This series of annual reports on the microfinance sector in India which seeks to document developments, clarify issues, publicize studies, stimulate research, identify policy choices, generate understanding, and enhance support for the sector. It highlights recent developments under each of the two main models of microfinance in India – the SHG and MFI models. The book highlights recent developments in Self Help Groups (SHGs) and SHG Bank Linkage Programme (SBLPs), and focuses on microfinance with regard to the investment scenario in India.
Chapter 9: Financial Inclusion
Even with near total control over the banking sector for more than two decades, financial inclusion of all needy segments of population has not been possible. The recognition that more active interventions are needed to bring marginalised, disadvantaged and poor sections of people to financial services has led the policy establishment to take a variety of actions in the recent past. The estimate of coverage of the population through financial services made by Reserve Bank from different study reports and surveys bring out1 that 40 per cent of adult population has access to savings account, 10 per cent to life insurance and 0.6 per cent to non-life insurance. 5.2 per cent villages have a bank branch, while 97.7 million small farmers are covered by farm credit. Over 33 million no-frills accounts (NFAs)2 have been opened ever since this product came into being. In spite of this the exclusion levels among people is estimated to be of the order of 40 per cent. A large proportion of those not included are poor and disadvantaged. A broader definition of financial inclusion looks at providing not only savings services but also credit, insurance and remittances. Insurance penetration has been traditionally low in the country. Remittances still take place through informal channels; in most cases on account of lack of options.
The reasons why inclusion levels are pretty low are fairly clear. Limited network presence of banks in the hinterland is a major reason. Even where the network presence is established a delivery mechanism in the form of staffing and processes employed for customer acquisition/servicing have not been of the desired quality. This again derives from banks not having a clear business model to ensure that the small customers are brought to the portals of the bank with a view to convert them into long-term customers of some significance over time. The technology options that were designed and implemented in the urban areas and for high net worth clients have not reached the rural areas. Low investments in technology and limited availability of technology solutions that can cost-effectively meet the requirement of adding a large number of clients to the banking system have been one of the critical barriers to inclusion.
Through its efforts RBI has ensured that banking system takes up the inclusion agenda seriously. Banks are experimenting with a variety of technologies for the bottom of the pyramid customer. A large number of correspondents have been enrolled and used in extending services. Within a short period of about 2 years, RBI, by showing policy intent and introducing practical ideas, has made the sector vibrant. The setting up of the committee on financial inclusion paved the way for looking at various options. The subsequent policy changes in BC framework, use of technology, introduction of mobile based banking, roll out of a scheme for financial literacy/counselling and the setting up of two financial inclusion funds improved the inclusion sentiment. The expectations of the sector and benefitting people also went up as a result. How to meet the rising expectations within a given time frame and cost effectively is the challenge.
The inclusion story is being marketed by the government and the RBI to the financial sector as the new paradigm of banks' continued relevance. This assumes that overall development and inclusive growth across the country require the financial sector to take much larger view of its customer acquisition potential. It also assumes that technology for such a massive expansion of banking clientele has arrived and is available or likely to be available in the near future. The third and a much larger assumption [Page 114]made is that poor are eminently bankable and could constitute a viable clientele for the banking system. The issue, however, is that the banking system is hesitant to operate on the basis of this new paradigm. Many, while paying token compliance to the policy pronouncement on the need for inclusion, do not strategise their efforts to ensure that it actually results in improved business prospects. More than any other reason, disconnect between policy, strategy and business objectives has adversely impacted the pace and quality of inclusion.
Through a clutch of measures such as new financial instruments (NFAs, general credit cards, Swarojgar Credit Cards etc.) new regulatory dispensation (such as relaxed KYC) and new support mechanisms (constitution of Financial Inclusion Fund and Financial Inclusion Technology Fund, schemes for financial literacy and credit counselling) RBI sought to accelerate financial inclusion. The RBI also required the state level bankers committee to prioritise certain districts in each state for total financial inclusion. For total financial inclusion, 431 districts were identified, and by March 2009, 204 districts have reported achieving total financial inclusion.
Inclusion efforts today have a savings bias. While savings is a primary service need, credit and insurance are also necessities. Risk management is a domain in which poor and rural have low awareness. Inclusion should be more inclusive in its product and service offerings. A new generation institution (Kshetriya Gramin Financial Services (KGFS) promoted by the Institute for Financial Management and Research (IFMR) Trust) is looking at financial services in its entirety so that its business remains relevant to the local population. (See Annex 9.3 for a description of KGFS and its operations). This is the kind of effort required of all participants in the national task, so as to make a difference to the people and at the same time realise the full business potential.
