THE ECONOMIC TIMES All Editions, Monday, September 20, 2010
Financial inclusion: Game changer
for urban renewal
Overcoming high costs, financial illiteracy and self-exclusion by the poor is needed to bring banking to the urban underprivileged
THE country's urban population is increasing at a
faster rate than the total population. By 2030,
about 40% of Indians will be living in cities and
towns compared to the current proportion of
30%, according to a recent study by McKinsey
Global Institute. This will also lead to an increase
in the number of urban poor, currently pegged at
80 million by NSSO in a report. It is this large
section of the population that lacks access to even
the most basic banking services: savings
accounts, credit, remittances and payment
services, financial advisory services, amongst
others.
Rana Kapoor In order to facilitate financial inclusion in this
segment, we need to first understand the reasons
and sources of financial exclusion, which are
quite distinct from the financial exclusion of rural
India. Urban financial exclusion typically results
from the inability to access necessary financial
services in an appropriate form. Urban financial
exclusion is also a result of problems with
conditions imposed, pricing, marketing or self-
exclusion in response to negative experience, or
actual or perceived absence of benefits in
betterment of their social or economic conditions.
Physical access is not a critical issue for financial
exclusion among the urban poor.
Pricing: Banks and financial institutions running
While there financial inclusion initiatives tend to incur a high
cost due to inactive accounts with insufficient or
are several nil balances. However, in the context of the urban
poor, extension counters and mobile banking
challenges in services along with appropriate technologies
biometrics and handheld collection devices can
be lowercost solutions to achieve reach within
achieving limited geographical areas with high density of
potential clients.
urban The price here not only includes the cost of service
by the service provider, but the cost incurred by
financial the client in availing the service, e.g., loss of wages
due to involvement of the client in availing the
financial service. It has been observed that the
inclusion, urban consumer is more comfortable in paying
electricity bill with late payment once a quarter
two macro- than paying on a monthly basis as the loss of
wages is more than the penalty incurred in case of
enablers, the non-regular payment. Establishing identity:
Absence of relevant knowyour-customer (KYC)
documents is perceived as a key reason for
Unique
financial exclusion given the profile of the urban
poor:
Identificatio ¡ Migrants from the same state or other states,
¡ Living in ghettos and groups (4-5 individuals
n Authority living in one room) with no independent
references,
¡ Employed in unorganised sector, frequent job
of India and changes and inability and cost implications for
the bank to verify addresses in distant villages.
National The above are not unsurmountable as there are
several government schemes and regulations that
Payment have created identities for a large section of the
urban underprivileged to satisfy the KYC
criterion and the UID project will be a huge step in
Corporation this direction. Lack of financial literacy or
marketing: Insufficient effort at creating financial
of India, will literacy is an important reason for urban financial
exclusion. Efforts at spreading financial literacy
take the by banks and other financial institutions among
the urban poor have been limited and probably
restricted to the metros as this social class is not
financial perceived to be an economicallyviable banking
proposition. However, a recent study by the
inclusion to Skoch Development Foundation shows that there
is a huge need for savings, insurance and
the next level remittance products for the urban low-income
and weaker sections. Thus, technology and
product innovation with a clear profitability
objective can like in the telecom sector achieve
the goal of a mass-based and profitable service
through economies of scale. Self-exclusion: Self-
exclusion by the urban poor is a critical issue.
Given the low income levels and absence of
meaningful surplus along with uncertainties in
income, interest rates on small periodic savings
cannot compensate the cost and effort in frequent
withdrawals needed for daily or weekly
consumption. With daily wage earners either as
labourers, household help or small entrepreneurs
like tailors, carpenters, cobblers, autorickshaw
drivers, handcart vendors, hawkers, plumbers,
mechanics, dabbawallahs, etc, time involved in
banking activities means time lost on earning
livelihood. Hence, doorstep banking on a
periodic basis is a key requirement for this
segment and anything involving more time from
their side has very low marginal utility.
In urban areas, building peer pressure is a
difficult task for institutions as well as
individuals, and hence, institutions following
only the group methodology fail to deliver the
services.
