondent model hold a great promise to realize this social mission”
“Agent banking is a good initiative, since it is the combination of both technology and convenience as it’s the locals who are engaged as business correspondents”
—Suneel Gupta, CTO, FINO
—Suchin Gupta, CEO, Mindmill Software
Technology in any form that has a mass appeal must not be ignored,” suggests Haragopal Mangipudi, global head, Finacle, Infosys Technologies. Instead of being guided by RBI and the government, banks need to work with them from the beginning and take serious steps ahead. Of course the primary duty of setting up a minimal-risk platform lies with the government. Hence the government has planned to further fund its no-frills movement with an amount of `850 crore, which will be used to part-finance the additional expenses borne by banks towards opening no-frills accounts. Besides, it’s committed to empower co-operative banks and extend low-cost business correspondents into rural areas, which are expected to contribute largely to financial inclusion.
Tech Empowering Co-op Banks
The challenge is to make the banking sector efficient in terms of both alloca-
tion and operation. While the former pertains to easy access to people, the latter is about harnessing technology rather than merely mechanizing to improve the functioning of banks. Large banks from both private and the public sector do own efficient technology infrastructure but have little reach in rural areas. On the other hand, co-operatives and rural banks have reach in some parts but lack infrastructure.It is with this in mind that the government and RBI have largely laid their focus on empowering co-operatives and urban co-operative banks (UCBs). Uma Shankar, Reserve Bank’s general manager of Urban Co-operative
The rural banks which are already present in some parts are unorganized and ill-prepared to take financial inclusion in their agenda
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Banks Department last year advocated the role of co-operative banks in the real last mile financial inclusion. According to her, their support is required so as to help people participate actively in the financial inclusion program. She advised co-operative banks to use advanced technology and recruit more efficient people. For this purpose, the government has already set up 2 separate funds in the last Union Budget— the Financial Inclusion Fund and the Financial Inclusion Technology Fund, worth `1,000 crore—which are being extended through NABARD (National Bank For Agriculture and Rural Development) to banks. “The co-operative banks, because of their geographic spread in the remote areas, need to be equipped with technology. NAFCUB has embarked on technology revolution in the urban co-operative banking sector. Realizing the need of core banking solutions in these banks, NAFCUB, in association with RBI, has shortlisted 4 technology February 15, 2011 | 21
Cover Story vendors to offer their CBS solutions to UCBs,” says Gupta (NAFCUB). He also says that NAFCUB is constantly taking steps to help the relatively weak and smaller urban co-operative banks in adopting modern technology and interlinking through the Application Service Provider (ASP) system. The ASP based core banking solutions, Gupta says, are economical for small and co-operative banks. The 4 vendors shortlisted to offer CBS solutions include C-Edge Technology, Mindmill Software, Tata Consultancy Services and Theme Technologies. In addition, the federation also plans to have CBS implemented in 300 UCBs, of the 1,674, with 6,900 branches in the country by the end of
erative banks have to pay on a monthly basis,” says G Srinivasa Raghavan, vice president and country head, India Business, Tata Consultancy Services.