Branchless Models Operated by Banks Through Correspondents
The banking correspondent and facilitator models were introduced in 2006 by the Reserve Bank on the basis of recommendations of the Khan committee. While banking correspondents are financial service agents that can put through cash transactions on behalf of the bank, the facilitators can provide client identification, acquisition, verification, collection and provision of information, etc. While a correspondent can provide all the services that a facilitator does, a facilitator can provide only non-financial services. But both these types of agents are not authorised to take decisions on KYC norms and credit proposals.
While progress of adoption of banking correspondent/banking facilitator (BC/CF) models was very brisk in the last year, several interesting developments in the banking correspondent model have taken place. Banks have been able to hire a number of banking correspondents in several states. While in some cases, these correspondents are large organisations (NGOs and non-profit companies); in others retired bank officials, small NGOs, MFIs and the like have also been engaged by banks. SBI has several correspondents contracted in different states. State Bank has also engaged India Post as its BC in several states. Many public sector banks and private sector banks have engaged BCs. In the initial stage, the BCs are engaged in urban and semiurban areas. Only in a few cases, rural areas have been targeted through the BCs. But the banks have strategised expansion in the rural areas once the BC hiring procedures and accompanying technology solutions stabilise.
The regulator's guidelines on using BCs have influenced the growth and processes in use. The bank, as per RBI's instructions, has to carry in its books all transactions that have been put through on its behalf by the BC at the end of each day or next working day.3 Further the area of operation of the BC should not be further than 15 km from the location of the bank branch in non-metropolitan areas and no further than 5 km4 from branches in metropolitan areas. RBI requires the banks to be able to supervise the work of the correspondents periodically. Such ongoing monitoring, according to RBI, would be possible only when the correspondents operate within a reasonable distance from the branch. The distance criterion is seen as a customer-protection measure as it is expected to control agent risks, through better and closer monitoring of the correspondents' work. The distance restriction has the unintended consequence of limiting the inclusion potential that a correspondent could achieve through better mobility and high-end technologies. Given that the banks remain responsible for the acts of omission and commission of their agents, the monitoring arrangements are best left to the discretion of banks. Banks would be able to offer compliance with the distance restriction as a sufficient excuse for failure of BCs to provide satisfactory service.
Limits on ticket size per transaction (Rs 10,000) through the BC have also been introduced. These [Page 115]limits on transactions would evolve and increase/ decrease in the light of experience and strength of demand from clients. If the banks utilise the services of correspondents to carry out customer services and put through transactions manually, the end of the day accounting would be time consuming and error prone. Thus, technology has become a critical element of use of BCs by banks. Technology assisted BCs not only ensure back-office accounting and seamless porting of data to banks' servers at the end of the day, they also ensure that customers get a better protected, error free service on par with what they might get from a fully computerised bank branch.
Banking correspondent/facilitator network employs eligible individuals, NGOs, non-profit companies and others. The BCs acquire clients for the banks and enable small transactions to be put through. As explained earlier in most cases the correspondents are supported with technology products and solutions that enable the bank to comply with RBI regulation on keeping the transaction accounts current at the close of business each day. Financial inclusion taking place especially in the remote and poor areas is increasingly powered by high technology.
Banks have taken up several pilots and initiatives to achieve objectives of financial inclusion. State Bank of India, Indian Bank, Union Bank of India, Punjab National Bank, Andhra Bank in the public sector and ICICI Bank, HDFC Bank, Axis Bank in the private sector have taken interesting steps for new customer acquisition. New technologies such as biometric rural ATMs, card-based systems, mobile telephony based banking, physical mobility based banking by staff, Kiosk based models have all been tried out. Technical service providers have launched not-for-profit companies to facilitate the banks' work. Organisations such as BASIX, Financial Information Network & Operations Ltd (FINO) and Zero Mass Foundation have provided critical services to banks as also to governments. An important part of the inclusion story is the involvement of the state. Governments have been involved in finding the synergies between inclusion and benefits transfer to people without leakages. The Andhra Pradesh (AP) pilot on National Rural Employment Guarantee Scheme (NREGS) payments through smart card based savings accounts has worked reasonably well enough for banks to try and upscale the same. The HDFC Bank's BC model of using NGOs for reaching SHGs has been successful in terms of both outreach and portfolio quality achieved. Its hub and spoke model of mobile bank staff providing services in the rural areas has also been a good learning experience.
