FINANCIAL INCLUSION:

CHALLENGES AND ISSUES

Rani Singh*, Professor R.C.Bhatnagar**, Rajesh Verma***

______________________________________________________________________________

*Student: MBA (Insurance & Banking): Semester IV, ASIBAS, Amity University, Noida, U P

**Professor, ASIBAS, Amity University, Noida, U P (D.G.M. Retired, Bank of India)

*** Asst. Professor, ASIBAS, Amity University, Noida, U P

ABSTRACT

A vast segment of India's population exists on the margins of India's financial systems. There is

growing concern about people being ‘under-banked’. Financial inclusion is important priority of

the country in terms of economic growth and development of society. It enables to reduce the

gap between rich and poor. It helps to channelize money-flow to the economy; it ensures people

who are unable to access financial system so far can access it with ease.

The present banking network of the country (as on 31.03.2014) comprises of a bank branch

network of 1,15,082 and an ATM network of 1,60,055. Of these, 43,962 branches (38.2%) and

23,334 ATMs (14.58%) are in rural areas. Moreover, there are more than 1.4 lakh Business

Correspondents (BCs) of Public Sector Banks and Regional Rural Banks in the rural areas. BCs

are representatives of bank to provide basic banking services i.e. opening of basic Bank

accounts, Cash deposits, Cash withdrawals, transfer of funds, balance enquiries, mini statements

etc. However actual field level experience suggests that many of these BCs are not actually

functional. Public Sector Banks (PSBs) including RRBs have estimated that by 31.05.2014, out

of the 13.14 crore rural households which were allocated to them for coverage, about 7.22 crore

households have been covered (5.94 crore uncovered). It is estimated that 6 Crore households in

rural and 1.5 Crore in urban area needs to be covered.

KEYWORDS

1. Telecom connectivity

2. Keeping the accounts "Live”

3. Commission to Bank on Direct Benefit Transfer (DBT)

4. Coverage of difficult areas

“Inclusive growth should not be a mere slogan but a fundamental driving force for

sustainable development”.

-Dr. Pranab Mukherjee

The efforts to include the financially excluded segments of the society into formal financial

system in India are not new. The concept was first mooted by the Reserve Bank of India in 2005

and Branchless Banking through Banking Agents called Bank Mitr (Business Correspondent)

was started in the year 2006. In the year 2011, the Government of India gave a serious push to

the programme by undertaking the "Swabhimaan" campaign to cover over 74,000 villages, with

population more than 2,000 (as per 2001 census), with banking facilities. Learnings from the

campaign suggest that the efforts need to be converged so as to cover the various aspects of

PMJDY, like availing of Micro Credit, Insurance & Pension:-

• The campaign focused only on the supply side by providing banking outlets in villages of

population greater than 2000, but the entire geography could not be covered.

• The target was for coverage of villages and not of the households.

• The remuneration of the Bank Mitr (Business Correspondent) was very poor.

• Dependability and trust factor with a mobile BC was not high. Most of the BCs operated off-

line which locked a customer with a particular BC thereby constraining the utility.

• Some technology issues hampered further scalability of the campaign.

• The deposit accounts so opened under the campaign had very limited number of, or no

transactions.

• The task of credit counselling and Financial Literacy did not go hand in hand with the

campaign.

Consequently the desired benefits were not visible. Learning from the past, the present proposal

is, therefore, an integrated approach to bring about comprehensive financial inclusion.

Out of 5.92 lakh villages only 0.49 lakh villages have bank branches. In order to cover the

remaining areas with the banking outlets, a composite approach is proposed through branch and

branchless banking. Strategy for branchless banking is through online fixed points Bank Mitr

(Business Correspondent) who act as representatives of Banks to provide Basic Banking

Services. Mobile banking facility with USSD based technology is also proposed to be provided

to every account holders with low end mobile phones. Mobile wallets would also be effectively

utilized to deepen Financial Inclusion.

