Financial Inclusion - IT as enabler · 133 FINANCIAL INCLUSION - IT AS ENABLER low as 16 percent. At the other end, Maharashtra, credit/state GDP ratio at 116 percent and ratio is

Reserve Bank of India Occasional PapersVol. 32, No. 2, Monsoon 2011

Financial Inclusion - IT as enabler

Sanjeev Kumar Gupta * The Indian banking sector today is grappling with the issue of financial inclusion.Operatingcostofprovidingfinancialinclusionandchargesleviedontheusersareimportantdimensions of the process of financial inclusion.Technology can play an important role inreducing operating cost of providing banking services, particularly in the rural and unbanked areas. There are technologies that could drive the growth in financial inclusion. Againstthisbackdrop, thispaperoutlinesmajorstepswhichhavebeen takenso farby theReserveBank andGovernment of India to enable financial inclusion forweaker sections of Indiansociety.The effortsmade by theReserveBank in this direction so far, role of InformationandCommunicationsTechnology(ICT)withfocusonMobileBankingandfinallytheUniqueIdentification(UID)numberarediscussedindetailinthispaper.

JEL Classification : O32, O33Keywords : Financialinclusion,ElectronicPayments,Branchlessbanking,MICRO

ATM

Introduction The InformationTechnology (IT) saga in IndianBankingsectorcommenced from themid eightieswhen the Reserve Bank of India(RBI)tookuponitselfthetaskofpromotingcomputerisationinbankingtoimprovecustomerservices,bookkeeping,ManagementInformationSystem (MIS) to enhance productivity. RBI has played the guidingrolewhichhelpedbanks in achievingvariousobjectives such as theintroductionofMICRbasedchequeprocessing,ImplementationoftheelectronicpaymentsystemsuchasRTGS(RealTimeGrossSettlement), ElectronicClearingService(ECS), ElectronicFundsTransfer(NEFT),ChequeTruncationSystem (CTS),MobileBankingSystemetc.ThePayment and Settlement SystemsAct, 2007 (effective fromAugust12, 2008) designates the RBI as the authority for regulation andsupervisionofpaymentsystemsinIndia.Withincreaseinreach,size

*AuthorisAGMinDepartmentofInformationTechnology(DIT),CentralOffice.TheauthoristhankfultoDr.AnilKumarSharma,GM,DITforhisencouragement.Viewsexpressedinthepaperareentirelypersonalandnotoftheinstitution,theauthorbelongsto.

RESERVEBANKOFINDIAOCCASIONALPAPERS 130

andsignificanceofpaymentsystems,theRBIiscommittedtoassuringsafeandefficientfunctioningofpaymentsystemsbyidentifyingvariousrisks, addressing risk-reduction by putting in place risk-mitigationmeasuresandmandatingappropriaterisk.TheRBIhasalsoencouragedthe setting up ofNational PaymentsCorporation of India (NPCI) toactasanumbrellaorganisationforoperatingRetailPaymentSystems(RPS)inIndia.

Under the aegis of RBI, the Institute for Development andResearchinBankingTechnology(IDRBT),wassetupinHyderabadasaresearchandtechnologycentreforthebankingsectorforexcellenceandadvancementintechnology.ThisresultedinthecommissioningoftheINdianFInancialNetwork(INFINET)asaClosedUserGroupbasednetworkfortheexclusiveuseoftheBankingSectorwithstate-of-the-artsafetyandsecurity;CertificationAuthority(CA)functionsforensuringthat electronicbanking transactionsget the requisite legal protectionunder the InformationTechnologyAct, 2000; Implementation of theNationalFinancialSwitch(NFS)toensureinter-connectivityofsharedATMsand toprovide for fundsettlementacrossvariousbanks (nowmanagedbyNPCI).IDRBTalsoprovidesaplatformfortransmissionof electronic messages across banks using common standards, forfacilitating ‘Straight Through Processing ‘ (STP) in the form ofStructuredFinancialMessagingSystem (SFMS),which is similar tothe Society for Worldwide Interbank Financial Telecommunication(S.W.I.F.T)messagingpattern.

Recognising the need for upgrading the country’s financialinfrastructureinrespectofClearingandSettlementofdebtinstrumentsandforextransactions,TheReserveBankofIndiainitiatedthemovetosetuptheClearingCorporationofIndiaLtd.(CCIL).Thecountry’slargest bank, State Bank of India, took the lead in setting up of the CCIL.TheothercorepromotersofCCILareLIC,IDBI,ICICIBank,HDFCBank,andBankofBaroda.CCIListhecountry’sfirstclearinghouseforGovernmentSecurities,Repos,Forexandotherrelatedmarketsegments.

