Final

FINANCIAL INCLUSION 1
Introduction to Financial Inclusion

About 2.9 billion1 people around the world do not have access to
formal sources of banking and financial services.
In India alone 560 million2 people are excluded from formal
source of finance, a
figure in tight correlation with the 41.6 percent (457 million) of
the populace that
still lives below the poverty line (US$1.25/day).
While India has enjoyed growing domestic demand and globally
recognized
prowess in the areas of information technology, automotive, life
sciences,
telecommunications and even space exploration, its continued
success and growth
as an economic power (in common with other emerging
economies) can only be
assured if concrete steps are taken to ensure that the social and
economic
development is inclusive.
Definition of Financial Inclusion
Financial Inclusion is the process of ensuring access to
appropriate financial products and services needed by all sections
of the society in general and vulnerable groups such as weaker
sections and low income groups in particular at an affordable cost
in a fair and transparent manner by mainstream institutional
players.
a. The role of Government
The importance of financial inclusion to national economies is
evidenced by the
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support of individual governments as well as international bodies

around the world.
The United Nations Capital Development Fund (UNCDF), which is
present in 33 of
the identified 50 Least Developed Countries 3 (LDC), invests in
local development and inclusive finance with a total program
portfolio amounting to US$130 million. UNCDFs vision of inclusive
finance is to offer appropriate financial services to all segments of
the population to be supported by sound government policies,
legal and regulatory frameworks and infrastructure. UNCDF has
been instrumental in taking innovative
approaches to build inclusive financial sectors to help them
reduce poverty and
achieve inclusive growth. Similarly, the International Financial
Corporation (IFC), a member of the World Bank, supports
numerous causes designed to support the proliferation of financial
inclusion.
b. The role of technology
Government policies have laid a strong foundation wherein
technology has helped
to spread the reach of financial services. Some of the technology
solutions being
implemented today are Smart Cards, Biometric ATMs, Point of
Service Devices
and Mobile Phone Applications. Leading banking and financial
institutions are
engaged in providing banking services to the financially
underserved through
pilots or limited commercial rollouts using either one or multiple
technologies
cited above. However, the needs of the vast majority of the
underserved and unbanked
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have not yet been addressed. Technology solutions are being

promoted to
address the scalability challenges facing financial inclusion in
India and other
developing countries. Amidst the ever-changing technology
landscape, Selfservice
has emerged as the foremost scalable and sustainable solution.
c. Financial inclusion case studies
At a national level, significant steps have been taken to achieve
financial inclusion
by a number of governments. Some of these initiatives are shared
below.
India
The government of Indias National Rural Financial Inclusion Plan
(NRFIP) has set a target to achieve complete financial inclusion by
2015. The plan aims to serve fifty percent of the financially
excluded (280 mn) population by 2012 through regional and semiurban branches of commercial and regional rural banks.
To help achieve these goals, two funds of about US$125 million5

each have been
allocated the Financial Inclusion Fund (FIF) and the Financial
Inclusion
Technology Fund (FITF).
The objectives of the FIF is to support "developmental and
promotional activities"
with a view of securing greater financial inclusion, particularly
among weaker
sections, low-income groups and in under developed regions and
hitherto unbanked
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areas.
Current banking infrastructure in rural India relies on the manual
delivery of
services. This presents a massive hurdle in reaching out to the
sheer number and
geographical spread of the financially underserved population. In
matching the
FIF with the Financial Inclusion Technology Fund (FITF), the
government has
given equal importance to the development of technology that
can provide
scalable and sustainable solutions for inclusive growth.
Specifically, the objectives of FITF are to enhance investment in
Information and
Communications Technology (ICT) aimed at stimulating research
and technology
innovation in the area of financial inclusion, increase the adoption
of technology
among financial services providers and users, and encourage an
environment of
innovation and cooperation among stakeholders.
The government has also set up a Committee on Financial
Inclusion under the
chairmanship of the ex-governor of the Reserve Bank of India
(RBI), Dr. C
Rangarajan, to study the pattern of exclusion, identify barriers,
review
international experience and provide recommendations for
achieving the
objectives of financial inclusion.
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Indias Socio-Economic Landscape

In the Index of Financial Inclusion (IFI) prepared by the Indian
Council for
Research on International Economic Relations (ICRIER), India has
been placed
50th position in the list of 100 countries. The Index of Financial
Inclusion, which
measures the availability and usage of banking services, is based
on indicators
like the number of bank accounts per 1,000 adults, number of
ATMs and bank
branches per million people and the amount of bank credits and
deposits.
While economic growth in India has benefited a growing middle
class, it has also
created great disparities between urban and rural areas,
prosperous and lagging
states, and between skilled and low-skilled workers. Poverty is
fuelled by a lack of
access to social benefits, productive assets and financial
resources. High levels of
illiteracy, inadequate healthcare and extremely limited access to
social services
only aggravate the situation.
About three-quarters of Indias population in poverty live in rural
areas and are
mainly dependent on agriculture. Indeed, agriculture employs a
full 65 percent of
Indias population, but contributes only 22 percent of GDP.
Typically, small and
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marginal farmers, unable to access financial loans to grow their

businesses, have
been forced to get loans from local agents at extremely high
interest rates of above 40 percent per annum.
Agriculture employs large sections of the populace that is semiskilled and semi-literate and at times unskilled and illiterate.
Rural, semi-urban and urban slums have a similar nature of
human resources available.
Urban India
World Bank data shows that a third of Indias populace lives in
towns and cities
and generates about 90 percent of the governments revenues
and two-thirds of
GDP. Migration from rural to urban India stands at 30 percent.
In India, a quarter of the urban population lives in slums. In
Mumbai, that figure
rises to half of its 13.6 million people. It is not surprising that the
highest
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concentrations of un-banked populations in urban areas are found

in slums 6 .
According to United Nations statistics division, 55.5 percent of
countrys
population in 2001 was living in slums. At present, migrant
unskilled labour forms
the biggest fraction of the urban slum population. Poor
infrastructure, absence of
financial network for urban poor, absence of credit rating and
financial history and absence of financial knowledge deprives
slum-dwellers of formal sources of credit
Rural India
About 70 percent of the population (770 million people) lives in
villages, a
fraction lower as compared to the post independence (in 1947)
figure of 75
percent. The vast majority of this group a full 65 percent of the
population is
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employed in agriculture. For financial inclusion policy makers, this

fact
emphasizes the importance of financial facilities being made
available to the
unorganised primary sector, particularly agriculture and agrobased industries.
Small investments such as seeds, fertilizers, pesticides create
demand for microcredit for small and medium sized farmer
households.
Non-farming households dependent on unskilled activities,
including landless
labour, construction workers and farm product processing
workers, are also
underserved by formal sources of finance due to low income. The
Report of the
Committee on Financial Inclusion (January 2008) stated that 72.7
percent of
Indias 89.3 million farmer households are excluded from formal
sources of
finance.
Un-banked unbankable population

Two-fifths (41.6 percent) of Indias population live on less than
US$1.25 a day.
This section of underserved population needs social improvement
and attention to
basic needs such as health, education and housing amongst
others through
government grants. Social and economic development can be
brought about by
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creating opportunities such as employment for the unskilled

masses, developing
work skills and providing a stable economical environment. For
this group, the
unbanked unbankable, economic development follows social
development. Once
they are socially and economically stable, financial literacy,
formal sources of
microfinance and appropriate delivery channels can aid inclusive
economic
growth.
Unbanked
U
UnbankedB ankable
Need Social development
to financial services
through,
through,
Government grants
Transaction (Deposit,
Savings, etc)
Social benefits such as health,
Micro finance
education, etc
Insurance
nbankable
Need access
Banking
Employment
Micro Credit /
Micro
Multiple
product deliver
Platform
Page | 9
FINANCIAL INCLUSION
FINANCIAL
UNDERSERVED
Underbanked bankable population

The section of Indian society just above the poverty line (living on
between
US$1.25 and US$2.00 a day) also requires social development
and strong
government support.
But this group, reckoned to number 370 million, is in a better
position to benefit
from economic stability and improve their socio-economic
condition.
Access to products such as no-frills accounts, micro-insurance,
government
Page | 10
benefits, micro-credits, crop loans and microfinance for microenterprises

encourage better management of funds and provide opportunities
for financial
stability and growth.
This section of society can be regarded as the underbanked
bankable
Financial Inclusion Lifecycle

