Financial Inclusion - Role of Information Technology

Latest Indian Business News Financial World - Latest Articles Latest World News

Financial Inclusion - Role of Information Technology

NSN REDDY*

Email id: nsn6507@yahoo.com ; Mobile 09490213002

***

The banking industry has shown tremendous growth in volume and complexity during the last few decades. Despite amplified thrust by the government on increase of branch network across the country since 1969, still the fruits of the banking not reached to the common man which is evident from the below:

Ų Half of the residents are out of the banking system and unable to prove their identity on account of poor financial back ground and belong to Below Poverty Line (BPL) segment.

Ų 60% of farmers do not have access to credit from Banks.

Ų Poor pay usurious interest at 40% to 50% to Money Lenders. Even Micro Finance Institutions charge 20-30% interest.

Ų More than 40% of the government’s subsidy and social spending is being siphoned off, mostly by “ghosts” and undeserving recipients.

Ų In spite of best efforts, the various welfare/employment generated programs aimed at poor households with huge budget allocations (NREGS, JSY and PDS) are going into unscrupulous hands and leading to widespread leakage of public money.

Though, the banking industry has made significant improvements in the areas relating to financial viability, profitability and competitiveness, banks have not been able to reach and bring vast segment of the population, especially the underprivileged sections of the society, into the fold of basic banking services.

Even after six decades of political independence and four decades of Bank’s Nationalization, still majority of residents are under the clutches of Money Lenders and deprived of financial independence. The views of Sri.K C Chakrabarty, Deputy Governor, RBI on the issue is worth noting “Our approach is that those who are borrowing from Micro Finance Institutes must now borrow from the Banks and those who are borrowing from the Money Lenders must borrow from Micro Finance Institutes”.

In the above backdrop, the concept "Financial Inclusion” has attained utmost importance in the recent years. Financial Inclusion is delivery of banking services at an affordable cost to the vast sections of disadvantaged and low income group without discrimination. It means not only to extend banking facilities to rural people but also to provide it at their convenient time and location. It is envisaged that the beneficiaries of the various schemes will be paid directly through banks and this paves the way for effective control on usage of government funds and lays strong foundation to achieve financial inclusion in the ensuing years. RBI wants to ensure that within three years, all villages with a population of at least 2000 should have access to banking.

No Frill Accounts

RBI exhorted the banks, with a view to achieving greater financial inclusion, to make available a basic banking 'no frills' account either with 'NIL' or very minimum balances as well as charges that would make such accounts accessible to vast sections of the population. All banks are urged to give wide publicity to the facility of such 'no frills' account, so as to ensure greater financial inclusion.

Simplified KYC Norms

Opening of account is an Herculean task for common man since it warrants to fulfill KYC norms i.e. submission of address proof and identity proof, where as majority of rural/urban poor do not possess them. To facilitate persons belonging to low income group both in urban/ rural areas, RBI introduced simplified norms (with out documentary proof) to open accounts for those persons who intend to keep balances not exceeding Rs.50000/- in all their accounts taken together and the total credit in all the accounts taken together is not expected to exceed Rs.100000/- in a year. However, these accounts requires introduction of existing KYC complaint account holder. Photograph and address of the customer who proposes to open the account need to be certified by the introducer.

Opening “No frills accounts” with simplified KYC norms is only the first step in building the relationship which would require sustained efforts on the part of Banks and Customers to achieve the objective of Financial Inclusion. However, in rural areas customers cannot be expected to come to branches in view of opportunity cost and Time and hence banks will have to reach out through a variety of technology driven delivery channels such as Micro ATMs, Bio-metric ATMs, Mobile ATMs, Smart Cards, UID number, Mobile Banking, Post offices, e-seva etc.

Financial Inclusion – Role of Technology

Micro ATMs: The presence of ATMs mostly found in Metro/Urban centers and banks are not keen to install ATMs at Rural/Semi Urban centers on account of high investment and low transaction volume. In order to make the ATMs viable at these centers, there is a need to deploy low cost ATMs with basic features such as cash withdrawal and balance enquiry and should be located at places where rural folk pays frequent visits such as petrol pumps, mandis etc. It is convenient and cost effective compared to paying visit to the bank branch located at nearby center.

Biometric ATMs: The penetration of ATMs into Rural / Semi-urban areas may not serve the envisaged purpose unless it is put to use by illiterates/semi-literates whose presence is predominant in rural areas. The existing ATMs are not being used optimally by rural folk on account of PIN and Password related issues. Introduction of Biometric ATMs enables the illiterate and semi-literate customers to avail ATM facilities on par with literate customers. Under this, Thumb impression of the cardholder will be scanned and transfer the same to central server as one time measure. ATM dispenses cash and other services only after verifying the thumb impression of the cardholder with that of finger print available with the bank’s server. Bio-metric ATMs are going to play an important role in the remote rural areas in the ensuing years.

Mobile ATMs are designed for providing ATM facility to the rural folk as well as other customers. The Van would move to the pre-determined places and also accessible to Biometric card holders. Opening of accounts also can be undertaken during the visits to the rural areas. This can be used at weekly shandis/markets effectively.

All the above initiatives warrant the banks to invest substantial amount on infrastructure besides recurring expenditure. The distribution of financial products and services at the lowest rung of the pyramid requires a low-cost model that allows accepting and making of a large number of micro payments to and from the poor. The high intermediary cost of the banks is a stumbling block to reach the poor, which need to be addressed. Hence, it is warranted the banks to search for the following alternate models to extend Branchless Banking across rural India.

