The correlation between financial inclusion and economic growth has

long been widely recognized: low financial inclusion impedes

economic growth. Access to easy and affordable credit by the
disadvantaged social groups is acknowledged as a key criterion for
poverty alleviation and reducing social inequity. However despite
broad international consensus on the importance of access to finance
as a powerful poverty alleviation tool, it is estimated that over 2 billion
people globally continue to be excluded from the formal financial
sector.
India with 135 million households is home to the second largest
financially excluded population, after China.
Given the size of the challenge and the heterogeneity of the
financially excluded segment, there cannot be an approach or model
which can be prescribed globally. Instead, models which are
contextual to the local consumer requirements are required. Each
stakeholder of the financial inclusion ecosystem including financial
institutions, regulatory agencies, technology service providers, NGOs
etc will need to play their part and more importantly collaborate with
each other to design and implement effective interventions.
ICT has a key role in enabling supply and demand side interventions
which can deliver affordable financial services at a scale and pace
which the problem demands.
Financial Inclusion From
Obligation to Opportunity
1
Financial Inclusion From Obligation to Opportunity
About the Author
Rajdeep Sahrawat
Rajdeep is Senior General Manager and Head of Strategic Initiatives
at the Government Industry Solutions Unit. His work focuses on
creating technology enabled strategies and solutions which can
address the challenge of inclusive growth.
Prior to joining TCS, Rajdeep was Vice President at NASSCOM, the
premier trade body for the Indian IT-BPO industry in India.
Rajdeep has a Bachelor of Technology degree and a Master in
Business Administration.
2
Financial Inclusion From Obligation to Opportunity
Table of Contents
1. The Financial Inclusion Imperative 3
2. Understanding The Consumer 8
3. The Supply Side Ecosystem 10
4. From Obligation To Opportunity 14
5. Summary 24
The Financial Inclusion Imperative
The correlation between financial inclusion and economic growth has been long recognised: low financial inclusion
impedes economic growth. Access to easy and affordable mainstream financial services by disadvantaged social
groups is acknowledged as a key criterion for poverty alleviation and reducing social inequity. Such unfettered access
enables the financially excluded population to build savings, carry out investments, avail safe and low-cost credit and
perhaps most importantly it enables the poor to mitigate risks of income seasonality, illness and employment loss.
However despite broad international consensus on the importance of access to finance as a powerful social
1
development instrument, it is estimated that over 2 billion people globally continue to be excluded from the formal
financial sector resulting in them languishing in an endless cycle of deprivation and segregation from the mainstream
economy. Financial exclusion relegates the poor to a subsistence livelihood and increases the probability of their being
dependant on social welfare schemes thereby increasing the burden on the economy. Difficulty in accessing credit
from formal financial institutions leads these disadvantaged groups to depend on non-formal sources including local
un-regulated credit providers especially for non-productive consumption oriented expenses e.g. medical
emergencies, social ceremonies and marriages etc.
Financial exclusion also has an adverse national economic impact as it precludes large sections of the population from
micro-entrepreneurship opportunities thereby restricting them from becoming economically productive and
increasing their contribution to the national GDP in a bigger way.
Financial inclusion has particular significance for developing economies as it helps in improving the effectiveness of
the social development initiatives by reducing leakages in welfare disbursements. It can also enable replacement of
goods based welfare schemes e.g. heavily subsidized food, into targeted cash subsidies which can be disbursed directly
to the beneficiaries.

While the largest concentration of the global financially excluded population resides in India, China and Brazil, huge
numbers of the financially excluded also populate Africa and other parts of Asia. It is estimated that China has 263
million financially excluded households followed by India with 135 million and Africa with 230 million financially
excluded households. The United Nations has estimated that in the least developed countries (LDCs), more than 90
percent of the population is excluded from access to the formal financial system.
Defining and Measuring Financial Inclusion
Given the impact of social, geographical and economic variables, it is not surprising that financial inclusion lacks a
universally accepted definition. Many definitions of financial inclusion are prevalent today ranging from defining
2
financial inclusion in terms of geographical access to a more holistic definition covering unbiased awareness, access
and usage of financial products and services.
The scope of financial inclusion is also evolving from being limited to a bank account and simple saving products to
include remittances, savings, loans, financial counselling, insurance (life and non-life). Consequently a holistic financial
inclusion ecosystem will include banks, co-operatives, microfinance and insurance institutions.
3
Financial Inclusion From Obligation to Opportunity
1
(United Nations, 2006a)
2
Unbiased access refers to access without restrictions of caste, creed, religion, gender, social group etc
3
The Reserve Bank of India (RBI) defines financial inclusion as the process of ensuring access to financial services and timely
and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable
cost.
However it needs to be emphasized that mere ownership of a financial product does not result in financial inclusion. It is
the usage of the financial product for economic self-reliance and growth which ultimately leads to financial inclusion.
For example, opening a bank account by an individual is often treated as an indicator of financial inclusion. However a
better indicator of financial inclusion would be the usage intensity of the bank account by the individual as it is
ultimately the quantum of transactions and interaction variety between the individual and the financial institutions(s)
which reflects the value derived by the individual from participating in the mainstream financial system.
Another relevant point regarding financial inclusion is that, even among the population who have access to formal
financial sector institutions, many are often poorly served both quantitatively and qualitatively from the perspective of
products and services. This leaves a majority of the low-income population dependant on non-performing,
unsustainable institutions, which in-turn are themselves dependant on Government subsidies. Figure 2 depicts the
extent of the challenges in accessing formal financial services by the poor.
Measuring the extent of financial inclusion is not a perfect science despite the increased focus on addressing financial
inclusion. Published financial inclusion literature does not provide a comprehensive set of lead and lag measures to
indicate the extent of financial inclusion across nations and regions. Typical measures include number of bank
accounts, number of bank branches and credit disbursement to disadvantaged social groups. In more mature financial
systems, the measures may include usage of products like credit cards and life insurance, among others.
Unfortunately these indicators only provide limited information about the extent of financial inclusion. These
information gaps, result in partial understanding of the most vulnerable social groups, which products, services and
financial institutions are most suitable for access by the poor households and what are the elements of an enabling
regulatory framework etc. Not surprisingly, the quantitative and qualitative lack of information about the extent of
financial inclusion is more prevalent in developing nations where a majority of the global financially excluded
population resides.
4
Financial Inclusion From Obligation to Opportunity
Figure 1: Scope of Financial Inclusion
3
Report of the RBI Committee on Financial Inclusion in India (2008)
Savings
Insurance
Payments /
Remittances
Affordable
Credit
Financial
Counseling
Bank Accounts
Financial Inclusion
Financial Inclusion in India
With 135 million financially excluded households, India faces a severe financial inclusion crisis. Only 34 percent of the
Indian population is currently engaged with the formal financial sector. If usage intensity of a savings account is
considered as a true indicator of financial inclusion rather than mere ownership, then the financial inclusion percentage
will certainly be much lower.
