BUSINESS MODELS FOR FINANCIAL INCLUSION

Radhika Raavi Gitam university hyderabad

ABSTRACT

Financial inclusion has been a focus of attention in recent times. The

increase in the number of branches has not answered the needs of
the farmers; and reaching the unbanked population to enable
inclusive growth is a serious problem today.
It has been over two decades since microfinance initiatives were
introduced in India, but financial inclusion still remains a distant
dream. Achieving total financial inclusion is a concern of most
countries; yet it is very geographical in nature, as it largely depends
on a country’s financial policy and its financial industry regulations.
Branchless banking could be the big step towards providing easy
financial access to the poor people and achieving financial inclusion.
Committee reports submitted to the Indian government call for
access to financial services, including credit, to be raised to 50
percent by 2012 and 100 percent by 2015.
Such a mammoth task at hand can only be achieved by an earnest
technology incursion which can be achieved through branchless
banking. The Reserve Bank of India (RBI) has shown sincere interest
in this matter and envisaged that branchless banking is the solution
to the problem..
Branchless banking is the concept of providing banking services
outside the conventional bank branches by either using information
and communication technology services or third party organizations
(commonly referred to as ‘Business Correspondents’).
In this paper the author is trying to examine the various business
models that could be used to ensure the most proper implementation
and sustenance of branchless banking systems namely business
correspondent based model and non-business correspondent based
model.

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INTRODUCTION

Financial Inclusion is no less important than social inclusion. As we

see in our society,

millions of people not considered for a fair treatment either from the
social institutions or

from the financial institutions. 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.

Research in the last decade or so has shown that there exists a

robust link between a well-functioning financial system and inclusive

growth. In India, in spite of the commitment to social banking and the

vast banking network, over 50% of the farmer households remain

without access to credit. Additionally, only 59% of adult Indian’s have

access to a bank account.

In light of these disappointing figures, financial inclusion has

received a special attention from the Indian government and the

Reserve Bank of India. All out efforts are being made as financial

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inclusion can truly lift the financial condition and standards of life of

the poor and the disadvantaged.

What is Financial Inclusion?

In order to address the issues of financial inclusion, the Government

of India constituted a ‘Committee on Financial Inclusion’ under the

chairmanship of Dr C.Rangarajan .The Committee submitted its final

report on 04 January, 2008. The Committee has defined 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”

Thus, financial inclusion is delivery of banking services at an

affordable cost to the vast sections of disadvantaged and low income

groups. As banking services are in the nature of public good, it is

essential that availability of banking and payment services to the

entire population without discrimination is the prime objective of the

public policy.

The scope of financial inclusion:

The scope of financial inclusion can be expanded in two ways.

Through state-driven intervention by way of statutory enactments ( for

instance the US example, the Community Reinvestment Act and

making it a statutory right to have bank account in France).

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Through voluntary effort by the banking community itself for evolving

various strategies to bring within the ambit of the banking sector the

large strata of society.

When bankers do not give the desired attention to certain areas, the

regulators have to step in to remedy the situation. This is the reason

why the Reserve Bank of India is placing a lot of emphasis on

financial inclusion.

To address the issues of financial exclusion in a holistic manner, it is

essential to ensure that a range of financial services is available to

every individual.

These services are:

1. a no-frills banking account for making and receiving payments

2. a saving product suited to the pattern of cash flows of a poor

household

3. money transfer facilities

4. small loans and overdrafts for productive personal and other

purposes and

5. micro-insurance (life and non-life).

One of the benchmarks employed to assess the degree of reach of

financial services to the population of the country, is the quantum of

deposit accounts (current and savings) held as a ratio to the adult

population. In the Indian context, taking into account the Census of

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2001 (ignoring the incremental growth of population thereafter), the

ratio of deposit accounts to the total adult population was only 59%

*(details furnished in the table). Within the country, there is a wide

variation across states. Compared to the developed world, the

coverage of our financial services is quite low. For instance, as per a

recent survey commissioned by British Bankers' Association, 92 to

94% of the population of UK has either current or savings bank

account.

When the excluded sections approach formal financial institutions

they are confronted with problems of accessibility, timeliness,

inadequacy of credit. For one reason or other, they are compelled to

approach the informal agencies to meet their credit demands as we

all know..

Some of the recent concerns on financial inclusion have emanated

from the results of the All-India Debt and Investment Survey (AIDIS),

2002. Over a period of 40 years, the share of non-institutional

sources of credit in sources of credit for cultivator households had

declined sharply from about 93 per cent in 1951 to about 30 per cent

in 1991, with the share of money lenders having declined from 69.7

per cent to 17.5 per cent.

