Declaration

I hereby declare that the project report on the topic “Financial Inclusion: Policy Initiatives and

Assessment of ICT based Initiatives for NREGA Beneficiaries in District Amritsar” is submitted

to the Reserve Bank of India for the partial fulfillment of summer internship as a part of the

curriculum of MBA, UIAMS.

This report is record of the original work done by me, Aarti Katoch between 18, June 2010 to 30,

July 2010 during the period of this internship at Chandigarh regional office of Reserve Bank of

India under the guidelines of Mrs. Anitha Srinivasan, DGM and Mr. Susheel Raina, AGM, Rural

Planning and Credit Department.

Aarti Katioch

This is to certify that Ms. Aarti Katoch has successfully completed the project on the topic

“Financial Inclusion: Policy Initiatives and Assessment of ICT based Initiatives for NREGA

Beneficiaries in District Amritsar” under my guidelines. Her conduct throughout the

accomplishment of the task was excellent and I wish her all the best for her future endeavours.

Place: Chandigarh Mrs. Anitha Srinivasan,

Date: (DGM, RPCD)

Mr.Susheel Raina, AGM,

(AGM, RPCD)

1

Acknowledgement

I would like to express my gratitude to the Reserve Bank of India that they provided me with the

opportunity to accomplish my goal particularly the Rural Planning and Credit Department.

I express my heartfelt gratitude to Sh. Jasbir Singh, present Regional Director. RBI, Chandigarh

who gave me an opportunity to work on the project titled financial inclusion.

I owe enormous intellectual debt towards my guide Smt. Anitha Srinavasan, DGM & Mr.

Susheel Raina, AGM, RPCD for giving me valuable insight into my field of study. I would like

to thank and sincerely appreciate my mentors for their encouragement and continuous guidance

in a friendly atmosphere.

I extend my sincere thanks and gratitude to all the staff members specially Mrs. Peeyoosh Nag,

AGM, DAPM for providing me the support. Also during this project I had frequent interaction

with officers and staff of other departments at RBI Chandigarh, I appreciate their willingness to

co-operate and share information with me.

I am extremely indebted to my institution for infusing in me a spirit of dedication and

capabilities to accomplish this project.

I would like to thank my pal Ankita Rapa and colleagues for their cooperation and help during

my work. I would also like to thank staff of Oriental Bank of Commerce, Regional Office,

Amritsar for the cooperation they provides me during my field visits.

Last but not the least, I would like to acknowledge the invaluable contribution of my beloved

parents for their good wishes and for being my side all the time and encouraging me to fulfill my

duty with determination.

2

Background

I, Aarti Katoch, student of University Institute of Applied Management and Sciences, Panjab

University, Chandigarh joined The Reserve Bank of India as summer trainee in partial

fulfillment of the requirements for the degree of Masters of Management Studies. The report is a

record of original project done by me between June 18, 2010 to July 30, 2010 during the period

of my summer internship at Reserve Bank of India, Chandigarh under the guidance of Smt.

Anitha Srinivasan (DGM) and Mr. Susheel Raina (AGM, RPCD).

Approach adopted

For the present work, I studied the basics of the topic and previous work done on it. My first goal

was to have in depth knowledge of the theoretical part of the subject than to have first hand

experience of it in the field. For this purpose, I visited Regional office of Oriental Bank of

Commerce in Amritsar. I also visited some of the villages like Chogawan & Kirlgarh of district

Amritsar for the field study and survey. I conducted a survey among the rural people of these

villages to know the level of penetration of banking in these interior rural areas and what are the

perspectives of the people regarding banking services.

3

Executive Summary

Access to safe, easy and affordable credit and other financial services by the poor and vulnerable

groups, disadvantaged areas and lagging sectors is recognized as a pre-condition for accelerating

growth and reducing income disparities and poverty. An open and efficient society is always

characterized by the unstrained access to public goods and services. In this concern both the

government and the Reserve Bank of India have been pursuing the goal of financial inclusion

over the last several decades through various initiatives for example- opening of no frill

accounts, lead bank scheme, easier credit facility, simplified KYC norms, use of ICT solutions,

building FLCC & EBT through banks etc.

Now-a-days ICTs {Information and Communication Technologies} are being used in many

fields specially in banking to improve the efficiency, reliability and ease of operation. They are

widely used in the form of mobiles ATMs, biometric smart cards, mobile banking and so on.

Branchless banking in the form of Business Correspondents and Business Facilitators is one of

the major initiatives of RBI in this direction through which they are able to reach the unbanked

population.

The project report includes the understanding of the Business Correspondent model and its

working i.e. the enrollment process and the transactions through biometric smart cards. The

survey was also conducted among rural people to know the penetration of banking in the interior

areas of district Amritsar. Project also focuses on the problems of the BCs and the rural people

and includes the suggestions on the basis of research conducted.

Microfinance and Information and Communication Technology (ICT), in their own right, can be

argued to have a lasting impact on the social and economic order. However, to have an even

more profound impact, these different approaches to orchestrating change- social and economic-

will have to integrate and collaborate, in a way that ensures actualizing of a more holistic

development framework that beat leverages the respective strengths of both microfinance and

ICT.

4

Table of ContentsChapter Title Page(s)

I. Introduction

Why Financial Inclusion?

Who are Excluded?

Causes of Financial Inclusion

Consequences of Financial Inclusion

7-12

II. Financial Inclusion – Defined

Indian Scenario

13-15

III. Some Indian Initiatives

Initiatives of Reserve Bank of India

Initiatives of NABARD

Other Institutions

16-22

IV. IT enabled Financial Inclusion

Branchless Banking

Business Correspondents/Facilitator Model

ICT and Financial Inclusion

23-31

V. Progress in ICT based FI in Punjab 32-36

VI. Survey

Overview of the Model

Enrollment Process

Transaction Process

Achievement so far

Field issues

Methodology

37-51

5

Findings from the Survey

Problems of BCs and Rural Population

VII. Some suggestions 52-54

VIII. Questionnaire 55

IX. Abbreviations 56-57

6

Chapter I

Introduction

Access to safe, easy and affordable credit and other financial services by the poor and

vulnerable groups, disadvantaged areas and lagging sectors is recognized as a pre-

condition for accelerating growth and reducing income disparities and poverty. Access to

a well-functioning financial system, by creating equal opportunities, enables

economically and socially excluded people to integrate better into the economy and

actively contribute to development and protects themselves against economic shocks. In

most developing countries, a large segment of society, particularly low-income people,

has very little access to financial services, both formal and semi-formal. As a

consequence, many of them have to necessarily depend either on their own or informal

sources of finance and generally at an unreasonably high cost. The situation is worse in

least developed countries (LDCs), where more than 90 per cent of the population is

excluded from access to the formal financial system.

Inclusive finance, including safe savings, appropriately designed loans for poor and low-

income households and for micro, small and medium-sized enterprises, and appropriate

insurance and payments services can help people to enhance incomes, acquire capital,

manage risk, and come out of poverty. It has been well recognized that access to financial

services facilitates making and receiving financial payments and reduces transaction

costs. Furthermore, access to financial services contributes to higher production and

social protection, as the financial sector – through stored savings, credit and insurance –

serves as a measure of crisis mitigation. Broader access to financial services has,

however, attracted less attention despite the emphasis it has received in the theory.

7

Why Financial exclusion?