Inclusion Efforts—A Critique
While there are very successful efforts in the field, there are also problems. The picture that one gets from the ground on the quality of efforts is not always rosy. The studies commissioned by RBI5 in several states on the quality of financial inclusion brings out that neither the inclusion levels were high enough to claim success nor was the effort sustained enough to ensure that the new clients actually used the facilities available. RBI in its instructions to banks notes that ‘although the State Level Bankers Committees (SLBCs) have declared several districts as 100% financially included, actual financial inclusion has not been to that extent in all the districts. Further, most of the accounts that have been opened as a part of the financial inclusion drive have remained inoperative due to various reasons’. In Ganjam district, 65 per cent of those desiring to have an account were able to open an account while in Hoogly district of West Bengal (WB) it was 51.2 per cent. Srikakulam in AP, Gandhinagar in Gujarat and Rajsamand in Rajasthan have included 70, 71 and 92 per cent of those desirous of inclusion. However, of those who managed to open accounts a significant proportion did not or could not transact on the same. While in Rajsamand 52 per cent had no transactions in their account, in Hoogly 25 per cent of no-frills accounts owners did not visit the bank branch. Srikakulam reported 97 per cent as having no transactions while Gandhinagar reported 33 per cent only as having transactions. In Himachal Pradesh financial inclusion initiatives seem to have had a better outcome with 98 per cent of the sample surveyed having been included and 38 out of 72 blocks achieving 99 per cent inclusion.
A study by CMF-IFMR6 found that in Cuddalore, Tamil Nadu, a full inclusion district, 25 per cent of households remained excluded after full inclusion was declared. This was about 47 per cent of excluded before the project was taken up. The reason for their exclusion was reported to be unwillingness. The study found that unwillingness of households to open accounts was a function of the banks that surveyed the area. To quote from the report
[T]he team randomly selected some households within a 1 km distance from the branches to find out the reasons for unwillingness. Everyone agreed that the signature on the survey form was theirs. But [Page 116]they were not aware that those officials who carried out the survey came for opening a bank account. They said that the surveyors had asked for their ration card and filled details from it without informing that they could open a bank account. They signed the survey forms thinking that the process was for some government scheme that would come in the future. It is therefore premised that the unwillingness was on the part of the bank to open the accounts rather than the other way round.
On usage of the new accounts the study found that 72 per cent of the accounts had zero or near zero balance even after 1 year. Eleven per cent of the accounts had a balance of Rs 200 and at least one transaction during the year. Many dormant account holders did not know the reason for opening of the account; they had assumed that it is for some future government scheme. One of the significant conclusions7 of the study was that the new accounts with low balances of less than Rs 1,000 can be a viable proposition for the banks.
A study of financial inclusion in Gulbarga8 found that the inclusion drive in the district more than doubled the number of people with bank accounts. But after the drive was completed one-third of the poor were still without bank accounts. On a limited sample of 172 who opened bank accounts, only 64 opened NFAs of which only half were financially excluded. The interesting findings from the study were: only 4 per cent households opened the accounts for saving; 68 per cent opened it to receive NREGS wages. Among the account holders, 84 per cent said that Panchayat officials helped them open accounts. Ninety per cent did not know that banks open NFAs for anyone.
Skoch Foundation found that around 11 per cent of the newly opened accounts under different initiatives (especially in the form of no-frills accounts) actually see transactions. The remainder of the accounts, due to different reasons, does not become active. A point of note here is that opening of the account seems to be the sole criterion on which performance is measured. Once the account is opened, it is deemed that the goals of inclusion have been realised. The fact that the account should be operational and used by the holder to save, borrow and remit money does not seem to matter. Unless the account becomes a fulcrum of economic activity for the holder, the objectives of inclusion would stand unrealised.
The strategy of financial inclusion looks at the banking sector as the only feasible option to connect people with affordable and quality services. Persuading the banking sector to include all those with a requirement is a mammoth task. Even if they are compelled to accept the responsibility for including all people with a financial services requirement it is difficult if not impossible to make them provide effective quality services to included clients. Both network and staff problems would continue to bog the banks. Providing access and ability to transact on the account to the customer is the substance of inclusion. The ability to transact comes from easy access to the branch or the point of sale and willingness of those who are at the branch or point of sale to take the extra step towards meeting the customers' requirements. Looking to the past and the quality of the existing services available from the banking system in general, it is difficult to envisage the staff taking the extra step to make the poor customers comfortable.
Institutional Inclusion Options
There are institutions that have a much better distributed network presence in the rural hinterland and are in a position to take financial services to the doorsteps. We refer to the primary cooperative credit societies at the bottom most tier of the cooperative credit structure with more than 90,000 points of presence and the MFIs which have become ubiquitous in many parts of the country (including some which are acknowledged to be difficult and remote). The post office with its 1,20,000 rural branches is another institution having not only the network presence but also staff who are close to the rural population. SHGs are also not reckoned as part of the inclusion accounting, even though they offer services that are deep in terms of both savings and credit (and mostly insurance too) with nearly [Page 117]100 per cent clients actually using the accounts. The combined presence of these three types of institutions is at least four times more than the rural branches of the commercial banking system. But the performance of the SHGs, post office, primary agricultural credit societies (PACS) and MFIs is not taken into account for the purpose of financial inclusion. But a comparative analysis of operations of savings in the different types of institutions and banks come out as the least effective. SHGs come out as the best options in making customers save and use their accounts.