In 2002, the AIDIS revealed, however, that the share of money

lenders had again increased to 27 per cent, while that of non-

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institutional sources overall rose to 39 per cent (Table 1). In other

words, notwithstanding the outreach of banking, the formal credit

system has not been able to adequately penetrate the informal

financial markets; rather it

seems to have shrunk in some respects in recent years.

* as on March 31st 2001

Coincidentally, it is also true that the rate of agricultural growth during

the last decade has slowed down and it is particularly striking in

respect of food grains production. Since the green revolution, banks

have been mainly focused on financing crop loans connected largely

with food grains. There is, therefore, reason to believe that financial

exclusion may actually have increased in the rural areas over the last

10-15 years.

Table 2: Relative Share of Borrowing of Cultivator

Households#

(per cent)

Sources of Credit 1951 1961 1971 1981 1991 2002$

1 2 3 4 5 6 7
Non-institutional 92.7 81.3 68.3 36.8 30.6 38.9
of which:
Money lenders 69.7 49.2 36.1 16.1 17.5 26.8
Institutional 7.3 18.7 31.7 63.2 66.3 61.1
of which:
Co-operative societies, etc. 3.3 2.6 22.0 29.8 30.0 30.2

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 Commercial banks 0.9 0.6 2.4 28.8 35.2 26.3
Unspecified - - - - 3.1 -
Total 100.0 100.0 100.0 100.0 100.0 100.0

# : Borrowing refers to outstanding cash dues.

$ : AIDIS, NSSO, 59th Round, 2003. Source: All India Debt
and Investment Survey

Enabling access to a greater number of the population to the

structured and organized financial system has explicitly been on the

agenda of the Reserve Bank since 2004. Unlike several central

banks, which focus solely on inflation, many developed and emerging

economies, including ours, focus also on growth. There is currently a

clear perception that there are a vast number of people, potential

entrepreneurs, small enterprises and others, who are excluded from

the financial sector, which leads to their marginalisation and denial of

opportunity for them to grow and prosper. The Reserve Bank has

therefore introduced various new measures to encourage the

expansion of financial coverage in the country. Not only is financial

inclusion essential because of its implications for the welfare of

citizens but it needs to be stressed that it has to be an explicit

strategy for fostering faster economic growth in a more inclusive

fashion. It is in this context that I thought it would be appropriate to

study the business models that are introduced by RBI

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Financial Inclusion by Extension of Banking Services - Use

of Business Facilitators and Correspondents

With the objective of ensuring greater financial inclusion

and increasing the outreach of the banking sector, it has been

decided in public interest by RBI to enable banks to use the services

of Non-Governmental Organisations/ Self Help Groups (NGOs/

SHGs), Micro Finance Institutions (MFIs) and other Civil Society

Organisations (CSOs) as intermediaries in providing financial and

banking services through the use of Business Facilitator and

Correspondent models.

Business Facilitator Model: Eligible Entities and Scope of

Activities

Under the ';Business Facilitator'; model, banks may use

intermediaries, such as, NGOs/ Farmers' Clubs, cooperatives,

community based organisations, IT enabled rural outlets of corporate

entities, Post Offices, insurance agents, well functioning Panchayats,

Village Knowledge Centers, Agri Clinics/ Agri Business Centers,

Krishi Vigyan Kendras and KVIC/ KVIB units, depending on the

comfort level of the bank, for providing facilitation services. Such

services include

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1)identification of borrowers and fitment of activities; 2) collection

and preliminary processing of loan applications including verification

of primary information/data; 3)creating awareness about savings

and other products and education and advice on managing money

and debt counseling; 4) processing and submission of applications

to carry out its transactions, but finally the responsibility of putting

through transactions rest with the banks; 5) promotion and nurturing

Self Help Groups/ Joint Liability Groups; 6) post-sanction

monitoring; 7) monitoring and handholding of Self Help Groups/

Joint Liability Groups/ Credit Groups/ others; and 8) follow-up for

recovery. The BFs can refer clients, pursue the clients’ proposal and

facilitate the bank staff As these services are not intended to involve

the conduct of banking business by Business Facilitators, no

approval is required from RBI for using the above intermediaries for

facilitation of the services indicated above.

. Business Correspondent Model: Eligible Entities and Scope of

Activities

The business correspondent (BC) model allows the bank to use third

party financial institutions to handle account opening, transaction

management, and other financial services viz., NGOs/ MFIs set up

under Societies/ Trust Acts, Societies registered under Mutually

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Aided Cooperative Societies Acts or the Cooperative Societies Acts

of States, registered NBFCs not accepting public deposits and Post

Offices. In engaging such intermediaries as Business

Correspondents, banks should ensure that they are well established,

enjoying good reputation and having the confidence of the local

people. Banks may give wide publicity in the locality about the

intermediary engaged by them as Business Correspondent and take

measures to avoid being misrepresented.