Broadly, financial exclusion is construed as the inability to access necessary financial

services in an appropriate form due to problems associated with access, conditions,

prices, marketing or self-exclusion in response to discouraging experiences or

perceptions of individuals/entities. Definitions of financial exclusion in the literature vary

depending on the dimensions such as ‘breadth’, ‘focus’ and ‘degree’ of exclusion. The

‘breadth’ dimension is the broadest of all definitions linking financial exclusion to social

exclusion which defines financial exclusion as the processes that prevent poor and

disadvantaged social groups from gaining access to the financial system (Layton and

Thrift, 1995). The ‘focus’ dimension is in the middle of the spectrum that links financial

exclusion to other dimensions of exclusion. It defines financial exclusion as the potential

difficulties faced by some segments of population in accessing mainstream financial

services such as bank accounts/home insurance (Meadows et al., 2004). The definitions

laying emphasis on the ‘focus’ also vary significantly to include various segments of

population such as individuals, households, communities, and businesses. The ‘degree’

dimension, which is the narrowest of all definitions of financial exclusion, defines

financial exclusion as exclusion from particular sources of credit and other financial

services including insurance, bill-payment services and accessible and appropriate

deposit accounts (Rogaly, 1999). Finally, definitions of financial exclusion vary

considerably according to the dimensions such as the concept of relativity, i.e., financial

exclusion defined relative to some standard (i.e., inclusion). This line of thinking defines

the problem of financial exclusion as that emanating from increased inclusion, leaving a

minority of individuals and households behind (Kempton et al., 2000).

Both the Government and the Reserve Bank have been pursuing the goal of financial

inclusion over the last several decades through building the rural cooperative structure in

the 1950s, the social contract with banks in the 1960s and the expansion of bank branch

networks in the 1970s and 1980s. These initiatives have paid off in terms of a network of

branches across the country. Yet the extent of financial exclusion is staggering. Out of the

600,000 habitations in the country, only about 30,000 have a commercial bank branch.

Just about 40 per cent of the population across the country has bank accounts, and this

8

ratio is much lower in the north-east of the country. The proportion of people having any

kind of life insurance cover is as low as 10 per cent and proportion having non-life

insurance is an abysmally low 0.6 per cent. People having debit cards comprise only 13

per cent and those having credit cards only a marginal 2 per cent.

The National Sample Survey data reveals that, in 2003, out of the 89.3 million farmer

households in the country, 51 percent did not seek credit from either institutional or non-

institutional sources of any kind. These statistics, staggering as they are, do not convey

the true extent of financial exclusion. Even where bank accounts are claimed to have

been opened, verification has shown that these account are dormant. Few conduct any

banking transactions and even fewer receive any credit. Millions of people across the

country are thereby denied the opportunity to harness their earning capacity and

entrepreneurial talent, and are condemned to marginalization and poverty.

Who are excluded?

9

Senior citizens

Senior citizens

Landless Labourer

Landless Labourer

Self Employed

Self Employed

Marginal Farmers

Marginal Farmers

Urban Slum Dwellers

Urban Slum Dwellers

Unorganized Sector

Enterprises

Unorganized Sector

Enterprises

Socially Excluded Groups

Socially Excluded Groups

Ethnic MinoritiesEthnic

Minorities

MigrantsMigrants

WomenWomen

Financially

excluded

Financially

excluded

Poor infrastructure and

physical access act as

deterrent.

The requirements of independent documentary proof of identity and address can be a very important barrier in having a bank account especially for migrants and slum dwellers.

From the supply side,

distance from branch,

branch timings,

cumbersome

documentation and

procedures, language

are common reasons for

exclusion.

From the demand side,

lack of awareness, low

incomes / assets, social

exclusion, illiteracy act

as barriers.

Causes of financial exclusion:

The exclusion of large numbers of the rural population from the formal banking sector

may be for several reasons from the supply side, such as:

Persons are unbankable in the evaluation/perception of bankers,

The loan amount is too small to invite attention of the bankers,

The person is bankable on a credit appraisal approach but distances are too long

for servicing and supporting the accounts and expanding branch network is not

feasible and viable,

High transaction costs particularly in dealing with a large number of small

accounts,

10

Why this Financia

l Exclusio

n?

Lack of collateral security,

Inability to evaluate and monitor cash flow cycles and repayment capacities due

to information asymmetry, lack of data base and absence of credit history of

people with small means,

Human resources related constraints both in terms of inadequacy of manpower

and lack of proper orientation/expertise,

Adverse security situation prevailing in some parts of rural India,

Inadequacy of extension services which is crucial to improve the production

efficiency of the farmers leading to better loan repayments.

From the demand side, there are several reasons for the rural poor remaining excluded

from the formal banking sector, such as:

High transaction costs at the client level due to expenses such as travel costs,

wage losses, incidental expenses,

Documentation,

Lack of awareness,

Lack of social capital,

no availability of ideal products,

Very small volumes / size of transactions which are not encouraged by formal

banking institutions,

Hassles related to documentation and procedures in the formal system,

Easy availability of timely and doorstep services from money lenders/informal

sources and

Prior experience of rejection by/indifference of the formal banking system.

Consequences of financial exclusion:

Financial exclusion is not evenly distributed throughout society; it is concentrated among

the most disadvantaged groups and communities and, as a result, contributes to a much

wider problem of social exclusion. Broadly, the issue of cost of financial exclusion may

be conceived from two angles, which are intertwined.

11

First, the exclusion may have cost for individuals/entities in terms of loss of

opportunities to grow in the absence of access to finance or credit.

Also, financial exclusion leads to higher charges for basic financial transactions

like money transfer and expensive credit, besides all round impediments in basic/

minimum transactions involved in earning livelihood and day to day living.

It could also lead to denial of access to better products or services that may

require a bank account.

It exposes the individual to the inherent risk in holding and storing money –

operating solely on a cash basis increases vulnerability to loss or theft.

Individuals/families could get trapped into a cycle of poverty and exclusion and

turn to high cost credit from moneylenders, resulting in greater financial strain

and unmanageable debt.

Second, from the societal or the national perspective, exclusion may lead to

aggregate loss of output or welfare and the country may not realize its growth

potential.

At the wider level of the society and the nation, financial exclusion leads to social

exclusion, poverty as well as all the other associated economic and social

problems. Thus, financial exclusion is often a symptom as well as a cause of

poverty.

Financial exclusion is not evenly distributed throughout society; it is concentrated

among the most disadvantaged groups and communities and, as a result,

contributes to a much wider problem of social exclusion.

The more tangible outcomes of financial exclusion include cost and security

issues in managing cash flow and payments, compromised standard of living

resulting from lack of access to short-term credit, higher costs associated with

using informal credit, increased exposure to unethical, predatory and unregulated

providers, vulnerability to uninsured risks, and long-term or extended dependence

on welfare as opposed to savings (Chant Link and Associates, 2004).

Chapter II

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Financial Inclusion – Defined

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.

The scope of financial inclusion: It can be expanded in two ways

Through state-driven intervention by way of statutory enactments

Through voluntary effort by the banking community itself for evolving various strategies

to bring within the ambit of the banking sector the large strata of society.

In India the focus of the financial inclusion at present is confined to ensure a bare minimum

access to a savings bank account without frills, to all. Internationally, the financial exclusion

has been viewed in a much wider perspective. Having a current account/savings account on

its own, is not regarded as an accurate indicator of financial inclusion. There could be

multiple levels of financial inclusion and exclusion. At one extreme, it is possible to identify

the ‘super-included’, i.e., those customers who are actively and persistently courted by the

financial services industry and who have at their disposal a wide range of financial services

and products. At the other extreme, we may have the financially excluded, who are denied

access to services only for deposits and withdrawals of money. But these persons may have

only restricted access to the financial system, and may not enjoy the flexibility of access

offered to more affluent customers.

13

14

Indian scenario

Bank nationalization in India marked a paradigm shift in the focus of banking as it was

intended to shift the focus from class banking to mass banking. The rationale for creating

Regional Rural Banks was also to take the banking services to poor people. The branches of

commercial banks and the RRBs have increased from 8321 in the year 1969 to 68,282

branches as at the end of March 2005. However there are certain under-banked states such as

Bihar, Orissa, Rajasthan, Uttar Pradesh, Chattisgarh, Jhaarkhand, West Bengal and a large

number of North-Eastern states, where the average population per branch office continues to

be quite high compared to the national average.