Business Correspondent Model
Taking inclusion down to the poor was, and still is, a tough job. Banks, though in rural areas, should have a medium to touch base with the unbanked and under-banked because many village people would not dare to even enter a bank, even in the big cities, not to mention the ‘audacity’ it takes to speak to a bank manager about a loan. To address this problem, the RBI, in January 2006, allowed banks to em-
“It would, in fact, be almost impossible to make financial inclusion happen without extensive use of mobile technologies” —K Sree Kumar, CEO, Intellecap
“A comprehensive approach from banks, government and technology providers may bring fruitful results because all 3 can identify a market among the unbanked” —Haragopal Mangipudi, global head, Finacle, Infosys Technologies
it is the locals who are engaged or appointed as business correspondents,” says Suchin Gupta, CEO, Mindmill Software. “There is a unanimous acceptability among all stakeholders that alternate technology and the business correspondent model hold great promise to realize this social mission,” adds Suneel Gupta, CTO of FINO, a company focussed on the BC model. Many banks have utilized the scheme for expanding their operations. The SBI among the public sector banks has been recruiting as many BCs/BFs as possible. The banks have also enrolled Post Offices as BFs to offer several financial services to the post offices’ existing clients. Because the RBI has pushed and brought changes into its BC guidelines, private banks like ICICI Bank and HDFC have come forward in making use of the scheme. Mostly NGOs and MFIs of the eligible categories have been enrolled as BC/BFs by banks. “Business correspondents is a good move, since individuals such as village grocers, dealers in agricultural inputs and retired bank officials are being used as facilitators. These individuals are familiar with the local culture and language, thereby increasing the scope of success,” says Gupta of NAFCUB. While all this holds potential, experiences suggest that the scheme didn’t take off in the way it was envisioned, due to insufficient flexibility for the BC system to be viable. To address this problem, RBI, in September 2010, announced revised guidelines to banks for engaging business correspondents for financial inclusion of the non-banking population through extension of banking services. RBI has now permitted to engage all registered companies, except non-banking financial companies (NBFCs), as business correspondents (BCs) in addition to the individuals/entities permitted earlier. The new guidelines have opened up avenues for even technology com-
this year. The introduction of the CBS system would, adds Gupta, modernize the UCBs across the country. Further, their six crore-odd account holders would have access to modern banking, including the 80,000-odd ATMs of various banks across the country. “Inclusion needs robust infrastructure. Co-operative banks can play a significant role in rural financial inclusion if they ably take advantage of the technology in place. The CBS system is available on cloud, for which co-op-
ploy 2 categories of intermediaries viz, business correspondents and business facilitators (BF) who could approach the masses and carry out transactions on behalf of the bank as agents. The BFs can refer clients, pursue clients’ proposals and facilitate the bank to carry out its transactions, but finally the responsibility of putting through transactions rests with the bank staff. “Agent banking is a good initiative, since it is the combination of both technology as well as convenience as
22 | February 15, 2011
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Surat District
Banking on Wheels Having implemented CBS, The Surat District Central Co-opera“The bank tive Bank is supporting financial inclusion in Gujarat’s Suraj area. The introduced bank started its financial inclusion drive in 2008 when it introduced ‘Banking an innovative model to extend its financial services to the common masses. on Wheels’ “With core banking in place, the bank introduced ‘Banking on to connect Wheels’ model to connect with the unbanked populace in the remote with the areas of Surat district. The mini-van is equipped with a banking counter enabling customers to deposit cash in their Saving Account, Fixed unbanked Deposits and Recurring accounts; pay loan installments; and withdraw populace in the remote areas money. In short, it allows customers to perform most of the banking activities on wheels,” says IC Mahida, managing director, The Surat of Surat district...the mini District Central Co-operative Bank. van was equipped with a Today, the mini-van covers 55 villages consisting of approximately banking counter” 50,000 customers. The bus follows different planned routes over five days of the week. At the end of each day, the data from the mini-van —IC Mahida, managing director, The Surat District is consolidated with the central server from the Mandvi branch. On Central Co-operative Bank just the ‘Banking on Wheels’ channel, in the last 1.5 years, the bank has attracted 6,000 new customers and generated a turnover of `7 crore. Additionally, the bank has tied up with the NGO called GRISFER, a branch of Bharatiya Agro Industries Foundation for providing credits/loans to self help groups and sakhi mandals. In FY 2011-12, the bank plans to extend the ‘Banking on Wheels’ model in other Talukas. To extend the reach of our financial inclusion objectives, the bank plans to appoint PACS (Primary Agricultural Credit Societies) as their business correspondents,” says Mahida. To enable real time integration from various channels and models, the bank also plans to implement connectivity on VSAT (Very Small Aperture Terminal), a two-way satellite ground station.