FINANCIAL INCLUSION: CURRENT STATUS AND ISSUES

Despite various measures for financial inclusion, poverty and exclusion continue to

dominate socio-economic and political discourse in India even after six decades of

post economic independence era. Though economy has shown impressive growth

during post liberalization era of 1991, impact is yet to percolate to all sections of the

society and therefore, India is still home of 1/3 of world's poor.

Census, 2011 estimates that only 58.7% of the households have access to banking

services

As on 31.03.14 present banking industry comprises of 1,15,082 bank branches and

1,60,055 ATM networks. Out of these 38.2% i.e. 43,962 and 14.58% i.e. 23,334

respectively are in rural areas.

There is also an increase in banking outlet nearly to 2,68,000 from 67,679 in March

2010.

With a reduction of 1300 rural branches during last two decades, nearly 7,400 rural

branches have been opened during this 3 years.

At the end of March 2013, 33.8 million people have been provided with small

entrepreneurial credit.

At the end of March 2013, 3.6 million households have been provided with small

entrepreneurial credit with the addition of nearly 2.24 million nonfarm sector

households during this period.

About 490 million transactions have been carried out in ICT-based accounts through

BCs during the three-year period.

Financial Inclusion Summary:- Progress of all Banks including Regional Rural Banks (RRBs),

during five years period are as under:-

Particulars Year

Ended

March

2010

Year

Ended

March

2011

Year

Ended

March

2012

Year

Ended

March

2013

Year

Ended

March

2014

Banking outlets in Villages

1. Branches

2. Villages covered by

BCs

3. Other Models

4. Total

33,378

34,174

142

67,674

34,811

80,802

595

1,16,200

37,471

1,41,136

3,146

1,81,783

40,837

2,21,341

6,276

2,68,454

46,126

3,37,678

-

3,83,804

Urban location through

BCs

447 3,771 5,891 27,143 60,730

Basic Saving Bank Deposit A/c- branches

1. No. in millions

2. Amount in billions

60.19

44.33

73.12

57.89

81.20

109.87

100.80

164.69

126.00

273.30

Basic Saving Bank Deposit A/c- BCs

1. No. in millions

2. Amount in billions

13.27

10.69

31.63

18.23

57.30

10.54

81.27

18.22

116.90

39.00

OD facility availed in BSBDA’s accounts

1. No. in millions 0.18 0.61 2.71 3.92 5.90

2. No. in billions 0.10 0.26 1.08 1.55 16.00

KCCs (No. in

millions)

24.31 27.11 30.24 33.79 39.90

(Source: RBI Annual Reports)

The statistics show that there is substantial progress towards opening of accounts, providing

basic banking services during the recent years as indicated above. However, it is essential that all

the sections be financially included in order to have financial stability and sustainability of the

economic and social order.

ISSUES UNDER FINANCIAL INCLUSION

1. To provide access to comprehensive financial services to financially excluded across

different states in foreseeable future.

2. Enlisting support of civil society organisations, adopt BC models for collection of small

value deposits, receipt and delivery of small value remittances, other payment

instruments, disbursement of small value credit, recovery of principal/ interest collection

and sale of micro insurance/ mutual fund products, pension products etc.

3. To not only cover every village but every household.

4. Provision of a robust technology which remain functional and safe 24X7, 365 days a

year.

5. Motivate every account holder to start operating the otherwise. Presently, 80% of the

deposit accounts opened are yet to become eligible for insurance and overdraft products.

6. Credit counseling and financial literacy to go hand in hand to spread awareness.

7. Overcoming the operational problems like connectivity, non-viability and risk

management etc.

8. Provision of more and more bio-metric ATMs and POS in rural areas.

9. Financial literacy drive with help of village panchayats, business correspondents,

NGO’S, civil society organizations and banks may motivate 80% of account holders to

start with small savings in their NFAs.

10. An ongoing review of KYC norms for financially excluded by RBI at the same time

protecting the banks from frauds and money laundering activities.

11. Creating awareness amongst Banks and their employees to accept the challenges of

financial inclusion and deal with them in mission mode for sustainable economic growth.

The attitude of Banks and their employees will be the key driving force in taking

financial inclusion to the next level.