The first step of Financial Inclusion is to educate customers and
open an account.
However, merely opening a bank account for a poor individual is
not financial
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inclusion. This approach generally results in an inactive account

or, at best, a
repository for government benefits.
A three-step approach (see Chart 4a) is required to bring
financially underserved
individuals into a financially inclusive society. After improving
financial literacy
and opening an account of some form, it is usage of that account,
linkage with
other financial services and access to all the financial instruments
that are
required to complete the financial inclusion lifecycle.
Step 1: Financial Literacy
To begin the financial inclusion process, one needs to understand
financial
products, usage, operation and management of accounts.
As defined by the Reserve Bank of India (RBI), financial education
is "the process
by
which
financial
consumers/investors
improve
their
understanding of financial
products, concepts and risks and, through information, instruction
and/or
objective advice, develop the skills and confidence to become
more aware of financial risks and opportunities, to make informed
choices, to know where to go
for help, and to take other effective actions to improve their
financial well-being."
Efforts for financial literacy can be driven through microfinance
institutions (MFIs),
self-help groups (SHGs), cooperative and rural banks.
Collaboration between
these parties would accelerate results.
Step 2: Opening a Bank Account
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Opening a bank account is the second step towards financial

inclusion. It provides
access to financial facilities for the financially underserved
through formal sources
of banking. Financial services providers, technology service
providers and
regulators are the functioning participants in the system.
As a major initiative to promote financial inclusion, the RBI has
directed banks to
introduce a basic no frills banking account with either zero or
very low minimum
balances to better meet the needs of the poor. The RBI has also
eased 'know your
customer' (KYC) norms to minimize the procedural obstacles of
opening a bank
account.
Step 3: Delivering Financial services
The cost of delivery of service is considered to be the bottleneck
in the value
chain because, for the very consumer, anything but very low
transaction costs are
not feasible.
Currently, the favored delivery channel for microfinance and
microcredit is via the
business correspondent (BC) model, whereby an agent (who may
or may not be a
direct employee of the financial institution) personally travels
within a wide
geographical area to enroll customers, delivers loans, and collects
repayments.
The doorstep banking model has obvious restrictions of scale as
well as security.
Agents may abscond with their clients funds or may themselves
be the target of
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thieves.
Conventional delivery model
Technology can improve conventional delivery channels such as
the BC model by
adding new levels of security, speeding up enrolment procedures
or ensuring
accuracy. Used in this way, technology offers conventional models
the chance to
increase scale, though to a limited degree. A conventional BC
model will always
be restricted by the amount of ground the agent can physically
cover.
Technology-enabled delivery model
Alternatively, technology can actually become the direct delivery
channel. Selfservice
technology, in particular, has already achieved this in the broader
financial industry, through ATMs, the internet and user-driven
mobile phone
banking.
With policy support, self-service technology can provide a feasible
platform for
the delivery of financial services to the financially underserved
population.
As well as technology providers, the other participants in this third
step are the
financial services providers.
object of financial inclusion

The objective of Financial Inclusion is to extend financial services
to the large hitherto un-served population of the country to unlock
its growth potential. In addition, it strives towards a more
Page | 14
inclusive growth by making financing available to the poor in

particular.
Position of households availing banking services:
As per Census 2001
As per Census 2011
Househo
lds
Total
number
of
househo
lds
Total number of
households
Perce
nt
Number
households
availing
banking
services
of
Page | 15
Numb
er
Perce
nt
Rura
l
138,271,
559
41,639,9
49
30.
1
167,826,7
30
91,369,8
05
Page | 16
54.
4
Urba
n
53,692,3
76
26,590,6
93
49.
5
78,865,9
37
53,444,9
83
67.
8
Tota
l
Page | 17
191,963,
935
68,230,
642
35.
5
246,692,
667
144,814,
788
58.
7
Expansion of Banking Infrastructure: As per Census 2011,

58.7% households are availing banking services in the country.
There are 102,343 branches of Scheduled Commercial Banks
(SCBs) in the country, out of which 37,953 (37%) bank branches
are in the rural areas and 27,219 (26%) in semi-urban areas,
constituting 63 per cent of the total numbers of branches in semiurban and rural areas of the country. However, a significant
proportion of the households, especially in rural areas, are still
outside the formal fold of the banking system. To extend the
reach of banking to those outside the formal banking system,
Government and Reserve Bank of India (RBI) are taking various
initiatives from time to time some of which are enumerated
below:-
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(a) Opening of Bank Branches: Government had issued

detailed strategy and guidelines on Financial Inclusion in October
2011, advising banks to open branches in all habitations of 5,000
or more population in under-banked districts and 10,000 or more
population in other districts. Out of 3,925 such identified villages /
habitations, branches have been opened in 3,402 villages/
habitations (including 2,121 Ultra Small Branches) by end of April,
2013.
b) Each household to have atleast one bank account: Banks
have been advised to ensure service area bank in rural areas and
banks assigned the responsibility in specific wards in urban area
to ensure that every household has at least one bank account.
(c) Business Correspondent Model: With the objective of
ensuring greater financial inclusion and increasing the outreach of
the banking sector, banks were permitted by RBI in 2006 to use
the services of intermediaries in providing financial and banking
services through the use of Business Facilitators (BFs) and
Business Correspondents (BCs).
A USB would comprise of a small area of 100-200 sq. feet where
the officer designated by the bank would be available with a laptop on pre-determined days. While the cash services would be
offered by the BCAs, the bank officer would offer other services,
undertake field verification and follow up the banking
transactions. The periodicity and duration of visits can be
progressively enhanced depending upon business potential in the
area. A total of over 50,000 USBs have been set up in the country
by March, 2013.
(f) Banking Facilities in Unbanked Blocks : All the 129
unbanked blocks (91 in North East States and 38 in other States)
identified in the country in July 2009, had been provided with
banking facilities by March 2012, either through Brick and Mortar
Page | 19
Branch or Business Correspondents or Mobile van. As a next step

it has been advised to cover all those blocks with BCA and Ultra
Small Branch which have so far been covered by mobile van only.
(g) USSD Based Mobile Banking : The Department through
National Payments Corporation of India (NPCI) worked upon a
Common USSD Platform for all Banks and Telcos who wish to
offer the facility of Mobile Banking using Unstructured
Supplementary Service Data (USSD) based Mobile Banking. The
Department helped NPCI to get a common USSD Code *99# for all
Telcos. More than 20 Banks have joined the National Uniform
USSD Platform (NUUP) of NPCI and the product has been launched
by NPCI with BSNL and MTNL. Other Telcos are likely to join in the
near future.
USSD based Mobile Banking offers basic Banking facilities like
Money Transfer, Bill Payments, Balance Enquiries, Merchant
payments etc. on a simple GSM based Mobile phone, without the
need to download application on a Phone as required at present in
the IMPS based Mobile Banking.
Expansion of ATM network : Pursuant to Budget
announcement 2013-14, Banks are required to ensure an onsite
ATM in all the branches. Out of 34,668 onsite ATMs thus identified
to be installed by Public Sector Banks, 1,097 ATMs have been
installed by end of April, 2013
FINANCIAL INCLUSION THROUGH FINANCIAL

LITERACY
Page | 20
Although the concept is defined usually at convenience by

stakeholders, but its broad contours remain same, that is the
ability to take informed deisions, make choices leading to
empowerment.
OECD defines financial literacy as 'the process by which financial
consumers/investors improve their understanding of financial
products, concepts and risks, and through information, instruction
and/or objective advice, develop the skills and confidence to
become more aware of financial risks and opportunities, to make
informed choices, to know where to go for help, and to take other
effective actions to improve their financial well-being'.
There are good intentions and genuine concerns about vast
groups of population still unaware of institutional banking
concepts and the know-how to make informed decisions. This
makes them vulnerable to exclusion from mainstream socioeconomic framework. Financial literacy is an engine that will aid
achieving comprehensive financial inclusion and hence financial
freedom.
Access to financial services allows the poor to save money
outside the house safely, prevents concentration of economic
power with a few individuals and helps in mitigating the risks that
poor face as a result of economic shocks. Hence, providing access
to financial services is increasingly becoming an area of concern
for the policymakers for the obvious reason that it has far
reaching economic and social implications. There is a need to
perceive financial inclusion as a quasi public good.
Page | 21
STEPS TAKEN BY RESERVE BANK OF INDIA (RBI)

