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Financial Inclusion
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Transcript of Financial Inclusion
BUSINESS MODELS FOR FINANCIAL INCLUSION
Radhika Raavi Gitam university hyderabad
ABSTRACT
Financial inclusion has been a focus of attention in recent times. The increase in the number of branches has not answered the needs of the farmers; and reaching the unbanked population to enable inclusive growth is a serious problem today.It has been over two decades since microfinance initiatives were introduced in India, but financial inclusion still remains a distant dream. Achieving total financial inclusion is a concern of most countries; yet it is very geographical in nature, as it largely depends on a country’s financial policy and its financial industry regulations. Branchless banking could be the big step towards providing easy financial access to the poor people and achieving financial inclusion. Committee reports submitted to the Indian government call for access to financial services, including credit, to be raised to 50 percent by 2012 and 100 percent by 2015. Such a mammoth task at hand can only be achieved by an earnest technology incursion which can be achieved through branchless banking. The Reserve Bank of India (RBI) has shown sincere interest in this matter and envisaged that branchless banking is the solution to the problem..Branchless banking is the concept of providing banking services outside the conventional bank branches by either using information and communication technology services or third party organizations (commonly referred to as ‘Business Correspondents’).In this paper the author is trying to examine the various business models that could be used to ensure the most proper implementation and sustenance of branchless banking systems namely business correspondent based model and non-business correspondent based model.
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INTRODUCTION
Financial Inclusion is no less important than social inclusion. As we see in our society,
millions of people not considered for a fair treatment either from the social institutions or
from the financial institutions. The banking industry has shown tremendous growth in
volume and complexity during the last few decades. Despite making significant
improvements in all the areas relating to financial viability, profitability and
competitiveness, there are concerns that banks have not been able to include vast segment
of the population, especially the underprivileged sections of the society, into the fold of
basic banking services.
Research in the last decade or so has shown that there exists a
robust link between a well-functioning financial system and inclusive
growth. In India, in spite of the commitment to social banking and the
vast banking network, over 50% of the farmer households remain
without access to credit. Additionally, only 59% of adult Indian’s have
access to a bank account.
In light of these disappointing figures, financial inclusion has
received a special attention from the Indian government and the
Reserve Bank of India. All out efforts are being made as financial
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inclusion can truly lift the financial condition and standards of life of
the poor and the disadvantaged.
What is Financial Inclusion?
In order to address the issues of financial inclusion, the Government
of India constituted a ‘Committee on Financial Inclusion’ under the
chairmanship of Dr C.Rangarajan .The Committee submitted its final
report on 04 January, 2008. The Committee has defined 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”
Thus, financial inclusion is delivery of banking services at an
affordable cost to the vast sections of disadvantaged and low income
groups. As banking services are in the nature of public good, it is
essential that availability of banking and payment services to the
entire population without discrimination is the prime objective of the
public policy.
The scope of financial inclusion:
The scope of financial inclusion can be expanded in two ways.
Through state-driven intervention by way of statutory enactments ( for
instance the US example, the Community Reinvestment Act and
making it a statutory right to have bank account in France).
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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.
When bankers do not give the desired attention to certain areas, the
regulators have to step in to remedy the situation. This is the reason
why the Reserve Bank of India is placing a lot of emphasis on
financial inclusion.
To address the issues of financial exclusion in a holistic manner, it is
essential to ensure that a range of financial services is available to
every individual.
These services are:
1. a no-frills banking account for making and receiving payments
2. a saving product suited to the pattern of cash flows of a poor
household
3. money transfer facilities
4. small loans and overdrafts for productive personal and other
purposes and
5. micro-insurance (life and non-life).
One of the benchmarks employed to assess the degree of reach of
financial services to the population of the country, is the quantum of
deposit accounts (current and savings) held as a ratio to the adult
population. In the Indian context, taking into account the Census of
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2001 (ignoring the incremental growth of population thereafter), the
ratio of deposit accounts to the total adult population was only 59%
*(details furnished in the table). Within the country, there is a wide
variation across states. Compared to the developed world, the
coverage of our financial services is quite low. For instance, as per a
recent survey commissioned by British Bankers' Association, 92 to
94% of the population of UK has either current or savings bank
account.
When the excluded sections approach formal financial institutions
they are confronted with problems of accessibility, timeliness,
inadequacy of credit. For one reason or other, they are compelled to
approach the informal agencies to meet their credit demands as we
all know..
Some of the recent concerns on financial inclusion have emanated
from the results of the All-India Debt and Investment Survey (AIDIS),
2002. Over a period of 40 years, the share of non-institutional
sources of credit in sources of credit for cultivator households had
declined sharply from about 93 per cent in 1951 to about 30 per cent
in 1991, with the share of money lenders having declined from 69.7
per cent to 17.5 per cent.