panies to engage with banks as business correspondents. “TCS is engaged on the business correspondent level with certain banks and is taking active part in field management platform. The new guidelines would address common issues such as physical constraint of spacing and location,” says Raghavan. Though the guidelines are applicable to all scheduled commercial banks, including regional rural banks (RRBs) and local area banks (LABs), RBI wants banks to be selective in engaging individuals or entities as BCs. “The new guidelines even allow retired teachers, retired government employees and ex-servicemen, individual owners of kirana shops, etc among others to be business correspondents. The approach, combined with appropriate use of IT solutions, can work in
the right direction,” shares Gupta of NAFCUB. “To further inclusion, the biggest challenge banks face is the identification of borrowers where BCs are going to play an active role. Their activities apart from this will also include collection and preliminary processing of loan applications, creating awareness about savings and other products like advice
RBI has now permitted to engage all registered companies, except non-banking financial companies, as business correspondents in addition to the individuals/ entities permitted earlier
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on managing money and debt counselling, processing and submission of applications to banks,” says Mangipudi of Infosys. Until now, business correspondents appointed by institutions like FINO, SBI, and Eko, etc, have widely used a variety of customer-touched technologies such as biometrics and POS (point of sale) devices. But the transactions done using them do not happen in real time with the bank’s core banking system. BCs have to walk to the banks in order to update the transactions on the bank’s system. “In many cases, banks don’t have a standardized core banking system. For example, if someone has to transfer money from one account to another in the same village, many rural banks still lack a system that lets it happen in real time. The business correspondent model February 15, 2011 | 23
Cover Story can be successful, if banks do also focus on standardized solutions,” remarks Gupta (Mindmill).
Mobile Banking—a Rescuer
Whether it’s the question of adding co-operatives and rural banks in the financial inclusion drive or appointing business correspondents, what will oil their financial machinery well is mobile technology. Industry peers bet big on connectivity and the mobile revolution to make the financial inclusion initiatives successful. “A decade back mobiles were scarce in India, today they are everywhere. Mobile has to be the focus to carry inclusion forward,” adds Gupta (Mindmill). Mobile-based technology is ubiquitous in India; where among more than 600 mn mobile users about 20% do not have bank accounts. “Mobile Banking will help achieve what credit cards and debit cards achieved in the previous decade and hence implementation of mobile banking, in the right way, will ensure that urban poor and rural populations would be able to realize their loan approvals and other cash benefits from merchant establishments all over, as if it were happening through a credit card/debit card,” says Tripathi of Infrasoft. This was marginally addressed through Kisan Credit Cards and Rural ATMs, but the problems still remain unresolved. He further suggests, “Mobile platform services such as receiving credit, payments and transfers, account opening and receiving loan approvals, etc, can be offered on cheaper mobile phones over a period of time.” What makes mobile a potential tool to carry financial inclusion further is that mobiles have become an integral part of the rural social landscape. “The skill with which Indian mobile communication companies 24 | February 15, 2011
have driven costs down, and the impact that the mobile phone has had on business and social practices, it would, in fact, be almost impossible to make financial inclusion happen without extensive use of mobile technologies,” says K Sree Kumar, CEO, Intellecap, an Indian social advisory firm. At the same time, banks have to ensure that they do their reasonable bit to use the mobile platform. But then they can’t completely rely on mobile for financial inclusion. “Our experience suggests that still customers are more comfortable doing transactions through agent-assisted models compared to self-assisted transactions on
Urban Co-operative Banks Can Use the CBS System NAFCUB has shortlisted 4 CBS vendors for urban co-operative banks. Irrespective of their sizes, the banks can leverage the solution on affordable monthly rentals. n CBS is now within reach of all urban co-operative banks—even the smallest n CBS is compliant with updated RBI regulations n Allows any branch and any time banking connectivity n Offers ATM networking compatibility n CBS will be available at competitive monthly rental of `12,000 per branch
mobile. It is because literacy levels are at the bottom in rural areas. Mobile technology can foster realtime connectivity with a bank’s core banking system for real-time transactions,” says Gupta (FINO). Mobile-based financial inclusion has also attracted Telecom Regulatory Authority of India’s attention after RBI moderated its policies on m-banking. Trai will implement tariff regulations so that financial services are offered at low cost to the masses. The regulator has, thus, proposed a framework for delivery of basic financial services including transfer of funds under various government schemes and programs targeted at poor people. In a recent statement, the regulator has said, “Tariff regulation would be crucial if adoption of mobile banking is to be encouraged, especially among the unbanked segments of the population. In such a situation, cost effectiveness of delivery of basic financial services through mobile phones becomes an important consideration.” The interministerial group (IMG) constituted by the Cabinet Secretariat to frame rules for banking services on cellular handsets has said that banks in turn must pay the telcos a minimum of 2.25 per transaction or 1.4% of the total amount, while it has also added that the commission can be gradually reduced to 1% over a period of five years. The IMG report also underlines that if telcos want to set up mini ATMs, and if the transactions are to happen through these, then banks must pay them a minimum of 3 per transaction or 2.25% of the amount. Furthermore, extending their footprints into country’s financial inclusion initiative, cellphone companies are also entering into tie-ups with banks. Bharti Airtel has formed a 49:51 joint venture with State Bank of India to provide mobile-banking and other fi-
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Cover Story nancial services, whereas Vodafone Essar has also entered into a joint venture with ICICI Bank to offer similar services. “Operators’ participation in the financial inclusion is a step further and, if reaped properly, can cover a large chunk of the unbanked population in a short span,” says Gupta.