The institutional strategy of inclusion needs serious re-examination. The new strategy should focus on those institutions which have the presence and the capability to expand presence in rural areas with low volume business coming infrequently from the clients. Banks are not best option for primary financial intermediation in such locations. It is best left to lower cost institutions which could be incentivised for bringing in the customers to transact on whatever financial framework that is established. On the issue of SHGs' role in inclusion, the national seminar of SHG federations had some interesting observations and suggestions. It felt that SHGs are far better equipped to achieve the objectives of inclusion and that they should be suitably supported. The need for accounting SHGs and their members in the inclusion arithmetic was emphasised. The number of regularly saving members in SHGs at 78 million in March 2009 is too large to be ignored in any reckoning of financial sector's influence.
Post Office and Financial Inclusion9
Post office has the largest and strongest network in rural India and offers a solution because of the established network in rural areas, traditional expertise in handling money and banking, reliable cash management expertise and quality accounting procedures. Being a state organisation is a great advantage especially for savers.
Table 9.1 Savings account usage in different institutions10
There are four significant attempts at financial inclusion in post offices:
- NABARD SHG model in Tamil Nadu
- India Post-SBI tie up
- Goa model with Corporation Bank
- ‘India Post-Uttaranchal Gramin Bank’ tie up in Uttarakhand
Post office can play a major role in financial inclusion provided there is a good model that creates value for both India Post and the bank. The post office can open up its 0.12 million rural branches to be extension counters of banks, virtually double the number of rural branches of banks.
Some of the prerequisite for the success of post office as a correspondent would be that banks should not treat branch post offices to be competitors. The postal staff should be well trained by the banks. Investments in IT based process management for control and monitoring operations should be made. At a national level strong managerial and technology support of central institutions like RBI, NABARD, Ministry of Rural Development (MORD), MoF and Planning Commission should be provided.
Some possible impediments are that banks may not like post offices in rural areas taking up the role of financial inclusion for it reduces the potential for growth of banks in the long run; severing of bank-customer relationship caused by post office becoming the BC may not be relished by banks and the traditional practices followed by post offices would require a huge effort to reform the management.
RBI and NABARD should take critical decisions on prioritising the choice of post office as a BC by banks and provide support from Financial Inclusion Fund (FIF) and Financial Inclusion Technology Fund (FITF) to upgrade the staff and systems of post office. At stake is a large network of rural post offices that could partner the banking system with marginal investments.
Financial Inclusion Technology
The banking correspondent framework that was introduced by RBI has been progressing and the pace seems to have increased in the recent past; it made very slow progress in the initial 2 years. Many technology options have been designed and piloted to ensure that the banking correspondents operate under safe and efficient conditions wherein the back-office accounting is also enabled on an almost real-time basis. However, the technology cost of banking correspondent has not been found [Page 119]to be easily affordable. A high cost per transaction makes it difficult for adopting technology as a basis to do correspondent banking. Estimates made by the Skoch Foundation put the cost of providing financial access to 110 million household using plastic cards at Rs 13.3 billion. This is on account of not only the cost of issue of cards but also the costs incurred on transactions. The financial inclusion promotion and technology funds have a substantial corpus of Rs 10 billion which should be sufficient to cover this cost if the funds are fully utilised to support technology adoption.
At the micro level the study in Cuddalore referred to earlier computed costs and estimated the breakeven requirements of business.
But in the field quite a few of the card based experiments have failed to deliver on the promises they started with. At times, the institutions have piloted models that are not appropriate in the local context. Biometric cards have faced problems of clean finger prints and failure of biometric features requiring manual override of transactions by the correspondent staff. Such events in the field erode the protection level available to the customer as transactions and cash accounting take place outside of the banking systems. The more important point is the recovery of costs in case of wrong choices made. The costs of technology are also sought to be recovered within a very short period of time. While new branches and new institutions plan for viability over a period of 5 to 7 years, the banking correspondent arrangements are not seen as an investment in expansion of business. Typically breakeven within a year or two is targeted. Some of the initial costs are not seen as long-term investment but as current cost and if not recovered within the year, they are seen to be loss making efforts. The thinking with regard to financial inclusion has to change, as a business with a long-term focus that would breakeven over a period of time.