FINANCIALINCLUSION-ITASENABLER131

Section II

Financial Inclusion - Concept and Definition

Thereisnocleardefinitionoffinancialinclusion.Afewdefinitionsintheliteraturearementionedasunder:

Financial inclusion means delivery of financial services ataffordablecoststosectionsofdisadvantagedandlowincomesegmentsof the society. Defining financial inclusion is considered crucial foridentifyingthefactorsthatleadtolowlevelofaccesstothefinancialsystem.Asmeasuring inclusion isperceived tobedifficult,financialinclusionisgenerallydefinedintermsofexclusionfromthefinancialsystem.However,financialinclusionisnotjustaboutphysicalaccesscausedbythechangingtopographyoffinancialservices.Therefore,thedebatehasnowbroadenedtoincludealltypesofpeoplewhomakelittleornouseoffinancialservicesandtheprocessesoffinancialexclusion(FordandRowlingson,1996;Kampsonandwhyley,1998).

“Theprocessofensuringaccess tofinancialservicesand timelyandadequatecreditwhereneededbyvulnerablegroupssuchasweakersectionsandlowincomegroupsatanaffordablecost”-TheCommitteeonFinancialInclusion(Chairman:Dr.C.Rangarajan,2008)

Inmostdevelopingcountries,alargepopulationparticularlyoflowincome,hasverylittleaccesstofinancialservices.Asaconsequence,manyofthemhavetonecessarilydependeitherontheirownorinformalsourcesoffinanceandgenerallyatanunreasonablyhighcost.AreportoftheNationalSampleSurveyOrganisation(NSSO)mentionsthat76percentoftheruralhouseholdsinthecountrydependonloansfrommoneylendersastheirsourceoffinance.

Financial inclusion, as far as banks are concerned, seems to begeographicallylimitedtosomepartsofthecountry.Inordertoanalysethe spread of banking services, two ratios i.e. (i) State wise BanksCredit-depositratio(ChartI)and(ii)amountofbankcreditwiththeStateGDP(ChartII)arecalculated.

In some states, the credit-deposit ratios are very low, implyinginter alia, thattheirfundsarenotbeingusedbythestate.Perhapsthe


rootcausemaybethefinancialexclusion.Thisalsoindicatesthatbanksarereluctantingivingcredittothesestatesduetovarietyofreasons.Thecredit-depositratiosofsomestatesareTamilNadu(114percent),Maharashtra(81percent),UtterPradesh(44percent)andlowestisinArunachalPradesh. Thusitisclearthatsomepartsofthecountryareunder-bankedespeciallythenorth-east.Ontheotherhand,thesouthernstates are known to have a strong bank branch network and hence their CDratioishigh.

Ifwetakethegrossdomesticproductof thestatesandcomparewith theamountofbankcredit, the ratio shouldbemoreor less thesame.Thatwouldmeanthatbanksarelendingtheirfundsinproportionto thesizeof thestateeconomy.But therearewidevariations in thecredit/stateGDPratio.North-Eaststatesareatthebottomwithcredit/stateGDPislessthan18percent.ForBihartoo,thispercentageisas

Chart I: Bank Credit/Depositas on March 2011

114110

908177737272666460

5251

444340383736353533312929262423

Tamil NaduAndhra Pradesh

RajasthanMaharashtra

PunjabKarnatakaKeralaHaryanaGujarat

West BengalMadhya Pradesh

ChhattisgarhOrissa

Uttar PradeshMizoram

Himachal PradeshSikkim

Jammu & KashmirAssam

UttarakhandJharkhandManipurTripuraGoaBihar

NagalandMeghalaya

Arunachal Pradesh

Percent

Chart II: Bank Credit/ State GDP(current) as on March 2011

4238353433322727272626252423222019161616151312

4452556272

116

Madhya PradeshJammu & Kashmir

Uttar PradeshOrissaGoa

ChhattisgarhJharkhand

Himachal PradeshUttarakhand

SikkimAssam

MizoramBihar

TripuraMeghalaya

Arunachal PradeshManipurNagaland

Andhra PradeshPunjabKerala

West BengalRajasthanHaryanaGujarat

Puducherry

KarnatakaTamil NaduMaharashtra

Ratio


low as 16 percent.At the other end,Maharashtra, credit/state GDPratioat116percentandratioissimilarforthestatesofTamil-NaduandKarnataka.Fromtheanalysis, it isclearthatstatessuchasUttarPradesh,Bihar,ChhattisgarhandtheNorth-Eaststatesarereceivingfarlessbankcreditthanwarrantedbythesizeofthestateeconomy.

Main factors affecting access to financial services: Thefinancialinclusion can be seen to have two categories of barriers, viz.,demandandsupplysidebarriers.Thefactorsthatdrivethesebarriersarelistedasunder:

Demand Side Barriers: Thebarriersarisingoutof thedemandsidefactorsmaybecharacterizedbythefollowingfeatures:

Complexity:The excluded sections of the society find financialservices complex in nature. They see no reason to go to the banksfor conducting small transactions, which in their opinion, are timeconsumingandperplexing

Place of living: Generally commercial banks operate only incommercially profitable areas and it would not be viable for banksto open branches in the remote villages. People who live in underdevelopedareasfinditverydifficulttoreachthenearestbankduetotransportation cost and wages lost in travelling to the bank

Limited literacy: Financial illiteracy and lack of basic education areprohibitingfactorsleadingtonon-accessoffinancialservices.