The financially excluded population in India includes landless labourers, oral lessees, marginal farmers, unorganised
sector work-force, urban slum residents and socially excluded groups. With 82 percent of Indias poor households
located in rural locations, vast majority of rural India can be considered as financially excluded. Some key statistics
5
regarding the extent of financial inclusion in India are as follows :
l41% of the Indian population is unbanked (80 million households). Out of this, 40 % is unbanked in urban areas and
60 % in rural areas. Only 14% of adult population has credit accounts with formal financial institutions.
lOut of the 203 million households in India, 147 million households are located in rural India. Out of these rural
households, 89.3 million households are famer households. 66 percent of farmer households are marginal farmer
households.
l51.4 percent farmer households (45.9 million out of 89.3 million) are financially excluded from both formal and
informal financial sources.
5
Financial Inclusion From Obligation to Opportunity
4
Asian Development Bank, 2007
5
RBI, NSSO Survey 59th Round
4
Figure 2: Dimensions of Access Challenges
Low Income Households and their
micro & small enterprises
Majority with no access to finance at all
Very large proportion is underserved Very small proportion with full access
Small minority with access to finance
Significant
number depends
on services of
unsustainable
institutions
Many have access to
deposit services of
state owned
financial institutions
and co-operatives
Significant
proportion has
access only to credit
from micro-credit
institutions
Proportion with
access to banking
services is very
limited
Access to insurance
service is very
limited
Clients have to
pay high
transaction costs
Withdrawing
funds is not
always easy
Transaction costs
are high
Poor credit
quality
Client transaction
costs are high
Long processing time
High minimum loan
requirements
Banks geared to
serve high income
groups
High product
incompatibility
Low transparency
l27 percent farmer households have access to formal sources of credit. Among non-cultivator households nearly 80
percent do not access credit from any source
lNorth-East, Eastern and Central India account for 64 percent of all financially excluded farmer households in India.
Overall indebtedness to formal finance sources is 19.66 % in these three regions.
lGeographically, 256 districts (out of 640 districts) representing 40 % of total districts in India, spread over 17 states
and 1 UT have critical credit exclusion thresholds in respect of access to formal credit.
lThe proportion of people having some form of life insurance cover stands at 10 percent and people with any form of
non-life insurance cover stands at less than 1 percent. There are only 3.1 policies per thousand people in India
(2007)
The following figure illustrates the geographical spread of financial exclusion in India:

As it exists for many things in India, the rural-urban divide also exists in financial inclusion. At 56 percent, the rate of
6
financial inclusion of urban households is more than double that of rural households at 24 percent .
6
Financial Inclusion From Obligation to Opportunity
Figure 3: Geographical spread of financial exclusion in India
6
BCG Report on The Next Billion Consumers in India
Jammu
&
kashmir
Punjab
Haryana
Rajasthan Uttar Pradesh
Madhya Pradesh
Delhi
Maharashtra
Andhra Pradesh
Karnataka
Tamilnadu
Bihar
Jharkhand
West Bengal
Orissa
Assam
>75%
51-75%
25-50%
< 25%
7
Financial Inclusion From Obligation to Opportunity
The case of the urban poor particularly the migrant work-force is particularly serious as they do not fit into any defined
category. Lack of any fixed household address due to the migratory nature of their livelihood and an absence of a
verifiable identity makes it almost impossible for this section of Indian society to become financially included under the
current ecosystem.
While the above statistics number may indicate otherwise, financial inclusion has been on the Governments agenda for
the last few decades.
The following is a summary of the key national financial inclusion initiatives over the last four decades.
While many public sector banks in India have launched financial inclusion initiatives, these are often due to RBI
mandates rather than a desire to seize a blue sky business opportunity. Unsurprisingly, most of these initiatives
continue to remain at a pilot stage with limited impact on the ground.
However the last five years have seen a renewed thrust on financial inclusion in India. Initiatives like the SHG-Bank
linkage program have resulted in millions of Indians participating in the formal financial ecosystem resulting in marked
improvements in their lives. There has been a huge upsurge in micro finance initiatives with some micro finance
institutions (MFI) acquiring national footprints.
Apart from poverty alleviation, increasing financial inclusion may have a multiplier effect on the Indian economy. It will
enable the Government to provide social development benefits and subsidies directly to the beneficiary bank accounts
thereby drastically reducing leakages and pilferages in social welfare schemes and leading to a reduction in the subsidy
burden. Greater financial inclusion often leads to an increase in economic prosperity which has a positive influence on
inclusive growth.
1960s, 70s
1980s,90s
2000s
lFocus on increasing credit to the neglected economy sectors and weaker sections of society
lDevelopment of the rural banking ecosystem including RRBs, rural and semi-urban branches etc
lImplementation of the social contract with banks
Lead bank scheme launched for rural lending
lBranch licensing policy to focus on expansion of commercial bank branches in rural areas
lEstablishment of National Bank for agriculture and Rural Development (NABARD) to provide refinance to
banks providing credit to agriculture.
lSHG-Bank linkage program launched by NABARD
lThe term 'Financial Inclusion' introduced for the first time in RBIs Annual Policy Statement for 2005-06.
lBanks asked to offer 'no-frills account', General credit card facility at rural and semi-urban branches
lKnow Your Customer (KYC) norms simplified
lBanking Correspondent and Banking Facilitator concept introduced to increase out-reach
l100 percent financial inclusion drive launched
lRestrictions on ATMs deployment removed
8
Financial Inclusion From Obligation to Opportunity
Understanding The Consumer
While a majority of the challenges of FI are often viewed from the supply side perspective with a resultant thrust on
supply side interventions, it is equally if not more important to develop an understanding of the demand side
challenges. This will enable a more balanced set of interventions and also align the supply side interventions with
consumer needs.
Profile of the financially excluded consumer
The financially excluded consumers have certain unique characteristics which decouple them from the formal financial
system in its current form:
lFinancial illiteracy: The financially excluded consumer has more often than not, a low awareness and
understanding of the need for personal financial management and of the services and products provided by the
formal financial system. Majority of the interventions for building financial literacy are reliant on printed collateral
.i.e. brochures, manuals etc and have limited outreach which makes it difficult for the poor to update themselves
on the available financial services.
lLow and cyclical income: The consumers have a very cyclical and variable income pattern which is often linked to
the agriculture cycle in rural locations and availability of work in the urban areas which makes their adherence to
fixed schedules impractical.
lMinimal collateral: A focus on consumption expenses and reluctance or inability to create fixed assets due to low
incomes and migrant lifestyles result in the financially excluded consumers often not possessing any assets which
can be accepted as viable collateral against credit.
lLack of credit history: Financial exclusion results in the poor having no verifiable credit history which makes it
difficult for banks and other financial institutions to authenticate their credentials while extending credit.
lAbsence of formal and verifiable identity: The financially excluded often have no means of proving their identity as
the conventional means like driver licenses, voter identity card, passport, ration card and utility bills are not
available to them.
lGeneral illiteracy: The high levels of illiteracy prevalent among the financially excluded especially amongst the
rural population make them unable to comply with the complex documentation requirements of formal financial
institutions.
lApprehension of bureaucracy: Their legacy of social oppression results in the financially excluded having an
apprehension and fear of dealing with bureaucracy. The inimical attitude often displayed by the staff of financial
institutions further alienates the poor.
lCredit primarily for personal consumption: The typical credit requirements of the poor are mainly for consumption
kind of expenses e.g. marriages, celebrations, medical emergencies etc. which makes it difficult for them to avail
credit from formal sources.
