Best Practices on Financial Inclusion in Indian Banking Sector

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ABSTRACT
Banking Financial Services and Insurance (BFSI) holds the key for the inclusive growth of the nation. Essence of financial service is trust. A bank- customer relationship is fiduciary and not based on a transaction- it is a hard standing relationship and there is every need for banks to act with responsibility. In the area of customer service, cherished principles are
1) Transparency,
2) Reasonableness,
3) Truth in selling,
4) Confidentiality, and
5) Assistance when needed.
Yet banks charge housing loans with fixed interest and floating interest with the customers not knowing what is really fixed? It is common knowledge that it is easier to get an education loan for 20 Lakhs for pursuing education abroad but very difficult to get a loan for 1 Lakh for education in India for a rural student. The essence of Financial Inclusion is to ensure that a range of appropriate financial services are available to every individual and all those who need these services are made to understand and avail them. Every citizen must be able to have his/her basic needs – access to food, clothing, education, healthcare, shelter met. Given the economic level of rural people and given the density of the population, conventional banking methods (brick and mortar) cannot cover all people in a cost effective manner. IT needs to be part of the core infrastructure for development 72% of the population lives in rural according to 2001 census. Available data shows that only 59% of the adult population has bank accounts. There is many duplicate data as the rich tend to have multiple accounts bringing this figure still less. The unbanked segment in the rural sector is about 61%.
The limited access to affordable financial services such as savings, loans, remittances and insurance services for the vast majority in the rural areas and unorganized sector is acting as a constraint to the growth impetus to the rural sector and Indian economy.
INTRODUCTION
By financial inclusion, we mean delivery of banking services and credit at an affordable cost to the vast sections of disadvantaged and low income groups. The various financial services include savings, loans, insurance, payments, remittance facilities and financial counseling / advisory services by the formal financial system. An open and efficient society is always characterized by the unrestrained access to public goods and services. As banking services are in the nature of public goods, financial inclusion should therefore be viewed as availability of banking and payment services to the entire population without discrimination of any type.
Financial inclusion offers a huge potential for business in terms of resources and assets and banks therefore need to take aggressive steps to use technology, business processes and personnel to be able to exploit this potential in innovative and creative ways. Use of technology is critical in building up a reliable credit information system, build up data base on customers for a variety of purposes, thereby reducing the transaction cost involved in checking encumbrances and collaterals and also facilitating better pricing of risk.
1 Report of the committee on financial inclusion. “NABARD”
2 Kochhar, Sameer, “Speeding Financial Inclusion”, Skoch Development Foundation, 2009, p. 40.
3 iibf.orgdocuments/jaiibupdatesjune2009
Government has come up with various Practices like
A) Banking Correspondents,
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/ pension/other third party products and;
(v)Receipt and delivery of small value remittances/other payment instruments
The BC model is one good example of how an innovative model emerges based on market needs to serve the bottom of the pyramid.
"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." Besides, the model brought an added risk into the picture. Banks have not been quick in developing 'microfinance packages' to catch the fancy of the self-help groups, which was one of the reasons for the dismissal performance of the BC model. Technology service providers feel there is a need for innovative partnerships and convergence in the fields of micro -finance and asset building which could make the BC model work
The BC model may however be well suited for providing many other banking services, like opening accounts initially and processing insurance, loan or agriculture credit. This coupled with mobile banking may successfully extend the reach of many banking services to the rural areas.
B) Banking facilitators.
Banking facilitators like A Little World, Fino, Integra, and Ekowhich are active in the microfinance sector acts as facilitators for banks by providing biometric cards to unbanked people and help them open new bank accounts in banks like State Bank of India
C) Introduction of zero balance and no frills savings accounts
This has a wonderful initiative of the Banks that has made opening of a bank account within reach of the poorest of the poor in the rural areas. But a perusal of sample zero balance and no frills savings accounts reveal that 72% have zero or minimum balance even after one year of opening. Only 15 % accounts had a balance of more than Rs 100 thus leaving 85% of the new frill free accounts inoperative
D) Simplification of Know your Customer (KYC) procedures
This initiative by the Reserve Bank of India has again helped for the rural poor to open accounts as the KYC norms with their identification by Passport, Voter Id card, Telephone bill, PAN Number etc cannot be produced b y the rural poor.