The financial inclusion initiatives especially those carried out through the banking correspondents are not likely to recover cost as long as they attend only to saving services. Even in case they attend to a comprehensive range of requirement of savings, credit, remittances and insurance it might take a while for these operations to recover cost and breakeven. Inclusion being a public policy objective sought to be implemented through commercial establishments such as banks, the policy stance should possibly be that any gap in costs and viability would be reimbursed. There is a price to pay for the policy objective that aims at serving poor and disadvantaged through commercial establishments. One could incentivise these institutions to acquire customers at a much faster pace than has been possible so far. In such a case the requirements for reimbursement of deficits should also state that transactions in the account and regularity of contact would be a critical criteria rather than mere opening of the accounts. There is a need to ensure that financial inclusion does not remain as an exercise where reports generated and happiness sheets are produced. Financial inclusion must result in tangible benefits to the customers in terms of real access to financial services. The emphasis should not merely be on NFAs which are a poor proxy for meaningful inclusion. The emphasis should also be on providing credit to those who deserve the same and an improved coverage of population in various insurance schemes that have been brought out by the government schemes or by insurers. A combination of risk mitigation and regularity of transactions in accounts would lend credibility to the financial inclusion initiatives and make the access to the financial system more meaningful for the clients.
The two funds that has been announced by the government a couple of years back have been operationalised. During the year as against a total corpus of Rs 5 billion that was announced for each of these funds Rs 150 million had been actually released. NABARD has reported that four projects have been sanctioned till March 2009 under the financial inclusion fund. These are mostly focused on financial literacy and credit counselling. One project on information and communication solutions has also been supported. Under financial inclusion technology fund five projects have been sanctioned, which include two smart card pilots, opening of financial inclusion hubs in primary cooperative societies, setting up ATMs in regional rural bank (RRB) branches in the North-East and an impact study. Apart from this, NABARD also reports that it has developed a training model for bankers on financial inclusion as well as a handbook which have been circulated to the key players in the sector. In terms [Page 120]of these two funds, the announcements had been made but the actual performance and usage of the funds have not lived up to the initial promise. The urgency expressed in achievement of inclusion objective is not fully reflected in the operationalisation of two major funds which were intended to support and facilitate the financial sector's ability to fulfil a national promise.
Climate and Architecture
The flip side of the inclusion initiatives is the hit banks took under loan waiver schemes which seem to have caught the fancy of several state governments as well. With millions of new clients entering the system and availing facilities including that of credit, mass waivers (which have become epidemic) make the banks distinctly uncomfortable. The enthusiasm of the banks to undertake the credit side of financial inclusion would be understandably dampened in a climate of expectation of imminent waiver. If meaningful inclusion has to take place, announcements relating to waivers and postponement of repayment of loans (regardless of who pays for the waivers) should cease. It is unfair to ask banking system to include the poor and the marginalised on one hand and ask them to waive loans given to such sections of people on the other.
The financial inclusion policy should also look at the financial architecture that exists in the country and conceptualise the future architecture needed to take care of the full service requirement of all those who are potential customers. The expectation that the present financial system with its network and human resources would cover a substantially expanded client base which could be a 150 per cent more than the existing numbers in far flung and remote areas is not well founded. The forms of organisation that might be needed to undertake intermediation in several local contexts and the need for new institutions being set up, their linkages with the existing financial sector participants as also issues relating to service standards, service quality and customer protection need to be thought through in an integrated manner. As the client numbers, volume of transactions and amounts involved increase, the present network might show severe signs of strain. Much before this happens, a blue print for smoothening of transaction load and lessening of the strain on the existing players need to be prepared. Acceptance of those players who are not deemed to be part of the mainstream financial sector such as MFIs, primary societies and even post office branches might become necessary. Practical means of bringing these in some ways to the mainstream financial sector have to be designed.
In case of insurance, emergence of more players could improve insurance penetration. Using the same logic as in the case of banking system the report has argued that space for smaller insurance firms should be created—in an earlier chapter. The issue in insurance is also one of product relevance and fit. There are critical issues relating to client drop-out which tends to increase acquisition costs and inclusion more difficult than in case of savings and loans. However the inclusion mandate today does not consider insurance to be a dire requirement compared to bank accounts. But the risks that poor face in their lives and livelihoods warrant greater consideration.
In the last year's report issues relating to banking correspondent and banking facilitator arrangement were dealt with in some detail. The BC framework had been introduced as a mechanism to further the financial inclusion objective. There were certain regulatory issues which were raised. RBI has introduced incremental changes. One of the important changes extends the area of operation of banking correspondent by requiring that the banking correspondent should be placed within a radius of 25 km12 from the bank branch to which it is attached. This should provide the necessary stability and a viable geographical area coverage for BCs that would facilitate cost recovery.