Consumer expectations from the formal financial ecosystem
To transform the financially excluded population into customers of the formal financial institutions, it is important to
stimulate demand for financial products and services. Such products should not be stripped down versions of products
and services originally created for the more affluent consumer segments and should instead holistically address the
following expectations of the financially excluded consumers:
lAppropriate products: The products and services currently offered by the formal financial institutions are largely
unsuitable for the financially excluded consumer. The financial products are complex, assume regular income
profile, have large denominations, high fees and require strict procedural compliance e.g. minimum savings
account balance. These product characteristics make them unaffordable and unsuitable for the financially
excluded consumer. For example, a bank loan typically requires collateral, fixed repayment schedule, extensive
documentation, minimum denomination and credit history etc. These requirements are completely at variance
with the profile of the typical financially excluded consumer explained in section 2.1.
lFinancial counselling: High financial illiteracy coupled with the complexity of the current financial products and
procedures, necessitates that the financially excluded consumers have access to counselling and advice in order
for them to select the most appropriate products for their needs. Without the counselling, adoption of financial
services may remain low, since the targeted groups may not fully appreciate the benefits of the services and
products on offer.
lIncreased accessibility: Typically the financial institution offices operate during fixed hours (.i.e. 1000 1400 hours)
on certain days of the week. The offices are likely to be located within large villages and towns. As the financially
excluded are highly likely to be daily wage workers, there is often a huge opportunity cost of lost daily wages for the
consumers if they have to visit these offices. Even if they are not daily wage workers, the excluded consumers will
often find it difficult to leave their daily activities to visit offices during working hours.
Contrast this rigidity of the formal sector with the flexible access provided by the informal financial system e.g.
money-lenders which the financially excluded are typically used to. The financial institutions need to remove the
physical access impediments to enable the financially excluded population to access the financial institutions as
per their life-style convenience.
lSimplified procedures: The current procedures for availing products and services from the financial institutions are
complex and very intensive on documentation requirements including identity and address verification. A
consumer who suffers from a high degree of financial illiteracy and also has low literacy levels will find it extremely
challenging to deal with complex procedures and documentations and will either agree without comprehending
or not avail of the products at all.
An example of complex procedures is identity verification through conventional means .i.e. licenses, voters id,
passport, ration cards etc. These documents are often not available with the financially excluded especially the
migrant work-force and thus act as a steep entry barrier for financial inclusion. Alternative forms of identity
verification based on bio-metrics, personal introductions etc need to replace document based identity
verification.
lImproved public interface: A less than welcoming attitude displayed by the staff of the formal financial institutions
towards the financially excluded creates a deep sense of alienation and makes them reluctant to approach the
formal financial institutions. The financially excluded consumers expect to be treated with respect and empathy by
the financial institution staff.
It must be pointed out that while being deprived of access to the formal financial sector, the financially excluded
consumers have active interactions with the informal financial sources, typically money-lenders, friends and family.
Unlike the formal financial sources, the informal financial sources overcome a number of the impediments of the formal
sector. The informal sector is operationally flexible, empathetic to the needs and easily accessible for the financially
excluded. Unfortunately, this comes at the price of usurious charges which often is a root of many social evils like farmer
suicides, forced marriages, land grabbing etc.
9
Financial Inclusion From Obligation to Opportunity
10
Financial Inclusion From Obligation to Opportunity
The Supply Side Ecosystem
While there is no doubt that there is a need to stimulate the demand for formal financial sector products among the
financially excluded consumers, appropriate and effective supply side interventions hold the key to increasing financial
inclusion, especially in the short term.
Supply side constraints
Some of the constraints impeding the scaling up of financial inclusion are as follows:
lProducts: Many of the products and services offered by the formal financial sector today are not suitable for the
financially excluded consumers resulting in slow uptake. This is because most of the currently available products
and services have been designed for a certain customer segment and either the same products or their stripped
down versions are being offered to the financially excluded segment. Continuing to see financial inclusion as a
social obligation rather than a viable business opportunity, the financial institutions are reluctant to invest in
developing products specifically for the financially excluded consumers and in undertaking market development
initiatives.
lProcesses: The rigidly enforced processes of the formal financial institutions are complex and documentation
intensive and deter the financially excluded consumers, many of whom are illiterate or semi-literate, from
approaching the formal financial sector. Stringent requirement of identity verification through documentary
evidence, requirement of credit history, fixed loan repayment schedules, operating timings are some examples of
processes acting as access barriers.
lTechnology: While many public sector banks have undertaken major technology adoption initiatives e.g. Core
Banking System implementation, other supply side stakeholders of the formal financial ecosystem including post
offices, Micro Finance Institutions (MFI), Regional Rural Banks (RRB), Primary Agricultural Co-operative Society
(PACS) continue to be seriously under invested in IT. Since these institutions have the primary responsibility to
provide financial services to rural India, their low IT capabilities often impedes their ability to provide services
efficiently and scale up their operations. Poor IT adoption also makes it difficult for these institutions to integrate
their operations with the other constituents of the financial ecosystem, both upstream and downstream.
lPeople: A majority of the staff in rural branches of financial institutions are on temporary deputation from urban
branches and hence do not understand the unique requirements of the financially excluded consumer often
leading to an inimical interaction between the bank staff and the consumers. This also impedes financial
counselling by the bank staff leading to a detrimental impact on improving financial literacy of the financially
excluded consumers which is critical to remove the prevailing distrust of the formal financial institutions.
lOutreach: While the density of bank branches is on the increase in the urban areas as banks find urban locations
more lucrative, the per capita density of the bank branches in the rural locations continues to be a concern. In India,
7
currently the average population density per bank branch is 16,000 and the numbers for rural and urban locations
are 17,000 and 13,000 respectively.
7
2007 data from Basic Statistical Returns of SCBs in India.
11
Financial Inclusion From Obligation to Opportunity
Current operational model for financial inclusion

The various operational models used for financial inclusion by the banks today converge on certain key processes and
technology components. Typically most of the models include a smart card issued to the beneficiary in which his
transaction history is maintained, a multi-function hand-held device used by the BC for enrolment and transactions and
a local computer which integrates the field transactions with the banks CBS. Some key elements of the current
operational model are as follows:
lBanking Correspondent: During 2005, the RBI made a key policy decision by introducing the concept of Banking
Correspondent (BC) to increase the rural outreach of the banks especially in the areas where the brick-and-mortar
bank facilities are not available. A BC can either be a Section 25 company, NGO, MFI or an individual (retired bank
employees, ex-servicemen, retired government employees). A BC represents the bank to its customers and is not
allowed to charge fees from the customers for performing services and instead is remunerated by the bank.
Recently the RBI increased the categories of people who can act as BCs to include kirana/medical/fair price shop
owners, public call office (PCO) operators, agents of insurance firms, individuals who own petrol pumps, retired
teachers and SHG groups linked to banks.