IMPLEMENTATION OF FINANCIAL INCLUSION CHALLENGES

1. On 15th August, 2014 Hon’ble Prime Minister Sri Narendra Modi has announced Prime

Minister Jan –Dhan Yojna( formally launched on 28 th August, 2014 nationwide), with

particular focus to empower the weaker sections of society including women, small and

marginal farmers and labourers, both urban and rural. Announcing the scheme, he said

“Mahatma Gandhi worked to remove ’Social Un-touch ability’, if we want to first get rid

of ‘financial un-touch ability, we have to connect every person with the financial system:

this programme has been given impetus for that…..’(Shri Narendra Modi)

The salient features of the PMJDY are as under:-

To enable universal access to banking facilities to all households in the country,

providing basic banking accounts with Rupay debit card, overdraft facility and in

built personal accident insurance cover of Rs. One lac to every household by

August 2015

Household with one exiting account would also be covered under the scheme by

opening one more account with Rupay debit card, overdraft facility and inbuilt

insurance cover of Rs. One lac.

Account would be linked with Aadhar number of the account holder and would

become the single point of contact for DBT’s from central and state governments

Overdraft facility of Rs. 5000/- would start with Rs. 1000/- and will be raised to

Rs. 5000/- upon satisfactory performance. OD facility will be covered by the

Credit Guarantee Fund to be created by GOI.

The PMJDY is expected to provide access to banking facilities to households a

shift from geographical focus. In a short time of three months over 700 lacs have

been opened although mostly with Zero balance

2. Telecom connectivity: The feedback from the Banks is that in tribal and hilly areas of

the country, the telecom network is not dependable and therefore setting up Bank Mitr

(Business Correspondent) in these areas and ensuring opening of bank accounts is going

to be difficult. Representatives of the Department of Telecom (DoT) and BSNL held a

meeting in this regard and it was assured that the ongoing telecom connectivity problems

would be resolved by mutual consultation. It was also advised that DoT is separately

seeking the Government approval to cover all villages in the North East and difficult

areas with telecom connectivity. Banks would also work to apply the National Optical

Fibre Network (NOFN) when it reaches the Panchayat level.

3. Keeping the accounts "Live": It is essential that all Government benefits - Central,

State or local should flow to these accounts as it has been observed that a lot of duplicacy

exists in this area and sometimes States have not followed the Service Area Approach

and allocated areas to some banks other than service area banks creating avoidable

confusion. The DBT schemes especially MNREGA need to be pushed and DBT in LPG

needs to be restarted.

4. Coverage of difficult areas: Parts of North East, Himachal Pradesh, Uttarakhand, J&K

and 82 Left Wing Extremism (LWE) districts face challenges of infrastructure besides

Telecom connectivity. All households in such areas may not be fully covered under the

campaign in the first phase.

5. Use of technology: One of the major constraint of the ICT based BC typical has been the

technical problems associated with the model. It recently reported that procedures, such

as, hand held machines, smart cards, POS terminals and values which are crucial to the

functioning of the model are not correctly operational in many areas of the country.

Limited number of technology service providers to cover the unbanked villages of all

banks as well as restricted service centre’s for checking devices has unfavorably

impacted banking operations in many villages. Given the learning level of the rural

population, handiness of trained manpower in the villages to ensure that dealings are

carried out in a user friendly manner in the local language and that the customers

effortlessly transit from assisted model to self-service model in using technology,

wherever possible (e.g. use of ATMs/mobile/internet banking). This could lead to erosion

of certainty on the ICT-based BC model. Technical problems, therefore, need to be

addressed quickly. Banks also have to ensure that the improvement time between account

opening and account operationalization has to be minimized so as to gain confidence of

the customers in such models.

