Financial_Inclusion

Financial Inclusion Definition Financial inclusion is aimed at providing banking / financial services to all the people in a fair, transparent and equitable manner at affordable cost. The banking system today has been transformed from a brick and mortar life infrastructure to a system well supplemented by other channels like ATM’s credit/debit cards, online banking, online money transfers etc. The important point however is that these services remained restricted to a select few. There is a growing divide among the high and middle income population, who have an access to increasing range of personal finance options, and a significantly large population who lack access to even the most basic banking services. This is termed as ‘financial exclusion’. The ideal definition would also take into consideration the credit worthiness of the clientele. In short, If genuine claimants for credit and financial services are denied the same, then that is a case of exclusion. Taking into consideration the above aspects financial inclusion can broadly be defined to be : “Financial inclusion may be defined 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.” Extent of Inclusion NSSO data reveal that 45.9 million farmer households in the country (51.4%), do not access credit, either from institutional or non-institutional sources. Further, despite the vast network of bank branches, only 27% of total farm households are indebted to formal sources (of which one-third also borrow from informal sources). Apart from the fact that exclusion in general is large, it also varies widely across regions, social groups and asset holdings. The poorer the group, the greater is the exclusion. World Bank estimates suggest that around 59% of Indian households do not have financial access. Assuming a population of 1.147 billion (CIA fact book) and that there are 5 persons per household, means 229.4 million households in India. Assuming 2.5 persons per household work (based upon the fact that 63.3% of Indians are of 15-64 age which is considered working age [CIA fact book], and you get a conservative estimate that 338 million working Indians are affected by lack of finances. This means that many of the transactions performed are four or five times removed from any formal infrastructure. Being so disjointed from the multiplicative power of financial infrastructure to provide capital, means that Indian’s cannot be as efficient as their potential. Scope of Inclusion The financial inclusion policies for the un-banked population should focus on rural as well as semiurban and urban poor. The scope of banking services to be provided includes not just a no- frills account but all the facilities like savings, withdrawals, loans, investments, personal finance, insurance etc. The essence of financial inclusion is in trying to ensure that a range of appropriate financial services is available to every individual and enabling them to understand and access those services. Also, there are two sides to the issue of financial inclusion. The demand and the supply side. The demand can only be increased by educating the rural population and crating awareness among them to access the services of a bank rather than going to the local money lender. The demand side efforts need to be taken in tandem with including improving human and physical resource endowments, enhancing productivity, mitigating risk and strengthening market linkages. However, a lot is desired in terms of improving the supply side or the delivery systems. The various steps taken so far to improve the same would be discussed subsequently. Story so far The central bank, in line with the importance given to financial inclusion, especially in the context of enhancing agricultural output, has brought in several policy changes, the major among them being the directive to banks to open as many no-frills accounts as possible, simplification of the KYC (Know your customer) procedures for the BPL (below poverty line) segment, providing the full range of banking services through business facilitators or business correspondents in inaccessible rural areas and setting up of CIBIL to make available credit histories of individuals and small businesses with a view to lower the risk for banks. These measures actually increased the access to formal banking services through the use of intermediaries like self-help groups (SHGs) and microfinance institutions (MFIs). Today, apart from NABARD and public sector banks, several private sector and foreign banks have accessed the microfinance market either directly or through SHGs or MFIs providing a spectrum of financial services ranging from small value loans to several complex financial services to this relatively higher risk segment of the population. A few of the measures which would be used in this whitepaper model are being discussed in slight detail. Business Correspondent Model The Reserve Bank of India defines the eligible entities and the scope of the BC model to include NGOs/ MFIs set up under Societies/ Trust Acts, Societies registered under Mutually Aided Cooperative Societies Acts or the Cooperative Societies Acts of States, section 25 companies, registered NBFCs not accepting public deposits and Post Offices . RBI states that the banks may conduct thorough due diligence on such entities keeping in view the indicative parameters given in RBI report. A few additional activities that these BC’s can take up are (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. Regional Rural Banks RRBs, post-merger, represent a powerful instrument for financial inclusion. Their outreach vis-à-vis other scheduled commercial banks particularly in regions and across population groups facing the brunt of financial exclusion is impressive. RRBs account for 37% of total rural offices of all scheduled commercial banks and 91% of their workforce is posted in rural and semi-urban areas. RRB’s have a large presence in regions marked by financial exclusion of a high order. Self Help Group The SHG - Bank Linkage Programme is a major plank of the strategy for delivering financial services to the poor in a sustainable manner. It was started as an Action Research Project in 1989 which was the offshoot of a NABARD initiative during 1987. The search for such alternatives started with internal introspection regarding the innovations which the poor had been traditionally making, to meet their financial services needs. It was observed that the poor tended to come together in a variety of informal ways for pooling their savings and dispensing small and unsecured loans at varying costs to group members on the basis of need. The same will have to used for the success of the model presented in the white paper. Information, Communication, Technology (ICT) models Bankers in general believe financial inclusion can be achieved by leveraging IT. The government is responsive and the budget had provided for the setting up of two funds for financial inclusion – the Financial Inclusion Fund for Developmental and Promotional Interventions and the Financial Inclusion Technology Fund to meet cost of technology adoption of about $125 million each. The enabling provisions and support of RBI has facilitated successful pilot projects in use of IT for extending the banking outreach for the “excluded”. These projects are premised on technology which uses hand-held devices and connectivity with host computers through mobile and landline networks. There are also rural bio-metric