INCLUDES:
No-Frill accounts: In November 2005, RBI asked banks to
offer no-frills savings account which enables excluded people
to open a savings account. Normally, the savings account
requires people to maintain a minimum balance and most
banks now even offer various facilities with the same. Nofrills account requires no (or negligible) balance and is
without any other facilities leading to lower costs both for
the bank and the individual. The number of no-frills account
has increased mainly in public sector banks from about 0.4
million to 6 million between March 2006 and March 2007.
The number of No-frill accounts in private sector banks also
increased from 0.2 million to 1 million in the same period. No
significant increases were there in foreign banks. This is
understandably so as majority of rural and sub-urban bank
offices are in public sector banks.
Usage of Regional language: The Banks were required to
provide all the material related to opening accounts,
disclosures etc in the regional languages.
Simple KYC Norms: In order to ensure that persons
belonging to low income group both in urban and rural areas
do not face difficulty in opening the bank accounts due to
the procedural hassles, the KYC procedure for opening
accounts has been simplified for those persons who intend to
keep balances not exceeding rupees fifty thousand (Rs.
50,000/-) in all their accounts taken together and the total
credit in all the accounts taken together is not expected to
exceed rupees one lakh (Rs.1,00,000/-) in a year.
Easier Credit facilities: Banks have been asked to consider
introducing General purpose Credit Card (GCC) facility up to
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Rs. 25,000/- at their rural and semi urban branches. GCC is

in the nature of revolving credit entitling the holder to
withdraw upto the limit sanctioned. The limit for the purpose
can be set Based on assessment of household cash flows,
the limits are sanctioned without insistence on security or
purpose. The Interest rate on the facility is completely
deregulated. A simplified mechanism for one-time
settlement of overdue loans up to Rs.25,000/- has been
suggested for adoption. Banks have been specifically
advised that borrowers with loans settled under the one time
settlement scheme will be eligible to re-access the formal
financial system for fresh credit.
Other rural intermediaries: Banks were permitted in January
2006, to use other rural organisations like Nongovernmental organizations, self-help groups, micro-finance
institutions etc for furthering the cause of financial inclusion.
Using Information Technology: A few Pilot projects have
been initiated to test how technology can be used to
increase financial inclusion. Few important measures are:
Smart cards for opening bank accounts with biometric
identification;
Link to mobile or hand held connectivity devices ensure that the
transactions are recorded in the bank's books on real time basis.
Some State Governments are routing social security payments
as also payments under the National Rural Employment
Guarantee Scheme through such smart cards. The same delivery
channel can be used to provide other financial services like low
cost remittances and insurance.
The use of IT also enables banks to handle the enormous
increase in the volume of transactions for millions of households
for processing, credit scoring, credit record and follow up.
Financial Education: RBI has taken number of measures
to increase financial literacy in the country. It has set up a
multilingual website in 13 languages explaining about
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banking, money etc. It has started putting up comic strips to

explain various difficult subjects like importance of saving,
RBI's functions etc. These comics explain myriad and
complex concepts in an entertaining manner.
RBI in collaboration with Organization of Economic Development
(OECD) has issued a concept paper, promoted a financial literacy
website, and set up credit counseling centers to provide advice on
personal finance. RBIs Project Financial Literacy aims at
disseminating information about the central bank and basic
banking concepts through various media like films, games,
cartoons and comic books, and essay writing competitions,
specifically target school and college-going students. Various
corporate banking organizations have also promoted financial
literacy drive, mostly as part of their Corporate Social
Responsibility.
A notable achievement has been made by Kerala by achieving
total financial inclusion. At least one member of every household
of the state has a bank account. Kerala now tops the Index of
Financial Inclusion (IFI) prepared by RBI.
Page | 24
RBI's Policy Initiatives to foster Financial Inclusion

Let me now turn to some of the supporting policy initiatives that
RBI has taken to further the Financial Inclusion in the country.
(a) Reach
(i) Branch expansion in rural areas
Branch authorisation has been relaxed to the extent that
banks do not require prior permission to open branches in
centres with population less than 1 lakh, which is subject to
reporting. To further step up the opening of branches in rural
areas, banks have been mandated to open at least 25 per
cent of their new branches in unbanked rural centres.
In the Annual Policy Statement for 2013-14, banks have been
advised to consider frontloading (prioritizing) the opening of
branches in unbanked rural centres over a three year cycle
co-terminus with their FIPs. This is expected to facilitate the
branch expansion in unbanked rural centres.
(ii) Agent Banking - Business Correspondent/ Business
Facilitator Model
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In January 2006, the Reserve Bank permitted banks to utilise

the services of intermediaries in providing banking services
through the use of business facilitators and business
correspondents. The BC model allows banks to do cash in cash out transactions at a location much closer to the rural
population, thus addressing the last mile problem.
(iii) Combination of Branch and BC Structure to deliver
Financial Inclusion
The idea is to have a combination of physical branch
network and BCs for extending financial inclusion, especially
in geographically dispersed areas. To ensure increased
banking penetration and control over operations of BCs,
banks have been advised to establish low cost branches in
the form of intermediate brick and mortar structures in rural
centres between the present base branch and BC locations,
so as to provide support to a cluster of BCs (about 8-10 BCs)
at a reasonable distance of about 3-4 kilometers.
(b) Access
Relaxed KYC norms
Know Your Customer (KYC) requirements have been
simplified to such an extent that small accounts can be
opened with self certification in the presence of bank
officials.
RBI has allowed Aadhaar to be used as one of the eligible
documents for meeting the KYC requirement for opening a
bank account.
Roadmap for Banking Services in unbanked Villages
In the first phase, banks were advised to draw up a
roadmap for providing banking services in every village
having a population of over 2,000 by March
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2010. Banks have successfully met this target and have

covered 74398 unbanked villages.
In the second phase, Roadmap has been prepared for
covering remaining unbanked villages i.e. with population
less than 2000 in a time bound manner. About 4,90,000
unbanked villages with less than 2000 population across the
country have been identified and allotted to various banks.
The idea behind allocating villages to banks was to ensure
availability of at least one banking outlet in each village.
(c) Products
Bouquet of Financial services
In order to ensure that all the financial needs of the customers
are met, we have advised banks to offer a minimum of four
basic products, viz.
A savings cum overdraft account
A pure savings account, ideally a recurring or variable
recurring deposit
A remittance product to facilitate EBT and other remittances,
and
Entrepreneurial credit products like a General Purpose Credit
Card (GCC) or a Kisan Credit Card (KCC)
(d) Transactions
Direct Benefit Transfer
The recent introduction of direct benefit transfer, leveraging
the Aadhaar platform, will help facilitate delivery of social
welfare benefits by direct credit to the bank accounts of
beneficiaries. The government, in future, has plans to route all
social security payments through the banking network, using
the Aadhaar based platform as a unique identifier of
beneficiaries. In order to ensure smooth roll out of the
Page | 27
Governments Direct Benefit Transfer (DBT) initiative, banks

have been advised to:
o Open accounts of all eligible individuals in camp mode with
the support of local Government authorities.
o Seed the existing and new accounts with Aadhaar numbers.
o Put in place an effective mechanism to monitor and review
the progress in implementation of DBT.
Tracking Financial Inclusion through Budget

Analysis
While financial inclusion is an important issue, it may also be
interesting to assess whether such inclusion as earmarked in
policies are actually reaching the common beneficiaries. Since the
1990s, there has been serious efforts both in the government
agencies and in the civil society to monitor the fund flow process
Page | 28
and to track the outcome of public expenditure through budget

tracking. Organisations like International Budget Partnership (IBP)
are undertaking global surveys in more than 100 countries to
study the openness (transparency) in budget making process.
There are various tools used by different civil society groups to
track public expenditure. Such tools may include performance
monitoring of public services, social audit and public
accountability surveys. In India, the institutionalisation of Right to
information (RTI) has been a supporting tool for activists and
citizen groups for budget tracking and advocacy for social
inclusion.
This year in budget analysis was as fallows:To provide all households in the country with banking services, a
time bound programme would be launched as Financial Inclusion
Mission on 15 August this year. It would particularly focus to
empower the weaker sections of the society, including women,
small and marginal farmers and labourers. Two bank accounts in
each household are proposed to be opened which will also be
eligible for credit.
FINANCIAL INCLUSION BY GOVERNMENT

Financial Inclusion through Microfinance Services:
Microfinance has been recognized as an important tool in
connecting the unbanked population to mainstream finance. The
Page | 29
clearance of the draft document of the Microfinance Institutions