In India, the banks typically engage an organisation as a BC in specific geographies and a bank can have multiple BC
partners across geographies. Each BC appoints agents who typically cover a few local villages within a defined
geographical boundary and provides services like customer enrolment, collecting deposits and small withdrawals
to the account holders. The BC has to upload the customer transactions to the banks CBS within a defined time-
period e.g. 48 hours.
Apart from the BCs, some of the other modes used by the banks to increase outreach are kiosks and bio-metric
enabled ATMs. POS terminals have not really taken off due to poor connectivity infrastructure in rural areas.
Figure 4: Typical operational model for financial inclusion in India
FI Gateway
Base Branch CBS
Customer
Acquisition System
Kiosk Laptop POS POS
Delivery Channels
Card
Management System
File Upload
Customer Trxns
Customer Trxns (Online/Offline)
C
I
F

&

A
/
c

o
p
e
n
i
n
g

d
a
t
a
lHand-held device: While there are many modes of addressing the last mile delivery of financial services including
kiosks, rural ATM etc, most of the current financial inclusion delivery models converge on the hand-held devices.
These devices have wireless connectivity, bio-metric readers for beneficiary authentication and micro-printers.
The account-holders authenticate themselves typically through bio-metric validation based on their personal data
captured during enrolment. The devices typically connect through wireless GPRS/CDMA/GSM protocols. Near
field communication technology is also becoming popular.
lSmart card: The smart card is used to record the recent transactions of the beneficiary and his identification details.
The capabilities of the cards in use today vary from the very basic to intelligent cards equipped with RFID chips with
cost often being the key determinant regarding the selection of the card technology by the bank.
lProcesses: The following are the key operational processes under the current FI operational model:
- Customer enrolment: The customer enrolment is done by the BC using bio-metrics (typically finger-prints) and
the recently simplified KYC norms. The BC uploads the customer details to the bank where the no frill account is
created subsequent to validation and processing by the bank. Once the account is opened, the beneficiary is
informed and the card is delivered to him.
- Customer transactions: The beneficiary conducts the transactions with the BC typically through the hand-held
device. The beneficiary identification is done using bio-metrics and the withdrawal and the deposit transaction
details are entered into the hand-held device which also generates transaction receipts for the beneficiary. The
card of the beneficiary is also updated with the recent transactions. The BC uploads the transactions to the
banks CBS either online through wireless connectivity or in an offline batch mode within 48 hours of the
transaction taking place. The field transactions are often initially uploaded to the BCs internal FI server and
subsequently transferred to the banks CBS.
- Cash Management: The net cash collected by the BC (net of deposit and withdrawal transactions) needs to be
submitted to the nearest bank branch within a defined time period. The remoteness of many locations makes
this process very challenging as it also involves the physical security of the BC. In some instances, the banks debit
the net cash position of the BC from the deposit which the BC maintains with the bank thereby eliminating the
need for physical cash deposit at the bank branch.
Challenges of the current operational model
l High cost: The CAPEX and OPEX costs for the banks to develop the FI business continue to be high. The financial
institutions find it difficult to make a profit as the FI transactions are typically low value and the volumes continue to
stagnate due to the poor usage intensity of the products and services.
lEconomic viability of BC model: The current business model is not economically viable for the BC. This is because
firstly there are not enough products for distribution by the BC beyond savings and withdrawals and secondly they
cannot charge commission/fees from the beneficiaries and end up depending upon the bank for their
remuneration. The operational expenses including travel etc are also often not reimbursed. Additionally, the BCs
have to bear the cost of the hand-held devices and pay interest to banks on the over-draft provided to them. There
is also little incentive for BC to push any products as either he does not get a commission or the commission is very
low. The geographical restrictions on a BC have a negative impact especially in hilly districts where population
density is low and terrain inhospitable. Cash management is also a challenge as the BC has to deposit the cash with
the bank branch within a stipulated time period which is often not possible in remote areas. While ideally the cash
management should be outsourced to a specialised third party, the banks are reluctant to undertake the additional
expense.

12
Financial Inclusion From Obligation to Opportunity
l Lack of standards: The smart cards issued by the various banks are not interoperable across the banks/POS outlets
which inhibit the ability of the consumer to conduct transactions through the POS of other banks which is an
important requirement given the migrant lifestyle of many poor people. The smart cards themselves are not as per
any uniform technology standards approved by a national standard setting body. The beneficiary bio-metric data is
also not maintained in any standardised format.
lLow technology adoption:The RRB, MFI, Post offices and PACS continue to severely lag behind in technology
adoption which adversely impacts their ability to increase efficiency and scalability of their operations cost
effectively.
l Lack of products: Apart from small denomination deposits, withdrawals and some basic remittances, there are
hardly any products which are offered to the beneficiary currently. This has two major disadvantages. Firstly, there is
little value for the beneficiary to engage more vigorously with the formal financial sector and secondly, the lack of
products adversely impacts the BCs economic viability.
lLack of accountability: There are a large number of institutions involved in financial inclusion e.g. banks, BC firms
and technology providers etc. This result in a lack of accountability when it comes to addressing customer
grievances leading to an attitude of finger-pointing. For example, while the BC is the face-of-the-bank to the
beneficiary, he is actually not a bank employee and instead is often the employee of a firm proving BC services to
the bank.
lPoor counselling capacity: The target beneficiaries are financially illiterate people who are unaware or mistrustful of
the formal banking sector. The Banking Correspondents and the Banking Facilitators are often not adequately
trained to provide financial counselling services to the beneficiaries and help them overcome their mistrust of the
formal financial institutions. This creates a drag effect on demand for services from the financial sector.
13
Financial Inclusion From Obligation to Opportunity
14
Financial Inclusion From Obligation to Opportunity
From Obligation To Opportunity
Ensuring sustainable scalability for financial inclusion will require the supply side and demand side issues discussed
earlier to be addressed simultaneously through systemic solutions. Every stakeholder of the financial inclusion
ecosystem including financial institutions, regulatory agencies, technology service providers and civil society
organisations will not only need to play their individual parts effectively but more importantly collaborate with each
other to architect and implement effective interventions.
The size and the heterogeneity of the financially excluded population preclude a single silver bullet approach or
model which can be prescribed globally. Instead, models which are contextual to the local consumer requirements are
required as has been demonstrated by the success of Grameen Bank in Bangladesh and MPESA in Kenya and Indias
own SHG-bank linkage initiative with each being specific to its local environment. Multiple and diverse approaches also
mitigate systemic risk, increase competition and improve efficiency.
Role of Financial Institutions
The financial institutions have perhaps the largest stake in the success of financial inclusion. However to realize this
opportunity, they will need to create an entirely new portfolio of products and services delivered through radically
different distribution structures which are aligned to the needs and lifestyles of the financially excluded consumer. The
following figure shows the typical financial institutional structure and the products and service offered through these
institutions today.