In 2002, the AIDIS revealed, however, that the share of money
lenders had again increased to 27 per cent, while that of non-
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institutional sources overall rose to 39 per cent (Table 1). In other
words, notwithstanding the outreach of banking, the formal credit
system has not been able to adequately penetrate the informal
financial markets; rather it
seems to have shrunk in some respects in recent years.
* as on March 31st 2001
Coincidentally, it is also true that the rate of agricultural growth during
the last decade has slowed down and it is particularly striking in
respect of food grains production. Since the green revolution, banks
have been mainly focused on financing crop loans connected largely
with food grains. There is, therefore, reason to believe that financial
exclusion may actually have increased in the rural areas over the last
10-15 years.
Table 2: Relative Share of Borrowing of Cultivator Households#
(per cent)
Sources of Credit 1951 1961 1971 1981 1991 2002$
1 2 3 4 5 6 7
Non-institutional 92.7 81.3 68.3 36.8 30.6 38.9
of which:
Money lenders 69.7 49.2 36.1 16.1 17.5 26.8
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Institutional 7.3 18.7 31.7 63.2 66.3 61.1
of which:
Co-operative societies, etc. 3.3 2.6 22.0 29.8 30.0 30.2
Commercial banks 0.9 0.6 2.4 28.8 35.2 26.3
Unspecified - - - - 3.1 -
Total 100.0 100.0 100.0 100.0 100.0 100.0
# : Borrowing refers to outstanding cash dues.$ : AIDIS, NSSO, 59th Round, 2003. Source: All India Debt and Investment Survey
Enabling access to a greater number of the population to the
structured and organized financial system has explicitly been on the
agenda of the Reserve Bank since 2004. Unlike several central
banks, which focus solely on inflation, many developed and emerging
economies, including ours, focus also on growth. There is currently a
clear perception that there are a vast number of people, potential
entrepreneurs, small enterprises and others, who are excluded from
the financial sector, which leads to their marginalisation and denial of
opportunity for them to grow and prosper. The Reserve Bank has
therefore introduced various new measures to encourage the
expansion of financial coverage in the country. Not only is financial
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inclusion essential because of its implications for the welfare of
citizens but it needs to be stressed that it has to be an explicit
strategy for fostering faster economic growth in a more inclusive
fashion. It is in this context that I thought it would be appropriate to
study the business models that are introduced by RBI
Financial Inclusion by Extension of Banking Services - Use
of Business Facilitators and Correspondents
With the objective of ensuring greater financial inclusion
and increasing the outreach of the banking sector, it has been
decided in public interest by RBI to enable banks to use the services
of Non-Governmental Organisations/ Self Help Groups (NGOs/
SHGs), Micro Finance Institutions (MFIs) and other Civil Society
Organisations (CSOs) as intermediaries in providing financial and
banking services through the use of Business Facilitator and
Correspondent models.
Business Facilitator Model: Eligible Entities and Scope of
Activities
Under the ';Business Facilitator'; model, banks may use
intermediaries, such as, NGOs/ Farmers' Clubs, cooperatives,
community based organisations, IT enabled rural outlets of corporate
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entities, Post Offices, insurance agents, well functioning Panchayats,
Village Knowledge Centers, Agri Clinics/ Agri Business Centers,
Krishi Vigyan Kendras and KVIC/ KVIB units, depending on the
comfort level of the bank, for providing facilitation services. Such
services include
1)identification of borrowers and fitment of activities; 2) collection
and preliminary processing of loan applications including verification
of primary information/data; 3)creating awareness about savings
and other products and education and advice on managing money
and debt counseling; 4) processing and submission of applications
to carry out its transactions, but finally the responsibility of putting
through transactions rest with the banks; 5) promotion and nurturing
Self Help Groups/ Joint Liability Groups; 6) post-sanction
monitoring; 7) monitoring and handholding of Self Help Groups/
Joint Liability Groups/ Credit Groups/ others; and 8) follow-up for
recovery. The BFs can refer clients, pursue the clients’ proposal and
facilitate the bank staff As these services are not intended to involve
the conduct of banking business by Business Facilitators, no
approval is required from RBI for using the above intermediaries for
facilitation of the services indicated above.
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. Business Correspondent Model: Eligible Entities and Scope of
Activities
The business correspondent (BC) model allows the bank to use third
party financial institutions to handle account opening, transaction
management, and other financial services viz., NGOs/ MFIs set up
under Societies/ Trust Acts, Societies registered under Mutually
Aided Cooperative Societies Acts or the Cooperative Societies Acts
of States, registered NBFCs not accepting public deposits and Post
Offices. In engaging such intermediaries as Business
Correspondents, banks should ensure that they are well established,
enjoying good reputation and having the confidence of the local
people. Banks may give wide publicity in the locality about the
intermediary engaged by them as Business Correspondent and take
measures to avoid being misrepresented.