In addition to activities listed under the Business Facilitator

Model, the scope of activities to be undertaken by the Business

Correspondents will include (i) disbursal of small value credit, ii)

recovery of principal / collection of interest (iii) collection of small

value deposits (iv) sale of micro insurance/ mutual fund products/

pension products/ other third party products and (v) receipt and

delivery of small value remittances/ other payment instruments.

Regulations from RBI emphasize that transactions should be visible

in the bank’s books within 24 hours. Such a compulsion has

encouraged the use of smart cards and mobile technology by the

BCs (for e.g. pilot projects by Corporation Bank). This technology can

also be used to conduct other financial activities like fixed deposits,

loan disbursement, and insurance.

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Reserve Bank of India Working Group has expressed the view that

banks would need to accept the BC model as extremely vital for

achieving the goals of financial inclusion. As the traditional ‘brick and

mortar’ branches could penetrate into remote areas of the vast

country only to a limited extent, this model presented banks with a

workable option to provide banking services in inaccessible areas in a

cost-effective manner. It suggested new entities to work as BCs.The

Working Group has noted that BCs should be used not only for

opening and servicing no-frills accounts but for the full range of

financial activities. The arrangements with the Business

Correspondents shall specify:

1 .suitable limits on cash holding by intermediaries as also limits on

individual customer payments and receipts, 2. the requirement that

the transactions are accounted for and reflected in the bank's books

by end of day or next working day, and 3. all agreements/ contracts

with the customer shall clearly specify that the bank is responsible to

the customer for acts of omission and commission of the Business

Facilitator/ Correspondent.

Thus, Branchless banking is a technology enabled, low-cost,

alternate delivery channel that facilitates basic banking services to

the rural communities at their doorstep through Business

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Correspondents at an affordable cost in a secure manner. It facilitates

customers to transact from their villages and at their convenience and

save or withdraw small amounts depending upon their need, without

the hassles of filling up a challan for depositing cash or withdrawing

money.

Non-Business Correspondent Model

In the non-business correspondent model the business

correspondent is excluded from the system and the customer himself

is provided with a mobile device. The regulatory policies of India have

recently allowed transactions from mobile devices, but with a very

small ticket size. The mobile devices are used to store information of

the user, conduct transactions, and maintain transaction records.

Various models have been proposed to realize mobile based

banking. One model is where the mobile devices are equipped with

Near Field Communication (NFC) technology and RFID chip, which

are then used for user authentication and some transactions. Another

model which proposes to leverage the widespread network of retail

agents involves both banks and telecom operators where the retailer

has an account in the bank and the transactions are carried out in a

manner similar to the way customers recharge their phones.

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Telecommunications has taken the world to a new phase in

managing communication and data irrespective of a person’s

location. The banking and payments industry is predicting that mobile

banking is going to be the next big revenue generator.

. It is expected that there would be 200 million rural connections by

2012, up from the current 90 million. Thus, the use of mobile devices

for payment and banking services can be the best suited model for

branchless banking in India.

Limitations of Business Models

When RBI allowed banks to use mediators to reach out to the rural

poor population in 2006, the business correspondent (BC) model

offered a’ win-win' situation for lenders, borrowers and mediators. On

one hand, the bank does not have to invest in infrastructure to reach

the un-banked areas and on the other hand, borrowers are assured

of easy access to financial services. However two years down the

line, the flaws in the system have proved to be a stumbling block.

Banks usually identify correspondents, who are locally settled retired

post-masters, schoolteachers, bank staff and even defense

personnel. An ideal BC model envisages large cost reductions while

including the poor in the financial system. However, the model has

not achieved the desired results because of following limitations

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1. The requirement of a BC to be within 15 km radius of a rural

bank branch as notified by RBI was a hindrance for banks that

do not have many rural branches.

2. Besides, the model brought an added risk .” Policies regarding

the BC model put reputation, legal and operational risk for a

bank. limited choice to select an eligible BC discourages banks

to initiate the model," noted HDFC Bank's business head of

micro-finance division Manohara Raj

3. Inadequate capital and human resource are the issues that

need to be addressed for the model to be implemented

successfully

4. . Banks see it as a tough job to identify and train a large

number of non-bank professionals to reach out to the poor.

5. In addition to operational problems there is a question mark

over the viability of the model itself. One of the key issues

constraining the reach of banks to the un-banked areas is the

prime lending rate (PLR) cap on banks' lending. Experts point

out that PLR lending is not viable, as microfinance institutions

(MFIs) are exempt from the PLR model.