(Development and Regulation) Bill by the Union Cabinet is an
indication of the Governments faith in the sector3.
The RBI and NABARD have supported the propagation of micro
finance considerably through the SHG-Bank Linkage Programme
(SBLP) and have designed incentives to support micro finance
institutions in forming Joint Liability Groups (JLGs). Commercial
Banks are incentivised to lend to Micro finance institutions (MFIs)
by placing MFIs under priority sector lending (PSL)4. PSL
requirements mandate banks to ensure that 40% of their
aggregate net banking credit goes to stipulated sectors that are
considered important to foster financial inclusion.
Self Help Group Bank Linkage Programme (SBLP): Designed
and developed by the NABARD to promote and link Self Help
Groups (SHGs) to banks in 1992, NABARD still supports this
initiative by refinancing and promoting stakeholders such as
banks, Non-Government Organizations (NGOs), and other
government agencies and departments5. As on March 2011,
NABARD has provided Rs. 25.45 billions to banks covering their
lending to SHGs. Around 4.82 million SHGs received loans from
banks with an outstanding amount of Rs 306.27 billion while 7.54
million SHGs have been linked to the banking system
Page | 30
600
500
400
Series 1
300
Series 2
200
100
0
2008
2009
2010
2011
Despite this growth in the number of SHGs being linked with

banks (as shown in Figure 1), it is reported that there is almost
no growth in loans in real terms as the average disbursed loan
per SHG has declined in real terms from Rs 84,500 in 2010 to Rs
81,000 in 2011. In addition, it is also reported that compared to
the previous year, the SBLP had underperformed during the year
2011-2012.
Induction of SHG-2: NABARD has recently acknowledged
SHGs inadequate outreach in many regions in recent years,
delays in opening of savings accounts and disbursement of
loans, and non-approval of repeat loans even when first loans are
repaid on time9. This has motivated NABARD to prepare a
strategy to revitalize the SHG movement leading with the
induction of SHG-2 model. While the primary function of the
SHG-2 model continues to be the promotion of savings-led credit
product, some additional features have been added such as:
Voluntary savings apart from compulsory savings
Allowing the sanction of a cash credit / overdraft system of
lending for SHGs for a longer operational tenure, and
Page | 31
Graduating selected members of the group that have

entrepreneurship potential into a joint liability groups for
borrowing larger amounts10
Women SHGs Development Fund: The Union Budget 20112012 has proposed to set up a Womens SHGs Development
Fund with a corpus of Rs. 500 crore. The GoI created this fund to
empower women and promote their SHGs and it is operated by
NABARD through its two major microfinance funds- Financial
Inclusion Fund (FIF) and the Financial Inclusion Technology Fund
(FITF)13.
The FIF primarily supports capacity building inputs to service
providers, resource centres, training institutes, financial
institutions as well as promoting and nurturing SHGs. This fund
will also support pilot projects for development of innovative
products, processes and prototypes for financial inclusion.
Likewise, FITF promotes technology innovation and solutions as
well as research relating to technological interventions for
financial inclusion.
Other
Government
promoted
initiatives:
Financial
inclusion being one of the components
Swarnjayanti Gram Swarozgar Yojana (SGSY): It is a
centrally sponsored scheme that follows the mechanism of
forming SHGs of rural poor households, providing capacity
building training and linking groups to banks. SGSY is primarily
designed to promote self-employment oriented income
generating activities for the Below Poverty Level (BPL)
households in rural areas.
Since the inception of this program in 1999, approximately 3.13
million groups have been formed. However, only 0.92 million
groups are reported to be having outstanding loans from banks
in March 200829. The loan size in the SGSY is reported to be
higher than normal SHGs but SGSY groups have been faring
poorly in repayment rates. It has been reported that nonperforming assets (NPAs) in SGSY loans are at 5.72 % compared
to NPAs of all groups of SHGs of 2.9 % 30. Even though some
Page | 32
improvements were seen during the year 2010-2011,31 banks

are still reluctant to lend to SGSY groups due to issues with
group quality and in certain cases, faulty selection of livelihood
activities such as cottage industries set up without ensuring a
market linkage to sell the products. .
In the mid-term appraisal of the eleventh five-year plan, the
Planning Commission has been critical of the performance of
SGSY32. The major problem identified in this report is that most
members of SGSY are engaged in activities with low productivity
and low returns due to lack of training and low usage of
technology. While nearly two thirds of the total funds were given
out as subsidies, only 6% of the total SGSY funds were utilized
for training and capacity building during the past decade33. The
Committee also criticized SGSYs low credit-subsidy ratio.
Although the target for credit under SGSY increased moderately,
the credit to subsidy ratio remained way below the target ratio of
3:1. The Committee explains that this is due to the failure to
strengthen the demand side of credit by improving the capacity
of the poor to absorb credit for income generating activities and
due to supply side failures as well. The Committee has also
criticized SGSYs uneven distribution of SHGs across regions,
particularly mentioning that the performance of SGSY was
unsatisfactory in states with high incidence of poverty due to
functionaries of District Rural Development Agencies (DRDAs),
Block Development Officers (BDOs) inadequate knowledge of
the program, and banks little interest in the initiatives.
Nevertheless, the SGSY program has been successful in Southern
states of Andhra Pradesh, Kerala and Tamil Nadu due to the
existence of organizations that promote formation of SHGs and
establish bank linkage. These organizations federate the SHGs
into effective self-governing organizations with a hierarchy of
appropriate functions. The robust network of SHGs and their
federations have enabled the groups to act as financial intermediaries and involve institutional partnerships with the
Page | 33
bankers. Based on the lessons of the implementation of the SGSY

model in the last decade, the GoI has restructured SGSY as the
National Rural Livelihood Mission, which was rolled out in 2010.
National Rural Livelihood Mission (NRLM): Established in
June 2010 by the Ministry of Rural Development (MoRD), GoI, it is
modeled on the current poverty alleviation program being
implemented in Andhra Pradesh under the name Indira Kranti
Patham (IKP).
The key strategies of NRLM34 are to
Implement the program with greater emphasis on federations
of SHGs
Provide flexibilities to states for designing specific action plans
for poverty alleviation,
Introduce interest subsidy for encouraging repayments of loans
and provide multiple doses of credit
Improve training and capacity building efforts by setting up
skill training institutes in each district
Facilitate market linkages and
Improve monitoring and evaluation process.
Even though NRLM indicates that there will be emphasis on
creation of federations of SHGs, the clear role for the federations
of SHGs as financial intermediaries has not been indicated.
The Mahatma Gandhi National Rural Employment
Guarantee Scheme (MGNREGS): This scheme aims to
enhance the livelihood of the rural people by guaranteeing at
least one hundred days of wage employment in a financial year
to a rural household whose adult members volunteer to do
unskilled manual work.35 As the payments are made through the
bank/post office accounts, in 2010-11, nearly 10 crore bank/post
office accounts have been opened36.
A CMF-IFMR study reports that the state government of Andhra
Pradesh has played a major role in increasing access to formal
savings accounts due to its concrete effort to deliver all wages
to participants in MGNREGS through formal saving accounts. This
Page | 34
policy has a substantial impact on access to saving accounts

because many MGNREGS participants lacked a formal savings
account prior to the adoption of the policy. The study also found
that vast majority of accounts (79%) were opened either to
receive government benefits or to increase the chances of
receiving a loan. This was prevalent in the case of post offices
where accounts were used to receive government benefits. This
has important implications, indicating that linking savings
accounts to those who want to receive payments may be a good
way to encourage financial inclusion and savings account usage.
Aadhaar- Unique Identification Authority of India (UIDAI) :
The GoI has embarked an initiative to provide an individual
identification number to every citizen of India and in 2009, it
established the UIDAI to issue these cards on behalf of the GoI.
This number provided by UIDAI will serve as a proof of identity
and address, anywhere in India37. The Aadhaar number will also
enable people to have access to services such as banking, mobile
phone connections and other government and non-government
services in due course. In addition, the UIDAI has introduced a
system in which the unbanked population will be able to open an
account during enrollment with Aadhaar without going to a bank.
The individual will be able to access such bank accounts through
a micro-ATM network with large geographic reach.38 Currently,
UIDAI is at an advanced stage of discussion with the RBI and
Department of Revenue for updating the banks KYC regulation to
include Aadhaar authentication39. If realized, this regulation can
equal Aadhaar to become equal to KYC, which could possibly ease
the account opening process without any need for physical
documentation as online authentication from UIDAI can meet the
requirements.
Page | 35
FINANCIAL INCLUSION PLAN BY BANKS

Financial Inclusion Plan 2010-13
We have encouraged banks to adopt a structured and planned
approach to financial inclusion with commitment at the highest
levels, through preparation of Board approved Financial Inclusion
Plans (FIPs). The first phase of FIPs was implemented over the
period 2010-2013. The Reserve Bank has sought to use the FIPs
as the basis for FI initiatives at the bank level. RBI has put in place
a structured, comprehensive monitoring mechanism for
evaluating banks performance against their FIP plans. Annual
Page | 36
review meetings are being held with CMDs of banks to ensure top
management support and commitment to the FI process.
What has been achieved so far?
15. A snapshot of the progress made by banks under the FIPs
(April 10 March 13) for key parameters, during the three year
period is as under:
Nearly 2, 68, 000 banking outlets have been set up in villages
as on March 13 as against 67,694 banking outlets in villages in
March 2010
About 7400 rural branches opened during this period
Nearly 109 million Basic Savings Bank Deposit Accounts
(BSBDAs) have been added, taking the total no. of BSBDAs to
182 million. Share of ICT based accounts have increased
substantially Percentage of ICT accounts to total BSBDAs has
increased from 25% in March 10 to 45% in March 13
With the addition of nearly 9.48 million farm sector
households during this period, 33.8 million households have
been provided with small entrepreneurial credit as at the end of
March 2013
With the addition of nearly 2.25 million non farm sector
households during this period, 3.6 million households have
been provided with small entrepreneurial credit as at the end of
March 2013.
About 4904 lakh transactions have been carried out in ICT
based accounts through BCs during the three year period
Page | 37
It is important to analyse this progress against the some