One of the benchmarks employed to assess the degree of reach of financial services to the

population of the country, is the quantum of deposit accounts (current and savings) held as a

ratio to the adult population. In the Indian context, taking into account the Census of 2001

(ignoring the incremental growth of population there-after), the ratio of deposit accounts

(data available as of March 31, 2004) to the adult population was only 59%. Within the

country there is wide variation in the across states. For instance, the ratio for the states of

Kerala is as high as 89% while Bihar is marked by a low coverage was a meager 21% and

27% respectively. The Northern Region, comprising the States of Haryana, Chandigarh and

Delhi, has a high coverage ratio of 84%. Compared to the developed world, the coverage of

our financial services is quite low.

Chapter III

Policy initiatives

Initiatives of the Reserve Bank of India

Reserve Bank of India in its annual policy statement of April 2005 recognized the

problem of financial exclusion and has, since then initiated several policies aiming at

15

promoting financial inclusion. Some of the major initiatives aimed at promotion of

financial inclusion include:

No Frills Accounts: Taking the view that access to a bank account can be considered

a public good, in 2005, RBI directed all banks to offer at all branches the facility of

‘no frills’ account to any person desirous of opening such an account. These accounts

have ‘nil’ or low minimum balances and charges, and have limited facilities. Since

2005, over 39 million no frills accounts have been opened. However, there are certain

barriers that inhibit the active operation of such accounts like the time and cost

involved in reaching the nearest branch where the accounts have been opened. Hence,

branchless banking has been allowed to ensure that these accounts are more

accessible to their holders.

Easier Credit facility: Banks were asked to introduce a General Purpose Credit Card

(GCC) facility to be issued by banks without insistence on collateral or purpose, with

a revolving credit limit up to Rs. 25,000. However, total number of GCCs issued by

banks as at end-March, 2009 was only 0.15 million.

KYC regulations for small value clients and transactions: One significant area,

where it was found that regulation could be a challenge in achieving greater financial

inclusion is in regard to Know Your Customer (KYC) norms. In a country where

most of the low income and poor people do not have any document of identity or

proof of address it is very difficult to have KYC norms that insist on such documents.

At the same time, to ensure integrity of financial transactions, it is necessary that each

customer is properly identified before accounts are opened. In rural areas, this is

addressed by asking for identification by local officials and requiring a photograph of

the account holder. Drives for financial inclusion locally have been achieved through

active involvement of government in the identification process. In big towns and

cities where there are a large number of migrants who do not have any documents,

fulfilling KYC norms and opening a bank account continue to be a challenge. As a

proportional regulatory dispensation having regard to the degree of risk, RBI has

simpler KYC norms for small value accounts where the balances in the account do

not exceed about Rs 50,000 and where the annual credits in the account do not exceed

16

about Rs 2,00,000. There are similar dispensations for walk-in clients for small

remittances and payments not exceeding Rs 50,000.

Recently, the Government of India constituted the Unique Identification Authority of

India (UIDAI) to issue a Unique Identification Number (UID) with biometric

recognition to every resident of the country. It is expected that by latter part of this

year, the UIDAI will begin issuing UIDs and roll out 600 million UIDs in a phased

manner by 2014. UID enrolment would be done with the help of State Government

machinery and other Registrars. Banks could benefit by synchronizing opening of

bank accounts for those who will be enrolled through this exercise. Government is

also looking into the possibility of converting food and fertilizer subsidies into cash

payments which will flow through bank accounts. This project is a unique

opportunity to leverage UID, bank accounts and mobile telephony services. Using

UID for fulfilling KYC for small value accounts will facilitate financial inclusion. In

a country with deep penetration of mobile phones, this is expected to give a boost to

the financial inclusion while ensuring the integrity of financial transactions.

100% Financial Inclusion Drive: The Reserve Bank launched a financial inclusion

drive targeting one district in each state for 100% financial inclusion. In the light of

the experience gained, coverage has been extended to other areas/districts. For the

purpose, external evaluation of the quality of 100% financial inclusion reported by

banks was carried out.

In order to improve provision of financial inclusion services in the north-eastern

region and prepare an appropriate State-specific monitorable action plan RBI has set

up a Committee on financial sector plan for the North-eastern region headed by

Deputy Governor of Reserve Bank of India, with members from financial institutions

and banks, State Government from the North-Eastern states and academics.

Use of ICT Solutions for Enhancing Outreach of Banks: The Reserve Bank has

been encouraging the use of ICT solutions by banks for enhancing their outreach with

the help of their Business Correspondents (BCs). The BCs carry hand-held devices,

which are essentially smart card readers. The information captured is transmitted to a

central server where the accounts are maintained. These devices are used for making

payments to rural customers and receiving cash from them at their doorsteps.

17

Mobile phones have also been developed to serve as card readers. Account holders

are issued smart cards, which have their photographs and finger impressions. Certain

banks have been using this technology in Andhra Pradesh, Karnataka and

Maharashtra. Pilot studies have also been carried out in Mizoram and Uttarakhand.

Financial Literacy and Credit Counseling: Recognizing that lack of awareness is a

major factor for financial exclusion; Reserve Bank is taking a number of measures for

increasing financial literacy and credit counseling. A multilingual website in 13

Indian languages on all matters concerning banking and the common person has been

launched by the Reserve Bank on 18 June 2007. Comic type books introducing

banking to schoolchildren have already been put on the website. Similar books are

being prepared for different target groups such as rural households, urban poor,

defense personnel, women and small entrepreneurs. Financial literacy programs are

being launched in each State with the active involvement of the State government and

the SLBC. Each SLBC convener has been asked to set up a credit-counseling centre

in one district as a pilot and extend it to all other districts in due course. A Centre for

Financial Education & Excellence is proposed to be set up in RBI's College of

Agricultural Banking at Pune.

EBT through Banks: The Reserve Bank is in consultation with state governments to

encourage them to adopt Electronic Benefit Transfer (EBT) by banks.

Mandated priority sector lending: Priority sectors broadly include agriculture and

allied activities, micro and small enterprises, education, housing and micro-credit. All

domestic commercial banks are required to allocate 40 per cent of their lending to the

priority sectors. For foreign banks, the requirement is 32 per cent and export credit is

also included in their case. Credit extended by banks to SHGs, micro finance

institutions, to NBFCs for on-lending to priority sector, and to regional rural banks

for agriculture and allied activities has been included in the definition of priority

sector. Investments made by banks in securitized assets, representing loans to various

categories of priority sector which are originated by banks and financial institutions,

are also included in priority sector. A bank can also purchase priority sector lending

from another bank though participatory notes. Any shortfall in priority sector lending

is required to be deposited in special funds maintained by NABARD/SIBDI/NHB,

18

which are used for funding rural infrastructure/micro-enterprises/housing sectors. As

on March 31, 2009, the coverage under priority sector was to the tune of 51 million

loan accounts. While it could be argued that mandated credit distorts allocative

efficiency of the banking system, I would like to emphasise that no subvention is

involved as interest rates are deregulated and all the usual prudential norms for

income recognition, asset classification and provisioning, as also standard risk

weights are applicable, which ensures that such loans do not add undue risk to the

bank’s balance sheet.

Linking branch licensing approvals to penetration in under-banked areas: Under

the current laws in India, every bank requires a license from RBI for opening a

branch. This legal requirement has been used as a regulatory tool for furthering

financial inclusion. Statutory approvals for branch licenses in more lucrative centres

are linked to the number of branches opened in under -banked districts and States, as

also other factors such as fulfilling priority sector obligations, offering no frills

accounts and other parameters to gauge achievements in financial inclusion and in

customer service.

Unbanked villages having population more than 2000: In order to push up the

inclusion process Reserve Bank has set the time limit of March 2012 for the banks to

reach out in any mode i.e. brick & mortar or ICT mode to the unbanked villages

having population more than 2000. The sub-committees at District level have

identified such villages and in the State of Punjab 1581 such villages have been

identified. These villages have been allotted to the banks and banks have already got

them Board approved Financial Inclusion planes for the roll outs in those villages.

