FINANCIAL INCLUSION : PROBLEMS AND STRATEGIES

Financial inclusion is delivery of banking services at an affordable cost to the vast sections of disadvantaged and low income group. The exclusion is of three types:  1.People who do not have access to a regular financial system.

2. People who have limited access to banks and other financial services.

3. People who use inappropriate products.

Drivers for exclusion:

1. High transaction cost.

2. Transactions of small value.

3. Lack of banking habit.

4. No proof of identity.

5. Illiteracy

6. Lack of information about existing products.

7. No collateral security.

8. Precious experience of rejection by the banks.

9. Lengthy procedure of availing credit.

10. Fear of debt

11. Inappropriate product

12. Remote location of the village.  

13.Fear of fraud- misappropriation of their funds.

14.Failure of chit fund and similar institutions reducing faith in financial institutions.

Extent: In our country, 20 crores of people do not have access to banking services. According to World Bank – NCAER rural finance access survey (2003), 70% of the poor and landless farmers do not have access to bank accounts. 87 % of them do not obtain credit from formal sources. As per the census 2001, the rate of deposit accounts to the

adult population is only 59%.

 

Coverage of banking services:

 Region No of account per100 of No of account per 100 of

population. adult population. Northern 43 84North eastern 19 37Eastern 22 41Western 35 61Southern 39 65Central 26 51All India 31 59

Delhi, Chandigarh, Goa, Kerala, and Pondichery are over banked. Major states like Assam, Rajasthan, Bihar, Orissa, Chhatishgarh, and M.P. lag behind.

Indian experience:

1.Commercial banks have 338 million savings and current accounts.2.The annual rate of growth in accounts is 3%, above the rate of population growth.3.Number of loan accounts is 77 million.4.The growth in rural loan accounts is 2.5% whereas it is 14 % in urban areas (2000-05)5.Number of bank offices is 47586 (almost constant from 2000-05).

International experience  U.S.A In spite of Community Reinvestment Act (CRA), 22% of low-income people do not have bank accounts. 

France 1984 banking act has made right to bank account a legal right. U.K. Financial inclusion fund has been created so that the poor can operate their account through Post Office Card Accounts (POCA). Belgium Post Office acts as a bank for the poor. Australia: Self services banking and older Australian program has been implemented where the appointed person demonstrates the use of ATM, telephone & internet banking. Bangladesh Grameen Bank is the model of financial inclusion. Nepal : 26% households have bank account and 38% get loan from the informal sector (2006)

South Africa: A low cost national banking account called – is lacunas through 4 major retail banks, first National Banks Ned Bank, standard Bank and rest Bank. 3 million m- banks accounts well agents million a year (2005-06) 90% of whom are female account holders, mobile phone, satellite phone. Portable computers and smart cards are low cost-processions ways for deposits and payments. Kenya: Faulu (MFI) introduced m-pesa that allows customers to receive and repay loan through mobile phone. Uganda: Uganda Microfinance Union trains merchants who host its pos devices to help poor illiterate clients. The banks equip Bank Correspondent with a pos device such as card reader or PC. 

Brazil: Banks in Brazil use point-of sales terminals such as bank card readers at retail and postal outlets to deliver savings, credit, insurance and money transfer products. Customers of Bunco Popular can open account by keying their tax identification number and postal card into the terminal.

Two state-owned banks have developed 27000 banking correspondent e.g. post-office, super market, grocery store etc. Bolivia: Prodem (Bolivia) designed ATMs with color-coded touch-screens and audio instructions available in Spanish and two major languages of the state. Malaysia- Opportunity Bank accepts finger print, biometrics stored in a small card and in lieu of pass port/ driving license for opening bank account.

RBI’s Policy

1.No frills account- The customer need to maintain nil or minimum balance. 5 lakh accounts have been opened.2.General purpose credit card (GCC) .It provides credits upto Rs 25000/- (revolving credit) based upon income in rural and semi-urban areas.3.There is also Kisan Credit Card for agricultural financing.4.Know your customers. The procedure for opening accounts with balance less than Rs. 50000/- have been simplified.5.Financial literacy.6.Pilot project in one district of each state to attain 100% financial inclusion.7.Lending targets to mandatory sectors8.Interest rate ceilings9.Government subsidies chanelled through financial through

financial institutions to help the disadvantaged sector.10.Accenting of banking correspondents for reaching the

interior villages and disadvantaged sections.

Strategy: Banks are to invest in technology to lower cost per transaction, usability (of illiterate customers) perceived value addition and continuous consumer education would make technology useful for banks and the mass.

 Regulatory issues- The relevant issues are- allowing MFIS

to collect limited savings from the registered clients subject to capital adequacy of the organization and liquidity considerations and allowing them to act as agents of banks.

 Partnership model: ICICI tying up with internet kiosks MFIs,

SHGs all to deliver credit, savings and insurance products to retail customers

Financial literacy: - Establishment of farmer training centre, village knowledge centre to disseminate knowledge and information to rural clientele. Using MFI, NGOs: Using NGOS and MFIs for providing credit plus services for linking with community based organizations to get over information gap and access barriers. Compliance, Standardization and innovation- National consumers’ council summarized the process of inclusion as compliance, standardization and innovation. Innovation: Creating Basic Bank account, remove supply and demand side barriers.  

