Over the last decade, India has seen a phenomenon economic growth. But this has not resulted in financial inclusion of vast majority of Indian population. People have no option but to take help of informal finance players like moneylenders, chit funds. Although, many steps have been taken by government and private players, but still there are lots of gaps. Financial inclusion of the poor requires innovative business models and extensive collaboration between various stakeholders like government, private players, community and NGO's.
Keywords: Informal financial players, Business models, new technology, collaboration
In a broader sense, financial inclusion is providing or ensuring banking services at affordable costs to the weaker sections of society or the unbanked segment which does not have access to the formal banking system. In bigger cities, every household may have more than one bank account but thousands of villages in India do not even have a bank branch. With a population of over 1 billion, India surprisingly has only around 300 million bank accounts.Of the six lakh Indian villages, only 30,000 have bank branches. A government-sponsored report says only 10 per cent of Indians have a life insurance cover, 13 per cent have debit cards and just two per cent own credit cards.
Absence of a formal banking system forces people living in these areas to opt for informal financial system and mostly private money lenders for their financial requirements. It also prevents flow of funds from such areas in form of deposits into the formal banking system.
What is present system and Reasons for financial exclusion?
The informal financial service providers include moneylenders, pawnbrokers, savings and credit associations such as chit funds, community-based organizations and credit services offered by few NGO's. Although this sector offers easier access to financial services, its ability and suitability to expand financial inclusion are limited. Informal providers often rely on personal relationships to assess risk. Chit funds have huge risk of mismanagement, fraud and bankruptcy. Moneylenders often charge exorbitant interest rates, sometimes forcing customers into a debt trap or even bonded labour.
Out of the many factors that deter the adoption of banking, specifically in rural parts is the proximity.Other reasons are:
- Lacks of suitable products- Formal banks are unwilling to give loans without collaterals even in the cases of small loans. Poor people won't be satisfied with cheaper, stripped down versions of mainstream products.
- Poor financial Literacy and awareness: Cash is still preferred more over electronic transactions in most of the towns and villages. People do not consider savings account for their savings. People invest their money in assets like jewellery or chit-funds.
- Banks disinterest: Rural branches and not-much-profit areas are not serviced by banks properly. Banks lack staff and customer service is not much stressed upon.
Government and Private Initiatives
The government has set a target of reaching out to all 1.07 lakh unbanked villages having population over 2,000 by 2011. Rewards in form of financial incentives are being offered to commercial banks that open branches in the unbanked areas of the country as government attempts to bring about financial inclusionease of access, availability and usage of the formal financial system.
Banks are opening no-frills account for the low-income groups. The central bank has simplified the Know Your Customer, or KYC, norms in cases where the account balance does not exceed Rs 50,000 and credit does not cross Rs 1,00,000 a year.Recently, the Reserve Bank of India (RBI) has decided to allow self help groups (SHGs) and primary agriculture credit societies (PACS) as business correspondents to ensure a greater banking penetration in the country s interior rural belt.
Among the private players, Citigroupis rolling out a network of biometric automatic cash machines aimed at illiterate Indian slum dwellers, using the latest technology to woo the country's millions of unbanked poor. The machines will recognise account holders' thumbprints, eliminating the need for a personal identification number, and will have colour-coded screen instructions and voiceovers to help guide them through transactions. But such biometric ATM network would not be easy to replicate beyond India's urban areas because of the lack of electricity and other facilities in rural areas. Mobile companies like Nokia are expected to soon roll out their financial and banking services under the banner of 'Nokia Money'. It plans to tap its huge network of 1.9 lakh phone retailers and dealers who will act as the consumer point and banking correspondents.
What to do for financial Inclusion?
Financial Inclusion has to be a multi-prong procedure which would involve partnership and collaboration between different players like retailers, telecom companies, banks, government, and private palyers.
Product: By downsizing the offerings according to rural need and not degrading. Customizing products like low payment instalments, ability to delay or consolidate instalments.
Customer Reach: Evaluation of new channels for distributing financial products like Moblie technology, NGO's, post offices, kirana stores etc. It is also important to educate and make people aware of financial products.
Risk management: Use of community guarantee as collaterals, maximum use of local knowledge to assess risk, risk evaluation through tie up with telecom companies and retailers in local region etc.
Administration and collection: Centralization of back-office operations can greatly reduce the expenses incurred by the banks. Use of local correspondents, particularly for collection could help greatly. Banks could even use traditional institutions like 'Nyaya panchayat' which help resolving issues at village level.
To bring the financially excluded into the banking fold, Government can set up a central fund which could provide certain percentage of money to banks to carry out their operations in presently loss making areas for financial inclusion.
Initiatives by banks
Flexibility: People at bottom of pyramid do not have a fixed and steady source of income. Therefore they require their financial services providers to be very flexible.
Simplicity and speed: Simplicity to financially excluded means fast processing and less cumbersome paperwork.
Small product size: In the form of small personal loans, small premium paying insurance policies etc.
Linkage between income and inclusion
Mobile is a superior medium to reach the large masses of unbanked and it is beneficial to both the banking fraternity - which can cover significantly more customers than it could by setting up physical branches - and to the unbanked, which are unlikely to otherwise have a formal bank account.
Today mobile connectivity has successfully reached to areas, where banks have not been able to reach. This deep penetration of the mobile telephony, across India, presents a huge opportunity to unbanked Indians to leverage the same, transact freely and benefit from the nation's economic growth. With the right technology, a mobile phone can be used for credit card transaction, balance enquiries, direct debits, and bill payments. Mobile connection could also be used as debit cards. Handsets could be protected through multiple passwords and remote activation. Banking through mobile phones will boast must lower costs and greater convenience than traditional banking products.
Mobiles can be used to educate the consumers as well as providing information about new products.
New business channels and Touch-points
Innovative and new channels could be explored for conducting banking business as agents of the banks at places other than the bank premises. These could include intermediaries such as, NGOs/ Farmers' Clubs, cooperatives, community based organisations, IT enabled rural outlets of corporate entities, Post Offices, insurance agents, among others, besides micro-finance institutions.
Profit or Loss making?
Access to financial services will provide the poor opportunities to build savings, make investments and avail of credit. Also, such access helps them insure themselves against income shocks and equips them to meet emergencies such as illness, death in the family or loss of employment. It protects the poor to a great extent from the clutches of the usurious money lenders
Financial inclusion can also help the government reach the benefits of social security efforts, NREGA payments to the rural poor directly through the banking system, thus reducing the time and transaction costs. Better flow of money in the economy could be guaranteed by ensuring money from poor are also circulated. Even financially, opening branches in such areas is not such a bad deal.According to two public sector bank heads, branches in villages with a population of 2000 can breakeven over a period of two years without any monetary support from the government. Technology would be the great enabler in tapping these unbanked areas.
Successful Initiatives in other countries
Mobile-commerce activities in Asian countries like Philippines, Malaysia, Pakistan and Bangladesh and in different African nations had helped reinforce the convenience and leverage of the M-commerce eco-system, particularly for the unbanked populations.Pioneered in Zambia, flourishing in Kenya, and recently introduced to parts of southern and West Africa, money transfers using mobile phones and other forms of telephone banking are taking off across the continent. In Zambia, 2% of Zambia's GDP was transferred through mobile service.
To engage financially excluded, financial institutions must first understand this segments financial needs and aspirations along with barriers that give rise to exclusion. Creative new business models supported by government initiatives and regulatory reforms can upend the economics of reaching financial excluded and allowing financial service providing companies to unlock opportunities for profitable expansion.