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Conclusion

Developing and under-developed economies all over the globe are

looking for new modes and means to contain poverty and include

their citizens in the financial system. It is becoming increasingly

apparent that addressing financial exclusion will require a holistic

approach on the part of the banks in creating awareness about

financial products, education, and advice on money management,

debt counseling, savings and affordable credit. The banks would

have to evolve specific strategies to expand the outreach of their

services in order to promote financial inclusion

The main focus of the banks in the country has been towards using

business correspondents for reaching out to the unbanked

population. However, with the increasing penetration of

telecommunications in the country and greater reach, mobile based

business models (also referred to as M-Banking) will prove to be

instrumental in realizing branchless banking and taking it to higher

grounds by enabling low cost and real time transactions over secure

networks.

REFERENCES

Mohan, R. (2002): 'Transforming Indian Banking: In Search of a

Better Tomorrow', RBI Bulletin (January).

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 Mohan, R. (2004): 'Financial Sector Reforms in India: Policies and
Performance Analysis', RBI Bulletin (October).

Mohan, R. (2006): 'Agricultural Credit in India: Status, Issues and

Future Agenda', Economic and Political Weekly (March), pp.1013-23.

Rajan, R.G. and L. Zingales (1998): 'Financial Dependence and

Growth', American Economic Review 88, 559-86.

Rajan, R.G. and L. Zingales (2003): Saving Capitalism from

Capitalists, Crown Business, New York.

Reserve Bank of India (2004): Report of the Advisory Committee on

Flow of Credit to Agriculture and Related Activities from Banking
System (Chairman: V. S. Vyas). RBI, Mumbai.

Report of the NABARD on financial inclusion

TABLE 1

Coverage of Banking Services (Ratio of Demand Deposit

Accounts to the adult population)

Region/State/Union Current Savings Total Adult Total No. No. of a

Territory Accounts Accounts Population Population Of Per 100
(Above 19 accounts populat
yrs

NORTHERN 4215701 52416125 132676462 67822312 56631826 43

REGION
Haryana 572660 8031472 21082989 11308025 8604132 41
Himachal Pradesh 134285 2433595 6077248 3566886 2567880 42
Jammu & Kashmir 277529 3094790 10069917 5379594 3372319 33
Punjab 1156137 13742201 24289296 14185190 14898338 61
Rajasthan 689657 12139302 56473122 28473743 12828959 23

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Chandigarh 80607 1126696 900914 546171 1207303 134
Delhi 1304826 11848069 13782976 7929589 13152895 95
NORTH-EASTERN 476603 6891081 38495089 19708982 7367684 19
REGION
Arunachal Pradesh 10538 209073 1091117 544582 219611 20
Assam 378729 5071058 26638407 14074393 5449787 20
Manipur 12514 200593 2388634 1222107 213107 9
Meghalaya 24305 458779 2306069 1088165 483084 21
Mizoram 3441 117885 891058 476205 121326 14
Nagaland 13819 195452 1988636 995523 209271 11
Tripura 33257 638241 3191168 1784212 671498 21
EASTERN REGION 1814219 47876140 227613073 122136133 49690359 22
Bihar 464511 13225242 82878796 40934170 13689753 17
Jharkhand 166007 5834341 26909428 13737485 6000348 22
Orissa 228160 7030004 36706920 21065404 7258164 20
Sikkim 4097 125365 540493 288500 129462 24
West Bengal 942733 21544753 80221171 45896914 22487486 28
Andaman & Nicobar 8711 116435 356265 213660 125146 35
Islands
CENTRAL REGION 2202217 64254189 255713495 129316677 66456406 26

Chhattisgarh 192067 3346898 20795956 11209425 3538965 17

Madhya Pradesh 553381 11731918 60385118 31404990 12285299 20
Uttar Pradesh 1324509 45804350 166052859 82229748 47128859 28
Uttaranchal 132260 3371023 8479562 4472514 3503283 41
WESTERN REGION 3178102 49525101 149071747 86182206 52703203 35
Goa 81551 1584177 1343998 891411 1665728 124
Gujarat 955964 16220262 50596992 28863095 17176226 34
Maharashtra 2127240 31568184 96752247 56207604 33695424 35
Dadra & Nagar 6076 69308 220451 122765 75384 34
Haveli
Daman & Diu 7271 83170 158059 97331 90441 57
SOUTHERN 4666014 83386898 223445381 135574225 88052912 39
REGION
Andhra Pradesh 1156405 23974580 75727541 44231918 25130985 33

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Karnataka 1086662 19147819 52733958 30623289 20234481 38
Kerala 600065 17669723 31838619 20560323 18269788 57
Tamil Nadu 1786514 22052812 62110839 39511038 23839326 38
Lakshadweep 491 22997 60595 33686 23488 39
Pondicherry 35877 518967 973829 613971 554844 57
ALL-INDIA 16552856 304349534 1027015247 541031553 320902390 31

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