But the announcement of mobile banking guidelines is a shot in arm for the banking correspondents and banking facilitators' framework. Some pilots are already on to merge mobile technology-based transactions platform with that of the banking correspondents. MFIs also use mobile technology in transaction reporting and collection tracking. In the chapter on technology some of the mobile based pilots had been highlighted. The pilot on mobile banking using correspondents reported in the last year involving EKO Aspire Foundation has gained further ground with a new partner in SBI.
RBI also announced the guidelines on issuance of pre-paid instruments. This again has considerable potential for facilitating faster expansion of financial inclusion. A recent notification that debit card holders could draw cash from merchant establishments that have point of sale machines for honouring debit cards has further opened the door of technology based options for clients in rural areas. If banks are able to enrol merchant establishments [Page 121]in rural areas and provide them with point of sale machines then rural people would be able to draw money from their account in small sums of Rs 1,000 or less. Eventually this could move towards the direction of the Brazilian model of using small business enterprises such as grocery shop, mobile airtime resellers and lottery ticket vendors to become transaction outlets for banks.
Two high powered working groups of RBI had submitted their reports in the recent past which promise to change inclusion landscape. The committee headed by Mrs Usha Thorat, DG, RBI has recommended that the State Level Bankers Committee should take more responsibility for achieving financial inclusion. A sub-committee of the District Level Coordination Committee (DLCC) in district has been entrusted with the task of preparing a road map to provide banking services through a banking outlet at least once a week at every gram panchayat. The committee desires that ‘a banking outlet may be made accessible to each village having a population of over 2,000, at least once a week on a regular basis. Savings, loan, remittance and insurance products backed by financial education should form a part of achieving deeper financial inclusion’. A clear call for regulatory changes was also made by the committee for review of the extant guidelines on BCs to expand the category of persons who can be made eligible to act as BCs. It recommended that retail outlets like public distribution system (PDS) and fertiliser distributors as BCs may be examined by RBI from the policy, regulatory and consumer protection perspectives. It stressed the need for concerted efforts for using PACS as BCs where such PACS are running well.
The Working Group13 set up by RBI to review the BC arrangements had submitted its report. The group has taken into account a wide variety of problems and has suggested solutions in line with the expectations of the sector. The need for appointing those with cash handling requirements as BCs has been endorsed and the list of suggested entities as BCs reflects this. Only on the question of including common service centres as BCs (Skoch Foundation's suggestion), the Working Group has resevtions. Credit-only non-banking financial company (NBFC) MFIs would hopefully be able to become BCs and realise their full potential while serving the customers in the savings area as well. The committee has recommended allowing banks (not BCs) to collect reasonable service charges from customers so that they can remunerate the BCs better. But it has fought shy of recommending the removal of cap on interest rates. But this recommendation does answer the cost and remuneration problems.
The suggestions for banks absorbing the initial set up costs of BCs and some hand-holding costs would improve the enthusiasm on the part of new entities to become BCs. It is difficult to envisage banks offering an interest free overdraft. A more transparent mechanism is the increased remuneration and reimbursement of some initial costs which has been suggested. A presumptive ‘no objection’ for location of BC outside 25 km distance from the branch has been recommended, if the DLCC does not decide on an application from a bank for three months. The suggestions on establishing customer protection mechanisms are welcome and timely. The problems of customers at the hands of BCs and technology in use have been documented in Consultative Group to Assist the Poor's (CGAP, India) background paper on customer protection in branchless banking.14 Banks should be able to access FITF funds for technology investments in BCs once the group's recommendations are accepted. Overall the group has considered the representations made by the sector and has tried to ease the difficulties. The sector awaits RBI's acceptance and operationalisation of both the reports. One of the issues that remain was the subject of discussion in the policy retreat15 on banking correspondents in CAB, RBI, Pune. Registration and supervision of BCs by an authorised body was felt to be a critical requirement by banks and other practitioners. Some norms as to the entry requirements and financial soundness were seen as necessary. The problem of non-serious players joining as BCs and leaving after a short period has been faced by some banks. Replacement of a BC in the field is a vexatious problem. A registration and supervision body would discourage the non-serious players and those with questionable intentions, besides giving the banks a bogeyman to point to in case of disorderly conduct.
The inclusion agenda is exciting. The regulatory changes in the offing augur well for the sector. If an inclusive institutional choice accompanies the financial inclusion initiative, there are all round gains to be made. By making post office, MFIs, PACS and SHGs/their promoters as strong partners, a large capacity could be added. The field, as seen in the studies, requires that the potential customers' awareness is raised. For this as many partners as are available would be needed for a meaningful interface with the large numbers excluded.