6. Security concern: Technology is changing everyday. In today’s era all banking

transactions are being done with the help of technology. There are many issues related to

technology too in banking industry. Especially Security related issues resulting in frauds

have the potential to undermine public confidence in the use of electronic payment

products. While preventing fraud through robust security measures, one should not lose

sight of the fact that the ease and efficiency in operations for the customers is not unduly

eroded. The Reserve Bank has been taking several measures to strengthen the security for

electronic transactions to prevent their misuse. For instance Second Factor Authentication

has been made mandatory for all Card Not Present (CNP) transactions (e.g. requirement

of PIN in addition to CVV while putting through the transactions). Similar measures are

going to be implemented for Card Present (CP) transactions (e.g. use of chip and PIN or

Aadhaar cards) over a defined time period. SMS alerts now made mandatory for all card

related transactions is another added security feature. Encryption of transactions for value

above Rs. 5,000/– has also been mandated for all mobile based transactions as a better

security protocol.

7. Infrastructural limitations: Especially in rural/remote areas power supply and network

connectivity are still issue in most part of the country. Because of poor connectivity of

internet and frequent power failure in some areas, it is not possible to do banking

transaction. This problem is being seen mostly in North Eastern State and to overcome

this problem RBI came up with Satellite Connectivity Scheme to provide 100% subsidy

to bank branches in the NER subject to maximum 12,000 per month or the actual

expenditure incurred by the bank, whichever is less, subject to the condition that the

branches would offer services of electronic funds transfer free of charge to their

customers. 43.3% of the total 1756 branches in the North-East region had taken satellite

connectivity after the launch of the scheme. The scheme has since been extended by

another year and Sikkim has also been brought under the ambit of the Scheme.

8. Strengthening of BC Model:

To ensure both operational flexibility and viability of the BC agents with proper

training about basic banking and insurance products, provide them good

infrastructure in terms of good quality computers and other peripherals like micro

ATM, bio-metric scanners, and internet connectivity.

To open the national infrastructure of Post Offices to function as BC’s.

Banks may be advised to adopt a scheme for financing to the BC’s to set up office

and buy a laptop, a two wheeler vehicle and some working capital funds. These

credit facilities can also be covered under Credit Guarantee Fund.

9. Micro Insurance: IRDA has created a special category of insurance policies called

Micro Insurance policies to promote Insurance coverage. It can be life insurance policy

with a sum insured of Rs. 50000/- or less to start with.

10. Robust Payment and Settlement system: Money transfers, payments including with

Rupay etc under financial inclusion are going to add large volumes specially in number

of transactions is another challenge which needs to be tackled by NPC and RBI.

Differentiated Banks seem to be a possible solution.

CONCLUSION

The RBI in pursuit of its commitment to financial inclusion has taken several initiatives to

expand the reach of formal banking facilities to all. The road map to provide outlets in

unbanked villages with less than 2000 population has been drawn and allotted to banks.

Lead bank scheme has been extended to 16 metropolitan districts to address financial

exclusion in those districts. Having created a robust infrastructure for promoting access, the

focus of next stage of FI plans is on stepping up usage of Bank accounts. RBI intends to

improve the financial sector thru a series of initiatives that rest on 5 pillars. They are (1)

Strengthening of monetary policy frame work. (2) Increasing diversity and competition in

banking industry while improving governance in existing banks. (3) Broadening choice of

financial instruments, deepening and enhancing liquidity.(4) Improving access to finance.

(5) Reinforcing the financial system’s ability to cope with stress.

In addition, greater adoption of electronic payments and speed, efficiency and security, as

also creating trust and safety of operations in the minds of the users. Several initiatives for

infrastructure enhancement during the year included introduction of White Level ATMs,

cardless cash withdrawal facility for unbanked persons, introduction of next generation

RTGS and enhancing the capacity of the NEFT system larger volumes and efficiency.

More such initiatives would be needed to tackle the challenges in achievement of financial

inclusion.

Financial Inclusion cannot be achieved without the active and collaborative involvement of

all stakeholders like RBI, other financial regulators, banks, governments, NGOs, civil

societies, media, etc. Good intentions always need to be supported by concerted action for

achieving goals. The support of Policymakers, Regulators, and Governments, IT solution

providers, Banks / their staff and public at large would be essential to bring about a decisive

metamorphosis in Indian banking and making it inclusive.

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