Financial Inclusion In India

Summary of Last Discussion with Dr. Rajan Vohra & Saransh

Problems in MF
Weak Communications Infrastructure : Internet, Smartphones ,
Network
Loss of Transactions Data
High KYC Costs

Solutions Proposed
Microservices
Education & Training
Lower Manpower Costs
Distribution of Networks : POS,BCs on same network
Interperoblity
Low cost of hosting technology
Pay Per Use Models
Offline : BCs
Online : Adhaar Enabled Transactions

Business Opportunities
Customized Services
Reducing Time

Comments by Dr. Vohra

Refinement of Model
Identify Shareholders
Localized Research
Study Customization & Infra
Indias record of financial inclusion, despite the existence
of a large and well-regulated financial system dominated
by commercial banks, is poor. Judging by aggregate
macro data, the household debtGDP ratio of 8.9% is
among the lowest in the region, contrasted with the
Peoples Republic of China at 36.8% and Thailand at
around 83.0%. 4 The absence of inclusion is especially
conspicuous in rural India, home to around 60% of the
population. In 201314, deposits per head were only
Rs9,244 (about $154) in rural areas, with credit about
Rs6,000 (about $100) per head.

Commercial banks being regulated mainstream institutions

are in an advantageous position to bring about financial
inclusion. However, commercial banks have a sub-optimal
presence in the country and have challenges in expanding
their net work. Local Area Banks fill in the regulatory
definition of financial inclusion . mainstream
institutional players. LABs are mainstream institutional
players, licensed and supervised by RBI. They adhere to
all the norms stipulated by the regulator. The Committee
on Financial Sector Reforms (2008), Trend and Progress
of Banking in India 2012-13 (which is a RBI publication)

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and various other committees are all supportive of the LAB
model. The pros in respect of LABs are far too many to
reject the model. There is no discussion by the regulator
based on deep analysis about the demerits of LABs. In
fact the realities strongly support the LAB model.
Economic growth could be uniform in the economy only if
there is financial inclusion. Access to finance can benefit
the poor by increasing capital flow to the underserved
sections of the economy and increasing efficiency of
capital allocation thereby reducing inequality.

Given the geographical restrictions imposed by the

regulator LABs are not to be viewed as short term
business which would break-even in a short span of time.
They are a business model for long-term sustainability and
inclusive growth. They also contribute towards financial
stability as they do only basic banking and do not indulge
in investment banking or trading, thus are not dependent
on bulk or wholesale markets for funding. Countries like
Philippines, Indonesia etc have experimented with small
banks and have proved to be a great success. Philippines
offers incentives in the form of low minimum capital
requirements, lower reserve requirement ratio and
exemption from various taxes for such institutions. It would
not be right to presume that small institutions would lack
corporate governance. History is replete where large
institutions have failed investors due the absence of
corporate governance. Governance does not depend on

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the size of the institution. LABs have all the advantages of
being a commercial bank with a local touch and local feel
and are best suited take forward the financial inclusion
agenda of the Government and regulator.
The Committee on Comprehensive Financial Services for
Small Businesses and Low Income Households chaired
by Nachiket Mor submitted its Report on December 31,
2013. The Report highlights that 90 per cent of small
businesses have no link with the formal financial sector
and 60 per cent of the population does not have a
functional bank account. While the bank creditGDP ratio is
around 70 per cent of GDP, there are wide regional and
district-wise disparities which confirms that financial
inclusion has a long way to go (Tarapore, 2014).

A case for Small Banks: Experience in Philippines

showed that the establishment of small banks has been a
critical factor for increasing the provision of financial
services to the poor (ADB, 2004). For example, several
rural banks in the Philippines that cater to small savers
and borrowers were offered incentives in the form of low
minimum capital requirements, lower reserve requirement
ratio and exemption from various taxes. These incentives
enabled these banks to offer higher interest rates on their
deposits and lower interest rates on loans and also build-

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up their capital. By 2004, these banks had a share of over
40 per cent of the total microfinance market in the
country. In the UK, the Treasury Committee of the House
of Commons noted that localized forms were better able to
target financially excluded who tend to have geographic
concentrations. New innovations in financial inclusion
strategies have often come from credit unions, community
banks and non-profit banking institutions (House of
Commons, 2006) (Rajan, 2008)