E) Setting of Biometric ATMs in rural areas for catering to illiterate customers
Biometric authentication systems are especially effective in rural areas with low literacy rates. Customers no longer have to rely on signatures or filling out documents - they can simply provide their fingerprints to authenticate themselves and access their accounts through specialized biometric teller machines (BTMs).
F) Removing usage fee on ATMs for use of other Bank ATMs
Charges for using an ATM of another bank generally discouraged the customer from using the ATMs of other banks. Now there is more utilization of the installed ATMs and it has also helped the customers from frequent unserviceablity of the ATMs
But these can address only a fraction of the problems. Empowerment and improving the living standards are interlinked. There is a need for coordinated effort on financial inclusion- bank, insurance etc. Duplication need to be avoided to reduce the costs. Different stakeholders have different perspectives based on their perceptions, which need to be addressed.
Given the economic level of rural people and given the density of the population, conventional banking methods (brick and mortar) cannot cover all people in a cost effective manner. The customers cannot be expected to come to branches in view of opportunity cost and time and hence banks will have to reachout through a variety of devices such as weekly banking, mobile banking, satellite offices, rural ATMs and use of Post offices.
Information and Communication Technologies (ICT) can be used as a tool for making need based solutions at an affordable cost. It needs to be part of the core infrastructure for development
Technology can help the banks in:
-Taking informed and timely decisions through the data that is available to the right people at the right time in the right format
-Having better flexibility in operations through the timely availability of data that is sent through whatever communications channels that are available
-Reducing operating costs with the use of scorecards that can predict customer behavior
-Having a standardized reporting system, not only within the institution but for regulators
-Increasing business through systems like easy-to-use tools
-Creating awareness and empowering the rural youth by increasing their employability levels are of at most importance as these schemes can work fully only when there is involvement by the people
Mobile telephony is India’s growth story of the current era. It has been found that Voice authentication is superior to even fingerprint. The unique identify card planned by the Government of India should help this to accelerate
DrRaghuraman's recommendations of creating a 'national electronic financial inclusion system' (NEFIS) is the backbone of such a system with its ability to carry out small value transactions (Rs100) at limited transaction cost (sub Re1). And the only way that can be done on a mass acceptable basis is via SMS, which is the single most pervasive feature in mobile technology revolution, cutting across all SEC's, geographies, handset vendors etc.
In urban and even in rural areas where mobile phones have penetrated, banks could use mobile technology for facilitating banking transactions. Mobile Page 10 of 13
phones can be used to transfer funds real time from and to bank accounts and could make remittances and payments at very low cost.
In Africa people are using prepaid airtime – the amount of time that can be spent talking on a mobile – as a sort of currency. The mobile phone eliminates most of the problems faced by traditional banks in delivering services to people in rural areas. Distance is no longer an issue: whether they live in a remote village or in downtown
Use of ingenious system based on a technology called unstructured supplementary services data (USSD), which is supported by all GSM phones and is compatible with older model handsets and SIM cards. The advantage of USSD is that it is both faster and cheaper than SMS.
New clients don’t have to fill in an application form, supply identification or show proof of residence. They simply dial a special number on their mobile phone and type in their national ID number. Money can be added to account via transfers from a bank account, or by depositing cash or a cheque at partner branch. The transaction is authenticated with a PIN (similar to M-check by AIRTEL for their airtime) Mobile operators have a direct line into people's pockets and they understand the needs of the mass market better than the banks do. They are already processing millions of very small transactions each day, so that mobile banking is a natural extension of what they already do. The transaction costs involved in mobile banking has been found to be very competitive as observed from the mobile services of Kenya and Philippines. A typical transaction through a bank branch that costs the bank US$2.50 would cost only US$0.50, if it were automated by using a mobile phone. A solution based on mobile phones can therefore substantially reduce the cost of spreading financial services over many retail environments, at least in areas with relatively high mobile phone penetration. 200 million mobile phone users in India do not have a bank account. The significant rural penetration of mobile phones can further be leveraged to draw additional customers into the banking space.