High Operating Costs and Low Business Volume are the major constraints of the banks in extending banking services especially in remote rural and inaccessible areas through Branch Banking Model. To address this issue, RBI permitted the banks to make use the services of Business Facilitators and Business Correspondents to take banking to un-banked areas in a most cost effective manner.

Business Correspondent (BC) model envisages the use of identified institutional agents, organizations and other entities for supporting the Bank in extending Financial Services, operating from different locations away from the Bank branches. The scope of activities to be undertaken by the BCs will include

Ų Collection of small value deposits / Disbursal of small value credit

Ų Recovery of principal / collection of interest

Ų Sale of micro insurance/mutual fund products/pension products/other third party products and

Ų Receipt and delivery of small value remittances

Under this model, the user is required to open account with a Bank and franchised to BC for the purpose of extending approved services. Technology plays an important role to establish link between the User, BC and Bank for seamless operations duly protecting the interest of all the concerned. Many organized players are entering in to this area and showing keen interest to make the model success by providing the desired services to the Users in a most cost effective and convenient manner using innovative technology applications.

Banks have already commenced the process of selection of BCs, however, they are yet to swing into action. The envisaged project paves the way to create ample employment opportunities and a business opportunity to the banks to improve retail accounts. The ability of the banks in positioning the model and the agility of the BCs in adoption of the approach will play key role in making the project a grand success.

Mobile Banking Model

The mobile-phone revolution that is transforming the world could also turn into a banking revolution. Today, the number of Mobiles in India is 60 crore and this number is expected to reach 70 crore by next year. The reach of mobile to the remote village and its usage by the common man has become order of the day and it is estimated that around 1/4^th of mobile users are residing in villages/small towns. The coverage of mobile phones and the use of such instruments by all section of the population can be exploited for extending financial services to the excluded populations. It enables the subscribers to manage their financial transactions (funds transfer) independent of place and time. The subscriber can approach to a retailer of mobile network for withdrawal/deposit of money and the transaction takes place using SMS messages. Recently, many banks have introduced mPAY to avail the benefits of financial transactions using mobile viz., funds transfer from one account to another account of the same bank.

Recently, National Payment Corporation of India (NPCI) has initiated steps to introduce Inter-Bank Mobile Payment Service (IMPS) which allows funds transfer across the banks to the credit of beneficiary accounts within India using mobile phones. It enables the banks to extend financial services independent of Agents or Business Correspondents. RBI is keen to implement this model by all banks by 31^st March 2011 and allow transfer of funds up to `50000/- free of cost. South Africa and Philippines countries have implemented this model successfully and providing banking services to the remote rural areas.

Smart Cards

State Governments are actively looking at making pension payments as also disbursals under Rural Employment Generation Program using through smart cards linked bank accounts. Smart card provides biometric authentication, which would help in reducing frauds and ensure identity of customers. Such cards can also hold all transaction details on the card. In order to popularize smart cards, all agriculture short term loans and payment of social security schemes are to be dispensed through Smart Cards.

Aadhaar Project

Government of India established Unique Identification Authority of India (UIDAI) with an objective to issue a unique identification number known as Aadhaar to all Indian residents with intent to eliminate duplicate/fake identities and to put hassle-free, cost effective verification/authentication system in place thereby to save considerable resources of various User Departments as well as beneficiaries at large. UID project gives a big push to the government’s financial inclusion agenda and also provides the strong foundation to deliver better services and paves the way to improve the operational efficiency of the system. All Public Sector Banks are acting as Registrars to undertake enrollment and authenticated services to their clientele and also other residents using technology embedded outsourced model.

Tie-up with Post Offices

Modernization of Post Offices is in full swing and now they are well connected. Banks may make use of the presence of the post offices to extend banking services to the persons of unbanked areas. Smart Cards with bio-metric features will be delivered to them. The customer has to produce the Smart Card at post office for remitting cash or for withdrawal.

E-Seva Centers

Banks may enter agreement with the respective state governments for sharing of resources, so that our rural/semi-urban customers can undertake financial transactions (Cash Deposit/Withdrawals) at these centers, which will be updated at Banks` server every day.

T-Banking

The presence of Television in all households is the order of the day and now it has become one of the most cost effective modes to disseminate information across the country. Banks may explore the possibility of making use of cable network to extend banking services to remote rural areas and this can be used as non-branch service delivery channel.

In the above backdrop, Banks need to revisit their approach towards low value accounts of vast neglected population and adopt “High Volume – Low Margin – High Profit” business model backed by technology. This strategy enables to bring more customers in to bank’s fold since this segment provides ample opportunities to improve business/profit on account of cost effective solutions.

Let us hope that the dream of the nation i.e. “financial independence” comes true shortly with the active participation of the Banks and the associated entities using Information Technology as powerful tool.

***

***December, 2010***

*[Mr NSN Reddy, who is working as Chief Manager, in Andhra Bank has B,Com, CAIIB, PGDBM (NIBM) qualifications to his credit and has over 32 years of Banking experience]

Important Notice : [The articles written by authors contains only the academic view of the writer and purely for discussions and updation of the knowledge of the bankers. The views expressed in the articles may not at all be subscribed by the organisation where the author is working and / or AllBankingSolutions.com]