At Work at Last
The basic purpose of any technology is that it should be able to address the need of the basic market. The role of one technology in silo is thus always denied. It is a combination of solu-
program as the government expects a recognizable contribution from this. According to banks, the UID would be a cost-effective way of reaching out to customers at a time when banks are grappling with issues related to client identity. Nandan Nilekani, chief of the UID project has also taken up the matter with banks to discuss how they can help achieve financial inclusion through the use of UID. Use of biometrics in the UID project has gained a lot of traction which, experts say, will further financial inclusion in India. “Use of biometrics based
not only bring the unbanked into the financial system but also ensure that the amount doesn’t land in corrupt hands. Some of the business correspondent efforts are being combined with government policy to process National Rural Employment Guarantee Scheme (NREGS) payments and extending PDS (public distribution system) subsidies to the under-privileged into their accounts. Brisk service delivery will ensure sustainable financial inclusion. “Most challenges are at the services delivery end for achieving successful and sustainable financial inclusion objectives. These can be resolved only by using intelligent hardware, such as pre-loaded cards, rural ATMs, kiosks, mobile solutions for agents and correspondents and mobile based transactions for purchase and sales,” says Tripathi. Financial inclusion will propel, if there is appropriate financial awareness among the masses. The poor must become part of banking activities such as loans and insurance facilities. Financial inclusion thus comes second to financial literacy. “Financial literacy is a prerequisite for effective financial inclusion, which will ensure that financial services reach the under-privileged and under-banked sections of society,” says Raghavan. Financial literacy at the bottom of pyramid is very important because only 13% Indians have debit cards, 10% life insurance, and only 1% have non-life insurance products. The government’s goal is to offer everyone at least 4 products: a savings account with access to an overdraft, a pure savings account, a remittance product and entrepreneurial credit. To conclude, banks have to willingly see a business opportunity in the rural inclusion. To compliment their mission, it would be crucial to work along with solution providers, service providers, telecom operators and government, among others.
tions, from mobile operators, CBS providers to hardware manufacturers who can create a massive business space for themselves along with banks in the financial inclusion mission. “In the relaxed regime, technology firms such as ours can also move on to be BCs. It would alleviate banks from training BCs for the paraphernalia they carry around. We can equip BCs with appropriate tools that allow real-time financial activities with a bank’s core banking system. In general, technologies of all kinds will have a huge say in the financial inclusion drive, when it is coupled with a bank’s intent to do so,” says Suchin Gupta. Similarly, the Unique Identification Number (UID) project is also in the limelight for the financial inclusion
front end systems and full implementation of the UID program should go a long way in making payments to the beneficiaries of various government programs,” believes Tripathi of Infrasoft. Along with UID that can help in authentication of a person making transactions, mobile will be a best fit in people-to-people remittances, adds Gupta (FINO).
26 | February 15, 2011
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A Small Step Towards Success
If the financial inclusion steps have not succeeded completely, they haven’t failed either—which is the silver-lining. The government is waking up to the fact that first it needs to disburse all payments and subsidies to the poor through its no-frills accounts. It will
—Onkar Sharma onkars@cybermedia.co.in