8
Figure 5: Institutional structure and their products and services in India
8
Report on Currency & Finance 2006-08 - Vol. II
Insurance Firms Banks/RRB/ PACS
MFIs/NGO
Financial Advise
Insurance
Loan/credit accounts
Saving Accounts
Small value credit/loans Remittance services
Remittance services Postal Saving Accounts
Financial Inclusion: Access to
products/services from formal
financial system
Product/service Institution
Post Office
lProducts: Products (deposits, loans, insurance, remittances etc) with the following features are required by the
financially excluded consumer:
- Small denominations as the financial needs of the poor are often small and predominantly for personal
consumption or for starting micro enterprises
- Flexible repayment schedule as the poor often have cyclical and unpredictable income tied to agricultural /
employment seasonality. The customer should be allowed to pay as per his capacity within a defined time-period
without attracting steep penalty charges. For example, a loan can have a repayment schedule of say Rs 100
during a quarter and the customer should have the flexibility to repay Rs 100 either as lump-sum or in smaller
instalments during the quarter.
- Collateral-less lending for small loans below a certain threshold. Physical collateral requirements can be replaced
by guarantors who have a well-established credit history.
- Given the extremely low uptake of insurance by the poor who are often the most vulnerable, the insurance firms
need to design appropriate products and create new distribution channels to reduce their costs, simplify
processes and increase outreach. Insurance firms need to balance their need for risk-aversion with the huge
market opportunity. Lack of historical data to calculate optimum premiums empirically often leads to high
premiums which is unaffordable. The partner-agent model is perhaps the best suited to address the outreach
challenge as it enables the insurance providers to collaborate with NGOs, MFIs, SHG etc to distribute the
insurance products without incurring huge costs to create distribution networks. Innovative products which
combine risk cover with savings will need to be created. Instead of individual insurance, group insurance
products can be offered to members of a SHG.
- Apart from traditional life insurance, other non-life risk covers which are needed by the rural population include
crop and weather insurance, livestock insurance and health insurance. New products will need to be designed as
the existing insurance products are often not suited to the needs of the poor e.g. crop insurance products are
often predicated on yield estimation based on samples.
lProcesses: The entire set processes deployed in the financial institutions needs to be simplified, made less
document intensive and aligned with the profile of the financially excluded customer. For example, financially
excluded consumers often do not have any credit history or traditional documents to prove identity. Biometric
based identity validation or letter of introductions from local citizens with good history with the bank can be used
to authenticate the beneficiary. Similarly the insurance providers will need to implement simplified processes and
systems to ensure expeditious claim settlement as this is one of biggest sources of dissatisfaction.
lOutreach: The geographic dispersal of the financially excluded consumers and their challenge of accessing the
formal financial sector necessitate the accessibility challenge to be addressed on a war-footing. The cost and long
gestation period of establishing brick and mortar facilities necessitates new distribution models for increasing the
outreach rapidly and cost-effectively:
- Banking Correspondents: Deploying a well established network of trained BCs is perhaps the most cost-effective
way of addressing the accessibility challenge. The BC model has gained traction during the last few years, but it
still faces regulatory and economic constraints. While the RBI has recently added many more categories of
people who can be considered as BCs by banks, corporate entities with huge retail outreach like telecom
15
Financial Inclusion From Obligation to Opportunity
16
Financial Inclusion From Obligation to Opportunity
operators cannot perform BC functions. The banks need to invest in training and certification of the BCs to
increase their effectiveness in the field. The remuneration structure of the BCs also needs to be made viable and
structured so as to encourage entrepreneurship.
- Self-Help Groups: The SHG-Bank linkage program launched in the 1980s in India has been a big success and it is
estimated that by 2007 nearly 3 million SHGs representing nearly 40 million households were linked with banks in
India. This program needs to be expanded further particularly in the backward districts of Central and North East
India where some of the poorest Indians reside. Apart from SHG, the initiative on Joint Liability Groups (JLG) also
needs to move beyond the pilot stage.
- Leverage existing distribution networks: The proliferation of smart cards in Indias financial inclusion drive should
stimulate the financial institutions to leverage the network of kirana (small grocery stores) and post offices to
provide POS based access for small value transactions.
lFinancial counselling: The extremely low levels of financial literacy of the financially excluded consumers will
require the financial institutions to invest in creating a capacity within their organisation which can offer financial
counselling and mentoring to the poor as part of basic banking services. The financial institutions should
collaborate to establish counselling centres around rural inhabitation clusters and ensure that they are operational
when the poor can access them e.g. in the evenings.
lMarket development: Market development activities targeting the financially excluded population need to be
stepped up through unconventional means. Typical approaches of using mainstream media e.g. TV / print,
websites or financial intermediaries e.g. brokers, to reach out to financially excluded population will not work
because many of whom do not own TV sets or have access to print media. Instead, vernacular FM radio channels,
mobile vans which travel to rural locations, local NGOs who have relationships with the local population, street
theatres/road shows etc are perhaps more suitable market development channels for this target population.
Ideally, this effort should be undertaken collectively by the formal financial sector as otherwise one-upmanship
among financial institutions may end up subverting the potential impact.
lInternal staff: Instead of going the extra-mile, the staff of the financial institutions establishments located in the
rural locations often tends to be dismissive and rude in their interactions with the poor thereby reinforcing the
alienation. The financial institutions need to mentor their staff to empathize with the financially excluded
consumers and extend them the same courtesy as they would do to urban/affluent customers. Staff performance
incentives which take into account the progress on financial inclusion will also be a powerful tool to induce
behavioural change.
Role of Regulatory and Public Policy Agencies
The traditional role of the regulatory and public policy agencies has been largely prescriptive and supervisory in nature
which needs to transform into a more pro-active role towards creating an enabling policy and regulatory framework for
financial inclusion.
In India, the RBI has been the prime-mover towards the promotion of financial inclusion. However the need for a
systemic strategy for accelerating financial inclusion requires other regulatory agencies including IRDA, IDRBT, IBA, BIS
etc to participate more vigorously. Some recommendations for an enabling policy framework are elucidated below:
17
Financial Inclusion From Obligation to Opportunity
lA National Mission for Financial Inclusion should be established to provide the requisite national focus. A mission
oriented approach will enable a time-bound national actionable agenda being prepared with clearly articulated
policies and milestones. The Mission would be able to integrate the efforts of the various stakeholders of the
financial inclusion ecosystem, create an enabling policy framework and ultimately ensure that financial inclusion
efforts move beyond successful pilots. The efficacy of the mission mode approach has been well demonstrated in
the past in India across multiple sectors.
lA National Financial Inclusion Plan (NFIP) should be created which is further disaggregated into State Financial
Inclusion plans which can be further disaggregated into district/block level implementation. The plan should
define milestones, deliverables and targets along-with roles and responsibilities of the various institutions (banks,
RRBs etc) involved in the on-ground implementation. As part of both the national and state level plan, initial focus
should be on districts which are high on financial exclusion. It will be useful to include the private sector
institutions including MFIs, technology providers and civil society organisations like NGOs into the
implementation of the plan.
lThe pivotal role of the RRBs in scaling up financial inclusion requires the RRBs to be made financially viable, have
specially trained staff and be allowed more operational autonomy. The RRBs should adopt the SHG-bank linkage
and the BC/BF models to scale up their operations.
lIncreasing the financial counselling capacity in RRBs and PACS will require training the staff of these institutions
through special courses and certification. To overcome the financial constraints of these institutions, the training
programs can be funded through nodal agencies like NABARD.
lWhile the public sector scheduled banks have implemented Core Banking Systems (CBS) and made their processes
IT enabled, the IT adoption level in the RRBs, PACS and UCS is quite abysmal. This is counterproductive as it firstly
inhibits these institutions from scaling up their services efficiently and secondly it creates impediments in their
integration with other institutions and national level financial infrastructure e.g. payments and settlements
systems. The RBI should facilitate the creation of a special fund for the IT up-gradation of the RRBs, PACS and UCS.
