Financial Inclusion in India: Integration of Technology, Policy and Market at Bottom of the Pyramid

Jatinder Handoo

Disclaimer:The Author is at present part of business strategy team at Financial Information Network and Operations Ltd, Mumbai. The views expressed in this paper are entirely his personal and do not in anyway reflect or relate to the views of the Financial Information Network & Operations Ltd or its business divisions.

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Financial Inclusion in India: Integration of Technology, Policy and Market at Bottom of the Pyramid
Jatinder Handoo

Abstract: Financial inclusion is one of the top most policy priorities of the Government of India. Ever since the UPA government has come into power in the centre, one of the most visible aspects of the governance has been agenda of social inclusion of which financial inclusion is an integral part. Taking cue from the state proclivity towards inclusive growth agenda, the Reserve Bank of India (RBI) has taken a proactive role in ushering the enabling financial environment inclusion for expediting length and

highlights how populations at bottom of the pyramid across the spectrum of developing world have gained access to financial services. The paper also highlights role of regulatory environment which has paved path for development of technology led models in the emerging economies of the world. In the second part, the paper vividly describes various technology led models of financial inclusion particularly branchless, which have mushroomed in India for last few years, the changes in regulatory environment and customer expectations due to multiple options available. Finally the paper sums up with an open ended question what does future hold for millions un(der) served in India and how does technology, banking and public policy could better address the developmental question of financial exclusion.

across

breadth of the country through bank led model. To reach out at 400 million plus un (der) banked population at pace with profitability is the single most important challenge faced by the multistakeholders, particularly banks and delivery channels. And here comes in the role play of technology led models and their efficacy over traditional brick and mortar branches. The paper is broadly divided into two parts, in the first part it takes an overview of the existing technology led branchless models of financial inclusion across the world and

Index Terms: Agent banking, biometric technology, financial inclusion, public policy,

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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. - C.Rangarajan Committee Report, 2008.

The

specific

policy

actions

of

the

Government could be traced back from nationalization of banks to the formation of Regional Rural Banks (RRBs) and ushering an era of SHG banking to the evolution of

INTRODUCTION
Financial Inclusion is considered to be an important determinant for social inclusion of poor and vulnerable. It is in fact, one of the essential conditions for reduction of poverty and socio- economic inequalities in the society [20]. The history of financial

BC/BF(Business Correspondent /Business Facilitator) model of branchless banking. Starting in late 1960s, India has been home to one of largest state intervention in the rural credit [11]. This clearly suggests that so far the policy approach for financial inclusion of in India has largely been credit driven [1] which is conceptually different and fundamentally contrasting with the actual tenets of financial inclusion and

inclusion dates back to the co-operative credit movement in India. Successive

Indian governments have tried to address the issue of financial exclusion by directing the banking sector to provide financial services to poor and vulnerable at

requirements of the excluded communities. Increasing inflow of rural credit, primarily for its large base of farming community in the hinterland has dominated the policy priority in India since long. It was observed that the main barriers in the approach were two fold i.e. institutional structure was neither

subsidized conditions.

profitable in rural lending nor serving the needs of the poor [10] In nutshell, the structure so created was quantitatively impressive but qualitatively weak[14].In

2006, the Government of India took some watershed steps for studying the issue of
The author is a Public Policy graduate and a social banker. He has been associated with rural business teams in the State Bank of India and HDFC Bank Ltd in the past. At present Jatinder is part of business strategy team at FINO Ltd and can be contacted at: Jatinder.handoo@fino.co.in

financial exclusion and devising strategic road map for financial inclusion for poor unbanked and under banked in India, consequent of which a commission headed by the eminent economist Dr. C.

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Rangarajan was formed and it came with its report on financial inclusion in 2008. The report has come with some fundamental policy suggestions and chalking out new role play for existing and new institutions like Cooperatives, Banks, Regional Rural Banks, SHGs, JLGs, NBFCs and other financial intermediaries like BC and BF .

branch size, location and business potential for operations like cash management,

branch banking services, staffing ,operating hours and the most important lending and interest banking rates on savings, which make with poor a costly and

unremunerative affair for banks. There is a huge banking potential at base of the pyramid but it is required to overcome all of the identified barriers. Any successful model would essentially need to address all the

