Financial Inclusion and IT Contribution

Financial Inclusion and How Technology can Contribute to it?

"India is failing, its rural poor with 230 million people being undernourished, the highest for any country in the world. Malnutrition accounts for nearly 50% of child deaths in India as every third adult (aged 15-49 years) is reported to be thin (BMI less than 18.5).Brought out by the United Nations World Food Program (WFP), the report points to some staggering figures. More than 27% of the world's undernourished population lives in India while 43% of children (under 5 years) in the country are underweight. The figure is among the highest in the world and is much higher than the global average of 25% and also higher than sub-Saharan Africa's figure of 28%. These targeting errors arise due to imperfect information, inexact measurement of household characteristics, corruption and inefficiency in providing funds to impoverished sector"

This news in TOI (dated 15.10.2009) reflects the Financial Exclusion and its impact citizens are facing in India.

Let us first understand what Financial Inclusion means to us:

As stated by RBI, Financial Inclusion stands for "The process of ensuring access to appropriate financial products and services needed by vulnerable groups such as weaker sections and low income groups at an affordable cost in a fair and transparent manner by mainstream Institutional players"

The need of the hour to push Financial Inclusion generated in spite of the fact that the banking industry has shown tremendous growth in volume and complexity during the last few decades. Despite making significant improvements in all the areas relating to financial viability, profitability and competitiveness, there are concerns that banks have not been able to include vast segment of the population, especially the underprivileged sections of the society, into the fold of basic banking services. Almost 60% of our population resides in rural area in India.

The scope of Financial Inclusion involves providing

Bank accounts - check in account

Immediate Credit

Savings products

Remittances & Payment services

Insurance - Health care

Mortgage

Financial advisory services

Entrepreneurial credit

Following sectors broadly describe the Financial Exclusion region:

Agricultural and Industrial Laborers

People engaged in un-organized sectors

Unemployed

Women

Children

Old people

Physically challenged people.

The consequences of this vary depending on the nature and extent of services denied. It may lead to increased travel requirements, higher incidence of crime, general decline in investment, difficulties in gaining access to credit or getting credit from informal sources at exorbitant rates, and increased unemployment, etc. The small business may suffer due to loss of access to middle class and higher-income consumers, higher cash handling costs, delays in remittances of money. According to certain researches, financial exclusion can lead to social exclusion.

From the data provided by Financial Inclusion committee (set by RBI), a conclusion can be reached which says the efforts taken by govt. has been quite palpable. But in spite of that we failed in providing banking facilities to Underprivileged section in rural and urban areas.

Key challenges faced by government as well as private players in providing financial services to these regions can be understood as follows:

- Lack of standard process for identification of individuals and SMEs

- Non availability of credit history of individuals and SMEs

- Need to provide Financial Service at bare minimum Cost

- Need to reach out to very small pockets of population which may make any FI investment inviable

- Lack of a proper business model

- Lack of an appropriate legal model

- Illiteracy within large section of population, which would need innovative ways of delivering banking channels / interaction model with banks or quasi banking entities -

Technology in Rescue:

Technology can contribute in finding a solution to these challenges. In rural finance, technology plays two key roles: implementing effective internal control when direct supervision is difficult due to distance, and decreasing the cost of penetration into more remote areas.

To promote entrepreneurship, financial accessibility in villages, providing loan is imperative. The foremost step in providing Basic Banking services, is Verifying/Authenticating a person, which may include his/her address, credit history.

Expanding the coverage of CIBIL (Credit Information Bureau India Limited) or establishing a new organization in line with CIBIL, exclusively for rural areas will help banks in accessing detailed information of a citizen or SME.

Our innovative project Unique Identification (LID) once executed successfully will provide information of an individual which can further be used to fetch credit history from CIBIL.

Providing banking services at minimum cost is a vital factor in reaching to the masses. This can be achieved by providing no-frills account, and loans of small amount at low rates. Microfinance Institutions and banks can find substantial customer base in this field as Usurers still dominate this sector even when high rate of interest that they demands from those seeking credit.

Investing to reach small pockets of population may look financially inviable, but appropriate technology, business model can help in increasing the ROI. PPP can help increasing the coverage at minimal costs.