Similar to the successful RAPDRP-II model implemented by the Ministry of Power in India, the fund can provide a
grant to an institution to implement an integrated end-to-end IT solution based on a prescribed model process
specifications. If the institution does not implement the IT solution based on the prescribed specifications in the
agreed timelines, the grant could get converted into a repayable loan.
lTransaction costs can be reduced by waiving off stamp duty on small loans to the financially excluded consumers.
The service tax on insurance premium payments may also be waived off. The documentation requirements for
credit products needs to be simplified with identity validation based on bio-metrics and collateral-less lending
enabled by guarantors.
lTo make the BC model economically viable, the BCs should be incentivised based on outcomes achieved .i.e.
number of accounts opened, transactions executed etc instead of only a fixed salary. The scope of the services of
the BC can also be expanded to include selling other financial products including insurance instead of only
executing basic transactions. Banks should also reduce the risks and operational cost burden of the BCs by
reimbursing the costs of cash management by specialised security firms and insurance expenses etc. Impediments
like the geographical coverage restrictions should be removed especially in the hilly states where the population
density is low. BC operations should be allowed in urban locations and in places where a bank branch exists to
overcome the financially excluded consumers deep rooted sense of alienation which inhibits them from
approaching the bank branch.
18
Financial Inclusion From Obligation to Opportunity
lTo increase the effectiveness of the BCs and BFs, they need to be trained and certified. Ideally only trained and
certified BC/BF should be allowed to operate in the field. Nodal agencies including NABARD and IBA should create
courses in the vernacular which can be used to provide training at the district level under the aegis of the lead bank
in the district. The cost of the training including content creation can be met through a special fund created by
nodal institutions like NABARD.
lThe success of the SHG-Bank linkage model needs to be further scaled up by evolving the SHGs current focus from
micro-credit into micro-entrepreneurship. This will require a special thrust including increased funding support
and capacity building in entrepreneurship and basic financial management skills amongst the SHG members. The
capacity building can be augmented by counselling by dedicated resource centres established by NGOs, banks,
MFI etc. As the role of the NGOs in the SHG-Bank linkage initiative is critical, it will be worthwhile if financial
incentives can be given to such NGOs to further scale their activities. A special focus should be provided to push the
SHG-Bank linkage model in the backward districts in Central and North-east India where it has not yet taken off.
lThe rapid urbanisation and migration trends are creating a huge pool of urban financially excluded people. Current
financial inclusion policies have traditionally focused more on the rural financially excluded poor and many of the
institutions created to address the challenges of rural poor are not allowed to operate in urban/semi-urban
locations. These barriers need to be re-examined and streamlined as there is limited capacity in urban locations to
address the needs of the financially excluded population. BC/BF services are currently not allowed in urban
locations.
lThe role of micro-finance (MF) in addressing financial exclusion is widely recognised. In India, the MF movement
has gained wide popularity and it is estimated that there are about 1,000 NGO-MFIs and 20 company MFIs
9
operational today . Currently the business and operational scope of the MFIs is limited to providing financial
assistance in small quantum. To further scale up the MF business in India, it is worth considering an increase in the
scope of the activities of MFI to include other financial services including small deposits, micro-insurance,
remittances etc. This increase in scope will need to be accompanied by a greater oversight and supervisory role by
regulators. The further scale up the MF initiatives and corporatize their operations, a special type of MF institution,
MF-NBFC (Non Banking Financial Company) can be allowed under the auspices of the current regulations
governing MFIs
lThe financially excluded population lives a high-risk life and is under constant threat of illness, weather and un-
employment etc. Ironically it has the least insurance protection. Micro-insurance has not really penetrated in India
partly due to requirement of huge upfront investments and partly due to low awareness. The entire insurance life-
cycle from customer acquisition to claims processing and settlement needs to be re-examined and re-designed for
the financially excluded consumers. IRDA should make efforts for capacity building for insurance servicing,
incentivising insurance providers to increase coverage in rural locations, increasing awareness of insurance among
the financially excluded and implementing consumer grievance redressal mechanisms. IRDA should also review
existing life and non-life schemes for their effectiveness and relevance.
lTo ensure empirical progress reviews and objective analysis of the various financial inclusion initiatives, systemic
and regular field research needs to be conducted nationally. Most of the data available on financial inclusion in
India is based on surveys conducted some years ago or from interpretation of disaggregated surveys. The NSSO (or
9
RBI Report of the Committee on Financial Inclusion
19
Financial Inclusion From Obligation to Opportunity
similar organization) should conduct detailed field research on all aspects of financial inclusion every two years to
enable that reviews and decisions are based on data rather than anecdotal evidence. This data can be maintained
in a central national level repository which can be accessed by the various institutions engaged in financial
institution. A national census on financial inclusion is also required and should be conducted either as part of other
national census activities or separately.
lThe large number of institutions engaged in providing financial inclusion services makes it imperative to protect
the rights of the poor and ensure that their hard earned assets do not fall prey to the unscrupulous. The poor have
no recourse to the various consumer protection forums which are taken for granted by the more affluent sections
of society. A specific nodal consumer protection agency with a cross-sector mandate and a pan-India rural
coverage should be appointed to speedily address the grievances of the poor regarding their experiences with the
financial institutions. Unequivocal accountability norms and code of conduct should be published for all service
providers in the financial inclusion ecosystem and widely circulated.
Role of Government agencies
One of the key challenges of the financial inclusion is to create the demand pull .i.e. how to encourage the financially
excluded consumers to use the products and services of the formal financial sector. The usage aspect is important
because it has been often observed that many of the no-frill accounts opened by financially excluded consumers often
become dormant due to poor usage.
While ultimately the onus of scaling up financial inclusion lies with the financial institutions, the Government has a key
role in priming the pump to provide the necessary impetus for scaling up financial inclusion.
Locations with high density of financial exclusion require special attention and investments towards development of
primary health, primary education and employability skills as these are pre-requisites for creating an economic
environment which creates a demand for financial products and services.