disconcerting trends that were noticed in the run up to the
structured Financial Inclusion initiatives that the banks launched
since 2010 onwards. First, the number of banked centres in the
country between 1991 and 2007 had actually come down (from
35236 to 34471). Second, the number of rural branches during
the same period had also declined significantly (from 35206 to
30409). Against this backdrop, the progress made during 2010-13
is certainly remarkable.
Financial Inclusion Plan 2013-16
In order to continue with the process of ensuring access to
banking services to the excluded, banks have now been advised
to draw up a fresh 3 year Financial Inclusion Plan for the period
2013-16. Banks have also been advised that the FIPs prepared by
them are disaggregated and percolated down up to the branch
level. The disaggregation of the plans is being done with a view to
ensure involvement of bank staff across the hierarchy, in the FI
efforts and also to ensure uniformity in the reporting structure
under the Financial Inclusion Plan. The focus is also now more on
the volume of transactions in new accounts opened as a part of
the financial inclusion drive.
Challenges and Way Forward
The current policy objective of inclusive growth with financial
stability cannot be achieved without ensuring universal financial
inclusion. Our experience suggests that the banks alone will not
be able to achieve this unless an entire support system partners
them in this mission. Only the support of policymakers,
regulators, governments, IT solution providers, media and the
public at large can bring about a decisive metamorphosis in our
journey towards universal financial inclusion.
19. Financial Inclusion of the unbanked masses is expected to
unleash the hugely untapped potential of the sections of the
society that constitute the bottom of the pyramid. However, in
pursuing the FI mission, the normal banking model has been
Page | 38
found wanting in terms of cost, scalability, convenience,

reliability, flexibility and continuity. To ensure that the banks give
adequate attention to financial inclusion, they must view this as a
viable business proposition rather than as a corporate social
responsibility or a regulatory obligation. For the business to
remain viable it would be important to focus on increasing usage
of existing banking infrastructure which would Financial
Inclusion Plan of banks
Page | 39
FINANCIAL INSTITUTIONS AND MARKET

Financial inclusion implies delivery of financial services at an
affordable cost to the vast sections of disadvantaged and low
income groups. Unrestrained access to public goods and services
is the sine qua non of an open and efficient society. 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 approach to Financial Inclusion in developing countries
such India is thus somewhat different from the developed
countries. In the latter, the focus is on the relatively small share of
population not having access to banks or the formal payments
system. Whereas in India, we are looking at the majority who are
excluded. Financial can be thought of in two ways. One is
exclusion from the payments system-i.e., not having access to
bank account. The second type of excluded to approach informal
and exploitative markets. After nationalization of major banks in
India in 1969, there was a significant expansion of branch network
to unbanked areas and stepping up of lending to agriculture,
small industry and business. More recently, the focus is on
establishing the basic right of every person to have access to
affordable basic banking services.
One common measure of financial inclusion is the
percentage of adult population having bank accounts. Going by
the available data on the number of savings bank accounts and
assuming that one person has only on account, (which
Page | 40
assumption may not be correct as many persons could have more

than one bank account) we found that on all Indian basis 59
percent of adult population in the country have bank accounts in
other words 41 percent of the population is unbanked. In rural
areas the coverage is 39 percent against 60 percent in urban
areas. The unbanked population is higher in the north eastern and
eastern regions. The extent of exclusion from credit markets is
much more, as number of loan accounts constituted only 14
percent of adult population. In rural areas, the coverage is 9.5
percent against 14 percent in urban areas. Regional differences
are significant with the credit coverage at 25 percent for the
southern region and as low as 7, 8 and 9 percent, respectively, in
north eastern, eastern and central regions (RBI, Bulletin, July
2007)
Initiative for financial inclusion

In November 2005, banks were advised to make available a
basic banking no-frills account with low or nil minimum
balances as well as charges to expand the outreach of such
accounts to vast sections of the population.
Banks are required to make available all printed material
used by retail customers in the concerned regional language.
In order to ensure that persons belonging to low income
group, both in urban and rural areas do not encounter
difficulties in opening bank accounts, the know your
customer (KYC) procedures for opening accounts has been
simplified for those persons with balances not exceeding Rs.
50000 and credits in the accounts not exceeding Rs. 100000
in a year. The simplified procedure allows introduction by a
customer on whom full KYC drill has been followed.
Banks has been asked to consider introduction of the general
purpose credit card (GCC) facility up to Rs.25000 at their
Page | 41
rural and semi urban branches. The credit facility is in the

nature of revolving credit entitling the holder to withdraw
upto the limit sanctioned. Based on assessment of household
cash flows, the limits are sanctioned without insistence on
security or purpose. Interest rate on the facility is completely
deregulated.
A simplified mechanism for one-time settlement of overdue
loans up to Rs 25000 has been suggested for adoption.
Banks have been specifically advised that borrowers with
loan settled under one time settlement scheme will be
eligible to re-access the formal financial system for fresh
credit.
In January 2006, banks were permitted to utilize the service
of non-governmental organization (NGOs/SHGs), microfinance institutions and other civil society organizations as
intermediaries in sponde (BC) models. The BC model allows
banks to do cash in-cash out transactions at the locations
of the BC and allows branchless banking. Other measures
include setting up pilots for credit counseling and financial
educations. A multilingual website in 13 Indian languages on
all matters concerning banking and the common person has
been launched by the reserve bank on June 18, 2007.
Page | 42
FINANCIAL INCLUSION BUSINESS

CORRESPONDENTS/BUSINESS FACILITATORS
MODEL.
1.)
Progress so far and challenges ahead:-
Banking services are in nature of public goods and services

is the sine qua non of an open and efficient society. And
certainly, a well functioning financial system empowers
individuals, facilitates better integration with the economy,
actively contributes to development and affords protection
against economic shocks. Inclusive finance- through secure
savings, appropriately priced credit and insurance products,
and payment services- helps vulnerable group to increase
income, acquire capital, manage risk and work their way out
of poverty.
Thus, at the core of financial inclusion is financial freedom,
that is, a sense of financial security equipped with the set of
skills and knowledge that helps to make informed and
effective choices leading to financial well-being.
Page | 43
Apart from the regular form of financial intermediation,

according to the committee of financial inclusion it (financial
inclusion) may include a basic no frills banking account for
making and receiving payments, a saving product suited to
the pattern of cash flows of a poor household, money
transfer facilities, small loans and overdrafts for productive,
personal and other purpose, insurance (life and non-life) etc.
while financial inclusion, in narrow sense, may be achieved
to some extent by offering any one of these services, the
objective of comprehensive financial inclusion would be
provide a holistic set of services encompassing all of the
above.
In January 2006, Reserve Bank of India (RBI) with the
objective of ensuring greater financial inclusion and
increasing the outreach of the banking sector decided in
public interest to enable banks to use the services of
intermediaries in providing financial and banking services
thought the use of business facilitators
and business
correspondent (BF/BC).
The guidelines which initially allowed MFts, NGOs and
other Civil Society Organizations (CSOs) to function as BCs /
BFs were revised further to more entities including corporate
entities having their Customer Service points (CSps) and
Business Correspondent Agents (BCAs) in the villages.
Presently, any individual can act as BC provided the bank is
satisfied and due diligence is done.
For, notwithstanding several bold and ambitious
attempts in the past - creation of State Bank of India (1955),
nationalization of banks (1969_1980), introduction of Lead
Bank Scheme (1970), formation of Regional Rural Banks
(1975), Self Help Group (SHG), Bank Linkage programme
Page | 44
(1992) being some of the examples - access to financial

services and products remained largely restricted to the
upper and middle income groups thus leaving vast sections
of the society outside the ambit of formal financial system.
The reason being absence of (a) viable delivery mechanism
while serving the poor and people living in sparsely
populated, far flung areas; (b) suitable technology; and (c)
lack of a business model.
Nearly fifty years after the first ambitious attempt,
some of the statistics related to availability of formal
financial services in lndia are staggering : (1) almost half the
country is unbanked; (2) only 55% of the population has
deposit accounts and 9% have credit accounts with banks;
(3) 145 million househotds (and not just farm households)
excluded from banking; (4) one bank branch per 14,000
people; (5) only a Iittle less lhan 2Oo/o of the population has
any kind of life insurance and 9.6% has non-life insurance
cover; (6)just 18% has debit cards and less than 2Y"
hascredit cards.
Despite
expansion
of
bank
branches
post
nationalization, the bank branches of commercial banks and
Regional Rural Banks (RRBs) till recenfly stood at 48,000 in a
country of 6 lakh villages. Thus,one branch is serving 12.5
villages.
Two years after RBI relaxed norms for outsourcing
banking services, in January 2008, the Committee on
Financial lncluslon appointed by Ministry of Finance,
Government of lndia with Dr. C. Rangarajan as its Chairman
submitted its report.
Page | 45
Financial Inclusion Index