ICT is considered the key and driven for reaching out into these villages.

Lead bank scheme: One of the major initiatives taken by Reserve Bank of India to

fulfill the credit needs of rural sector of the economy, particularly agriculture, small-

scale industry and services sectors remained virtually neglected. The study group

which was presided over by Prof. DR Gadgil recommended in Oct.’69 the adoption

of an “Area approach” for the development of credit and banking in the country on

the basis of local conditions. The Scheme emphasized making specific banks in each

district the key instruments of local development by entrusting them with the

19

responsibility of locating growth centers, assessing deposit potential, identifying

credit gaps and evolving a co-ordinate approach to credit deployment in each district,

in concert with other banks and credit agencies.

In 1989, the Service Area Approach (SAA) was adopted wherein service area villages

were identified and assigned to bank branches based on their proximity and contiguity

and by adopting a cluster approach. Credit plans were prepared on an annual basis for

the service area of each branch which involved co-ordination between the various

developmental agencies and credit institutions. Due to allotment of villages to

designated bank branches, the activities of the ‘service area branches’ were restricted

to the allotted villages and they were unable to provide financial assistance outside

their service areas, despite being in a position to do so. Similarly, borrowers

belonging to these villages were required to approach the ‘designated bank branches’

for their credit needs and were not in a position to avail of services of any other bank

branches, irrespective of whether they were satisfied with the services provided by

the designated bank branches or not. When bankers do not give the desired attention

to certain areas, the regulators have to step in to remedy the situation. This is the

reason why the Reserve bank Of India is placing a lot of emphasis on Financial

Inclusion.

Reserve Bank has created the funds i.e. Financial Inclusion Fund (FIF) and Financial

Inclusion Technology Funds (FITF) with NABARD with the purpose of helping the

banks of adoption/implementation of Technology in the inclusion process.

Initiatives of NABARD

Allowing banks to open accounts for Self Help Groups

An important regulatory dispensation that facilitated financial inclusion was given in the

early 90s, when banks were allowed to open savings accounts for Self Help Groups

(SHGs), which were neither registered nor regulated. An SHG is a group of 15 to 20

members from very low income families, usually women, which mobilises savings from

members and uses the pooled funds to give loans to those members who need them, with

the interest rates on deposits and loans being determined entirely by members. National

20

Bank for Agriculture and Rural Development (NABARD) launched the SHG–Bank

Linkage Program in 1992 to forge the synergies between formal financial system and

informal sectors. Under this programme, banks provide loans to the SHGs against group

guarantee and the quantum of loan could be several times the deposits placed by such

SHGs with the banks. The recovery rates of such loans have been good and banks have

found that the transaction cost of reaching the poor through SHGs is considerably lower

as such cost is borne by the SHG rather than the bank. Interest earned from group

members is retained in the group. The penetration achieved through SHGs has been very

significant. As per NABARD’s report on status of microfinance (2008-09), about 86

million poor households are covered under the SHG-Bank Linkage program with over

6.1 million saving-linked SHGs and 4.2 million credit-linked SHGs as on March 31,

2009. The initial phase of SHG movement saw concentration of SHGs in the southern

parts of the country, but now the SHGs have spread more to the eastern and north eastern

regions where the extent of financial exclusion is greater. The Government of India has

also been using the SHGs for subsidy linked credit schemes for the poor. NABARD

offers grant assistance to NGOs that promote SHGs and link them to banks.

Other institutions

Micro Finance Institutions (MFIs)

MFI is an organization or association of individuals including the following if it is

established for the purpose of carrying on the business of extending microfinance

services:

A society registered under the Societies Registration Act, 1860,

A trust created under the Indian Trust Act,1880 or public trust registered under

any State enactment governing trust or public, religious or charitable purposes,

A cooperative society / mutual benefit society / mutually aided society registered

under any State enactment relating to such societies or any multistate cooperative

society registered under the Multi State Cooperative Societies Act, 2002 but not

including:

a cooperative bank as defined in clause (cci) of section 5 of the Banking

Regulation Act, 1949 or

21

a cooperative society engaged in agricultural operations or industrial

activity or purchase or sale of any goods and services.”

MFIs could play a significant role in facilitating inclusion, as they are uniquely

positioned in reaching out to the rural poor. Many of them operate in a limited

geographical area, have a greater understanding of the issues specific to the rural

poor, enjoy greater acceptability amongst the rural poor and have flexibility in

operations providing a level of comfort to their clientele.

There are several legal forms of MFIs. However, firm data regarding the number

of MFIs operating under different forms is not available. It is roughly estimated

that there are about 1,000 NGO-MFIs and more than 20 Company MFIs.

Followed by the success of SHG-bank linkage programme as also Bangladesh

Gramin Bank model, many of the NGOs engaged in social intervention have

taken to finance intermediation for providing financial services to their target

clients adopting innovative delivery approaches.

Chapter IV

IT enabled Financial Inclusion

Financial inclusion is the key driver of an inclusive society and an inclusive economy.

Over the years, multiple definitions of Financial Inclusion have been given including the

one given by Rangarajan Committee on Financial Inclusion (2008). To define e-Financial

Inclusion, one could extrapolate the above and state as innovative applications of ICT for

delivery of financial & payment services and adequate credit where needed, at an

22

affordable cost to the vast section of disadvantaged and low-income groups, who

currently are unbanked.

To be able to ensure that the challenges of banking the unbanked are met effectively and

converted into growing and sustainable business for banks, there is no alternative to

adoption of ICT solutions on a very large scale and range. ICT solutions are required to

capture customer details, facilitate unique identification, ensure reliable and uninterrupted

connectivity to remote areas and across multiple channels of delivery, offer multiple

financial products (banking, insurance, capital market) through same delivery channel

while ensuring consumer protection, develop comprehensive and reliable credit

information system so essential for efficient credit delivery and credit pricing, develop

appropriate products tailored to local needs and segments, provide customer education

and counseling , enable use of multimedia and multi -language for dissemination of

information and advice.

Branchless banking

With 600,000 villages in the country, it was impossible to provide access to a bank

account for every household through branch banking. At the same time, electronic

banking for such a populace where cash forms the dominant payment mechanism, is

unlikely to become a reality for quite some time. Keeping in view these ground realities,

RBI issued the business correspondent guidelines in 2006, which paved the way for

branchless banking through agents. The guidelines allowed, for the first time, commercial

banks to offer simple savings loan and remittance products through agents, who were

allowed to undertake banking transactions, including ‘cash in cash out’ transactions at

locations close to the customer. Banks were advised as part of risk management to adopt

ICT solutions including biometric identification of the customer. The agents are required

to deposit bank’s cash balances beyond certain limits with the bank’s branches by end of

day or the next day. Initially, the regulations restricted the entities that could act as

business correspondents to “not for profit” entities such as NGOs/ cooperatives / post

offices etc. This was because we were concerned about the risk of reckless pushing of

products by agents whose sole incentive was earning commission; it was also felt that

local community based organisations and NGOs had the trust and confidence of the local

23

population. Over the last few years, the list of persons who can be appointed as business

correspondents has been relaxed to include individuals such as retired government

officials , school teachers, defence personnel as also “for profit” local “mom and pop”

shops, petrol pump/public call office operators etc entities that usually deal in cash in the

villages. Another regulatory requirement was that the business correspondents appointed

for direct contact with the customers should be within 30 km from a designated base

branch of the bank to ensure proper oversight of such agents and minimise agency risk.

The distance criteria can be increased in consultation with the district consultative

committee, a forum for bankers and government officials that meets each quarter.

Initially there was a restriction on the bank in recovering any charge from the customer

for such doorstep service as it was expected that the savings in cost of setting up a branch

would be sufficient incentive. Branchless banking illustrates an area where there have

been progressive relaxations of the regulations for furthering penetration while ensuring

consumer protection.