In addition to activities listed under the Business Facilitator
Model, the scope of activities to be undertaken by the Business
Correspondents will include (i) disbursal of small value credit, ii)
recovery of principal / collection of interest (iii) collection of small
value deposits (iv) sale of micro insurance/ mutual fund products/
pension products/ other third party products and (v) receipt and
delivery of small value remittances/ other payment instruments.
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Regulations from RBI emphasize that transactions should be visible
in the bank’s books within 24 hours. Such a compulsion has
encouraged the use of smart cards and mobile technology by the
BCs (for e.g. pilot projects by Corporation Bank). This technology can
also be used to conduct other financial activities like fixed deposits,
loan disbursement, and insurance.
Reserve Bank of India Working Group has expressed the view that
banks would need to accept the BC model as extremely vital for
achieving the goals of financial inclusion. As the traditional ‘brick and
mortar’ branches could penetrate into remote areas of the vast
country only to a limited extent, this model presented banks with a
workable option to provide banking services in inaccessible areas in a
cost-effective manner. It suggested new entities to work as BCs.The
Working Group has noted that BCs should be used not only for
opening and servicing no-frills accounts but for the full range of
financial activities. The arrangements with the Business
Correspondents shall specify:
1 .suitable limits on cash holding by intermediaries as also limits on
individual customer payments and receipts, 2. the requirement that
the transactions are accounted for and reflected in the bank's books
by end of day or next working day, and 3. all agreements/ contracts
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with the customer shall clearly specify that the bank is responsible to
the customer for acts of omission and commission of the Business
Facilitator/ Correspondent.
Thus, Branchless banking is a technology enabled, low-cost,
alternate delivery channel that facilitates basic banking services to
the rural communities at their doorstep through Business
Correspondents at an affordable cost in a secure manner. It facilitates
customers to transact from their villages and at their convenience and
save or withdraw small amounts depending upon their need, without
the hassles of filling up a challan for depositing cash or withdrawing
money.
Non-Business Correspondent Model
In the non-business correspondent model the business
correspondent is excluded from the system and the customer himself
is provided with a mobile device. The regulatory policies of India have
recently allowed transactions from mobile devices, but with a very
small ticket size. The mobile devices are used to store information of
the user, conduct transactions, and maintain transaction records.
Various models have been proposed to realize mobile based
banking. One model is where the mobile devices are equipped with
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Near Field Communication (NFC) technology and RFID chip, which
are then used for user authentication and some transactions. Another
model which proposes to leverage the widespread network of retail
agents involves both banks and telecom operators where the retailer
has an account in the bank and the transactions are carried out in a
manner similar to the way customers recharge their phones.
Telecommunications has taken the world to a new phase in
managing communication and data irrespective of a person’s
location. The banking and payments industry is predicting that mobile
banking is going to be the next big revenue generator.
. It is expected that there would be 200 million rural connections by
2012, up from the current 90 million. Thus, the use of mobile devices
for payment and banking services can be the best suited model for
branchless banking in India.
Limitations of Business Models
When RBI allowed banks to use mediators to reach out to the rural
poor population in 2006, the business correspondent (BC) model
offered a’ win-win' situation for lenders, borrowers and mediators. On
one hand, the bank does not have to invest in infrastructure to reach
the un-banked areas and on the other hand, borrowers are assured
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of easy access to financial services. However two years down the
line, the flaws in the system have proved to be a stumbling block.
Banks usually identify correspondents, who are locally settled retired
post-masters, schoolteachers, bank staff and even defense
personnel. An ideal BC model envisages large cost reductions while
including the poor in the financial system. However, the model has
not achieved the desired results because of following limitations
1. The requirement of a BC to be within 15 km radius of a rural
bank branch as notified by RBI was a hindrance for banks that
do not have many rural branches.
2. Besides, the model brought an added risk .” Policies regarding
the BC model put reputation, legal and operational risk for a
bank. limited choice to select an eligible BC discourages banks
to initiate the model," noted HDFC Bank's business head of
micro-finance division Manohara Raj
3. Inadequate capital and human resource are the issues that
need to be addressed for the model to be implemented
successfully
4. . Banks see it as a tough job to identify and train a large
number of non-bank professionals to reach out to the poor.
5. In addition to operational problems there is a question mark
over the viability of the model itself. One of the key issues
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constraining the reach of banks to the un-banked areas is the
prime lending rate (PLR) cap on banks' lending. Experts point
out that PLR lending is not viable, as microfinance institutions
(MFIs) are exempt from the PLR model.