Convenienceandaffinity towards informalsector:Theexcludedsectionofthesocietyfindsinformalsector(suchasthemoneylenderorthepawn-broker)moreuser-friendlyandaccessibleandassuch,theydevelopanaffinitywhichalwaysdrivesthemtoapproachthissectorfortheircreditneeds.

Supply Side Barriers: The supply side of barriers though not many,maybecharacterisedbythefollowingfeatures:

Legal identity: Inability to provide a legal identity such as voter id, residence proof, birth certificates, etc. often excludewomen andmigrantsfromaccessingfinancialservices.


Outreach Issue: Very often, even if a person is bankable, thedistances are too long for services & supporting the accounts at reasonablecosts.

Section IIITechnological Developments in Banks

DevelopmentsinthefieldofInformationTechnology(IT)stronglysupport the growth and inclusiveness of the banking sector, thereby facilitating inclusive economic growth. IT not only enhances thecompetitiveefficiencyofthebankingsectorbystrengtheningback-endadministrativeprocesses,italsoimprovesthefront-endoperationsandhelpsinbringingdownthetransactioncostsforthecustomers.Ithasthepotentialoffurtheringfinancialinclusionbymakingsmallticketretailtransactions cheaper, easier and faster for the banking sector as well asforthesmallcustomers.TheReserveBankhas,thus,beenactivelyinvolved inharnessing technologyfor thedevelopmentof theIndianbankingsectorovertheyears. AmajortechnologicaldevelopmentinbankingsectoristheadoptionoftheCoreBankingSolutions(CBS).CBSisnetworkingofbranches,whichenablescustomerstooperatetheiraccountsandavailofbankingservicesfromanybranchoftheBankonCBSnetwork,regardlessofwhere the customer maintains his/her account. The customer is nomore the customerof aBranchashebecomes theBank’s customer.Thus,CBSisasteptowardsenhancing,customerconveniencethrough,Any-where,AnytimeBanking. It is important to leverage on to thistechnologicaladvancementtolookatareasbeyondCBSthatcanhelpinnotjustdeliveringqualityandefficientservicestocustomersbutalsogeneratingandmanaginginformationeffectively. Another major technological development, which hasrevolutionised the delivery channel in the banking sector, has been the growthofAutomatedTellerMachines(ATMs).Thebankingspacehasseen considerable growth through theATMs, (approximately 87000ATMsatpresent)but the samehasbeen restrictedprincipally to theurban/metroareas.Aspertheexistingrules/regulations,onlybanksarebeingpermitted to set upATMs in urban/metro areas.Tier III toVIunbanked/underbankedareashavenotwitnessedmuchATMpresence.


Intheabovecontext,RBIhasreviewedtheextantpolicyonATMsandit has been decided to permit non-banks to set up, own and operateATMstoacceleratethegrowthandpenetrationofATMsinthecountry.SuchATMswill be in thenatureofWhiteLabelATMs (WLA) andwould provide ATM services to customers of all banks. Non-bankentitiesproposingtosetupWLAshavetomakeanapplicationtoRBIforseekingauthorisationunder thePaymentandSettlementSystemsAct2007.

DevelopmentofNationalPaymentSystems:Thepaymentsystemcouldbebroadlydividedintwosegments:

Paper-based Payments: Use of paper-based instruments (likecheques, drafts etc.) account for nearly 60 percent of the volumeoftotalnon-cashtransactionsinthecountry.Invalueterms,theshareispresentlyaround11percent.ReserveBankhad introducedMagneticInk Character Recognition (MICR) technology for speeding up andbringinginefficiencyinprocessingofcheques.Recentdevelopmentsin paper-based instruments include launch of Speed Clearing (forlocalclearanceofoutstationchequesdrawnoncore-bankingenabledbranchesofbanks) and introductionof cheque truncation system (torestrict physicalmovementof cheques andenableuseof images forpaymentprocessing).

Electronic Payments: The overall thrust is to reduce the use of paperfor transactionsandmove towardselectronicmode.Followingarevariouselectronicpaymentservicesavailableinthecountry:

Electronic Clearing Service (ECS)/National ECS (NECS):ECS isanelectronicmodeofpayment / receipt for transactions thatare repetitive andperiodic in nature.ECS is usedby institutions formaking bulk payment of amounts towards distribution of dividend,interest, salary, pension, etc.,orforbulkcollectionofamountstowardstelephone/electricity/waterdues,cess/taxcollections,loaninstallmentrepayments,periodicinvestmentsinmutualfunds,insurancepremiumetc.Essentially,ECSfacilitatesbulktransferofmoniesfromonebankaccounttomanybankaccountsorviceversa.