In India where we have above 50% of population residing in villages, the only way we can reach the majority is by POST. Post Office could play a vital role in providing access to financial services, including banking, saving, credit and insurance, to financially excluded people.

An Initiative by Uttarakhand Post, where it has entered into a business tie-up with Uttaranchal Gramin Bank with the following twin objectives:-

(a) Collection of high-end deposits on behalf of the bank.

(b) Disbursement of bank loans and collection of the re-payment installments (EMI) through Savings Bank Passbook Account and with the help of GDS (Gramin Dak Sevak) staff.

Both these services are rendered by Uttarakhand Post on reasonable charges. In short the endeavor is to expand the role of an agency functionary, that India Post has being playing on behalf of Ministry of Finance for long, to that of a Commercial Bank also for the reasons of better profitability and future prospects. Providing IT solution to Indian posts where they can create business tie-ups online with banks will help in accelerating this initiative.

The root cause for advancement in banking sector in rural areas is the cost factor. Technology can help in cutting down the cost factor. Use of IT reduces the costs of financial transactions, improves allocation of resources, and increases competitiveness and efficiency. Most importantly, it enables to take any product or service to the general masses. IT has also enabled efficient, accurate and timely management of the increased transaction volume that comes with a larger customer base. The 'Anywhere Banking' through Core Banking Systems, 'Anytime Banking' through new, 24/7/365 delivery channels like Automated Teller Machines (ATMs), and Net and Mobile Banking, etc., are also increasingly becoming an integral part of the banking services. Appropriate Technology and Efficient Delivery model can help in making banking feasible and profitable in rural areas too.

The need of the hour is leveraging technology in Indian banking for providing affordable and cost-effective banking services to the masses through multi-delivery channels. Before making a commitment, Banks analyze the region which will be covered by their investment and the ROI. What if Banks can reach the end customer without opening an exclusive branch in the distant area? Mobile phone banking is not new in this in generation. Mobile phone users now belong to all strata of society, spread across metropolitan, urban, semi-urban and rural centers. Banks and financial service providers can leverage the advantage by reaching out to people through this medium.

Few proposals and initiatives in strengthening financial growth in improvised sector:

- Another route by which FI can reach the masses is by DTH. Direct to home technology is currently very widely spread in even remote places of the country. An indigenously developed technology lets user access GMAIL and other websites through DTH on TV. The same technology can be upgraded to help users interact with banks and other FIs where they can provide necessary information to the people residing in far flung areas.

- Grocery stores or Health centers in our villages can also be used in providing banking services like insurance, loan or savings.

- 3i Infotech, a leading IT company has developed Kiosk based banking, i.e. internet based, and Bio-metrically enabled exclusively for rural areas.

- The use of IT also enables banks to handle the enormous increase in the volume of transactions for millions of households for processing, credit scoring, credit record and follow-up. Other uses of technology include taking instant photographs of people opening bank accounts, and using electoral ID cards to simplify form-filling.

- Hello Money is a mobile banking service launched by Barclays in India. Barclays aims to make banking viable to all segments of the population through this service, regardless of economic status. The service is also available in India's national language - Hindi - and will, in time, be available in other regional languages. Customers only need to be numerically literate to use the service, making it very simple and convenient. The Bank also offers "no frills" and zero balance savings accounts. As of December 2008 the Bank has opened 40,726 zero balance accounts (no balance commitments required of customers) and 3,935 no frills accounts. These offer a free cheque book, access to over 25,000 Visa ATMs, free statements, a passbook facility and SMS alerts. These services are particularly aimed at market traders, artisans and micro-entrepreneurs who might otherwise be excluded from financial services.

- eChoupal, an initiative of ITC Limited to link directly with rural farmers, with the help of technology, for procurement of agricultural / aquaculture products. eChoupal was conceived to tackle the challenges posed by the unique features of Indian agriculture, characterized by fragmented farms, weak infrastructure and the involvement of numerous intermediaries. ITC Limited has now established computers and Internet access in rural areas across several agricultural regions of the country, where the farmers can directly negotiate the sale of their produce with ITC Limited. The PCs and Internet access at these centers enable the farmers to obtain information on mandi prices, good farming practices and place orders for agricultural inputs like seeds and fertilizers. This helps farmers in improving the quality of produce, and also helps in realizing a better price.