Banking Correspondent/ Facilitator model

In January 2006, the Reserve Bank of India issued a new set of guidelines allowing banks

to employ two categories of intermediaries- Business Correspondents (BCs) and Business

facilitators (BFs) - to expand their outreach. BCs are permitted to carry out transactions

on behalf of the bank as agents. The BFs can refer clients, pursue the clients’ proposal

and facilitate the bank to carry out its transactions, but do not transact on behalf of the

bank. These intermediaries can be NGOs, SHGs, MFIs, community based organizations,

IT enabled rural outlets of corporate entities, post offices, insurance agents, well

functioning panchayats, Village knowledge centers, agri clinics/agri business centers,

krishi vigyan kendras and other Civil Society Organizations that provides financial and

banking services through the use of business facilitator and correspondent models.

Services provided by these intermediaries are:

Collection and preliminary processing of loan applications including verification

of primary information/ data.

Identification of borrowers and fitment of activities

Creating awareness about savings and other products and e3ducation and advice

on managing money and debt counseling

24

Processing and submission of applications to banks

Promotion and nurturing Self help groups/Joint Liability Groups

Post-sanction monitoring

Monitoring and handholding of Self help groups/Joint Liability Groups/ credit

groups and others

Follow-up for recover

It’s a big challenge to provide banking facilities closer to the customer, especially in

remote and unbanked areas, while keeping transaction costs low. And for the purpose, IT

enabled services are introduced and pilot projects are initiated utilizing smart

cards/mobile technology to increase their outreach. Accordingly banks are urged to scale

up IT initiatives for financial inclusion speedily while ensuring that solutions are highly

secure, amenable to audit, and follow widely-accepted open standards to ensure eventual

inter-operability among the different systems.

ICT and financial inclusion

Now-a-days ICTs {Information and Communication Technologies} are being used in

many fields to improve the efficiency, reliability and ease of operation. One of the sectors

where ICTs are being used extensively is banking. They are widely used in the form of

mobiles, ATMs, intelligent core banking systems and so on. Before going into those

details let us look at the Indian scenario. India has a large section of society which is very

traditional and people have the habit of saving money. In most cases they use to save the

money in their house itself. And the cash transfer takes place personally by hand to hand.

So there is a need for proper banking facilities to manage the money and make cash

transactions at affordable price.

25

Microfinance has proven to be a key economic development approach intended to benefit

low-income population. In recent years, this sector has also caught the attention of

commercially oriented businesses- given the significant market opportunity at the base of

the pyramid, which help in the betterment of our citizens. Microfinance and Information

and Communication Technology (ICT), in their own right, can be argued to have a lasting

impact on the social and economic order. However, to have an even more profound

impact, these different approaches to orchestrating change- social and economic- will

have to integrate and collaborate, in a way that ensures actualizing of a more holistic

development framework that beat leverages the respective strengths of both microfinance

and ICT.

The objective of leveraging ICT for microfinance delivery geared towards actualizing

specific projects that are cost effective, productive enhancing and sustainability sensitive.

Specific technology concepts that have been proven to have tremendous impact in other

industries- such as modular IT architecture design, standardization approach and

outsourcing- therefore need to be evaluated in the microfinance context. Known ICT

concepts and approaches, when applied in the manner outlined above. Establish the fact

that skill-sets and approaches required by the IT industry to service other sectors are

26

Banks which provide financial services

Banks which provide financial services

Customer who need financial services

Customer who need financial services

ICTs which enable the financial

inclusion

ICTs which enable the financial

inclusion

Very difficult to access, costly and time

Uses technology to access data from the

banks

Low cost and easy to access

equally applicable and relevant to the social sector in general and microfinance in

particular. This, when coupled with the sizing of the microfinance opportunity, will make

a compelling business case for the IT industry. Further, it will encourage IT firms to

provide impactful solutions geared towards meeting challenges and opportunities of the

microfinance sector.

The ICT Paradigm

With renewed interest in reaching out to financially excluded market segments and the

role that technology is proven to be capable of playing in addressing business

productivity, cost efficiency and risk management issues, it is not surprising that ICT is

being looked upon as an extremely viable option to circumvent the all too evident

problems that have traditionally inhibited meaningful intervention in the area of

microfinance. All of this makes the subject of microfinance and ICT application quite

central to the poverty reduction and financial inclusion agenda, irrespective of whether

one is microfinance or an ICT.

Key Challenges in ICT Adoption

Introducing ICT however comes with its own set of challenges. Apart from more

technical aspects (such as choosing an ideal and standardized technology solution,

developing an awareness about technology usage, handling new technology devices,

ensuring proper maintenance and servicing, etc.), that MFIs will have to struggle with

other issues that are more people oriented and less related to technology per say. From

handholding of employees at various levels, to working through the cost constraints in

making technology investments that make a tangible difference to operational and

profitability paradigms, to developing a mindset of embracing changes that it may bring

out in processes and 14 day to day working, ICT adoption has to grapple with many

softer issues, like challenges of awareness, politics, access, relevancy, meaningful in use,

sustainability and coordination.

Delivery Channels

The most important aspect of inclusiveness is the delivery channel. So it is essential to

develop multiple delivery channels that leverage locational presence as well as direct and

27

indirect modes of outreach. Not all interventions will, however, be relevant from the

beginning, and as pointed out earlier as well, investing in relevant field technologies will

have to go in tandem with the larger business considerations, and operational issues that

these technologies aim to resolve.

Providing financial services to less privileged is costly, in part, because they transact in

small amounts of money, often live in sparsely populated areas, and rarely have

documented credit histories. Mobile Banking can actually be one key element in

addressing this challenge, especially in the rather unique paradigm that most developing

economies face in dealing with a “cash-only transaction”. It can play an important role in

payment products, and when coupled with prepaid cards, can also facilitate in making

microcredit disbursements and repayments efficient and cost effective. When coupled

with other parallel developmental schemes catering to the same population, channel can

be further leveraged to reach out to the relevant set of people. Specifically talking about

the use of mobile phones as a financial services delivery channel, Mobile Banking and

Commerce has actually gained increasing acceptance amongst various sections of the

society in previous years. The reasons for its growth can be traced back to technological

and demographical developments that have influenced many aspects of the socio-cultural

behaviour in today’s world. Further, fast, secure and user-friendly mobile

telecommunication technologies are critical towards realizing commercial viability goals,

through the use of this alternative delivery channel for microfinance.

Challenges in the Smart Card Based Solution for Financial Inclusion

Smart card solution for Financial Institutions is limited in reliability because:

There is lack of standardization of the solution across the industry

A central agency that ensures that standards are complied with.

o Test and certify the smart cards and bank

o Assure data security of cards and terminals, during manufacture, while in

store and in transit.

28

Create a test environment and R & D labs for smart cards

Aggregate banking industry demand for all technology components of the

financial inclusion solution such as bank cards, bank terminals and the

intermediate or backend servers.

Develop an industry wide security management framework (the key management

system) and maintain the necessary infrastructure for its operation. Training and

hand holding the banks in financial inclusion implementation.

To overcome these issues following remedial actions has been taken:

Standardization

The IBA-IDRBT Committee on Open Standards for Financial Inclusion is addressing the

following aspects relating to standards:

The card numbering scheme

The smart card data architecture

The business correspondent card data architecture

The terminal functionality

Key management scheme

Card numbering scheme

There is necessity for a uniform card number for financial inclusion bank cards across the

industry. Normal debit/credit cards use the card number to route the cardholder server.

Hence the bank terminal/ATM and the backend switch need to identify the card presented

using the card number to get authorization for the banking transaction from the host

server. The scheme to be followed as under:

Length of the card number: 19 digits

9- national scheme

356- country code

XXXX- bank identification number

XXXXX- branch code

29

XXXXX- account number

X- checksum

The bank identification number (BIN) will be issued by a central agency. In case a

particular branch has more than a 1 lakh customer’s bank may opt for additional BIN.

The other important aspects relating to standards of the financial inclusion are smart card

hardware, smart card data architecture, business correspondent card, terminal

functionality specifications (hardware and software) and smart card securities.