Financial Inclusion: Challenges Ahead

Extending banking and credit services in rural and informal urban areas is a daunting challenge, considering the grassroots level realities which are characterized by

barriers at the same time [7]. This entails change in the approach of delivering services to the unbanked and under-banked areas. Therefore, the need was felt for

dilapidated soft and hard infrastructure like intermittent or no broadband and telecom connectivity, irregular power supply,

more innovative, cost effective and easily accessible delivery channel which would take financial services to the nooks and corners of India. Financial Access points in India Total Number of no frills A/Cs Total Number of Bank Branches Total Number of Rural Branches Total Number of ATMs Number of PoS machines Number of Kissan Credit Cards Number of GCC issued by PSBs
Source: RBI, [4]

unreliable public transport, sketchy road network, erratic cash flows among poor household and finally lack of a universally available and readily acceptable common identity proof. Serving low value retail customers in these geographies pose some operational, regulatory and viability

Status 41.5 Million as on June 30th,2009 81000 31,727 47,953 5,22,148 76 Million (CMIE 2008-09) 1,52,842 ( March 31st, 2009)

challenges for banks.

Banks are profit

oriented entities and must be able to recover the costs which they incur in providing services like deposits, credit, remittance, insurance etc. Otherwise the model would be unstable and may collapse one day. central On regulatory part the Indian bank does not make any

The latest mantra which has potential to solve the extant of financial exclusion in Page4of13

incentivizing exceptions for banks based on

India is the RBI proposed branchless banking model the business

post offices and small retailers as agents Hoffman Jenny, Finmark Trust Kenya. Attempts have been made to define branchless banking ,however a

correspondent (B.C) channel. The B.C enables financial inclusion by acting as an agent on behalf of bank. Basically the agent based model of banking beyond branches has emerged in Brazil where banks have been using correspondents since 1970 and it proliferated to other parts of the world like Kenya, South Africa, and Philippines,

comprehensive definition of may still be far away, primarily because of the expediously metamorphosing nature and scope of the sector which is driven by policy regulations, market demands and fast changing

Mexico etc. in its variants. Based on the domestic realities and global learnings, the Public-policy in India ushered a wave of branchless banking on January 25th, 2006 when the RBI came up with the initial guidelines on use of business

technologies like biometric smart cards and PoS, mobile phones, text based services etc. However, for the sake of convenience the paper uses CGAP definition which defines Branchless banking as a delivery of financial services outside conventional bank branches using information and

correspondents by banks with the policy objective of making social exclusion a history through financial inclusion of poor and vulnerable.

communication technologies and non bank retail agents, for example, over card-based networks or with mobile phones With the proliferation of branchless banking across the globe, In general, two models have emerged:

Branchless Banking: Models and Global Experiences

Taking banking transactions out of bank branches and into retail store in every neighborhood and in every village. This set up is called agent or branchless banking -Mas Ignacio, Melinda Bill Gates Foundation Use of technology such as payment cards or mobile phones to identify customers and record transactions electronically and thus allowing customers to initiate transactions remotely through third party outlets such as

1. Bank

led

model

of

branchless

banking and 2. Non Bank Led model. In both the models retail agents such as merchants, supermarkets, or post offices are engaged to channelize financial

services outside traditional bank branches. In case of the bank-based model, the nature of relationship each customer enjoys with Page5of13

the

prudentially

regulated

financial

whereas

countries

like

Kenya

and

institution is direct and contractual. It hardly matters whether it involves an account or an off site transaction even if the customer may deal with the correspondent of a particular bank equipped to communicate directly with the bank the nature of relationship remains unchanged . In case of the nonbank-based model, customers have no direct contractual relationship with a fully prudentially licensed and supervised institution. Customers

Philippines have shown development of non bank led models. However, in few other similarly placed countries across North Africa and the Middle East (MENA), the pace has been low. The rate of adoption

can primarily be attributed to a dynamic mix of market forces and enabling public policies. In countries like Brazil, India, South Africa and Mexico bank led models have emerged over a period of time and regulators have ushered branchless banking in a way based on learnings and market response. The case has been more or less similar in Kenya and Philippines except there has been proliferation of e - money or non bank

exchange cash at a retail agent (where cash in and cash out takes place) in return for an electronic record of value. This is a virtual account and is stored on the server of a nonbank, such as a mobile operator or an issuer of stored-value cards. The balance in the account can be used for making payments, storing funds for future use, transferring funds, or converting stored value back to cash at agents [3]. Growth of both the models has been shaped to a greater extend by the nature of regulations and in the countries like

based agent model and driven by market players like Globe telecom and Safaricom in Philippines and Kenya respectively. On the contrary, in most of the African and in the Middle East countries regulations are mostly restrictive for agent based banking (fig 1.0), thus less access to financial services by poor in these regions.