On June 25, 2013, CRISIL, India's leading credit rating and
research company launched an index to measure the status of
financial inclusion in India. The index- Inclusix- along with a
report,[16] was released by the Finance Minister of India, P.
Chidambaram[17] at a widely covered program at New Delhi.
CRISIL Inclusix is a one-of-its-kind tool to measure the extent of
inclusion in India, right down to each of the 632 districts. CRISIL
Inclusix is a relative index on a scale of 0 to 100, and combines
three critical parameters of basic banking services branch
penetration, deposit penetration, and credit penetration into
one metric. The report highlights many hitherto unknown facets of
inclusion in India. It contains the first regional, state-wise, and
Page | 46
district-wise assessments of financial inclusion ever published,

and the first analysis of trends in inclusion over a three-year
timeframe. Some key conclusions from the study are: [18]
The all-India CRISIL Inclusix score of 40.1 is low, though
there are clear signs of progress this score has improved
from 35.4 in 2009.
Deposit penetration is the key driver of financial
inclusion the number of savings accounts (624 million), is
almost four times the number of loan accounts (160 million).
618 out of 632 districts reported an improvement in their
scores during 2009-2011.
The top three states and Union Territories are Puducherry,
Chandigarh, and Kerala; the top three districts are
Pathanamthitta
(Kerala),
Karaikal
(Puducherry),
and
Thiruvananthapuram (Kerala).
A Feasible Solution for Financial Inclusion

Financial Instruments
One of the key reasons for the failure of Regional Rural Banks post
independence
was the absence of customised products for the marginal poor.
The banks failed to
measure the affordability of services for the poor classes. The
succes of microfinance
Page | 47
institutions (MFIs) and self-help groups (SHGs) in the last decade

has largely been
due to the customization of financial products for the financially
underserved
population.
There are about 3.37 million SHGs and about 750 registered MFIs
in India. The
ecosystem built by MFIs and SHGs can be termed as
microbanking with services
designed for small (low value) transactions.
No-frills savings account
In a no-frills savings account an account holder is allowed to
have a very low or
zero balance. He is also given five to ten free ATM-based
transactions each
month. The Committee on Financial Inclusion has set Indian banks
a compulsory
target of opening 250 no-frills accounts per branch per year in
rural and semiurban
India.
In just two years, the number of no-frills accounts opened has
increased from
less than half a million in 2006 to 15 million in 2008. Though the
numbers are
impressive, the RBI has said that most accounts have remained
unused due to
access constraints, financial illiteracy and other factors. A greater
solution for
access to the account is needed; otherwise, opening a no-frills
account would
merely be a target than a tool for Financial Inclusion. A multiple
product access
platform supported by formal education and easy-to-use
technology, well spread
Page | 48
self-service kiosks and a collaborative model backed with MFIs

and SHGs can
address this issue.
Bank Category
March 31, 2006 March 31, 2007 March 31, 2008
Public
sector 332, 878
banks
Private
sector 156,388
banks
Foreign banks
231
5,865,419
13,925,674
856,495
1,879,073
2,753
33,115
Total
6,724,667
15,837,862
Major
Challenge
Adressed
Affordability
of
account:
Zero/negligible
balance
required
489,497
Limitations
Solution
Roadmap
Dormant Account: Negligible

Microbanking,
frequency of access in most financial
cases
literacy campaigns
Absence of Linkages: Absence Self-service
of
solutions,
links with other financial services Business
Page | 49
for operating Absence of Credit scores:

Correspondent
account
Absence of credit rating system
(BC) Models
for
further financial services
Microfinance/Microcredit
There are about 750 MFIs registered with the Reserve Bank of
India (RBI),
serving a client base of 10.5 million of which, ninety percent of
this client base is
served by the top 40 MFIs. This includes SKS Micro finance Pvt.
ltd, Bandhan,
Microcredit foundation of India, Saadhan Microfin society and
Grameen koota
amongst others.
Microcredit creates an opportunity for a source of income for the
lending institute
and for the borrower a prospect for alleviation of his poor financial
situation.
Microcredit is the basis for the formation of various non-banking
financial
companies (NBFCs) including Bangladeshs oft-cited Grameen
Bank and a tool for
the permanent eradication of financial exclusion. Microfinance
institutions operate
in small volumes and have deeper penetration than banks due to
local networks
knowledge and presence, adoption of better delivery models and
optimum
technology usage. Due to the small enterprise size, flexibility in
their operations
Page | 50
and a profit-oriented approach, MFIs have shown better results

than banks in
reaching out to the financially underserved population and
providing access to
financial services.
Major
Challenge
Adressed
Limitations
Solution Roadmap
Affordabilit Absence of Credit

y of Loan:
history: Absence/Improper
Microfinance repayment record
and
microcredit
Cost of Service:
size
of transaction
Self-service Solutions,
Joint Liability Groups
(JLG)
and Self Help Groups
(SHG)
Micro Shared
Selfservice
solutions, BC
model
service,
Kisan Credit Cards (KCC)

The Kisan Credit Card (KCC) scheme is a form of cash credit
facility for farmers
and was introduced in 1998-99 by the Government of India, the
National Bank for
Agriculture and Rural Development (NABARD) and the RBI.
A pioneering credit delivery mechanism, KCC is intended to
provide adequate and
timely support from the banking system to farmers for their
cultivation needs,
including the purchase of seeds, fertilizers, pesticides and
livestock in a flexible
Page | 51
and cost-effective manner.

According to the Report on Trends and Progress of Banking in
India for the year
2006-07 released by the RBI, a total of 66.55 million Kisan Credit
Cards had been
issued by the end of 2007.
Major
Challeng
e
Adresse
d
Credit
facility:
Spontane
ous credit
Limitations
Absence of track record,

cumbersome process
Solution
Roadmap
Self-service kiosks,
data
network and SHGs
Unavailability for poor

farmers: Available exclusively
for privileged class of farmers
Innovative
products,
selfservice
solutions, shared
Ignorance: Facility virtually
service outlets, BC
ignores landless and marginal
and
farmers
as
well
as
flexible
credit
noncultivating
policy
households
Remittance
Indian agriculture is characterized by seasonal rain (monsoon),
seasonal crop
patterns and labour-intensive, non-mechanised cultivation
techniques. Wool work,
agro-based and several small scale industries in rural and semiurban India are
Page | 52
mostly seasonal, dependent on crops or festive seasons (such as

the production
of firecrackers used in Diwali festival in India).
As a result there is a large migrant population moving between
rural and urban
centers in search of (mostly unskilled) jobs. Earnings from this
section of the
population (put at 30 percent or 330 million people by the latest
Indian census)
need to be regularly remitted to their families back in their
villages.
Today, India Posts money order service is the biggest remittance
platform,
thanks to its vast network of 155,000 branches. As well as being
the biggest, it is
widely considered to be the costliest, charging five percent of the
funds
transferred. In 2005-06, India Post handled 96 million money
orders worth $1.8
billion.
Western Union Money Transfer (WUMT) channeled domestic
transactions in India
worth $937 million in 2006-07. According to one estimate, the
total market for
domestic Indian remittance is about US$6.5 to US$10 billion.
Many Indians, across a broad range of income groups, travel
overseas for work.
The RBI estimates that India received $26 billion in overseas
remittance in 200607, more than any other country.
WUMT intends to capture the largest shares of both the foreign
inward and
Page | 53
domestic remittance markets. It has grown its agent base more

than 13 times
since 2001 and now has 40,000 agents across India. Since mid2007, WUMT in
Major
Challenge
Adressed
Limitations
Solution Roadmap
Remittanc
e of cash
for
migrant
populace
Higher cost of remittance

through the widely used
money
order
service
(postal network) in India
Self-service
kiosks
that
provide access to
multiple products
through the same
platform.
Usage of informal and

illegal
delivery channels leading
to
exploitation
Limited
remittance
platform.
access
Collaborative model
of
banks,
MFIs
and
shared
access can provide
remittance platform
to
at
the
required
destination.
Page | 54
Technology Solutions
Technology providers are developing innovative solutions to help
banks and MFIs
address a large section of the financially underserved population.
Their objectives are to reduce cost, provide ease-of-use and to
drive small ticket, high-volume
transactions. It is the scalability of these solutions being able to
reach a huge
financially underserved population across a vast geographical
area at low cost that will make the delivery of financial inclusion
viable for financial service providers and other stakeholders.
However, conventional technologies that require human
assistance will continue to be challenged in this regard.
Self-service solutions have the ability to deliver multiple financial
services on a single platform and eliminate the need for human
assistance in the transaction process. Accordingly, financial
services providers should look to deploy self-service solutions that
scale easily are convenient to use and offers a multiple product
delivery channel in a profitable way.
Conventional Solutions
The Business Correspondent (BC) model (sometimes known as
banking
correspondent) is a conventional solution that delivers financial
services to
Page | 55
the underserved population through a human banking agent

supported by
technology. As a solution for doorstep banking, this model has
evolved over a
period of time and has been implemented by various developing
countries
including Brazil, India and Bangladesh. Several MFIs, SHGs,
public/private
sector rural banks follow this model whose promise is to deliver
financial
services to the geographically divided population tapping local
resources.
Technology has been employed in the BC model to aid the
financial inclusion
process, but the delivery of financial services is dependent on the
reach and
presence of bank agents and therefore limited when it comes to
scalability.
Some of the technology solutions being adopted today by
Business
Correspondents are smart cards, point of service devices,
biometric readers
and mobile phones
a. Smart Card
Smart cards contain a microchip that stores customer data
including identification and account information such as that
found on an ATM or credit card.
Moreover, data can be written to (rather than just read from) the
smart card, allowing it to serve as a repository of all transactions
undertaken by the customer including account updates. The card
Page | 56
ensures easy tracking of the financial performance of the

consumer
and reduces operational and administrative costs for the bank
b. Point of Service device