Standardise: - Standardise to limit danger of debt, to allay fear of fraud,

Cash Works: The need for control and visibility standardization/lowering of default charges  Compliance-What banks do and how banks do are important for financial inclusion.

WHO CAN BE THE BUSINESS FACILITATORS?

The following organisations and their members/staff can be business facilitators.

1.Non-Government Organizations (NGOs)2.Farmers Clubs.3.Community Based Organizations (CBOs)

4. Co-operative Societies5. Post Offices6 Insurance Agents7. Village Knowledge Centres (VKCs)8. Agri-Clinics and Agri Business Centres9. Krishi Vigyan Kendras10.KVIC/KVIB units in the area11. IT enabled Rural Outlets of Corporate Entities12.Farmers’ Service Societies13.Well functioning Panchayats.

Apart from the above organisations and institutions, individuals may also function as Business Facilitators. An illustrative list of such individuals is given below:

Primary and Secondary School Teachers Members of NGOs/LBOs

Members of Self Help Groups Anganwadi/Balwadi workers Primary Health Centre Staff Postal Staff such as Post Masters/Village Post Masters,

Postman, Postal Clerks Municipal and Gram Panchayat staff Village Officer and his staff Members of Farmers’ Service Societies Ration Dealers Shop Keepers and Kirana Merchants Members of any other Business Organisations and

Institutions functioning in the area.

WHO CAN BE BUSINESS CORRESPONDENTS?

Unlike business facilitators, business correspondents can also handle some cash transactions on behalf of the bank and clients. Hence, the following can function as Business Correspondent.

1. Non-Government Organizations (NGOs)

2. MFIs set up under Societies/Trust Acts.

3. Societies registered under Mutually Aided Co-operative Societies Act or the Co-operative Societies Acts of States.

4. Companies registered under section 25 of the Companies Act, 1956.

5. Registered NBFCs not accepting public deposits.

6. Post Offices

7. Insurance Agents

8. Krishi Vigyan Kendras

9. KVC/KVIB units

10.Registered Village Organizations.

Apart from the above organizations and Institutions,

individuals may also function as business correspondents,

in the light of the announcement by the Union Finance

Minister in his Budget Speech 2008-09. An illustrative list

of such individuals is given below:

Retired Bank employees Ex-servicemen Retired Government employees

BUSINESS FACILITATORS: SCOPE OF ACTIVITIES

The services performed by business facilitators generally include:

i. Identification of borrowers and fitment of activities

ii. Collection and preliminary processing of loan applications

iii. Preliminary verification of primary information/data

iv. Creating awareness among people in the villages about savings and debt products.

v. Educating people and advising them on managing money

vi. Credit (also debt) Counseling

vii. Submission of loan applications to bank’s branch

viii.Post-sanction monitoring

ix. Follow-up for recovery

BUSINESS CORRESPONDENTS: SCOPE OF ACTIVITIES

In addition to services identified for facilitation by business facilitators, the activities undertaken by the business correspondents would be such as may fall within the normal course of the banking business, but conducted at places other than the bank’s premises. These include:

i. Disbursal of small value credit

ii. Mobilisation of small value deposits

iii. Recovery of principal and collection of interest on item above.

iv. Sale of micro insurance, mutual fund products etc.,

v. Receipt and delivery of small value remittances and other payment instruments.

To mitigate risks, banks generally:

a) Specify suitable limits on cash holding by Business Correspondents

b) Specify limits on individual payments and receipts

c) Ensure that the transactions performed by them are accounted for and reflected in the bank’s books at the end of the day or at least the following working day, and

d) Ensure that all agreements/contracts with the customer shall clearly specify that the bank is responsible for the acts of commission and omission of the Business Correspondent.

RISKS AND THEIR MITIGATION

Sr. No. Risks Risks Mitigation Techniques

1 Strategic Risk

The service provider may conduct activities on its own behalf, which are inconsistent with the overall strategic goals of the regulated entity.

Inadequate expertise to oversee the service provider

The role / duties of Business Facilitator shall be publicized through media.

Proper training shall be given to them.

2 Reputation Risk

Poor service from the service provider

Customer interaction by the service provider may not be consistent with the overall standards of the regulated entity.

A feedback system from the customer shall be developed. The market enquiry from reputed persons of the village may also be done.

Proper training shall be given to them.

Sr No. Risks Risks Mitigation Techniques

3 Compliance Risk

Privacy, consumer and prudential laws not adequately complied with, by the service provider.

Outsourced service provider has inadequate compliance systems and controls.

No access to the branch record

In the event of breach of privacy, he/she may be penalized or black-listed.

4 Exit Strategy Risk

Appropriate exit strategies are not in place.

Over reliance on a single agency.

Loss of relevant skills in the regulated entity.

The replacement is possible

Stand-by arrangement should be available with the Bank.

5 Contractual Risk

Inability to enforce the contract The contractual capacity of the Business Facilitators/Correspondents shall be

Sr No. Risks Risks Mitigation Techniques

checked through due diligence check of the time of engagement.

6 Access Risk

Hinders ability of the regulated entity to provide timely data and other information.

BusinessFacilitators/Correspondents shall work in rural places where the transactions shall be manual

7 Concentration and Systemic Risk

Lack of control of individual firms over a service provider.

Systemic risk when considerable exposure to one single service provider.

Shall be checked through due diligence check and reporting system.