NationalElectronicFundsTransfer(NEFT):NEFTisapaymentsystemfacilitatingone-to-one funds transfer.Under this, individuals,firms and corporate can electronically transfer funds from any bankbranchtoanyindividual,firmorcorporatehavinganaccountwithanyotherbankbranchinthecountryparticipatingintheScheme.Thus,thisisaninterbankfundtransfersystem.

RealTimeGrossSettlement(RTGS)System:

This Real Time Gross Settlement is a continuous (real-time)settlement of funds transfer individually on an order by order basis(without netting). ‘Real Time’ means the processing of instructionsat the time they are received rather than at some later time. ‘GrossSettlement’means the settlementof funds transfer instructionoccursindividually(onaninstructionbyinstructionbasis).ConsideringthatthefundssettlementtakesplaceinthebooksoftheReserveBankofIndia,thepaymentsarefinalandirrevocable.

Pre-paid Payment Systems: Pre-paid instruments are paymentinstruments that facilitatepurchaseofgoodsandservicesagainst thevaluestoredontheseinstruments.Thepre-paidpayment instrumentscanbeissuedintheformofsmartcards,magneticstripecards,internetaccounts, internet wallets, mobile accounts, mobile wallets, papervouchers,etc.

Point ofSale (POS)Terminals /OnlineTransactions: There are overfivelakhPOSterminals inthecountry,whichenablecustomerstomakepayments for purchases of goods and services bymeansofcredit/debitcards.TofacilitatecustomerconveniencetheBankhasalsopermittedcashwithdrawalusingdebitcardsissuedbythebanksatPOSterminals.

TheeffortsofRBIaimedatpromotingelectronicpaymentsystemsvis-à-vis paper basedpayments are evident,with both the value andvolumesofthesesystemsregisteringimpressivegrowthratesasshowninthefollowingchartsIIIandIV.


Section IV

RBI’s Efforts for Financial Inclusion

Thebriefoutlineof theeffortspursuedby theRBIforfinancialinclusionare:

No frills accounts:TheAnnualPolicyStatement ofApril 2005,while recognising the concerns in regard to the banking practices that tend to exclude rather thanattractvast sectionsofpopulation,urgedbankstoreviewtheirexistingpracticestoalignthemwiththeobjective

Chart III: Volume wise share of Paperbased vs Electronic transactions

0

20

40

60

80

100

120

2008-09 2009-10 2010-11

Perc

ent

Paper Electronic

67.2 64.7 59.1

32.8 35.3 40.9

Chart IV: Value wise share of Paperbased vs Electronic transactions

0

20

40

60

80

100

120

2008-09 2009-10 2010-11

Perc

ent

Paper Electronic

83.9 88.3 89.7

16.1 11.7 10.3


of financial inclusion. Inmany banks, the requirement ofminimumbalance and charges levied, although accompanied by a number offree facilities, deter a sizeable section of population from opening /maintainingbankaccounts. In thiscontext,withaview toachievingtheobjectiveofgreaterfinancialinclusion,allbankswereadvisedtomakeavailableabasicbanking‘no-frills’accounteitherwith‘nil’orverylowminimumbalancesaswellaschargesthatwouldmakesuchaccountsaccessibletovastsectionsofpopulation.

Easier credit facility: RBI asked banks to introduce a GeneralCreditCard(GCC)facilityupto`25,000,fortheirconstituentsinruralandsemi-urbanareas,withaviewtoprovidingcreditcardlikefacilitiesinruralareaswithlimitedpoint-of-sale(POS)andlimitedautomatedtellermachine(ATM)facilities,basedontheassessmentofincomeandcash.

SimplerKnowYourCustomer(KYC)norms: In a country, where mostofthelowincomeandpoorpeopledonothaveanyidentityprooforproofofaddress,itisverydifficulttohaveKYCnormsthatinsistonproductionofsuchdocuments.Inordertoensurethatpeoplebelongingtolowincomegroupinurbanandruralareasdonotencounterdifficultiesinopeningbankaccount,theKYCprocedureforopeningaccountswassimplifiedforthoseaccountswithbalancesnotexceeding`50,000andcredittheretonotexceeding`100,000inayear.

Bank branch andAutomatedTellerMachines (ATM) expansionliberalization: IntheOctober2009PolicyReview,RBItookafurtherbig step by freeing branch opening in towns and villages with population below 50,000. Domestic scheduled commercial banks (other thanRRBs)arenowfreetoopenbranchesintownsandvillageswithlessthan50,000populationandareenjoinedtoensurethatatleastone-thirdofsuchbranchexpansionhappensintheunderbankedareas.ThiswillbeoneofthecriteriaintheReserveBank’sconsiderationofproposalsbybanks toopenbranches inmajor city (tier1) centres. Inorder toensurefairpricingandenhancedaccessoftheATMswhichhavealreadygainedprominenceas adeliverychannel forbanking transactions inIndia,RBIunder its “FreeATMaccesspolicy”sinceApril01,2009


ensures that no charges are payable for using other banks’ATM forcashwithdrawalandbalanceenquiry.However,bankscanrestrictthenumberofsuchfreetransactionstoamaximumoffivepermonth.