Phillipines,Mexico,India,Brazil,South Africa, Kenya etc. There is little doubt that the banking beyond branches has emerged as a dynamic model of retail micro-banking for last one decade particularly in developing countries of the world. Countries like Brazil, India, Mexico and South Africa have shown relatively faster adoption levels in bank led models

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70 60 Percentage 50 40 30 20 10 0

1.0Shareofthecountrieswhichallowbankstouseagents

Financial Inclusion Index designed by ICRIER clearly depicts the poor status of developing countries in terms of financial inclusion [21]. According to a study done by the CGAP-World Bank the numbers of bank accounts in the world are equal to the number of

Middl Latin High Europ Sub East e Ameri Incom e& Sahar Asia& South East& ca& e Centr an Pacifi Asia North Carre Count al Africa c Africa bian ries Asia 13 29 41 50 55 60 60

people,

but

these

accounts

are

concentrated mainly in the developed countries [6]. People in poor countries have very less bank accounts and these people are generally served by

Series1

non banking financial entities [6]. In this

Source: The World Bank, Report on Financial Access, 2009

context,

the

need driven

and

relevance

of

technology At present, there are about six billion people in the world but nearly half (2.7 billion) of the planets population is unbanked (GSMADFID website, 2010). The reasons are

innovative

banking

channels becomes paramount, especially in emerging economies of the world. The factors which have contributed to the variance in the pace and facilitation of financial inclusion in general and branchless banking in particular across these countries are regulatory and private market players. In a country like Brazil, it was the Brazilian central bank which brought changes in correspondent legislation in 2005 and

manifold. A simple analysis of access to finance data points that the number of traditional banking channels are much less than the required and therefore there is huge variation across countries in terms of a bank branch and population ratio. A country like Ethiopia has one branch per 100,000 people whereas India has one branch per 12500 people and Spain has one branch per 5000 people (approx). A huge chunk of the un(der)banked adults come from the developing countries . India alone has about 41 % unbanked adults. Other emerging economies like Brazil (70%) and South Africa (60%), Mexico (70%). The

incentivized private players like Lemon bank and Public players like Banco Postal and Caixa. Similarly, in Kenya, the Central Bank of Kenya provided enabling environment for M-PESA model consequent of which about 9.6 million have access to financial services of M-PESA. On the contrary in MENA region, there has been slow uptake of

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branchless banking, primarily on account of lazy banking on the part of central bankers.

accessibility

and

proximity.

The

decentralized structure of delivery channel powered by ICTs enables financial

Sustainable Financial Access Technologies

Proximity and easy accessibility to the end customer at odd hours are the two basic tenets for making financial inclusion a successful case in unbanked and underbanked geographies across the world. Basically these two underlying factors make informal channels like money lenders and sources like friends and relatives,

institutions to be in neighborhood locality of its customers and thus become closer to them [5,6 ]. There are evidences of saving banks having used technology to overcome operational hurdles in securing small

deposits in large volumes. Technology not only simplifies delivery channels but plays a holistic role in enabling financial inclusion and thus reducing

uncertainties and risks associated with livelihoods and ultimately cash flows. A new paradigm of financial inclusion embedded in the matrix of livelihood is being discussed by livelihood finance enthusiasts in India which envisage a greater role of technology beyond access. Recent report on financial inclusion in India published by UNDP highlights role of technology in securing livelihoods and thus reducing cash flow uncertainties.

neighbours more popular and preferred option for poor and vulnerable communities in informal set up where traditional brick and mortar branch channel finds its operations commercially unviable [5]. This is what makes innovative branchless banking technologies like Biometric smart Card-Pos, Mobile Phones, text based

services, online lending, e-money etc a detrimental factor for bridging the

accessibility and proximity divide chiefly because of their low cost and operational efficiencies. Therefore, technology plays a pivotal role in enabling financial inclusion ecosystem by reducing barriers to financial inclusion viz access, proximity, financial hurdles and information asymmetry which are identified as the key bottle -necks. Technology helps in decentralization of financial access points and breaks barrier of Page8of13

ICT driven Business Correspondent models in India: FINOs Case.