However, the urban poor need to be clearly
educated about the benefits of compulsory and
forced savings and insurance. Insurance
premium with no immediate benefit but a
protective cover against financial shocks in the
form of ill-health or death or accident or loss of
productive assets is considered a wasteful
expenditure that their incomes can ill-afford. A
bank remittance product that saves time, cost
informal channels of money transfer charge large
fees and risk of loss is the first step to get the
urban poor and weaker sections introduced to the
POTENTIAL PAYMENTS ECOSYSTEM POST-UID
Financial Inclusion
Remitter
UID-Enabled
BC, ATM,
Government Mobile, ACH
Financial
Inclusion
Employer Infrastructure
C2B,C2G
Retail
Customer
Internet,
Mobile, ACH National Switches
UID Authentication
Applications
Commercial
B2B, B2G
Company
Internet, ACH
Customer may link her
UID to any Bank account
of her choice
benefits of banking. This literacy would be a key
turning point towards sustainable financial
inclusion, especially in the urban poor. These
products should be designed considering the
credit needs, earning patterns, riskbearing ability
and bankability of the individual.
While there are several challenges in achieving
urban financial inclusion, two macro-enablers,
the Unique Identification Authority of India
(UIDAI) and National Payment Corporation of
India (NPCI), will take the financial inclusion to
the next level.
The UIDAI has two core objectives: to provide a
unique ID to every Indian citizen basis biometrics
and to authenticate any citizen based on this UID.
This mega-project is unparalleled in its scope and
scale, and the UID and ancillary developments
will usher in massive socio-political changes,
especially through successful facilitation of
targeted benefit programmes by enabling
financial inclusion, and these developments will
also radically change how banking is done in the
country.
The biggest roadblock in financial inclusion has
always been the difficulty in establishing identity.
Now, with the UID project establishing
recognition on the basis of biometric details
fingerprints, photograph and iris scan banks will
be able to identify customers, thus taking care of
KYC issues and use the UIDbased authentication
service to process transactions. Innovative
solutions leveraging UID authentication ability
can bring about the true last-mile connectivity.
In conjunction with the work being done by the
UIDAI, the National Payments Council of India
(NPCI) has also been mandated with creating the
financial infrastructure on several major projects:
other than managing the National Financial
Switch (NFS) for domestic ATMs, the NPCI is
working on creating a National Automated
Clearing House (ACH) system, a switch for
mobile-to-mobile payments called India Pay
Mobile Switch and creating an infrastructure to
enable UID-to-UID micropayments.
The vision is to link the UID to a bank account and
a mobile number in a central database. Once this
mapping is done, a payment can be initiated
through any bank or mobile phone-enabled
business correspondent, and routed to the
beneficiary's UID or mobile number, and this will
be automatically credited to the bank account
linked to that UID. The UID-based payments
initiative, coupled with the mobile payments
switch, is going to be a major enabler for financial
inclusion, and has the potential to completely
redefine the country's payments landscape, a
Banking NRRemittance
EGS Wages, Beneciary
Bill Pay,
Tax Pay
Merchants
Government
Vendors
Bill & Tax Pmt
Direct Debit
Suppliers
Government
SAVREEN
representation of which is given in the
accompanying graph.
The UID and NPCI infrastructure, supported by
bank and associated business correspondent or
retailer networks, can help bridge the banked-
unbanked divide by enabling channels like
micro-ATMs and mobile banking.
This transformation will be further accelerated in
urban areas covered by Jawaharlal Nehru
National Urban Renewal Mission (JNNURM) as
its sub-mission for providing basic facilities for
urban poor is creating a complementary
infrastructure to facilitate financial inclusion.
Banks will also need to gear up to meet the challenges
of managing a significant increase in the number of
customers and transactions, while improving service
levels across all channels and developing market-
based solutions for financial inclusion that address the
unique requirements of the bottom-ofpyramid market.
The immediate effect of these macro-projects will be
demonstrated in the urban areas, where banks can
leverage their existing infrastructure to enable and
closely monitor urban financial inclusion programmes.
(The author is managing director and
CEO of YES BANK)