Businesscorrespondent(BC)/BusinessFacilitators(BF)model-Branchlessbanking:

With the objective of ensuring greater financial inclusion andincreasingoutreachofthebankingsector,theReserveBank,inJanuary2006 permitted banks to use intermediaries as Business Facilitators(BF) / Business Correspondents (BC) for providing financial andbankingservicesleveragingupontheInformationandCommunicationTechnology(ICT).TheBCswereallowedtoconductbankingbusinessas agents of the banks at places other than the bank premises. ThecategoriesofentitiesthatcouldactasBCswerealsospecified.

The Business Facilitators (BFs) may be used for facilitationservices which may include identification of borrowers, collectionand preliminary processing of loan applications, creating awarenessaboutbankproductsandeducationandadviceonmanagingmoneyanddebt counseling, processing and submission of application to banks,promotionofSelfHelpGroups/JointLiabilityGroups,postsanctionmonitoring,followupforrecovery,etc.NoapprovalofRBIisrequiredforusingbusinessfacilitatorsfortheservicesmentionedabove.

IndividualBCs/InstitutionalBCs,apartfromtheaboveservicescan disburse small value credit, recover principal/ collect interest,collectsmallvaluedeposits,sellmicroinsurance/mutualfundproducts/pensionproducts/otherthirdpartyproducts,receiveanddeliversmallvalue remittance /otherpayment instruments.Whilebanksmaypayreasonablecommission/feetotheBFs/BCs,bank’sagreementwiththeBFs/BCsshouldspecificallyprohibitthemfromcharginganyfeeto thecustomersdirectly for services renderedby themonbehalfofthebank.Inorder toestablishitself, theBCModelhadtoovercomethreehurdlesthatarecommontoanynewpaymentssystemwhicharediscussedbelow.

Trust/Brand: Banks should ensure that the customers arecomfortable and have confidence and reliability in the new system


whichmayincreasestrongcustomersenseofaffinitywithandtrustintheoperator.BanksneedtoconstituteGrievanceRedressalMachinerywithinthebankforredressingcomplaintsaboutservicesrenderedbyBFs /BCs and give wide publicity about it through electronic and print media.BanksshouldalsoprovidetheenvironmenttoBClikehisownemployeeandredress theirproblemssoas tomotivatethemtoworksincerely.

Outreachandeducation:Thevaluetothecustomerofapaymentsystemdependsonthenumberofpeopleconnectedtoandactivelyusingit.SothepresenceoftheBCisrequiredintheareasothateitherhecanvisitthepersonorpersoncanapproachhimincaseofanytransaction.In order to retain BC reasonable remuneration and incentive pay isrequired.RBImayensureinteroperabilityofBCssothatpeoplemayhavethechoicetochoosethemforthebusinesstranscations.

Viablebusinessmodel/pricing:TheviabilityoftheBCmodelhasremainedthemostcriticalissuewhichhasledtothemodelnottakingoffasenvisaged.Amajorityofno-frillaccountsopenedbyBCshaveremainednon-operational.Assuch,openingoftheaccountstoprovidedeposit services to beginwith and subsequentlywiden the coverageof activities, with a view tomaking these accounts profitable, havenot made the desired progress. In order to ensure that accounts areoperationalthereisaneedforlegislationfromtheGovernmentmakingitmandatorytotransferallthesocialbenefitsthroughtheseaccounts.Oncethisisdonethebankinghabitwillstartdeveloping.

MonitoringofBCs-roleofICT-Inordertoachievetheabove,banks should closely monitor the BCs during their course of theirperiodicalvisits to thebranches.BanksmaydeviseanOff-SiteRealTimeMonitoring system, amobile-based IT initiative which uses acombinationofGPS(GlobalPositioningSystem)andGPRS(GeneralPacketRadioServices)technologiesthroughcellphonesformonitoringthe same. Banks have to invest one-time cost for software packagedevelopment, procurement of cell phones and charges for GPRSconnectivity.TheGPRStechnologyallowscellphonestocapturerealtimeimagesofBCatworkwiththedateandtimeofthepictureaswellas


thestampoflatitudeandlongitudealongsidetheimage,superimposedonaGooglemaplayer.

ThefacilitytoregisteracomplaintthroughSMSagainstBCwhichshouldgoto theconcernedofficialsunder that jurisdiction, timelinefor redressal, should also befixed.Thiswill build confidence in thebusinessmodelandmakeitasuccess.

Section V

Mobile Banking: Why a Requirement of a New Banking Channel?