Point of Service devices facilitate the transaction process of the
BC by taking banking services closer to the customers doorstep.
Using the device to access the banks database,
the agent can assist the client perform transactions and provide
credit facilities on the spot. There is no specification for the
features of the Point of Service device so it can be
customised to the needs of a financial institution. The point of
service device is scalable and can have a printer, biometric
scanner, smart card reader to facilitate faster, more convenient
and secure transactions.
The variations of a point of service device could be a hand held
devices or a
mobile phones supported by peripherals. Point of service devices
improves the mobility of the BC model, helping to deliver financial
services through door-step banking reaching a wider client base.
Page | 57
Biometric Reader
Biometric scanners read and authenticate users through
fingerprint recognition or retina scanning. They eliminate barriers
caused by illiteracy and regional languages and also act as a
second level of authentication thereby, enhancing transaction
security. Biometrics thus opens the door to Indias 433 million
illiterate and semiliterate population and reduce errors
caused by manual transactions.
c. Mobile Phones
In India, the penetration of the internet is only 5.2 percent8 as
compared to
the 31.5 percent of the population that have a mobile phone. The
countrys
wireless telecommunications infrastructure covers remote rural
areas and
appears to be a robust platform to deliver financial services to the
geographically divided, unbanked masses. Accordingly, mobile
phones are
used as a communication device and for data connectivity by the
BCs.
Page | 58
Self-service Solutions
As stated by the RBI, the majority of no-frills accounts are used
purely to receive
government benefits, such as social security and pensions.
Financial illiteracy
and access constraints to financial products are some of the key
reasons
historically cited for financial exclusion.
Self-service technologies offer proven solutions for better access
to financial
services deployed either independently by separate institutions or
as a network of
self-service devices shared by various banks and MFIs.
Self-service technologies enable businesses to better serve their
customers how,
when and where they choose across points of service, mobile and
online channels.
They can play a key role in transformation of the unbanked
populace in India by
introducing solutions that are secure, cost-effective and highly
scalable.
Coupled with Interactive Voice Response Services (IVRS) in local
languages, selfservice
has the capability to both educate customers about financial
products and
to also guide them through the transaction process. Tracking
customer behavior,
usage and transaction records and building a credit profile are
some of the
Page | 59
additional advantages of the self-service solutions.

There are two types of self-service solutions: Full Self-service and
Assisted Selfservice.
a. Full Self-service
With full self-service, there is no third-party intervention or
assistance; the
transaction process is driven entirely by the user using selfservice technology.
Financial transactions performed at an ATM over the internet or on
a mobile
device, (see below) are examples of full self-service.
Full self-service solutions reduce errors, enable faster transaction
times, improve
productivity, allow increased volumes of transaction and deliver
multiple financial
services from the same device.
Bank branches and agents simply cannot scale to cover Indias
huge population
spread across geographically divided states. Full self-service, as
part of a portfolio
of solutions, has the ability to scale quickly and at low cost.
1. Automated Teller Machine (ATM)
Automated Teller Machines (ATMs) are banking terminals that
provide bank
account holders easy access to cash and financial services in
public locations.
Today, there are over 40,000 ATMs across India.
As a full self-service device, the entire transaction is performed by
a customer
without any intervention by bank staff. ATM cards are used to
identify the
customer and authorisation is granted through a code (Personal
Identification
Page | 60
Number, or PIN) known only to the customer or via a biometric

reader. ATMs
can deliver a number of financial services including cash deposit,
check
deposit, cash withdrawal, balance enquiry, remittance, bill
payment and bank
statements.
While there are numerous solutions being worked on today for
financial
inclusion the ecosystem must plan for the challenges presented
by the
increase in volumes of transaction, change in demographics, ease
of use and
interoperable services. Interoperability refers to usage of service
from
different locations with the same account. For example, ATM cards
can be
used at any ATM location to avail financial services.
Interoperability provides
flexibility to transact and secures cash. These facilities are
currently not
available for the financially underserved population but there is a
need for
these services for this set.
There are different variations of ATMs:
Cash Dispensers and Cash Deposit Machines (CDM)
These would typically do routine transactions such as cash
dispensation or
deposits and statement printing
Multi-function ATM
These ATMs typically handle other transactions such as check
deposit, bill
Page | 61
payments and travel ticket bookings, etc, beyond the routine cash
and dash
like the CDM
2. Mobile Phone Applications
The explosion in mobile telephony has revolutionized the way
individuals
communicate with each other and with businesses. By the end of
2009, more
than 60 percent of the global population will have a mobile phone
subscription,
representing global growth of eight percent. Across Europe and
Russia, there
is already more than one mobile phone for every man, woman
and child.
[Source: Economist Intelligence Unit].
Of all the telephone connections in India, 90 percent are mobile9.
The demand
for Mobile phones is expected to rise by 24 percent in 2009, far
outstripping
global growth rates.
In many markets, financial institutions are offering banking
services via
mobile phones, each with varying levels of functionality, ease-ofuse, cost and
mass acceptance.
In western economies, phone banking is offered to established
customers as a
means of convenience, eliminating the need for the customer to
visit the bank
and perform transactions on the go.
Because of the penetration in poor and developing economies,
mobile phones are regarded as a tool to deliver financial services
to the masses. The biggest disadvantage with mobile banking is
Page | 62
the element of cash. When cash is needed, mobile banking

requires the assistance of other technologies or channels
b. Assisted Self-Service
Assisted self-service provides solutions to perform some or all
transactions with
human assistance or through other technology interfaces. Unlike
full self-service,
assisted self-service is dependent on additional elements for
complete delivery of
financial services.
Those elements may include availability of other services,
location and the level
of customer service (assistance) provided.
1. Point of Service Terminal
Point of Service Terminal is a shared access platform that offers
multiple
financial services on a single location. It may or may not be
technology
intensive. The terminal can be in a small retail store that provides
multiple
bill payment options and delivers financial services in assistance
with the
local owner of the outlet. A customer can visit the terminal and
pay his
electricity bill, mobile bill, water bill, insurance premium, refill
talk-time for
wireless connection and any other payment. Though this is not a
banking
terminal, it delivers multiple services under one roof and
customer may
not end up visiting different locations to manage routine
transactions.
Page | 63
Point of Service Terminal provides access to financial services

through a
convenient and local set-up and multiple services under single
touch point.
Technology Enablers
Page | 64
While self-service solutions are readily available and have been

deployed widely
around the world, financial inclusion presents some unique
challenges. Low levels
of literacy, the high number of languages spoken and poor
infrastructure, for
example, require enabling technologies to bring self-service closer
to the unbanked
population.
1. Biometric Recognition
Biometric recognition eliminates the need for a personal
identification
number (PIN). It authenticates the user by scanning a thumb
impression
or retina of the account holder.
Biometrics is an important enabler when reaching out to the
illiterate and
semi-literate population that avoids banking due to fear of
technology and
security concerns. Implementation of a biometric solution can
bring them
onto the economic development ladder.
2. Interactive Voice Response Services (IVRS)
Interactive Voice Response Services (IVRS) are software-based
solutions
that relate the transaction process in a synthesized voice format
and guide
a customer through the entire transaction flow. In India, this has
obvious
and immediate benefits as 36 percent of the population (433
million people)
cannot read or write.
3. Multilingual Software
Page | 65
There are about 1600 languages spoken in India and, according to

the
countrys constitution there are 22 official languages of
communication.
This creates a complex environment for the consistent delivery of
any
service.
As an extension of IVRS, multilingual software provides a
navigation
solution in multiple languages, overcoming regional barriers,
communication issues and illiteracy.
4. Graphical User Interface
Graphical User Interfaces (GUIs) as part of the navigation process
helps to
guide a user through a transaction by providing an intuitive set of
graphical images or pictorial references instead of words. For
Indias poor
and illiterate, GUIs increase confidence in performing a
transaction and
thereby encouraging adoption of new technology. GUIs can also
help to
eliminate transactional errors through step-by-step guidance.
5. Wireless Connectivity
Every month, nine million new Indians subscribe to a mobile
service. The
growing wireless networks provide an excellent platform to reach
out to
the financially underserved population in the diverse and remote
regions of
the country. Mobile banking applications can deliver banking
facilities to
the financially underserved population at low costs.
For a geographically divided country like India with the growing
rate of
Page | 66
mobile connectivity, banking through mobile phone presents a