Demand aggregation and economies of scale

There is need for a central agency to assist banks in the technology and business aspects

of the financial inclusion implementation. The central agency will aggregate demand for

the banking industry for all technology components of the implementation including

smart cards and handheld bank terminals. This will enable the industry to exploit

economies of scale. The central agency will make available to banks sample request for

proposal templates, acceptable maximum pricing of technology components and empanel

equipment suppliers and solution providers. The agency will support the industry by

drawing up and making available sample service level agreements that will assure quality

of service as well as end-to-end securities.

Quality assurance

Card manufacturing facilities need to be audited for assuring quality standards. Regular

audit needs to be undertaken to ensure data security standards are followed in storage and

transport of bank cards and terminals.

De-duplicate services

30

The central agency may provide de-duplication services to banks in order to remove

ghost customers from the system. Ghost customers are those who operate more than one

account to avail of government benefits several times. De-duplication is a method that

goes through all the biometric fingerprints in the system systematically and identifies

customers who get benefits from government scheme such as pension/wages several

times. This reduces fraud considerably.

Chapter V

Progress in ICT based FI in Punjab

Second phase of 100% financial inclusion

31

After the completion of first phase of 100% financial inclusion by providing basic

banking services to all rural households in the state of Punjab by either opening of

deposit accounts including under general credit card scheme, banks have started rolling

out their ICT driven Business Correspondent Model in the State. It has not attained this

scale, only plots have been rolled out.

Some of the banks like PNB, OBC and SBI have initiated the process of providing Bio

Metric cards in identified villages and the summary of the latest progress is given below:

Punjab National Bank- Rural

Sr. no. Particulars PNB (Fatehgarh

Sahib)

PNB(Taran

Tarn)

PNB(Muktsar)

1. Number of villages

covered

15 30 13

2. Number of households

in these villages

4450 10358 7167

3. Number of accounts

opened

5270 4495 4953

4. Amount of deposit

collected

Rs. 1054871 Rs. 13311 Rs. 22494

5. Number of Bio Metric

cards issued

5018 1024 2257

6. Whether transaction in

Bio Metric Card started

Yes Yes Yes

7. If yes to 6 above.

Number of transactions

held

Debit 6292

Credit 33816

Debit 27

Credit 145

Debit 352

Credit 610

32

State Bank of Patiala and Oriental Bank of Commerce- Rural

Sr. no. Particulars SBOP (Fatehgarh Sahib) OBC(Ferozpur)

1. Number of villages covered 8 13

2. Number of households in these

villages

2500 2117

3. Number of accounts opened 1333 1431

4. Amount of deposit collected Rs. 128134 Rs. 237000

5. Number of Bio Metric cards

issued

864 1182

6. Whether transaction in Bio

Metric Card started

Yes Yes

7. If yes to 6 above. Number of

transactions held

Debit 577

Credit 1146

Debit 3452

Credit 2321

State Bank of India

Sr. no. Particulars SBI(Gurdaspur) SBI(Patiala)

1. Number of villages

covered

155 40

2. Number of households 8159 9719

33

in these villages

3. Number of accounts

opened

8167 16759

4. Amount of deposit

collected

Rs. 127474 Rs. 1096187

5. Number of Bio Metric

cards issued

4600 6557

6. Whether transaction in

Bio Metric Card started

Yes Yes

7. If yes to 6 above.

Number of transactions

held

Debit 47

Credit 96

Debit 4784

Credit 5784

The SBI has also started implementation of IT enabled BC BF model in some other

district of Punjab. The brief of the same is as follows:

District Enrollment of accounts Number of biometric cards issued

Hoshiarpur 3400 1334

Amritsar 3200 780

Taran tarn 3226 340

Kapurthala 274 56

Fatehgarh Sahib 4678 0

Ferozpur 7656 0

Mohali 487 0

34

Ropar 45 0

Jalandhar 23 0

Moga 126 0

Oriental Bank of Commerce has also started implementing BC BF model for payments

under NREGA in Amritsar district and the progress is summarized below:

Number of villages covered 768

Total number of beneficiaries 78935

Number of beneficiaries enrolled 76246

Accounts opened 75425

Cards issued 56472

Punjab National Bank- Urban (non smart card based project)

Sr. no Particulars (Ludhiana) Urban

1. Number of kiosk established 2

2. Number of accounts opened 5199

3. Number of ID cards issued 4384

4. Amount deposit collected Rs. 405024

5. Number of transactions Debit 338

Credit 841

35

It is a non smart card based project where the account holders would be issued ID cards

for identification and the bio metrics of the customer would be captured in the system.

(source…SLBC, Punjab)

Chapter VI

Survey

Objective

The main purpose of the survey was to get information about the business correspondent

model, it’s working and how the inclusive process is carried out and what makes it a

36

favourite choice to reach out to the unbanked villages without going for brick and mortar

structures. The special focus of the study was on the field work of business correspondent

i.e how the various transactions are being done to provide door to door banking facility

through biometric smart cards. Another objective of the study was to conduct a survey

among the people of rural area availing these services and their opinion regarding

banking facilities provided to them.

I was asked to study the BC model of Oriental Bank of Commerce rolled out in district

Amritsar with technical collaboration with FINO (financial information network and

operation). The BC is actively engaged in making payments to NREGA beneficiaries i.e.

The National Rural Employment Guarantee Act (NREGA) that aims at enhancing the

livelihood security of the people in rural areas by guaranteeing hundred days of wage

employment in a financial year, to a rural household whose members volunteer to do

unskilled manual work. The daily wages of the NREGA beneficiaries in block

Chowgawan is Rs. 123 per day.

Overview of the model

FINO is the technology partner for OBC in district Amritsar. FINO provides end-to-end

core banking technology solutions including smart cards to microfinance partners, banks

and Non-Governmental Organisations (NGO) involved in serving low-income

households in the urban and rural regions in India as business correspondents of large

institutions. It serves the unbanked sector and also services the technology requirements

of entities engaged in servicing the bottom of pyramid customers. One of the biggest

challenges in the micro banking industry is the huge amount of paperwork and human

effort traditionally involved in supporting micro-transactions and credit scoring potential

customers. Other hurdles include Information gap, accessibility and reach, infrastructure,

illiterate populace & fool proof identity. High costs coupled with low returns did not

make microfinance viable beyond a certain threshold, thus hampering growth. The

concept of FINO was germinated to overcome all the above mentioned hurdles and make

financial services available to the unbanked. FINO act as a business correspondent that

37

covers various regions in blocks for the purpose of providing banking facilities to the

rural population.

I conducted the study in Chogawan block of district Amritsar. The branch of Oriental

Bank of Commerce in association with FINO in block Chogawan covers around 113

gram panchayat i.e 108 villages. They have enrolled around 8500 NREGA beneficiaries

by issuing biometric smart cards for the payment of wages. After enrollment of the

beneficiaries, the main purpose of the BC is the disbursement of the funds to the

beneficiaries at door step whenever required by them.

Enrollment of the beneficiary

FINO ensures that announcements for enrollment were made in Gurudwara / panchayat

well on time so that adequate numbers of persons gather on the day of enrollment.

On the enrollment day the Block Supervisor (FINO) organizes an area for verification of

KYC. After a worker-customer is found KYC compliant he is moved to the enrollment

area. Though the field staff of FINO is trained to complete the process whenever it is

possible the branch manager from OBC also accompanies him.

FINO gathers all ten fingerprints, photo, signature and other details so that smart cards

and bank accounts can be opened in the name of each beneficiary. This process is known

as “enrollment”. Enrollment is performed by the sub agents of FINO who gather client

details using a laptop with fingerprint reader, digital camera and signature reader with full

power backup facility.