- BASIX, an Indian institute that promotes sustainable livelihoods through microcredit, has been an early adopter of technology. It operates as the business correspondent (BC) (agents who work on behalf of banks) for Axis Bank, Citibank, and the State Bank of India (SBI), to reach areas where opening a bank branch is not viable. BASIX uses mobile phones to enroll customers and carry out transactions. It has set up fixed-location BC outlets, equipped with hand-held devices which are now being converted to mobile connections. BASIX is also trying out a card, similar to smart cards, and a remittance initiative to help workers in Delhi to send money home to their villages in central India.

- ACCION International as a Microfinance Organization promotes PortaCredit technology, which allows loan officers using handheld computers

to take loan applications.1 PortaCredit has helped a number of ACCION partners in Latin America improve their level of productivity, standardization and risk management.

- UMU in Uganda is currently launching a pilot for a Remote Transaction System (RTS), which is combination of technology and business processes that will enable cash deposits and withdrawals by microfinance clients through a network of accredited third party merchants (e.g. agricultural stockists, traders, gas station managers) in rural and non-urban areas. The RTS will also facilitate the electronic capture of transaction data at the client level and the creation of an electronic identification system.

- Customized ATMs with voice interactive features and other advances in technology as mentioned above can help in achieving Financial Inclusion target.

The advancement in technology and business model used will make it cost effective, so that every small transaction will be feasible through POS. Making the POS wireless or for that matter away from any kind of network will make it feasible to be used in remote areas too. The CashCard will contain the amount you hold in it and your security PIN. When you are out of cash in your CashCard, all you need to do is go to an ATM and recharge your card with the cash present in your saving/current account. The card can also be recharged online or by using your mobile banking feature. Hence this will save the investment bank needs to make in opening an exclusive branch in a financially less profitable area.

CashCard can be used by government/banks to provide loans to Farmers; they can use it for making their medical, insurance payments. Recharging of the cards can be done from ATM or authorized outlets. POS will help to make their day to day transactions easy and secured.

Designing innovative business models specifically for the market will encourage people to come forward and invest in their future.

A recently offered Mutual Fund scheme by SBI (SBI Chota SIP) lets individual to make benefit of low monthly investment amount of 100. Similarly on the lines FIIs have started offering Life Insurance cover which varies from Rs.5000 to Rs. 50000 where the annual premium varies from Rs.60 to Rs.600.

Remittances are another unexplored field in these regions where Banks and FIs are targeting now. Some banks have tried pilot projects allowing customers to use smart cards with biometric identification to open bank accounts. The cards have been linked to mobile or hand-held connectivity devices to ensure banks can record transactions in real time. Meanwhile, some State Governments are using smart cards to send social security payments under the National Rural Employment Guarantee Scheme. The same delivery channel can be used to provide other financial services such as low-cost remittances and insurance. The National Financial Switch offers nationwide networking of ATMs and can facilitate banking transactions including remittances.

Now Banks and other FIs see their role as playing an important part in fueling the growth of the Indian economy -not just servicing successful metropolitan companies but also reaching out to ordinary people. By following programs of branch expansion, improving financial literacy and leveraging IT solutions to extend reach, they are demonstrating their determination to make financial services available to all.

One such program is the HSBC Mann Deshi Business School for Rural Women, in the Satara district of the western Indian state of Maharashtra. It was set up in December 2006 to offer micro-loans to poor women to help them set up their own businesses. The school gives girls and women with limited or no formal education training in financial literacy, marketing, technical skills and negotiation skills. It has already benefited some 6,000 women, enabling them to start their own micro enterprises and become financially independent.

Concluding remarks:

The reason why we are concentrating on Financial Inclusion now is because, we now want to focus on Inclusive Growth, we have the Banking Technology which can help in reaching millions of deserving citizens, and the fact that Poor are bankable. Technology can be a very valuable tool in providing access to banking products in remote areas. To sum up, banks need to redesign their business strategies to incorporate specific plans to promote financial inclusion of low income group treating it both a business opportunity as well as a corporate social responsibility. They have to make use of all available resources including technology and expertise available with them as well as the MFIs and NGOs.