Nowadays,morethan60percentofthepopulationisinpossessionofamobilephone.Thisincludesalargesectionoftheruralpopulation.People have started understanding the value, convenience and ease of owningamobilephone.Mobilebankinghascomeinhandybecauseoflittleornoinfrastructurecosttothebankandnoadditionalinvestmentfromcustomers.So thismaybe auseful channelwheremostof thepopulation is unbanked. Mobile Phone, a Personal Device, whichincreasessecurity thoughSecondFactorAuthentication,mayalsobeadded.Oncomparingmobilebankingwithbranchbankingandinternetbankingmobile,mobilebankingcouldbemostaccessiblewithlowestcost of services

What exactly is amobile based payment? Withmobile devicesbecoming integral to people’s lives, banks are seeking to leveragethe ubiquity ofmobile phones to create a cost-effective distributionchannel,rapidlyinnovate,extendreachacrosssegmentsandimproveconvenienceandsecurityofuse.However,duetoconsumerconcernsregarding security, the adoption of this channel for value-based transactionshasbeenlimited.Oneoftheissueswithmobilepaymentsinthemarkettodayisthelackofclearandsharedinformationacrosstheindustry.

Mobile based payment: Mobile based payment is defined as apayment(transferoffunds)wherethemobilephoneisinvolvedintheinitiationandconfirmationofthepayment.Thelocationofthepayerisnotimportant:hemayormaynotbe‘mobile’or‘onthemove’orataPointofSale.Themobilepaymentwouldmakeuseofcashredundant.


One could pay a vegetable vendor/ kiranashoppayment,whodisplaysamobileNumberandMMIDatshop,instantaneously.InIndia,ithasbeendecidedtoadoptthebank-ledmodel.

NationalPaymentsCorporationofIndia(NPCI),acompanyunderCompanies Act, incorporated in December 2008 is facilitating theInterbankMobilePaymentService(IMPS).IMPSisamoneytransfersysteminwhichonecansendmoneytootherbankaccountsinstantly,the sender should use mobile banking to send money, the receivermobilenumber shouldbe registeredwithhisbankand themoney iscreditedtoreceiversaccountinstantly.

ForregistrationtheRemittermustregisterformobilebankingandgetMobileMoneyIdentifier(MMID)&MobileBankingPin(MPIN)forinitiationofatransaction.MMIDisa7digitnumber,tobeissuedbythebanktothecustomeruponregistrationandtheBeneficiarymustRegisterhis/hermobilenumberwiththebankaccountandgetMMID. AremittercaninitiateanIMPStransactionbysendingaSMStohisbanktypingtheBeneficiaryMobileNumber,BeneficiaryMMIDandAmount.ThereceiverwillgetaSMSconfirmationforthecreditofhisaccount.

Section VI

Unique Identification Number (UID): Why a New ID?

AchallengeforresidentsinIndia,particularlytheunderprivileged,isthelackofdocumentationthattheyhavetomakeavailabletoestablishtheir identity. Many of India’s poorest residents do not have basicidentitydocumentationsuchasabirthcertificate,oraproofofaddresssuchasanelectricitybill.Theseresidentsareconsequentlyunabletoaccess services and resources – such as opening a bank account – since theyareunabletofulfiltheKYC(KnowYourCustomer)requirementsthese agencies have. The challenges increase when people migrate,sincemost identificationdocumentationinIndia isprovidedbylocaladministrationandinvalidwhenthepersoncrossesstatelines.

UID,i.e.,Aadhaarisa12-digituniquenumberissuedbytheUniqueIdentificationAuthorityofIndia(UIDAI)toallIndianresidentsafter


collectingandverifyingtheirdemographic(e.g.,location)andbiometric(e.g., fingerprint, iris) data. The information in the databasewill beusedonlyforauthenticationpurpose. Ifanyoneseeks toauthenticatethe identity of another person using the Aadhaar database, he/she will onlyreceivearesponseintheaffirmativeorthenegative.TheAadhaardatabasewillnottransmitinformationorsharedatawithanyone.

Aadhaar will become the single source of identity verification.Residents would be spared the hassle of repeatedly providingsupportingidentitydocumentseachtimetheywishtoaccessservicessuchasobtainingabankaccount,passport,drivinglicenseandsoon.By providing a clear proof of identity, Aadhaar will also facilitate entry forpoorandunderprivilegedresidentsintotheformalbankingsystemandtheopportunitytoavailservicesprovidedbythegovernmentandtheprivatesector.

AADHAAR enabled bank accounts will be opened for every resident, withhisconsent. It is envisaged thatdisbursementof social securitybenefitslikepension,scholarships,MGNREGSwages,etc. would be through Aadhaar enabled bank account. UIDAI is actively workingwithstates/centralministriestodesignateAadhaar enabled accounts for disbursalofallsocialsecuritybenefits.Theindividualwouldbeableto access his/her AADHAAR enabled bank account through a low cost interoperablemicro-ATMnetworkwhichwillhavelargegeographicalreach.

MICROATMandroleofUID

With thegovernmentkeenonexpandingfinancial inclusion, theIndianBanks’Association(IBA)isworkingoutastrategytofacilitatebranchlessbankinginvillages.Remotevillageswithapopulationofjust2,000couldgetmicroAutomaticTellerMachines(ATM)forbankingtransactions,whichwouldeffectivelymeetapromisetothiseffectinBudget2010-11.FinanceMinisterPranabMukherjeehadsaid inhisBudget speech that all villageswith a population in excess of 2,000wouldgetbankingfacilitiesbyMarch2012.