India has shown dramatic improvement in the Global

Microscope between 2014 and 2016. Indias financial

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inclusion policy, Pradhan Mantri Jan-Dhan Yojana, has the
political will and institutional support of the government
and the RBI. This is demonstrated with quantifiable goals,
such as the opening of 100 million bank accounts for low-
income families in 2014 and assisted by the Aadhaar
national biometric identification programme. The
momentum in account opening continued over the next 2
years, reaching 221 million by April 2016. The plan also
emphasises access to credit, insurance and pension
facilities, as well as the goal of channelling all government
benefits into beneficiaries bank accounts to increase
usage. The RBI has targets in place to provide alternative
sources of access through bank branches, bank
correspondents, ATMs and satellite branches in villages of
2,000 or more residents. It has also issued guidelines to
strengthen financial literacy. In addition, the RBI is working
to strengthen the payment system with the launch of the
Unified Payment Interface (UPI) to facilitate digital money
transfers.
Transactions in India
With more and more inclusive bank accounts being
opened, attention must now shift to the use of those
accounts. In too many places, inclusion still entails no
more than the withdrawal of transfer payments from
accounts that are otherwise dormant. The monitoring of
information on transactions in such accounts is the first
step to understanding what measures need to be taken to
facilitate the use of those accounts.

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The RBI has been monitoring transactions in e-enabled
inclusive accounts over the past 6 years.
The average number of annual transactions in such
accounts has remained between 2.5 and 3.0 over the past
5 years; and the number of e-enabled inclusive accounts
has increased from 30 million to more than 220 million
during this period.
Ongoing concern about account dormancy has led to the
liberalisation of agent banking rules in India in order to
facilitate account use.
With the many financial inclusion reforms that India has
seen over the last 5 years, the proportion of the adult
population with a bank account has increased to 65
percent. But, a substantial 23 percent of those accounts
remain dormant, indicating that it will take a lot more than
just opening formal bank accounts for the financially
excluded to be truly included.
However, given the rise of digital financial services in the
last couple of years, and the facilitation of financial access
through numerous electronic platforms, financial inclusion
is being seen through a new lens: those who are digitally
financially included versus those who are not. This
category includes the population who transact digitally
using debit/credit cards, point of sale (POS) machines,
online banking, and mobile financial services. As per the
latest Financial Inclusion Insights survey, 49 percent of
Indian adults are digitally included. However, usage of

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these digital accounts remains debatable and very little
data exists around this.

Launched in 2014, Jan-Dhan Yojana witnessed 118 per

cent growth in deposits- from Rs. 795 to Rs. 1735 in May
this year. Also, the number of accounts rose to 308 per
cent from 53 million to 219 million for the same period.
But more vital fact in favour of financial inclusion is the
number of zero-balance accounts came down from 70 per
cent to 25.6 per cent in 2016. This means people are
saving and it gets proved from the volume of deposits
that increased 790 per cent - from Rs. 4,273 Crores in
September 2014 to a whopping Rs. 38,048 Crores in May
this year.While as of 2014, fewer than 40 crore Indians
had a bank account; with the launch of initiatives such
as the Jan Dhan Yojana, nearly 65 crore Indians have a
bank account, of which 25 crore are Jan Dhan accounts.
Balances in these accounts have improved after
November 8.

Demonitisation
Many international media firms questioned Indias
scorched-earth campaign against cash instead of a
phased layered approach. Fewer than 10 percent of

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Indians have ever used any kind of non-cash payment
instrument. Less than three percent of the value
transacted in the year ending March 2014 used cards.
Fewer than two percent of Indians had used a mobile
phone to receive a payment, compared with over 60
percent of Kenyans, according to a Bloomberg piece.
Perhaps the digital payment move should have been
spearheaded by mobile operators as much as banks.
Bloomberg also covered the opportunity for startups
and digital players in this space, such as Paytm,
MobiKwik, Freecharge; the India Stack players built on
Aadhar; and microATM providers such as NovoPay.
India's chaotic move to replace most of its cash could
slam the brakes on its red-hot economy, a CNN report
explained. India overtook China as the world's fastest
growing major economy in 2016, but may fall behind
again due to adverse effects on sectors such as retail,
construction, and real estate. These sectors rely heavily
on cash and contribute about 30 percent of GDP,
according to the Institute of International Finance.
Innovative responses to citizen woes, such as Canara
Bank's bright blue ATM bus, were covered by CNN.