Smart Cards

There are two cards. One, customer card and two, BC card. Agent has a mapping card

and completes the login process through the handheld device. Then the machine

downloads the customer database of the agent. Thereafter, the operations i.e. enrollment,

normal operations etc happen. The finger print reader authenticates the card holder and if

38

biometric data matches, transaction is authorized. This eliminates chance of fraud /

skimming

The customer card is a biometric card that works on the finger prints. It stores customer

ID, signature for verification, and has 10 pockets for various products. A customer can

put through a transaction and get a receipt. He can get history of transactions upto last 10

transactions. Since Fax roll is used and the print does not last, when required he can

request for normal transaction. From the base-branch of OBC he can get a pass book also.

Sub-agents

The sub-agents employed by FINO were ex-servicemen, teachers, local graduates, Ex-

OBC staff, Kirana shopkeepers etc. In order to have some sort of control over the sub-

agents, he is required to give a Fixed Deposit on his name for Rs 5,000/- as a security

deposit to FINO. The cash in transit is secured through the cover of ICICI Lombard. The

other controls are through machine. The machine stops working if the accounts are not

squared up at the end of the day. Not more than 200 transactions and 4 transactions per

customer per day can be put through.

Steps in enrollment process:

a. The Business Correspondent (BC) receives list of beneficiaries to enroll for the

benefit scheme from the Block Development Office.

b. BC plans the enrolment activity by organizing visits to the enrolment locations.

c. Enrolment activity happens on location in presence of the Block Development

Officer and/or the Village Panchayat Sarpanch. Beneficiaries are enrolled based

on KYC norms i.e. on verification of the Job Cards, Ration card or voter ID.

d. The account opening form is filled and in addition to it fingerprints, photograph

and other details of the beneficiaries are captured.

e. The soft copy of the information and the enrollment ID is sent to the head office

of the FINO in Mumbai. They verify the various details and give account number

to each ID.

f. The head office sends this account number and soft copy of the information to the

concerned bank and hard copy to the FINO i.e smart card with specially designed

39

chip containing beneficiary’s information and 10 fingerprints. But the card is

activated only after approval of the bank.

g. Bank matches the job card number and other information for the validity and

activates the smart card only in case if it completes the KYC norms.

h. This whole process takes around 3 weeks and smart card is physically handed

over to the beneficiaries by the village coordinator of the business correspondent.

40

BC receives list of beneficiary from the

BDO

BC receives list of beneficiary from the

BDO

Enrollment process starts in the presence of BDO or sarpanch

Enrollment process starts in the presence of BDO or sarpanch

BC organizes visit to the enrollment locationBC organizes visit to

the enrollment location

Send softcopy of filled enrollment applications

to BC head quarter

Send softcopy of filled enrollment applications

to BC head quarter

Head quarter checks the completeness of the

application and fingerprint acceptability

Head quarter checks the completeness of the

application and fingerprint acceptability

Fingerprint acceptability passes

Send beneficiary data to bank for account

opening or smart card activation

Send beneficiary data to bank for account

opening or smart card activation

Personalization of smart card

Personalization of smart card

Enrollment process is completed

Enrollment process is completed

Card packaged and dispatched by head

quarter

Card packaged and dispatched by head

quarter

Card handed to beneficiary by BC

official

Card handed to beneficiary by BC

official

Transaction process

The account of the beneficiary is uploaded with the amount on daily basis. This is done

by uploading the credit transaction file of concerned bank i.e OBC to the FINO server

which then further uploads the beneficiary’s account with money. When there is need of

any transaction, agents of the business correspondent visit the locations for the

disbursement of the funds. They need to visit the village ones in a week but more than

one visit is also possible in case of beneficiary’s demand. All the agents have their port of

transaction device through which all the transactions are done. There are around 70 such

devices in rural Amritsar out of which 11 are in Chogawan block.

Further steps involved in transaction are:

a. Agent of the business correspondent after reaching the location initiates begin of

day (BOD) by authenticating himself. Authentication is done by using their smart

card containing their personal information and 10 fingerprints in the chip. Agents

insert the smart card in the device which further asks for any of the 10 fingerprint

for authentication. If authentication fails, no further transactions can be permitted.

b. Once the agent’s smart card is authenticated, the beneficiary will be asked to

provide his/ her smart card for authentication purposes. The authentication

consists of a photo match as well as finger-print match using the biometric finger-

print scanner. If any of the above fails, the transaction is rejected, and the

beneficiary will be provided with a transaction advice including the reasons for

transaction failure.

41

Enrollment process

c. On authentication of the customer, the amount is deducted from the account of the

beneficiary and paid to him. Agent also prints 2 copies of receipt, one for

customer and another for FINO.

d. After the transactions get over, the settlement of the port is done. This means no

further transaction can be permitted for the day.

e. The data is uploaded on the FINO server and transferred to the concerned bank i.e

OBC. The withdrawal entry to the account holder is done by the bank.

42

43

Start of transaction

Money is credited to beneficiary’s account

Money is credited to beneficiary’s account

Authentication of the agent’s smart card (begin of day)

Authentication of the agent’s smart card (begin of day)

Authentication of the beneficiary’s smart

card

Authentication of the beneficiary’s smart

card

Ok

Fingerprint verification

Fingerprint verification

Authentication failed

Transaction stopsTransaction stops

Authentication failed

Authentication succeeded

Fingerprint verification failed

Fingerprint verification succeeded

Agent completes transaction

Agent completes transaction

Agent prints 2 copy of transaction receipt

Agent prints 2 copy of transaction receipt

Agent disburses cash to beneficiary

Agent disburses cash to beneficiary

End of transaction

Settlement of port Settlement of port

Print 2 copies of transaction receipts including transaction

failure

Print 2 copies of transaction receipts including transaction

failure

Print 2 copies of transaction receipts including transaction

failure

Print 2 copies of transaction receipts including transaction

failure

Transaction process

Achievement so far

OBC have covered 768 villages in district Amritsar to cover NREGA beneficiaries. The

number of accounts opened of the beneficiaries is 75,425 and the cards issued till now are

56,472.

Maximum attendance for enrolment is ensured by making announcements in Gurudwaras

and Panchayat meetings. Village Sarpanch also helps in ensuring full attendance by

sending his staff / field functionaries / office bearers to beneficiary’s houses.

BC observed that creating biometric database, taking photographs, and then keying in of

the beneficiary details resulted in slow enrollment process. So, in consultation with OBC

they have devised new simplified application form wherein details are filled up and

during the enrollment process only biometric data is captured and photos taken. The other

details like name etc are digitized / keyed in by the backup office in the evening or next

day at some other location which is fully equipped to complete the enrollment process.

This has helped in speeding up the process for enrollment.

The BC has put in place fine backup policy. The machines are replaced within 2 hours of

reported breakdown/ malfunctioning. Also the sub agent carries enough of backup

battery power for enrollment so that process is not halted due to erratic power supply.

Field issues

In rural areas the density of population is low. The retail agent (sub-agent) has to cover

vast areas and the transport cost is prohibitive.

Electricity is a big issue. So their field staff has to move with generator kits / batteries in

a few places.

Punjab govt gives details of beneficiaries in handwritten hard copy. So the backend

operations are more.

Bank manager accompanies them only on some occasions. Definitely it makes a big

positive difference when he comes. When he doesn’t it is very difficult to solicit

customers for general financial inclusion.

44

Finding sub-agent for BC is very difficult. They have special staff that is exclusively on

the job of finding sub-agents.

The BCs are required to surrender the cash after 24 hours in the branch and for this they

need to travel long distances thus increasing the cost of operations.

Villagers who are tied up with BC sometimes want to visit the base branch for

transactions. But his operation is not allowed because under BC setup, transaction is

possible from POT terminal only which is with BC. This operational restriction should

not be there. Account holder should be able to access his account from POS terminal and

base branch also to which he is attached with.

Methodology

Data was collected from same location i.e villages under Chogawan block. Survey was

conducted among people of these villages. The questionnaire consisted of 15 questions.

The main purpose of the survey was to look into various aspect of financial inclusion i.e

information regarding number of accounts, type of accounts, any loan taken from the

bank and reason for the same etc.