MicroATMmeanttobeadevicethatisusedbyamillionBusinessCorrespondents to deliver basic banking services.The platformwill


enable Business Correspondents (who could be a local kirana shop ownerandwillactas‘microATM’)toconductinstanttransactions.

Themicroplatformwillenablefunctionthroughlowcostdevices(microATMs)thatwillbeconnectedtobanksacrossthecountry.Thiswould enable a person to instantly deposit or withdraw funds regardless ofthebankassociatedwithaparticularBC.ThisdevicewillbebasedonamobilephoneconnectionandwouldbemadeavailableateveryBC.Customerswouldjusthavetogettheiridentityauthenticatedandwithdraworputmoneyintotheirbankaccounts.ThismoneywillcomefromthecashdraweroftheBC.Essentially,BCswillactasbankforthecustomersandalltheyneedtodoisverifytheauthenticityofcustomerusing customers’ UID. The basic transaction types, to be supportedbymicroATM, areDeposit,Withdrawal,Fund transfer andBalanceenquiry

Section VII

Could Post Office Network be used for Financial Inclusion? India Post is largest in the world Post network which covers over 1.55lakhbrancheswhichislargerthanallcommercialbanksinIndiaputtogether.Ason31stMarch2010,thenumberofruralpostofficesinthecountrywas1,39,182(89.81percent)andnumberofurbanpostoffices15,797 (10.19percent).Theexisting setupwhere89.81percentbranchesareinruralareamostsuitedtothemissionoffinancialinclusion.Onanaverage7,176peopleservedbythepostoffices;5,682inruraland20,346intheurbanareas.Averageareaservedbyonepostofficeis21km. WhileappointingindividualsasBCs,bankshavetoensurethattheseindividualsarepermanentresidentsoftheareainwhichtheyproposetooperate as BCs and also institute additional safeguards as appropriate tominimiseagencyrisk.However,incasethepostofficeleadmodelischosen,theaboveissuewouldberesolvedautomatically. Indian post needs no introduction and it provides the cheapest reliableservices to thecitizenof thecountry.Thenetworkof Indianpostbyandlargecoversentirenationespeciallytheruralareas.Post


offices are already connectedwith lease line/broadband etc with the power backup and it is easy to enhance further capacity rather than creatinganewsetup.Postofficesareprovidingremittancefacilityandcitizen can track the status of the transaction through the branch. IthasestablishedGrievanceredressalmechanism.Theimprovement intheperformanceleveloftheidentifiedpostofficeshasbeencarriedbyexternalaudit,enchasingtrustintheorganisation. TheengagementofBCsbybanksfordeliveryofbankingservicesexposesbankstomultipletypesofrisks:(i)creditrisk(ii)operationalrisk(iii)legalrisk(iv)liquidityriskand(v)reputationalrisk.Tomitigatesuchriskbanksneedtotakeappropriateaction.Incaseofpostoffice,riskmanagementwillberobust. AlmostallBCtransactionsarecashbased;theflowofcashwithBCs has been highlighted as the biggest issue.Besides the logisticsof handling large volumes of cash, it leads to increased costs andadded operational risks. Since post offices are alreadymanaging thePostOfficeSavingsBankaccounts,theriskofcashhandlingwouldbemitigated.Banksmayhaveagencyarrangementwiththepostofficeswhichmaybenefittheboth.ThoughtheviabilityoftheBCmodelisstillquestionable,thechancesofsuccessofthepostofficemodelarepositive. Given thevastnetworkof thepostofficeacrosscountry, Indianpostoffersthefacilitytocollectconsumer’sbillsonbehalfofserviceproviders from telephone /electricity /mobile phone etc., through retail post.Also it provides various retail services to the citizens ofthe country.The PostOffice SavingBank (POSB) is the oldest andlargestbankinginstitutioninthecountry.Itoperates240millionsavingaccounts.POSBisaagencyfunctionperformedbytheDepartmentofPostonbehalfofministryoffinance,GovernmentofIndia.Presentlyeight saving schemes are operated across country. These are savingaccount,RecurringDeposit,TimeDeposit,MonthlyIncomeScheme,PublicProvidentFund,KisanvikasPatras,NationalSavingCertificatesandSeniorcitizensavingscheme. Inordertoleveragethevastnetwork,ProvidentFundDevelopmentRegulatoryAuthority(PFRDA)ofIndiahasenteredintoaMoUwiththe


Departmentofpostforretailingofthenewpensionschemeatvariouspostoffices.AsregardstheBCs,thescopeofactivitiesthatcouldbeundertakeninclude(i)disbursalofsmallvaluecredit,(ii)recoveryofprincipal/collectionofinterest(iii)collectionofsmallvaluedeposits(iv)saleofmicroinsurance/mutualfundproducts/pensionproducts/otherthirdpartyproductsand(v)receiptanddeliveryofsmallvalueremittances/otherpaymentinstruments.Alltheseservicesarealreadytakencareofbythepostaldepartment,soitwouldbeaviablemodelincasepostdepartmentcanalsobegivenpartnershipinthefinancialinclusioninitiatives.