Conclusion
Developing and under-developed economies all over the globe are
looking for new modes and means to contain poverty and include
their citizens in the financial system. It is becoming increasingly
apparent that addressing financial exclusion will require a holistic
approach on the part of the banks in creating awareness about
financial products, education, and advice on money management,
debt counseling, savings and affordable credit. The banks would
have to evolve specific strategies to expand the outreach of their
services in order to promote financial inclusion
The main focus of the banks in the country has been towards using
business correspondents for reaching out to the unbanked
population. However, with the increasing penetration of
telecommunications in the country and greater reach, mobile based
business models (also referred to as M-Banking) will prove to be
instrumental in realizing branchless banking and taking it to higher
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grounds by enabling low cost and real time transactions over secure
networks.
REFERENCES
Mohan, R. (2002): 'Transforming Indian Banking: In Search of a Better Tomorrow', RBI Bulletin (January).
Mohan, R. (2004): 'Financial Sector Reforms in India: Policies and Performance Analysis', RBI Bulletin (October).
Mohan, R. (2006): 'Agricultural Credit in India: Status, Issues and Future Agenda', Economic and Political Weekly (March), pp.1013-23.
Rajan, R.G. and L. Zingales (1998): 'Financial Dependence and Growth', American Economic Review 88, 559-86.
Rajan, R.G. and L. Zingales (2003): Saving Capitalism from Capitalists, Crown Business, New York.
Reserve Bank of India (2004): Report of the Advisory Committee on Flow of Credit to Agriculture and Related Activities from Banking System (Chairman: V. S. Vyas). RBI, Mumbai.
Report of the NABARD on financial inclusion
TABLE 1
Coverage of Banking Services (Ratio of Demand Deposit Accounts to the adult population)
Region/State/Union Territory
Current Accounts
Savings Accounts
Total Population
Adult Population (Above 19 yrs
Total No. Of accounts
No. of acc. Per 100 of population
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NORTHERN REGION
4215701 52416125 132676462 67822312 56631826 43
Haryana 572660 8031472 21082989 11308025 8604132 41
Himachal Pradesh 134285 2433595 6077248 3566886 2567880 42
Jammu & Kashmir 277529 3094790 10069917 5379594 3372319 33
Punjab 1156137 13742201 24289296 14185190 14898338 61
Rajasthan 689657 12139302 56473122 28473743 12828959 23
Chandigarh 80607 1126696 900914 546171 1207303 134
Delhi 1304826 11848069 13782976 7929589 13152895 95
NORTH-EASTERN REGION
476603 6891081 38495089 19708982 7367684 19
Arunachal Pradesh 10538 209073 1091117 544582 219611 20
Assam 378729 5071058 26638407 14074393 5449787 20
Manipur 12514 200593 2388634 1222107 213107 9
Meghalaya 24305 458779 2306069 1088165 483084 21
Mizoram 3441 117885 891058 476205 121326 14
Nagaland 13819 195452 1988636 995523 209271 11
Tripura 33257 638241 3191168 1784212 671498 21
EASTERN REGION 1814219 47876140 227613073 122136133 49690359 22
Bihar 464511 13225242 82878796 40934170 13689753 17
Jharkhand 166007 5834341 26909428 13737485 6000348 22
Orissa 228160 7030004 36706920 21065404 7258164 20
Sikkim 4097 125365 540493 288500 129462 24
West Bengal 942733 21544753 80221171 45896914 22487486 28
Andaman & Nicobar Islands
8711 116435 356265 213660 125146 35
CENTRAL REGION 2202217 64254189 255713495 129316677 66456406 26
Chhattisgarh 192067 3346898 20795956 11209425 3538965 17
Madhya Pradesh 553381 11731918 60385118 31404990 12285299 20
Uttar Pradesh 1324509 45804350 166052859 82229748 47128859 28
Uttaranchal 132260 3371023 8479562 4472514 3503283 41
WESTERN REGION 3178102 49525101 149071747 86182206 52703203 35
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Goa 81551 1584177 1343998 891411 1665728 124
Gujarat 955964 16220262 50596992 28863095 17176226 34
Maharashtra 2127240 31568184 96752247 56207604 33695424 35
Dadra & Nagar Haveli
6076 69308 220451 122765 75384 34
Daman & Diu 7271 83170 158059 97331 90441 57
SOUTHERN REGION
4666014 83386898 223445381 135574225 88052912 39
Andhra Pradesh 1156405 23974580 75727541 44231918 25130985 33
Karnataka 1086662 19147819 52733958 30623289 20234481 38
Kerala 600065 17669723 31838619 20560323 18269788 57
Tamil Nadu 1786514 22052812 62110839 39511038 23839326 38
Lakshadweep 491 22997 60595 33686 23488 39
Pondicherry 35877 518967 973829 613971 554844 57
ALL-INDIA 16552856 304349534 1027015247 541031553 320902390 31
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