ATMs which have been introduced by banks and found to be very popular among rural masses. A Probable Path to Increase Scope of Financial Inclusion Today technology has pervaded the length and breadth of human existence and the rapid strides in growth can only be possible if it is supplemented by Technology. We, in our model have attempted to use technology to reach out to the millions who do not have access to any financial services. The technology application model is premised on providing financial services in the rural areas through the BC Model using low cost and simple IT based solutions. There has to be a central system which could be a shared infrastructure providing for economies of scale and consequential cost benefits, and a field system which enables access to the central computer by the business correspondents. The statistics on the number of mobile users give a reassuring figure. Out of the 392 mobile users in the country as of July 2009(source: Telecom Authority of India), 282 are urban mobile users and the rural users comprise the other 110 million. This shows that mobile telephony has penetrated the length and breadth of the country. In this column we attempt to make use of mobile services and signals to develop a model for better financial inclusion of the rural masses. Our model includes the Regional Rural Banks, low cost automated teller machine (ATM) machines, mobile networks, the private prepaid recharge card agents of mobile companies and the targeted audience. Instead of having external agents of the banks (which would add to the costs), we suggest that the existing agents who sell mobile prepaid cards be brought in the framework. Our assumption is that of the 110 million rural mobile users, more than 95% would be using the prepaid schemes. This gives us a figure of more than 100 million users. Role of the prepaid mobile recharge card agents ( henceforth referred to as PMRCA): These would act as the link between the Regional rural banks (RRBs) and the people. They would actively participate in encouraging people to open a “no frills” account with the RRBs. They are local people who know the target audience personally and hence can convince them more effectively. Training of the PMRCAs has to be done and this is one time responsibility of the RRBs. When people have opened their accounts with the bank through the PMRCAs, they can avail of deposits and remittances without actually having to visit the bank personally. Deposit into the account: The RRBs would issue the PMRCA booklets(similar to a lottery booklet). The characteristic of this booklet would be that it would contain leaflets of denominations Rs10/-, Rs 20/- , Rs 50/- and Rs 100/-. The total value of the booklet could be Rs 500/- or Rs 1000/- . The bank (RRBs) would sell these booklets to the PMRCAs. The overall design of the leaflet would be: When any depositor wants to deposit say Rs 50/- into his account, he would purchase leaflets equal to Rs 50/-. The PMRCA would then message the receipt number and the account number of the depositor to a toll free number maintained by the RRB, and the transaction would be recorded in the books of the bank automatically. Withdrawal: This is a sensitive issue which needs to be addressed practically and judiciously. In case of deposits, the PMRCA had already paid the money to the bank, so the depositor’s money was safe. When it comes to withdrawing money, the PMRCA cannot be solely trusted. So, we propose to install low cost ATM machines for withdrawal of money. Such ATM machines are being developed by researchers and success has been achieved in this field. These machines do not require airconditioning and use telephone networks for operation. The Host computer is the server which will be used by the banks. As the concept of shared infrastructure has already been explained, many RRBs can use the same server. Since the expected usage of the machine is not much, these machines would be installed to cater to a specific population, say one for every 10000 of population. A detailed demographic study has to be done for the same before deciding on the location of the machine and the number of machines to be installed. Working: Unlike traditional ATM machines, the machine which we tend to use does not need a magnetic swipe card to function. This serves the dual purpose of reducing cost for the bank and increased safety. The working of the machine would be based on 6 digit codes. The account holders will be provided a security device similar to what is issued by the Share Broking Firms (like Reliance Money etc ). When a person wishes to withdraw money, he goes to the PMRCA with the account number and the security device. The PMRCA sends across the account number of the person and the amount he wishes to withdraw. The server validates the account number and checks whether the amount to be withdrawn is available in the account of the account holder. The server then sends back a message giving a unique code. The withdrawer must enter the unique number in addition to the number on the security device to withdraw money. This ensures that fraud and money laundering is avoided. Since the number on the security device changes every 30 seconds on a real time basis, no other person other than the account holder can withdraw the money. Initially we are targeting only maintaining a savings account with the bank. As time progresses and people develop more confidence in the system, the services could be expanded to insurance of crops, personal insurance, fixed deposits etc. Incentive to the prepaid mobile recharge card agents: The mobile agents (PMRCAs) would earn income from: 1. Customer Enrolment Fees: For every new account that the PMRCA manages to open , he would be rewarded an amount not lesser than Rs 10/-(depending on the conditions set by the bank). 2. Customer Service Fees: Customer service demands a very high priority because our target audience is financially illiterate. So, the banks can provide PMRCAs with an incentive to provide financial literacy programmes. For every customer enrolled by a PMRCA, the bank pays him Rs 1/- per month, irrespective of whether the customer accesses the bank services or not. The incentive could be raised if a customer uses the services on a regular basis. 3. A 1% discount would be provided on the face value of the booklet. For e.g. if the PMRCA purchases a booklet of Rs 1000.- he would have to pay the bank Rs 990/- only. This would ensure that he encourages people to deposit money. Conclusion The Indian financial services industry has offered many schemes that have not adequately protected consumer deposits.Money laundering is another area of concern. Ultimately, it is important that regulators consider the cost of financial exclusion and weigh it against the possible fraud they are protecting against. In many cases such an analysis will reveal that opening up the system to innovation will far outweigh the risks involved. We belive that effective use of IT backed by goverement support the model would be a success and would be able capture the rural masses and hence bridge the gap between financial exclusion and inclusion. The model can be further accentuated through SHG. Much of this paper draws conclusions from the successes of telecom and we have seen telecom successfully move towards universal access with negative use of public money. Financial services regulators should see if universal financial access can be significantly increased in a similar manner.