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Nearly half the country's 200,000 ATMs were reportedly
out of cash in the aftermath of demonetisation.
In the public sphere, Aadhaar helps to distribute
subsidies worth about $40 billion a year, as reported in
The Economist. Aadhaar has already saved perhaps $5
billion in leakages, and is also a crucial part of the
public digital infrastructure called India Stack. This can
help with financial inclusion and signing up for new
services and employment.

MUDRA Bank
The newly formed MUDRA Bank has a key role in
catalyzing fund flows to MSMEs. MUDRA Bank aims to
meet the credit needs of the unfunded categories, broadly
defined as self-employed or own-account enterprises.
Borrowers in these MSMEs generally lack standardized

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documents and do not have the collateral that formal
sector financial institutions seek. This market segment is
large, almost entirely in the unorganized sector, and
vulnerable to a range of economic shocks. The primary
purpose of the bank is refinancing for lending to MSMEs. It
is also envisaged to perform regulatory functions for all
types of entities in the microfinance space.
MFIs
The industry bodies of MFIs, the MicroFinance Institutions
Network (MFIN) and Sa-Dhan, are now recognized as
self-regulated organizations by the central bank.11 It is not
yet clear if they will report to RBI or the newly created
Micro Units Development and Refinance Agency
(MUDRA) Bank. 12 Self-regulation is tricky and does not
imply discretionary regulation; it is simply a model of
regulatory outsourcing that obliges the organization to
monitor members and to ensure compliance with the
extant regulations of the central bank, including
responsible lending. Self-regulated organizations are
required to formulate a code of conduct and have an
effective grievance redress system for borrowers and a
dispute resolution structure for members. In the current
framework, MFIs can report to Sa-Dhan or MFIN, which is
not necessarily good for regulatory efficiency. Moreover,
such competition could result in regulatory arbitrage,
since, in practice, some MFIs could be members of both
Sa-Dhan and MFIN.

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MFIs have also emerged as important players in the
inclusion space, successfully revitalized after the 2010
crisis due to regulatory intervention and candid
introspection following the severe public censure (Sane
and Thomas 2013). Clients are now offered services with
clear communication of lending rates, tenure of loans, and
repayment flexibility. Complementing these regulatory
directions, there have been many self-regulatory initiatives
aimed at promoting responsible business practices in the
microfinance market. RBI has also raised its lending limits
for MFIs that will allow them to serve a wider section of
borrowers.

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Technology Trends
The most interesting place without a doubt is India, said
Tilman Ehrbeck of Omidyar Network at a panel on
FinClusion: Connecting the Unconnected, hosted by the
Center for Financial Markets at the Milken Institute in
December. India is home to 21 percent of worlds
unbanked population, and the Indian government has
implemented a financial inclusion strategy that includes
access to bank accounts, a domestic debit card,
government issued ID, and digitization of social welfare
transfers with regulatory changes to improve access to
mobile money. As a result, reports Global Microscope,
India climbed up the rankings to third place and warranted
a mover and shaker mention.
Enabling merchants to explore digital payments at low or
no cost, investing in digital infrastructure, and digitizing
government-to-person payments can serve as incentives
and conduits for strengthening the digital ecosystem,
write the reports authors Darrel M. West, John Villasenor,
and Robin Lewis.
QR code-enabled mobile apps are among the low-cost,
easy-to-deploy solutions to watch in 2017. QR codes are
matrix barcodes that contain scannable information.
Products like Masterpass QR, which launched in India,
Nigeria, and Pakistan this year allow small merchants to

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scan the codes to accept digital payments from customers
using their smartphones or feature phones.

Several Startups are into creating user readiness on

several counts to benefit from the growth of this segment
for:
Supporting platforms for e-KYC, based on Aadhar
Supporting mobile platforms and analytics to understand
customer segments and needs
Making available customer service models like multi-
lingual, voice based interaction, simplified service offerings
Basing innovation needs on already existing
technological initiatives that are scalable and capable of
integration with emerging disruptive technologies and
models such as Prepaid Instruments (PPI), Point of Sale
(PoS), kiosks, mobiles, payment banks, etc.