Annex 9.1: Details Regarding Number of BCs Appointed and Accounts Opened by Banks
Annex 9.2: India Post-Uttaranchal Gramin Bank Tie-Up16
Uttarakhand Post has entered into a business tie-up with Uttaranchal Gramin Bank with the following twin objectives:
- collection of high-end deposits on behalf of the bank and
- disbursement of bank loans and collection of the repayment instalments (EMI) through Savings Bank Passbook Account and with the help of Gramin Dak Sevak (GDS) staff.
Presently the scheme has been started as a test case in five post offices linked to an equal number of bank branches with a network of about 95 branch post offices.
For collection of high-end deposits: Customer will be identified by joint marketing of Uttarakhand Gramin Bank and the post office. Customer will be asked to open a savings account in the post office where he or she will deposit the money. Subsequently the customer will be asked to fill up the deposit forms and complete other formalities as required by the bank. The postmaster will send duly completed papers to the designated branch of the bank along with cheque in favour of the manager of that bank, corresponding to the amount of the deposit made by the customer. In case of more than one deposit on any day, the cheque with the list of depositors and papers would be sent. After scrutiny of all papers the bank will open an account for the customer and send the required passbook/fixed deposit receipt to the post office for delivery to the customer. At the end of the term customer will apply for closure of the account in the post office. The paper will be sent to the designated bank from where final sanction of the payment will be sent to the postmaster who will make the payment to the customer through the savings bank account.
For disbursement of loan and collection of repayment: The customer will be identified by the post office. Application for loan and other formalities will be completed from the customer by the post office GDS staff. The post office will confirm the identity of the customer and send the papers to the designated branch of the bank. The bank branch will process the papers and after satisfying itself, the bank will sanction loan and send the cheque of loan sanctioned to the postmaster. The postmaster will open a savings bank account of the customer and deposit the loan amount in that account. The customer can withdraw amount at his or her ease. Monthly repayment EMI will be received by the postmaster by cheque for the savings bank account and further transferred to the designated bank on monthly basis along with required MIS. In case the repayment is stopped, the postmaster will provide the service of soft recovery by inquiring the reasons for non-payment and conveying it to the bank authorities. Account will be closed after last EMI is received.
Advantages of the Scheme
For the rural public: Rural public will get banking services that includes high-end deposits, loans and repayment facility right at their doorstep through vast network of around 2,500 rural post office branches in Uttarakhand.
For the bank: The bank will be able to deliver banking services in the rural areas at a relatively much lower establishment cost, thus achieving objective of ‘financial inclusion’. Around 6,000 strong GDS force that provides postal services in rural areas will assist the bank in regular recovery of the loans. The bank can improve its business in the rural areas with the credibility of India Post in the rural area.
For India Post: The business prospects of the department will revive. India Post gets an opportunity to be socially relevant especially in the rural area and instrumental in the ‘rural financial inclusion’. Post Office SB Scheme as an instrument of transaction between the bank and the customer remains alive.
Annex 9.3: A Small Full–Service Institution with Different Concept of Inclusion
IFMR Trust Holdings rolled out the concept of a local MFI on a national scale after considerable work on the drawing board. The first of these Puduaru Kshetriya Gramin Financial Services (PKGFS) is just more than a year old, in Thanjavur, Tamil Nadu. Why does this find a mention in this year's report? It is positioned as a full-service institution in the rural space where the exclusions levels are high. By choice the location of branches of each KGFS will be in villages where there are few or no bank branches. The emphasis is on remote areas as it makes business sense for the branch to look at all the households as potential customers in a virgin market.
Ideally each branch will cover 10,000 population or 2,000 households. It will not segregate the customers into poor and non-poor. All those in the area would be potential customers and each customer would be able to access a suitable financial product of which there are 14 today. The products fall under four categories:
- Loan products: Joint liability group (JLG) loans, loans against mortgaged jewellery (called ‘jewel loans’ in the Indian banking industry), retailer loans and loans for rural industries like brick kilns, coir units, and rice and dal mills.
- Insurance products: Personal accident insurance, cattle insurance, weather insurance and life insurance.
- Investment products: Savings instruments that provide safety, liquidity and reasonable returns, fixed deposits of public sector finance companies and a gold accumulation plan that helps customers accumulate their savings in the form of jewellery, and pension plan annuities.
- Services: Sale of certified gold coins and remittance services to enable efficient delivery of money sent by migrant members of village households.
Most of these offerings are being made on behalf of mainstream financial institutions regulated by different bodies and laws. Of these 14 products and services, six are already being offered in rural Thanjavur through 15 PKGFS branches. While JLG, jewel and retailer loans are being provided directly by PKGFS, the company is a re-seller for certified gold sold by a reputed public limited company. PKGFS is also an intermediary for a personal accident insurance product offered by a reputed private sector insurance company. Leveraging its approximately 10,000-member-strong customer base, PKGFS has negotiated very attractive premium rates for accident insurance cover of INR 25,000 and above.