Section VIII

Conclusion The entire emphasis of the Government, RBI and banks is toopen more accounts. However, mere opening the account will nothelp furthering the cause offinancial inclusion.Thepeopleworkinginunorganisedsectorwhooftendealthroughmiddlemanandfallintotraps/clutchesofprivatemoneylendersneedtobetargetedtoincludethemunderfinancial inclusion.There is aneed that thepayment forsocialschemesshouldbedonethroughaccountpaymentsothatissueof money pilferage will be plugged. Financial inclusion requiresconsistenteffortswhichwillcomeatacost,asbanksareprofitmakingorganisations,TheGovernmentshouldmakeabudgetaryprovisionforthecostandreimbursebanksaccordingly.Banksshouldalsoprovidedoorstepbankingservicestothemasanincentivesothatotherpeoplealsojointheinclusionprogrammeofbanks.

Intheexistingsystem,thecashisdrawnfromtheBCsdrawerandsimultaneouslytheaccountoftheBCinthebankiscredited.OnceBCmodelgatherspopularity,theremaybeanissueinmanagementofcashwith BC at hand and needs to be addressed for the success of the BC model.Thecashavailability,consumerprotectionandqualityofservicedeliverycouldbeassuredwith thepromotionandencouragementofInstitutionalBCs.

FortherealsuccessoftheBCmodel,thesalary/chargestotheBCshouldberationalized.ThereisalsoaneedtoincentiviseBCforgood


work.Thebanks should show interest to recruit business correspondents (BCs)andthismaycreateemploymentopportunitiesforruralyouth,including women. There is a need for constant monitoring of theservices of the BCs which should be ensured through social audit that BCsshouldnottakeanycommission/chargesfromthepersons.

One of the reasons for slow progress in financial inclusion isabsenceofreachandcoveragebybanks.Thisgapnowcanbebridgedthroughtheuserofinformationandcommunicationtechnology.Mobilebanking /MicroATMoffers one of themost promising options forprovidingfinancialservicestotheunbankedpopulation.Mobilebankinghas taken off from an urban prospectivewhere an existing client ofthe bank is getting additional avenues to access his bank account and doingbankingtransactions.Tillnowthepotentialofachievingfinancialinclusionthroughmobilebankingappearstobemissingcompletelyforruralcustomers.

Themain reason for slow inclusion by banks is the absence ofdeliverymodelandproductsdesignedtosatisfythelowincomefamilies.Theprovisionofuncomplicated,small,affordableproductswillhelptobringthelowincomefamiliesintotheformalfinancialsector.Bankshavelimitationstoreachdirectlytothelowincomeconsumers.Theuseoftechnologyandusingeconomiesofscalewill,howeverbringdownthe cost of transaction to the banks and it will be a win - win position forbothbanksandcustomers.

Financialinclusionandtheextensionoffinancialservicestoeverycitizen of the country is a priority for theGovernment.The goal offinancialinclusioncannotbeachievedwithoutthehelpoftechnology.TheenrolmenttoUIDandUIDenabledbankaccountwillbeagamechangerintheentireprocessoffinancialinclusionplan.


References:

Ford,J.andK.Rowlingson.1966.“Low-incomeHouseholdsandcredit:Exclusion,Preferenceandinclusion”.EnvironmentandPlanning,28:1345-60.Indiapost,Annual report,2010-11. (http://www.indiapost.gov.in/Old/Report/Annual_Report_2010-2011.pdf)

Kempson, E. and C. whyley. 1998. “Access to Current Account”.London:BritishBankers’Association.ReserveBankofIndia,ReportoncurrencyandFinance,2006-08.ReserveBankofIndia,FinancialSectorTechnologyvision,2005.Reserve Bank of India,Operative guidelines for Banks on MobilebankingtransactioninIndia,2008.ReserveBankofIndia,Annualreport,2010,ReserveBankof India,Reportof theWorkingGroup toReview theBusinessCorrespondentModel,2009.ReserveBankofIndia,DeploymentofWhiteLabelATMs(WLAs).(http://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=2494)Subbarao, D. “Financial inclusion - challenges and opportunities.”SpeechpublishedinRBIbulletinJanuary2010.UIDAI,FromExclusiontoinclusionwithmicropayments2010.(http://uidai.gov.in/UID_PDF/Front_Page_Articles/Strategy/Exclusion_to_Inclusion_with_Micropayments.pdf)

UIDAI,HandbookforAadhaarenrolment.(http://uidai.gov.in/images/FrontPageUpdates/trainning_mod6.pdf)

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Financial Inclusion - IT as enabler · 133 FINANCIAL INCLUSION - IT AS ENABLER low as 16 percent. At the other end, Maharashtra, credit/state GDP ratio at 116 percent and ratio is