The level of financial exclusion in India is huge despite of various existing banking channels. There are about 267 Million unbanked adults and about 135 million financially excluded households in India and this number is second to only China[20,22]. The empirical evidences have pointed that one of the major barrier to financial inclusion is transaction cost in particularly in delivery of credit [17,20] . Considering all these realities and on the basis of Khan Group recommendations, the Indian Central bank introduced BC model of branchless banking

cent cheaper for both the parties than the conventional banking channels [14]. This finding reinforces the case of ICT based models of banking across the world in general and India in particular where there is huge untapped financial inclusion market at base of the pyramid Table 2.0 [12]
Market Player Laun ch Partn er Register ed Users Agen ts and type Producers Works without custo mers mobile

FINO

2007

25 Proje cts

14.5* Million

10,0 00

Micro insurance, No-Frills, MGREGA, SSP,Remitt ance, Micro loans

Yes

ALW

2007

SBI

4 Million

in the year 2006. Ever since the introduction of BC guidelines by the RBI, India has seen emergence of various branchless banking channels (table 1.2) which use multiple
Eko 2009 SBI 32,000 (Delhi ,Bihar)

8000 SHG s, GP empl oyee s

No frills savings a/c with payout of G2P benefits

Yes

280

frontend technologies like biometric smart card PoS, Mobile Phones, Pin, text SMS or IVRS based services to bring greater financial access to end customers across the nooks and corners of India. Quite recently cutting edge technology models like Nokia Money and Green Money have
Mobile Money services by YES Bank powered by NOKIA Feb 2010 Obopay with YES Bank and NOKI A Green Mobile Dec 2009 Paym ate with Corp Bank and TATA

P2P out of no frills a/c

N0

10,000 Mahara shtra, Kerala and Karnata ka

125 PCO s

Money Transfer

Yes

mushroomed but the fact remains that still India faces a huge levels of financial exclusion and this poses a challenge as well as an opportunity to multistakeholders. A recent study suggests that the technology led models of mobile branchless banking across the world are on an average 19 per

1000 (Pune)

40 NOK IAha ndset deal ers

P2P and Payments out of prepaid a/c at YES Bank

No

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Out of various existing models in India (table 2.0) , an analysis reveals that FINO is the largest branchless banking entity in India which has partnered right from with the

offers SaaS to financial institutions and employs ICTs like biometric smart cards Pos and mobile based solutions to provide financial inclusion services to more than

multistakeholders

banking

14.5 million plus unbanked and under banked poor at Base of the Pyramid . The manner in which banking was done in India until recent in rural and informal urban settlements has been transformed by FINO. Three main strengths which makes it different from others in the trade are: (a) scales and (b) on ground implementation capabilities in the hinterland despite of multiple operational hurdles ,(c) Varied range of products and services offered to end customers at their door step in an

institutions Public sector and Private sector, Insurance companies, Micro finance institution maintains , Government relationships entities with and other

knowledge based research organizations across the world. What makes it different is range of products and services offered to its end 14.5 million end customers across 22 states in India [6,12]. Introducing FINO: Financial Operations Information Ltd (FINO) Network is a and

affordable way . The suite of products and services offered by FINO through the channel of its 10,000 bandhus (agents) includes: 1. No frills savings accounts, 2. Insurance Accidental, 3. Remittance services, 4. Utility bill payment services 5. G2P services ( MGREGA,SSP : Health, Life and

financial

inclusion enabling entity which provides end to end technology solutions and offers doorstep banking to end customers. FINOs robust network of agents makes it worlds largest banking agent management

company [12]. FINO was formed three years back on July 13th, 2006 with a mission of enabling financial inclusion to all unbanked and under banked masses located in informal rural and urban areas . FINO today is a live example which depicts how entrepreneurial capitalism works to solve development challenges in emerging and transitional economies across the developing world. It

pensions ) 6. Microloans etc.

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Table 3.0: FINO Snapshot

TotalCustomers Locationsserved Districts States PartnerBanks MFIs Insurance Companies Government Entities
Source: FINO website

Conclusion: Finally , An analysis of the branchless banking and financial inclusion ecosystem across the emerging economies of the world in general and India in specific draws out few clear pointers for all stakeholders .It tells us how the sector is moving across in the world and what are the forces- market and regulatory which have contributed in shaping the ecosystem in some countries already discussed .To sum up with the Indian scenario, recent developments like formation of UIDAI ,National Financial daily

14.5Million(May31st, 2010) 26000 233 21 21 20 03 07

What makes FINO a leader in the Indian market in addition to the factors mentioned above are softer aspects and social

sensitivity, which has rolled out in the form of initiatives like Champions of Financial Inclusion(CoFI) an online space for collaborations and knowledge creation