strong
future for technology enabled financial inclusion.
6. Internet Connectivity
A persons usage of Internet banking basically depends on access
to
Internet through computer or mobile phone either at home or in
the office.
In Europe and North America, internet penetration is high and
access to
the Internet is chiefly via a home or office computer connected to
a fixed
telephone line. In most of Asia, where home computer penetration
is much
lower 15.3 percent, access to the internet, is increasing via the
wireless
mobile phone networks.
Nevertheless, Indias internet penetration is barely more than five
percent
and it is difficult today to see the internet by itself being a key
self-service
enabler for eliminating exclusion and bridging the divide.
NCR EasyPointTM 70 Tijori
To deliver doorstep banking, banks take risks transferring funds
through non-employees
who act as their agents, who may abscond with customers
money or may themselves be
the target of thieves. Construction of bank branches in every
village or urban slum is simply not feasible. A technology solution
must therefore ensure
safety of funds for both the bank and its customers and avoid the
need for
Page | 67
infrastructure. NCR in partnership with FINO10 piloted NCRs Easy

Point 70 Tijori that functions similarly to an ATM but in table top
form factor. NCRs Easy Point 70 Tijori also leverages FINOs smart
card and core banking platform to provide an end to end solution
to Banks and MFIs to support the unbanked population.
The NCRs EasyPoint 70 Tijori that was initially designed as micro
deposit machine is a scalable platform and can enable multiple
financial services, such as savings, deposits, remittance and
payment of micro-insurance premiums and utility bills.
Transaction details are recorded in the device and on the users
smart card. Transaction data can be transferred to the banks
system via an online connection. The EasyPoint 70 Tijori can
operate both online and offline, overcoming connectivity issues
normally encountered in rural India.
The recording of transactional data enables low-wage earners to
create a credit profile to access microcredit, further enabling them
to seek aid from banks to assist their business.
Page | 68
Technology features
1) Biometric reader
A biometric reader scans the fingerprint of the customer as an
authentication code for each transaction, allowing illiterate and
semiliterate
populations to transact with ease and ensure a second level of
authentication.
2) Audio-Video lead through
Use of the micro-deposit machine is made easy with instructions
relayed in
both video and audio (voice) formats.
3) Multi-lingual software
Voice instructions can be delivered in 14 regional languages
Page | 69
4) Printer
Customers receive a printed receipt for every transaction
performed
providing valid proof of deposits and withdrawals. This provides
increased
confidence for those using the device.
Conclusions
India is a country of huge socioeconomic contrast evident by its
growing middle
class of more than 300 million people and the 600 million people
that still live in
extreme to moderate poverty. Indias continued success and
prosperity will
largely be a measure of its inclusive development. However,
inclusive growth is
challenged by such factors as availability of financial services,
accessibility across
Page | 70
the vast rural and urban landscape, awareness through education

and literacy
programs (including financial literacy), and affordable cost points.
The Business Correspondent (BC) model, whereby agents
representing banks,
Micro-finance Institutions (MFIs) or self-help group deliver
doorstep banking is
the most persuasive model today supporting the governments
drive towards
Financial Inclusion. The BC model offers a lower cost channel and
local presence
without the infrastructure costs of branches. However, it is limited
by poor
security, time-consuming manual processes and a lack of scale.
Supplementing the BC model with technology can improve
security, speed up
enrolments and transactions, and extend the size of the physical
territory that
agents can cover. Even with enabling technology, the agent
model in isolation,
will always be limited to the size of the physical territory that can
be covered.
In addition to assisting or supplementing an existing, labourintensive delivery
channel, technology can become a direct delivery channel for
financial and
information services. This is particularly true of self-service
technology (e.g. ATMs,
mobile phones) where transactions are driven by the consumer
without third
party interventions. Once the unbanked are bought into the
banking model, a
whole range of financial services can be delivered through selfservice technology,
Page | 71
with minimal need for person to person interaction.

Self-service technologies are the foremost sustainable and
scalable solutions
because they offer multiple products and services from the same
platform/device,
at lower costs, ease-of-use, higher levels of availability and
accessibility by the
potential of leveraging existing physical infrastructures (i.e.
merchant partners
and kirana stores) as a distribution channel.
Self-service can provide the scale necessary to achieve

the Indian
governments target of full Financial Inclusion by 2015.
Self-service has been readily adopted in many industries:
In the financial industry, Automated Teller Machines (ATM) were
invented
over 40 years ago and are now deployed widely across
geographies.
In the travel industry, self-service has been a driving force in the
emergence and success of low-cost airlines, stripping out cost
from the
full-service model and providing easy access to ticket sales and
no-queue
convenience at check-in.
In retail, more than US$500 billion of goods were paid for using
selfservice
technology, a figure forecast to rise to more than US$1.2 trillion
by
2012.
Page | 72
To increase the adoption and usage enabling technologies have

been integrated
into self-service systems, such as biometric readers, multi-lingual
software,
interactive voice response services, and graphical user interfaces,
helping to
reach out to the millions of illiterate and semi-literate people in
geographically
and linguistically diverse regions.
Once the technology is deployed, the Economic Improvement
Quotient (EIQ) as
proposed herein measures the incremental change in the selected
populace
brought about by access to financial services. It captures the
impact in value
terms and establishes a business case for future reference that
can be used for
overall improvement in the delivery of financial services.
Together, policy makers, financial institutions and technology
providers can
establish a collaborative business model to profitably address the
social, moral
and economic imperative to bring financial and information
services to the
masses.
Page | 73

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FINANCIAL INCLUSION 1

Introduction to Financial Inclusion

support of individual governments as well as international bodies

have not yet been addressed. Technology solutions are being

To help achieve these goals, two funds of about US$125 million5

Indias Socio-Economic Landscape

marginal farmers, unable to access financial loans to grow their

concentrations of un-banked populations in urban areas are found

employed in agriculture. For financial inclusion policy makers, this

Un-banked unbankable population

creating opportunities such as employment for the unskilled

Underbanked bankable population

benefits, micro-credits, crop loans and microfinance for microenterprises

Financial Inclusion Lifecycle

inclusion. This approach generally results in an inactive account

Opening a bank account is the second step towards financial

object of financial inclusion

inclusive growth by making financing available to the poor in

Position of households availing banking services:

As per Census 2001

As per Census 2011

Expansion of Banking Infrastructure: As per Census 2011,

(a) Opening of Bank Branches: Government had issued

Branch or Business Correspondents or Mobile van. As a next step

FINANCIAL INCLUSION THROUGH FINANCIAL

Although the concept is defined usually at convenience by

STEPS TAKEN BY RESERVE BANK OF INDIA (RBI)

Rs. 25,000/- at their rural and semi urban branches. GCC is

banking, money etc. It has started putting up comic strips to

RBI's Policy Initiatives to foster Financial Inclusion

In January 2006, the Reserve Bank permitted banks to utilise

2010. Banks have successfully met this target and have

Governments Direct Benefit Transfer (DBT) initiative, banks

Tracking Financial Inclusion through Budget

and to track the outcome of public expenditure through budget

FINANCIAL INCLUSION BY GOVERNMENT

clearance of the draft document of the Microfinance Institutions

Despite this growth in the number of SHGs being linked with

Graduating selected members of the group that have

improvements were seen during the year 2010-2011,31 banks

bankers. Based on the lessons of the implementation of the SGSY

policy has a substantial impact on access to saving accounts

FINANCIAL INCLUSION PLAN BY BANKS

It is important to analyse this progress against the some

found wanting in terms of cost, scalability, convenience,

FINANCIAL INSTITUTIONS AND MARKET

assumption may not be correct as many persons could have more

Initiative for financial inclusion

rural and semi urban branches. The credit facility is in the

FINANCIAL INCLUSION BUSINESS

Progress so far and challenges ahead:-

Banking services are in nature of public goods and services

Apart from the regular form of financial intermediation,

(1992) being some of the examples - access to financial

Financial Inclusion Index

district-wise assessments of financial inclusion ever published,

A Feasible Solution for Financial Inclusion

institutions (MFIs) and self-help groups (SHGs) in the last decade

self-service kiosks and a collaborative model backed with MFIs

March 31, 2006 March 31, 2007 March 31, 2008

Dormant Account: Negligible

for operating Absence of Credit scores:

and a profit-oriented approach, MFIs have shown better results

Affordabilit Absence of Credit