In India, there are currently a large number of social development schemes where the Central Government and State
Governments make financial payments to socially disadvantaged groups. While difficult to quantify, anecdotally it is
estimated that for every INR 1 spent by Government on social subsidies, only INR 0.16 (16 percent) reaches the actual
beneficiaries. One such flagship social scheme is NREGA (National Rural Employment Guarantee Act) which has scaled
10
up from covering 21 million rural poor households in 200 districts in 2006-07 to over 60 million rural poor households
in 615 plus districts in 2008-09. Unfortunately there are increasing instances where targeted beneficiaries under NREGA
often do not receive their benefits mainly due to the corruption at various processing levels which includes falsifying
muster rolls, beneficiary impersonations or in many instances simply not making the payments. Apart from the
payments under the social development schemes, government-backed institutions make several other payments
including old age pensions, defence pensions and widow pensions etc. These payments are often manually disbursed
with the beneficiary having to visit a Government office to collect the payments resulting in substantial inconvenience
due to travel expenses incurred and lost wages.
While many interventions will be needed to eliminate the leakages from Government social development schemes, a
major remedial step will be to make the Government welfare payments directly to the beneficiaries through the EBT
10
Government of India NREGA website
20
Financial Inclusion From Obligation to Opportunity
(Electronic Benefit Transfer) approach. Under this approach, the beneficiary has to open a no-frill account with a bank.
Once the bank account has been opened, the beneficiary/bank notifies the relevant Government agencies from where
payments are expected. Upon verification of the details, the payments can be made directly to the beneficiarys bank
account thereby circumventing several manual processing layers which often spawn corruption and harass the
beneficiary. The beneficiary can access the bank account either by visiting the bank branch or through the business
correspondents etc. Apart from reduction in corruption, EBT will also have a positive impact on reducing administrative
costs and improving efficiency which are large given the huge quantum of social welfare payments in India. Over time,
the Government can replace subsidies currently distributed in form of goods e.g. subsidised rice, by direct cash
subsidies sent directly to the beneficiarys bank account through EBT.
Pushing social development scheme payments and other Government payments through EBT can be a major enabler
for inducing the financially excluded to interact with the formal financial sector. Reduction in corruption is a huge
complementary benefit. In an environment where large numbers of payments are made via state government
agencies, RBI mandates can help in accelerating the adoption of EBT in the country. Shared technology initiatives like
the National Financial Inclusion Switch can provide the required supply side stimulus.
Role of Information Technology
Information Technology (IT) ubiquity coupled with the rapid increase in the telecommunication network and service
quality has the potential being the force-multiplier for scaling up financial inclusion. ICT enabled interventions can
impact financial inclusion on the following dimensions:
lReduce operating cost of providing services: Perhaps the most significant impact of ICT on financial inclusion will
be on reducing the operating cost of providing financial services because the high cost of servicing low value
transactions is often cited as the major impediment for the financial institutions to provide services to the poor.
Typically, operating cost includes staff salaries, travelling expenses, commissions, marketing and promotion
expenses, rentals and other overheads. For banks the operating cost ranges between 3-4 percent to service average
borrowers. In India, a large PSU bank has estimated the cost of opening a no-frills account as approximately INR 48
and the cost of each transaction (deposit/remittance) as INR 10. While the same bank requires a balance of INR 2,000
in a no-frill account for it to be economically viable, the actual average balance in the no-frill accounts of the bank
was INR 528 which highlights the non-viability.
Conventional technologies available in banks including CBS when seamlessly coupled with new technology
paradigms including mobile and wireless connectivity can bring about a step change in the cost and outreach of
financial services. Peer-to-peer fund transfer & payments, account balance enquiry, remittances, bill payments,
mobile wallets, merchant transactions can be performed through mobile phones. The falling costs of increasingly
sophisticated mobile handsets and the proliferation of wire-less broadband can provide a further impetus to
provision of services through mobiles. The success of the branchless banking through the BC model is itself
predicated on technology including bio-metric enabled hand-held devices and mobile connectivity. Interoperable
smart cards and POS can enable the migrant work-force to execute financial transactions securely wherever they
are.
A good example of technology leverage is the SBIs Tiny Card Accounts initiative delivers financial services through
BCs equipped with mobile phones with near field communication technology, fingerprint recognition software
21
Financial Inclusion From Obligation to Opportunity
and integrated printer. The Tiny card allows transaction of funds for multiple purposes including micro-savings,
cash deposits and withdrawals, micro-credit, money transfer, micro-insurance, cashless merchant transactions,
and disbursements of Government social welfare benefits including NREGA payments, EMI payments etc.
lEnable product innovation: Many of the innovative products being created for the financially excluded consumer
would not have been possible without the usage of technologies like mobile, wireless connectivity, bio-metrics
etc. ICT also enables rapid market testing and reduction in the time-to-market. Smart and Globe Telecom are two
telecom firms in the Philippines who are using the mobile phone platform to offer products like electronic wallet to
conduct transactions including money transfer, purchases and utility payments. A product called Text-A-Tap (TAP)
from Globe Telecom uses SMS technology to make loan repayments of micro-loan borrowers, enable remote
deposit taking, cash withdrawal, remittances and bill payment. The Celpay service of Celtel, a telecom company in
Zambia, enables consumers to perform transactions like fund transfer, pay bills and make purchases. It is estimated
11
that transactions worth 2 percent of Zambias GDP were executed through Celpay in 2006 . The success of
products like Kenyas M-PESA further underscores the role of technology in product innovation.
lImprove service efficiency: High financial illiteracy and inability to travel away from work result in simplified
procedures and quick-turnaround time as two attributes valued by the financially excluded in their interactions
with the financial institutions. Increased ICT enablement of internal procedures can address these customer
expectations. Complicated document intensive beneficiary authentication can be replaced by bio-metric enabled
verification, pass-books can be replaced by smart cards which store account and transaction history, account
balances inquiries through mobile phones and mobile phones alerts in vernacular etc are some examples where
technology enablement can bring about a step increase in the service quality and efficiency and reduce the
alienation between the financially excluded and the financial institutions.
lIncrease outreach: Central, East and North-East India have some of the largest concentrations of the financially
excluded population in India due to lack of infrastructure including roads and power and dense forestation have
had a detrimental impact on the development of the financial sector in these regions. The population of these
regions often have to travel large distances over inhospitable terrain to access a financial institution. The
continuing slow pace of infrastructure development coupled with the long gestation period of the brick and
mortar banking model will obstruct any meaningful impact in these regions. The proliferation of mobile services in
these sub-par infrastructure regions can result in an increased outreach of financial services at a faster pace
through technology enabled service delivery. Many of the financial services discussed above can be provisioned
on the current technology and available connectivity infrastructure in these regions thereby fulfilling a significant
proportion of the financial needs of the poor.
While the positive impact of ICT on financial inclusion is proven by several successful pilots in India and other countries,
the following issues need to be addressed to enable the ICT impact to be fully realised:
lThe low level of IT adoption in RRBs, PACS, MF etc institutions is a major concern as it restricts them from providing
services efficiently affordably and constraints them to scale up their operations. Without leveraging technology,
these institutions will find it almost impossible to achieve their objectives.