Challenges
Supplyside challenges The most critical challenge for
financial inclusion initiatives is to maintain an efficient and
lowcost distribution network across the vast geography of
India. This gets even more complicated as the delivery of
financial services in these areas involves much more cash
management than the other sectors. Besides this,
initiatives also struggle to attain scale due to low adoption
rate. Winning the customers trust and explaining the

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benefits of financial products to them are some of the
biggest challenges faced by the frontline agents in the
dayto day delivery of financial services. One of the
reasons behind this is the lack of basic literacy and
apprehensiveness of marginal customers in dealing with
the formal, organized financial firms. These challenges in
turn lead to limited experimentation and innovation in
trying to make the financial inclusion initiatives successful.
Overall, financial inclusion initiatives have largely become
an obligation, with banks doing or planning to do just
enough to satisfy the Regulator and the policy makers.
Regulatory limitations Traditionally in India, as elsewhere,
the Regulator has focused on systemic stability and
depositor protection. Additionally, during the last decade,
the Regulator had to introduce safeguards like KYC
norms, as part of the prevention of unlawful activities (for
example, money laundering, terrorism, etc.). The cost of
KYC forms a substantial portion of the overall customer
acquisition cost. The full KYC cost varies between `150
and `250 per new customer, acquired through the
traditional banking network. This results in a heavy burden
on the viability of the marginal customers. It is only in 2005
that nofrills accounts with relaxed KYC norms have been
introduced. These nofrills accounts have reduced the
KYC outgo but there is room for further reduction using the
new authentication methods available. Similarly, even
during traditional transaction processing at bank branches,
the verification of a customer adds to the cost burden.

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Historically, there have been limited options other than the
traditional branchbased model for distribution. In the last
five years, the Regulator has permitted the introduction of
BCs. Even though the Regulator has introduced BCs as
the last mile customer touch point, the restrictions on who
can become a BC had constrained the availability of
credible, nationalscale BCs. It is only in December 2010
that forprofit entities have been allowed to become BCs.
Also, there is limited experimentation by service providers
due to concerns of attracting the Regulators disapproval.
For instance, given the low balances maintained by the
marginal customers, the traditional floatincomebased3
banking model is not appropriate. The usage of this
traditional model has resulted in most financial inclusion
initiatives being unviable. Even now, most service
providers are wary of experimenting with a transaction
pricingbased4 business model, due to uncertainty over
how the Regulator and more broadly the political economy
may perceive these initiatives. Technological limitations
Adoption of the Core Banking System (CBS) and
Automated Teller Machine (ATM), technology for the
delivery of financial services has been a fairly recent
phenomenon. Use of technology in increasing the reach of
financial services to the excluded sector has not been fully
harnessed for increasing financial inclusion. Till recently,
the adoption of CBS was limited CBS adoption by public
sector banks started only 10 years ago. It is only recently
that all their branches have come onto this platform.

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Earlier, most work, like transaction processing and record
keeping was done manually by the bank employees. This
required substantial time commitments on their part.
Moreover, it limited the customer handling capacity of a
branch and increased the service delivery cost. As a
result, addressing the marginal customers became highly
unprofitable for banks. Nonavailability of transaction
analytics data for credit assessment India has had limited
availability of transaction analytics data for customer credit
assessment. The ability to identify good customers can
allow financial service providers to reduce their overall
service delivery cost. The adoption of transaction analytics
has been limited not only because of limited technology
usage by financial service providers, but also because of
the lack of a unique customer identifier, which prevented
data from various accounts of a customer to be merged for
analytics. Telecom penetration in rural areas was limited
While this decade has seen tremendous growth in telecom
connectivity, till recently, most of the growth was coming
only from the urban areas. The connectivity in rural
locations was erratic and unreliable. Thus the adoption of
modern IT systems, which depend on telecom connectivity
for delivering financial services in rural areas, was not
possible.

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Opportunities
1. Customers do not mind paying charges as long as
they find value in service delivery.
2. It is critical for the formal sector to reduce their
documentation requirements and the time taken for
service delivery.

Optimization
1. Lowering manpower costs
One way of doing that is by adopting cost-effective
technology such that there is lesser need for human
intervention / effort. For example, even within the
traditional banking space, adoption of CBS has reduced

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human effort in generating transaction reports.Examples of
this can be found within the financial services space itself
where NBFCs, MFIs and more recently BCs have
innovated on reducing the per employee cost.
2. Lower the cost of distribution network
Recently, multiple tieups have been announced between
banks and telcos to expand the formers distribution reach,
viz. SBIAirtel, ICICIVodafone, AxisIdea, Union Bank
Nokia.
3. Create interoperability among subagents
Given Indias size, it is extremely difficult for a single
service provider to comprehensively cover the entire
geography. Of the various banking channels, ATM and
PoS have already moved to interoperable solutions that
can be shared across banks.
4. Use costeffective account hosting solutions
5. Transition from float economics to payperuse
economics
The traditional float or interest incomebased savings
account model were created to serve the rich and high
account balances.Where lower balances are maintained
this model does not work. Similarly, the traditional Equated
Monthly Installment (EMI) based credit models do not suit
farmers who have seasonal incomes. A float or interest
basedsavings model to a payperuse model is required

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where customers pay a small transaction fee for every
withdrawal they make.