Switch-NPCI,

enhancing

the

transaction limit of mobile banking followed by favorable recommendations of the Group of Ministers report on use of mobile phones as a framework of financial inclusion in India and relaxation in BC model guidelines has made it amply evident that the United Progressive Alliance (UPA) government in the centre is committed to the agenda of social inclusion of poor and vulnerable communities and Policy considers financial

among various actors of civil society for generating inputs for policy and academia . Financial Inclusion Education Academy

(FIEA) and financial literacy programme for strengthening the model as a whole by generating awareness and empowering end users. Engagement with the stakeholders across the spectrum to understand and adapt itself according to the dynamically changing micro-market and micro-customer

inclusion as one of the powerful tools to bring a social change in near future. The Financial Inclusion Policy environment in India has undergone a tremendous change in past one year and it is expected to bring more dynamic changes especially after the RBI has recently asked banks to come up with their board approved plans for financial inclusion, which is in tandem with the

requirements and adding value to poor customers and partner organizations- both at the same time is something which adds to the brand value of FINO.

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broader framework of National Financial Inclusion programme. It would be interesting to note the manner in which private players would respond to these policy changes and if they cash on gold at bottom of the pyramid.

DistrictofKarnataka.MoneyandFinance Conference.Mumbai:IndraGandhiInstituteof DevelpmentResearch. [11]Khandelwal,A.K.(2007,March). MicrofinanceDevelopmentStrategiesforIndia. EconomicandPoliticalWeekly,pp.11211126. [12].Krishnaswamy,McKay,Pickens,Rotman (2010).BuildingViableagentnetworksinIndia, CGAP. [13]Mas.I(2009).TheEconomicsofBranchless Banking,Innovations:Technology, Governance,Globalization,Vol4. [14]Mishra,A.(2006).MicrofinanceinIndia andMillenniumDevelopmentGoals: MaximizingImpactonPoverty.Singapore: DiscussionpaperonWorkshoponWorldbank. [15]NSSO(2006).HouseholdBorrowingand RepaymentinIndiaduring1072002to3006 2003.AllIndiaDebtandInvestmentsurveyNSS 59thRound,MinistryofStatisticsand ProgrammeImplementation,Governmentof India [16]Morawczynski.O,Hutchful.D,Rangaswamy.N ,Cutrell.E(2010),TheBankAccountisnot Enough:ExaminingStrategiesforFinancial InclusioninIndia. [17]PickensM,Porteous.D,Rotman.S(2009), ScenariosforBranchlessBankingin2020, CGAPFN57. [18]Pickens.M,McKay.C(2010),Branchless BankingPricingAnalysis.CGAP. [19]RajanRaghuram(2008).Reportofthe committeeonFinancialSectorReform,GoI [20]Rangarajan,C.R.(2008).Reportofthe commiteeonFinancialInclusion,GoI. Page12of13

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[1]Ansari,S.A(2007).MicrofinanceinIndia AsianEconomicReview. [2]Arunachalam.R.S(2008),ScopingPaperon FinancialInclusion,UNDP. [3]CGAPTechnologyProgramme(2009),Notes onBranchlessBanking,PolicyandRegulationin Mexico. [4]ChakrabarthyK.C(2009).Financial Inclusion,RBIInitiativesatNationalseminaron launchingaNationalinitiativeforfinancial inclusion,DFSGoI. [5]Emma.F(2007)Tenyearsofsharing innovationsinthesavingsmarket,WSBI. [6]FinancialAccessReport(2009),CGAP [7]FINOsources(website,presentations) [8]Hirchland,M.(2003)Servingsmallrural depositors:proximity,innovationsandtrade offs.PavingtheWayForward,International conferenceonbestpracticesinruralfinance. WashingtonDC. [9]IBAIBRDT(2009)workshoponopen standardsforFinancialInclusion,Mumbai, Ernst&Young. [10]K.B.Rangappa,Bai,R.,&A.L,S.(2008). SHGBankLinkageProgrammeandFinancial Inclusion:RuralHouseholdstudyinDevangere

[21]SarmaMandira(2008),IndexofFinancial InclusionICRIER. [22]Sinha.J,&Subramanian.A.(2007).The NextBillionConsumers:ARoadMapfor expendingFinancialInclusioninIndia.Boston, TheBostonConsultaningGroup. [23]Thorat.U,(2008).SpeechonFinancial InclusionandInformationTechnology,Vision 2020IndianFinancialServicesSector.

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