IFMR Trust Holdings has developed a savings surrogate through money market mutual fund (MMMF) products. A system has been worked out with benefits comparable to bank savings accounts, by acting as an intermediary for a reputed asset management company (AMC). The cutomer can withdraw investments in MMMF as if it is a savings account—KGFS pays out the cash and takes reimbursement from the AMC after a day. A reverse saving product for buying gold is also available (see Chapter 3 for a description of how this works). The most surprising fact is that the loans to JLGs are without group guarantees and are priced at 16 per cent17 on declining balance and no other charges. Each financial product carries innovations that make it attractive to the customer.
Three KGFS are in place in diverse environments, Thanjavur in Tamil Nadu, Ganjam in Orissa and Rishikesh in Uttaranchal. There are 28 branches presently—20 in Tamil Nadu, 4 in Orissa and 4 in Uttaranchal. 20,000 customers are acquired who hold 30,000 accounts. 4,000 have invested in MMMF scheme. 9,000 JLGs have availed about Rs 100 million and 9,000 loans against jewellery have been given to the tune of Rs 100 million. By March 2010 the branches would scale up to 100 and further to 300 by the third year. What is the national plan of KGFS? The model is built is a scalable one either as a total financial institution or in modules of each product line. IFMR Trust would very much like some others to see the model and create KGFS in other states on their own. It also provides training to other MFIs on specific products and enable them offer such products to their customers. The trust is also working on a franchisee model in which IFMR Trust would provide the initial support and operational experience along with a CEO to any willing investor. The plan is to have 300 KGFS operating in different parts of the country once the first three provide encouraging results.
This model is different on account of its total coverage of people and comprehensive range of products. Its back-office systems and HR practices are markedly different (KGFS do not require English competence in its staff!). Its branch location reverses the logic of remote areas and finds an untapped market, achieving [Page 125]multiple objectives. There is no compelling hurry to breakeven in the first 3 years. The customer has been at the centre of its design—of products, processes, HR policies and control systems. It does not want a monolith to have an all-India foot print. It would custom build small MFIs in each location, but loosely link them with critical and common services. This is a model worth watching, better emulating.
1. ‘Pushing Financial Inclusion—Issues, Challenges and the Way Forward’, presentation by Dr K.C. Chakrabarty, Deputy Governor at Skoch Summit on 17 July 2009.
2. No-frills accounts are savings bank accounts that are basic—without minimum balance requirements and without cheque drawing facilities— introduced by RBI to reduce barriers for poor in accessing banks.
3. RBI's circular dated 25 January 2006.
4. This was subsequently revised to 25 km.
5. RBI cicular instructions to banks RPCD.CO.MFFI. BC. No. 85/ 12.01.015/ 2008–09 dated 22 January 2009 contains an annex providing details of the findings of different studies.
6. Cost-Benefit and Usage Behaviour Analysis of No Frills Accounts: Study Report on Cuddalore District 2009. This study was jointly carried out by S. Thygarajan of College of Agricultural Banking (CAB), RBI and Jayaram Venkatesan of CMF.
7. More intensive work needs to be done to carry the hypothesis forward and come to some definitive conclusions.
8. Minakshi Ramji, January 2009. ‘Financial Inclusion in Gulbarga: Finding Usage in ACCESS’, Working Paper by, CMF-IFMR.
9. Based on inputs provided by Vivek Kaul, India Post.
10. Reproduced from Minakshi Ramji, January 2009. ‘Financial Inclusion in Gulbarga: Finding Usage in ACCESS’, CMF-IFMR.
11. The seminar was of SHG federations, organised by INFOS (a network of SHG federations), Madurai in July 2008.
12. RBI circular /2008–2009/455 DBOD.No.BL.BC.129 /22.01.009/2008–2009 dated 24 April 2009.
13. The committee was headed by Shri. Vijaya Bhaskar, Chief General Manager (CGM), RBI.
14. The paper is under publication at the time of drafting this report. N. Srinivasan. 2009. ‘Customer Protection in Branchless Banking’, Background Paper – India, CGAP
15. The Policy Retreat was a joint event organised by ACCESS Development Services and College of Agricultural Banking, RBI, Pune. A summary of the event by Yeshu Bansal and N. Srinivasan is carried in ‘Business Correspondents and Facilitators: The Story So Far, CAB Calling, 33 (April-June) 2009.
16. Based on a write up provided by Vivek Kaul of India Post through the UN Solution Exchange—microfinance community—in response to a query on experiences and innovations on microfinance and financial inclusion for the purpose of this report.
17. The interest rate currently is 12 per cent on declining balance. It is proposed to be reset at 16 per cent from 1 October 2009.[Page 126]
- savings banks
- banking systems