Offline solution
The customer identity and account details are stored on
the smart card which is authenticated using the BC device.
Online Solution
Since technology and connectivity are evolving at a rapid
pace, service providers must choose their solution
carefully, bearing in mind the direction in which the
technology might evolve in the future.

Regulations

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Banks incur a cost of about `50100 per account for the acquisition of
each marginal customer (as compared to `150250 for full KYC)
through a nofrills KYC. This cost comprises of the employee cost,
travel to the customer if needed, verification and the storage of
documents and supporting technology cost for enabling the accounts.
Tracking of transaction history across products and financial
service providers
Promote interoperable customer servicing networks

Conclusion
Leverage the new forprofit BC regulation to tie up with established
players from other sectors, like telecom, FMCG and agribased
companies that have complementary reach, especially in the rural
areas. Some early moves in this regard have already been made.
Share infrastructure with other service providers by making the
network interoperable and by piggyback riding the network of other
service providers
Leverage the network of selfhelp groups (SHGs) as BCs to deliver
normal banking services and credit offerings.
Banks / BCs must tie up with companies that have a rural presence
for cash management.
Deploy efficient and costeffective technology
It is critical to choose technology that will not only
help reduce delivery cost, but will also help improve
service quality in the long run. Technology solutions
should be chosen with a longer term vision of how the
landscape is likely to evolve. In this regard, financial
service providers have three key issues to consider:
Build an interoperable customer service network.

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This allows usage of other peoples network and
reduces costs over time.
Choose the online model wherever it is practical
to do so. Over time, it is important to
comprehensively migrate to the online solution.
This has direct implications on the service quality
on offer as well as on the cost and risk management
of the solution.
Make a judicious tradeoff between existing CBS
and a relatively cheaper IT platform for hosting
the financial inclusion accounts, keeping in mind
the features on offer and the cost of the solution.
4. Use Aadhaar platform for rapid growth and lower
costs
The UIDAI is expected to roll out 600 million Aadhaar
numbers (in a phased manner) over the next four years.
This is an extremely ambitious Government of India
program and financial service providers should leverage
the Aadhaar platform to get the following benefits:
Onetime opportunity to reduce customer
acquisition cost
Ongoing reduction in the cost of KYC
Creating an interoperable network using Aadhaar
prescribed biometric micro ATMs and hence
sharing of BC cost with more than one bank
5. Create targeted product and service offering

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It is important to make a judicious tradeoff on the
bouquet of products that one offers to the marginal
customers who actually need the entire set. Initiatives
with limited product offerings will have restricted
revenue potential, thus making the economics difficult.
Service providers should consider products from all
key categories namely savings, credit, remittance
and other banking and third party products like
insurance, investment and bill payments.
6. Shift from conventional floatbased economics to
payperuse economics
Service providers should experiment and innovate
with their business model to meet the specific needs
of the marginal customers. For example, the usage of
transactionbasedpricing models is critical to ensure
viability of service offerings and longterm
sustainability of financial inclusion initiatives, which
otherwise would see limited push from any service
provider. Similarly, there is a need to experiment with
other products as well, like repayment terms and
frequency of loans.
7. Conduct aggressive customer awareness
programs
Dedicate funds for literacy drives and vocational
training
Promote interoperable customer servicing

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networks
Facilitate tracking of transaction history across
products and financial service providers
Creation of FII for monitoring service delivery
Targeted incentives to promote financial inclusion
viability

- See more at:

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http://mastercardcenter.org/insights/2016-closer-
achieving-inclusive-growth-financial-
inclusion/#sthash.o25zUgnj.dpuf

https://www.adb.org/sites/default/files/publication/183034/a
dbi-wp568.pdf
https://www.researchgate.net/publication/305710525_India
's_Journey_to_Financial_Inclusion

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