Sample size: 60

Results:

45

Figure 1. Monthly Income

Figure 2. Saving Practices

46

Figure 3. Number of Accounts

Figure 4. Number of persons who availed loans out of the persons having bank accounts

47

Figure 5. Sources of Loans

Figure 6. Smart Card Holders

48

Figure 7. KCC/GCC/SCC holders

Figure 8. Life Insurance Policy

49

Figure 9. Monthly bank visits

Findings from the survey:

Out of surveyed population, 50% of the population is earning less than 2000 per

month, 32% is earning in between 2000-4000 and only 23% is earning more than

4000.

Saving habits among population with earning more than 4000 per month is found to

be more i.e. above Rs 500 per month. However population with earning in between

2000-4000 per month, they save less than 500 a month.

From the survey conducted, it was found that 27% of the population is not having

bank account, 56% is having at least 1 bank account and 17% of population is having

2 and more than 2 bank accounts.

The population without bank accounts is 16 i.e. 27% and out of these, 2 have availed

loans from local moneylenders.

Out of 60 households, 44 are having bank accounts and out of these only 6 i.e. 14%

household has availed loan facilities from the banks. However 10 i.e. 22.73% of

households availed loans from the local moneylenders.

The total number of population having biometric smart cards is 43% and rest of them

i.e. 57% is not having smart cards.

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Out of surveyed population, only 20% is having KCC/GCC/SCC and rest of them

i.e.80% is without these credit cards.

It is also seen that the population with saving habits, only visit the branch ones in a

month. Others with bank accounts but with no savings rarely visit the branch.

Problems of BCs and rural people:

Most of the business correspondents face problems during enrollment procedure. The

data they get from the server about job card numbers and other details sometimes

found to be different from the original data with beneficiaries.

Another major problem for BCs is that instead of using business correspondence

sarpanch of the village enroll the beneficiaries through post office where there is no

need of the presence of individual beneficiary. In such case sarpanch gets advantage

as he can get the money of the individual beneficiary by taking their thumb

impression.

Rural population rarely trusts on the technological aspects when it comes to money.

So they are hesitant in using smart cards.

The agents of the business correspondents can exploit or cheat the rural population

easily as most of the people are illiterate and they are not able to understand the

transaction process. Also the transaction slips are in English language which cannot

be understood by them.

The cost incurred by bank on each card is Rs125 which is personalized by the FINO

main office but the card is activated only after approval of the bank. If the customer is

not fulfilling KYC norms, card remains deactivated and loses are incurred by the

bank.

Sometimes bank is not able to understand the problems of the rural people as they are

connected by the BCs only. There is rare contact in between the bank and the

population when transaction and the enrollment procedure is done.

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Chapter VII

Some suggestions

Changes are good but people resist change. Earlier, it was a difficult target to achieve the

first phase of 100% financial inclusion by providing basic banking facilities. Now new

ICT based solutions are being rolled out for the purposes which are not easily understood

by the rural population and they hesitate in accepting it. Main reason behind this is

illiteracy and no knowledge about the advantages of such initiatives. So is needed to take

some initiative to enhance the financial inclusion in rural areas like:

First of all it is very important to conduct awareness camps in the interior areas of the

rural population so that they are well informed about the various banking services and

policies made for them by the government. The sarpanch of the village should be

taken into confidence so that he can motivate the people to attend these camps.

BC can be scaled up as financial literacy delivery route also as they have one to one

interaction with the rural poor. Some structured training modules focusing on

financial literacy aspects can be arranged for BCs for onward dissemination. This will

help in creating one more channel for spreading financial literacy in remote areas

where it is needed the most. This can be additional source of income for the BC and

as such will be more motivated to integrate. They should also be informed about the

ICT initiatives taken by the bank. The responsibility of the whole block should be

under the concerned branch.

In case of savings accounts, the account balance can be stored on the card itself thus

facilitating the BC to conduct transactions on the savings accounts even if the smart

card reader is not connected to the back end server.

The smart card issued by the BC should be multipurpose financial inclusion card with

GCC/KCC/debit cum credit card on the single card and it should be acceptable across

all ATMs/ merchandise outlets.

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Commissions for BCs need to be high for the initial stages. In order to achieve the

scale govt. beneficiary payments like old age pensions need to be mandatorily routed

through these BCs.

The receipts printed by BC at Point of transaction should be in the regional language

so that it is easily understood by the smart card holders.

The beneficiaries are illiterate people and they can be exploited by the agents. We can

test with speaking POS machines that speak in local language when the transactions

are held.

There must be some grievance handling system by the branch. There should be visits

of the bank officer to the areas where transaction and enrollment process is done so

that he can look into the problems faced by the customer.

Support of the state govt / district administration is the key to success of the BC

setup. Gram Panchayats should not be allowed to disburse the physical cash to

beneficiaries because of the skimming / leakage history.

The details of wage employment/social security benefit payments should be handed

over to BC in the soft copy. This will facilitate in speedy disposal of the job.

More concern should be given to the population with bank accounts but not availing

services out of it by providing them financial assistance on timely basis. The main

reason behind it is that they do not visit branch as the saving habit is nil. They are not

aware of the other services like loans, micro insurance etc which can be informed

through these camps.

Elder people are more reluctant in accepting changes as compare to younger ones. It

is very important to provide knowledge to the rural people when they are at young

age about the banking system and what best they can get by availing banking

services. These should be taught at lower level of schooling when they can be

influenced easily.

The students who pass out of RSETIs can be trained for becoming BCS/BFS and

initial capital required is made available through bank loan.

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Mobile Banking can play an important role in payment products, and when coupled

with prepaid cards, can also facilitate in making micro credit disbursements and

repayments efficient and cost effective. When coupled with other parallel

developmental schemes catering to the same population, channel can be further

leveraged to reach out to the relevant set of people.

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QUESTIONNAIREo Name:

o Age:

o Sex:

o Monthly income:

o Number of family members:

o Number of earning members:

o Number of accounts:

o Type of accounts: Saving bank account/ Fixed deposit account/ both

o Savings per month in the account:

o Any loan taken from the bank

o If yes, what was the purpose

o Any smart card and transaction done

o Any debit/credit card/ GCC/ KCC/ SCC and any transaction done

o How many times do you visit the branch in a month?

o Any debt taken from relatives, money lenders etc:

o If yes, purpose for which loan was taken:

o Medium of remittance of money back at home through bank/ post office/ relatives

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Yes

No Yes

No

Yes

No Yes

No

Yes No

o Any life insurance:

List of abbreviations used

ATM Automated Teller Machine

BCs Business Correspondents

BDO Block Development Office

BF Banking Facilitator

BIN Bank Identification Number

BOD Begin of Day

CDMA Code Division Multiple Access

DLRC District Level Review Committee

EBT Electronic Benefit Transfer

FI Financial Inclusion

FINO Financial Information Network and Operation

GCC General Credit Card

GSM Global System for Mobile Communication

IBA Indian Bankers Association

ICT Information and Communication Technology

IDRBT Institute for Development and Research in Banking Technology

IT Information Technology

KCC Kissan Credit Card

KYC Know Your Customer

LDCs Least developed countries

MFIs Microfinance Institutions

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NABARD National Bank for Agriculture and Rural Development

NBFCs Non Banking Financial Companies

NGO Non Governmental Organization

NHB National Housing Bank

NREGA National Rural Employment Guarantee Act

POS Point of Sale

POT Port of Transaction

PSTN Public Switched Telephone Network

R&D Research and Development

RBI Reserve Bank of India

RRBs Regional Rural Banks

RSETI Rural Self Employment Training Institute

SAA Service Area Approach

SCC Service Credit Card

SHG Special Help Group

SIDB Small Industries Development Bank

SLBC State Level Banker’s Committee

UID Unique Identification Number

UIDAI Unique Identification Authority of India

RSETI Rural Self Employment Training Institute

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