Keeping in mind that these institutions do not have the capabilities and capacity to invest in IT apart from piece-
meal applications, there is a need look at alternative models which can standardise applications, reduce
11
BCG Report ' The Next Billion Consumers'
22
Financial Inclusion From Obligation to Opportunity
implementation cost and schedules and keep operating costs low. Main-streaming of technology paradigms like
cloud computing and web 2.0 can help realise these objectives. The relative similarity of business processes across
these institutions also makes these institutions suitable for the ICT services delivered through the cloud. Agencies
like IBA and IDRBT can play an important role in defining the model business processes, security protocols, data
privacy requirements and application and network architecture frameworks to enable the technology industry to
develop standardised applications and business models.
lThe role of technology in scaling financial inclusion necessitates that standards for the core technology
components in a financial inclusion solution are defined, published and adhered to by the solution providers.
Standards not only ensure interoperability but also reduce cost of solution development and most importantly
allow secure systems which are essential to protect the hard earned assets of the poor.
A majority of the financial inclusion solutions being deployed are predicated on bio-metrics e.g. fingerprints and
smart cards for identity validation and accessibility respectively. Unfortunately, there is a lack of standards for the
smart cards with many of the smart cards just being basic swipe cards instead of having dynamic data storage
capabilities. Cards working on different protocol standards results in beneficiaries getting locked to financial
institutions and also inhibit usage across different POS devices thereby restricting outreach which is essential
feature for the migrant population. To ensure interoperability, open standards for smart cards need to be
prescribed.
Standards for encryption, security e.g. 3-DES and for capturing, storage and transmission of bio-metric data must
be defined and published. This is critical so that the beneficiary data can be re-used across applications and
institutions.
All financial inclusion technology solutions must undergo periodic audit and certification for standard compliance
by conformity assessment bodies.
lEven for the larger banks, the upfront investment for financial inclusion is often a challenge. Creating centralized
financial infrastructure like National Financial Inclusion Switch similar to the National Financial Switch (NFS) can
reduce transaction costs and increase interoperability. Similarly a national remittance system can reduce
remittance transaction costs and enable seamless anywhere and anytime remittances.

Role of inter-sector Collaboration
While the financial sector has the primary responsibility for addressing financial exclusion, the scale of the challenge will
require financial institutions to actively collaborate with their peers in other sectors in order to create the required
products and distribution innovations. Some typical inter-industry collaboration opportunities which can be leveraged
are elucidated below:
Telecom: It is highly likely that while many of the rural poor do not have bank accounts, they have mobile phones. This
ubiquity of the mobile phone and wide reach of the mobile networks presents a tremendous opportunity to firstly
deliver financial services at low price points and secondly create products with low transaction costs and wide access.
This collaboration between the telecom and financial industry firms is mutually self-serving. For the financial
institutions, this collaboration offers a low cost delivery channel and for the telecom firms this collaboration offers a
medium to offer value added services (VAS) to their subscribers and boost their ARPU (Average revenue per user).
23
Financial Inclusion From Obligation to Opportunity
Some of the products and services which can be deployed through this collaboration are as follows;
lRemittances
lBalance inquiry
lBill payment
lPayment transactions at POS
lMobile wallets
lPeer-to-peer payments
lAlerts
The security aspect of mobile banking transactions can be managed through encryption and operator portability can
be ensured by using the phone instead of the SIM card to host the applications and the data.
Telecom firms have developed a close relationship with their subscribers through regular interactions including bill
payments and selling add-on services etc. This relationship between a telecom firm and its subscribers can be
leveraged by the financial institutions to firstly offer financial products and secondly use the mobile phone distribution
network to provide simple financial services like collections and small denomination cash withdrawals. In essence, a
telecom firms can discharge all the typical functions of a BC and do much more. Unfortunately, telecom firms are not
allowed to offer BC services by the RBI.
The strict background checks and identity validation conducted by the telecom firms before granting connections can
also be used by financial industry firms as a viable background check. Additionally, bill payment history of a telecom
subscriber can act as a surrogate credit history of the individual.

Post Offices: Many developing countries have reasonably well functioning postal networks. Not only do the post-
offices have a large outreach including remote areas, they are also trusted by the general population. The postal staff
including postmen often belong to the local communities and hence enjoy a high degree of acceptability.
India with 155,516 functional post-offices at end of March 200512 has a well established postal network. The Indian
postal department is the only organization apart from banks that can open bank accounts in India. Apart from providing
postal services, post offices in India also offer basic financial services including saving accounts, simple saving products,
basic life-insurance etc.
Post offices do not have the core competence to develop financial products beyond the basic and thus will not be able
to offer the full gamut of financial services including non-life insurance (health, livestock, crop and weather etc.), credit
products, financial counselling etc.
Through collaboration, the post offices can become a low cost distribution channel for the products and services of the
financial institutions. Post offices can also host POS machines in a secure environment which can be accessed by the
poor through smart cards. If the financial sector can also help in increasing the IT adoption in the post-offices, it will
further increase the efficiencies of the post-office based distribution channel.
FMCG and Retail: The FMCG sector has created a very stable distribution channel which reaches some of the most
remote regions of India. Even in small rural hamlets, FMCG products are available in tiny retail outlets. This distribution
channel operates efficiently through well established delivery tiers.
12
RBI Report on Currency & Finance 2006-08 - Vol. II
24
Financial Inclusion From Obligation to Opportunity
The FMCG distribution network offers a low cost channel for offering simple financial industry products and services
including POS based access to beneficiary bank accounts.
NGOs and social organizations: Local NGOs and social organizations can play a vital role in promoting financial literacy
and providing financial counselling services to the financially excluded population. These organizations have deep
roots in the local communities and enjoy the trust of the local population which the staff of the financial institutions will
take a long time to develop.
The financial institutions should develop formal relationship with NGOs and invest in training the NGO staff in
providing financial counselling, providing collateral and also meeting basic expenses. Institutions like NABARD can
also provide small grants to NGOs who are engaged in capacity building.
Financial exclusion is often described as a scourge which perpetuates poverty and leads to several social ills. With over 2
billion financially excluded people globally, addressing the complex and deep-seated challenge of financial exclusion
does not lend itself to simple solutions.
Achieving sustainable financial inclusion will require a systemic effort which leverages technology, regulatory
framework and appropriate business models cohesively. It is not a preserve or responsibility of one sector and will
instead require game-changing innovations which more often than not occur at the intersection of different sectors
e.g. banking and telecom.
However the financial sector will have to lead the way as many of the current issues exist because of the reluctance of
the financial sector to embrace change and innovation. Financial sector institutions which address financial inclusion
as an opportunity instead of a social obligation and commit themselves to creating innovative products and services
will find themselves ahead of the curve competitively.
The growing ubiquity of IT and proliferation of wireless communication coupled with falling hardware and mobile
phone costs provides a unique opportunity to deliver mainstream financial services to the poor at the required scale
and affordability by leveraging ICT.
Appropriate and affordable technology accompanied by the right business model can make financial inclusion
economically viable for the formal financial sector and transform it from an obligation to an opportunity.
Summary
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About TCS Government Industry
Solutions Unit
TCS' Government Industry Solutions Unit is primarily engaged in
helping national and state governments to align their services with the
changing needs of citizens and stakeholders. With the rapid pace of
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