Assessment Report of Financial Inclusion Project with NABARD

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Table of Contents

Contents

Preface:.......................................................................................................................................................3

Introduction:...............................................................................................................................................3

Institutions Involved In the Programme:.................................................................................................4

Programme Summary..................................................................................................................................5

Phase I: RRB Organization & Technology Audit.....................................................................................6

Phase II: Customized ICT Pilot Study Kit Preparation Information Consolidation & Analysis...........6

Phase III: Training & Information Dissemination Sessions ICT Pilot Study Kit Distribution Technology and Study Execution.............................................................................................................7

Project Assessment.................................................................................................................................7

Achievements:.............................................................................................................................................9

Enrollment Achievements.......................................................................................................................9

Cards Distribution:.............................................................................................................................10

Transaction Achievements:...................................................................................................................12

Challenges Faced.......................................................................................................................................14

Observations.............................................................................................................................................15

Suggestions................................................................................................................................................15

Way Forwards............................................................................................................................................15

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Preface:

Financial Inclusion is the delivery of banking services at affordable costs to vast sections of disadvantaged and low income groups including households, enterprises, SMEs, traders.

Around 50% of the Indian population suffers from chronic poverty and hunger. Only 31 % of the Indian population has accsess to Banking services. The rest 69 % are still deprived of bare minimum banking services for which they are totally dependent on informal banking sources like private money lenders. While the need to solve this mammoth problem is great, we are unable to reach large numbers of the poor with products, services and information they need to achieve financial security.

Our national vision for 2020 is to open nearly 600 million new customers' accounts and service them through a variety of channels by leveraging on IT. However, illiteracy and the low income savings and lack of bank branches in rural areas continue to be a road block to financial inclusion in many states. To achieve this objective commercial banks have started a drive to open branches in hitherto unbanked areas.

Steps taken for Financial Inclusion:

It can be said that Bank nationalization was first step towards Financial Inclusion in India.

RRBs were created to take banking services to rural people.

Public Sector banks are making use of the services of non-governmental organizations (NGOs/SHGs), micro-finance institutions and other civil society organizations as intermediaries for providing financial and banking services. These intermediaries are being used as business facilitators (BF) or business correspondents (BC) by commercial banks.

Introduction:In order to deliver financial services at affordable costs to sections of disadvantaged and low income segments of society, NABARD along with its technology service provider STS is serving various villages through some of the RRBs.

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In India the focus is more on the financial inclusion at present to ensure a bare minimum access to a savings bank account without frills, to all. As NABARD is responsible for coordinating with the Government of India, the Planning Commission, State Governments and other agencies concerned with the development of rural industrialization, this initiative is taken as a step forward to the same direction.

Institutions Involved In the Programme:

NABARD:

"Growth with Social Justice" has been the basic objective of the Development Planning in India since independence. Since the beginning of planned development, the Government through Five Years Plans made significant strides in developing rural India.

The National Bank for Agriculture and Rural Development (NABARD) was set up in July 1982. It became the apex institution to play a pivotal role in the sphere of policy planning and providing refinance facilities to rural financial institutions and for augmenting their resource base.

Functions of NABARD

NABARD was set up essentially as a development bank for promoting agriculture and rural development. Its main function is to provide refinance for rural credit disbursed by the State Co-operative Banks, the Regional Rural Banks and other financial institutions as may be approved by the RBI.

The important functions of NABARD are as follows:

Providing finance and also refinance for production and marketing in the rural areas.

Coordinating and advising the operations of institutions engaged in rural credit.

Promoting research in agriculture and rural development.

SourceTrace

SourceTrace is the leading independent provider of remote transaction solutions for financial service, agriculture, healthcare, micro insurance and clean water providers and organizations operating in emerging markets.

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SourceTrace solutions are industry-specific, with the power to support global enterprises. With applications that work in diverse environments, often beyond the reach of conventional transaction technologies, SourceTrace’s customers depend on its microfinance, agricultural supply chain and clean water solutions to extend the reach of their information networks.

Programme SummaryNABARD and STS entered into an agreement in March, 2009. Memorandum of Agreement was signed between NABARD and STS on 20th March, 2009. STS started its operations along with BCs for various RRBs in June, 2009. Following RRBs were included in the programme:

No. RRB

1 Pandyan Grama Bank (Marthandam & Thirupunawam)

2 Vidharbha Kshetriya Gramin Bank (Arni & Khamgaon)

3 Utkal Gramin Bank (Khariar,nunahada)

4 Baroda U P Gramin Bank (Laxmanpur & Amethi)

5 Assam Gramin Vikash Bank (Boitamari & Nagabat)

6 Rajasthan Gramin Bank (Pilani ,Baragaon & Dhod Branches)

7 Uttar Bihar Gramin Bank (Mahamadpur & Madhubani)

8Allahabad UP (Triveni Kshetriya GB and Lucknow Kshetriya GB) Gramin Bank

(Sumerpur & Purjagiri))

9 Jharkhand Gramin Bank (Kanke & Kashida)

10 Haryana Gramin Bank (Bapoli & Newliklou)

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11 Satpura Narmada Gramin Bank (Namli)

12 Bangiya Gramin Vikash Bank (Bagbandha Syberia & yet to select)

13 Dena Gujarat Gramin Bank

The programme has been implemented into 5 phases:

Phase I: RRB Organization & Technology Audit • It included initial meeting and data gathering in the field.

• Customized questionnaire development

• Each RRB answers the questionnaire(s)

• Follow-up interviews and data gathering

• Field visit

In Phase I, branch locations and villages associated with that branch were surveyed. For technology preparations, the GPRS signal strength, power supply in the rural area was checked. We also checked the Internet and telephone connectivity in the branch location. In most of the branch locations it was found that there is no Internet connection in the branch and it was still running in old fashioned TBM system. There were very few numbers of computers and even fewer employees in the branch office in most of the RRBs. We met with the BC also and discussed about the importance and roll & responsibility of the BC in this project in presence of Branch manager and other bank officials.

Phase II: Customized ICT Pilot Study Kit Preparation Information Consolidation & Analysis

• Data analysis so that customized ICT kit can be prepared

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• Customize POS software for each RRB processes, policies, etc.

• Customize server software for each RRB processes, policies, etc.

• BC device selection criteria and requirements recommended

• BC selection criteria and requirements recommended

In phase II, we enrolled the customers and completed the minimum target of enrolling 1000 customers in two selected branches of each RRBs.

Phase III: Training & Information Dissemination SessionsICT Pilot Study Kit Distribution

Technology and Study Execution• Multi-day training seminar

• ICT basics

• ICT for Financial Inclusion

• ICT policies and best practices

• ICT kit training

• ICT kit usage

• ICT kit dissemination

• Launch operations for ICT solutions at each RRB

In phase III, cards were printed and distributed among the customers. These customers then start transacting with the cards.

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Project Assessment

BCs have played a vital role while implementing the project across all RRBs had been identified and appointed by RRBs. These were basically the people who were at times were recommended by the local Panchayats and are well know to villagers. BCs salaries and other expenses are paid by RRBs.These BCs were trained on the applications for enrolling customers by STS staff. BCs were imparted with the knowledge in case of any up gradation of the applications from time to time. They have been and are been supported on any technical issues faced at their end at the time of enrollments or transactions.

The Enrollments were first done by using the Laptop application which was easier to understand. Later POS application was also introduced to BCs for enrolling customers. There many RRBs who are using both the applications for enrolling customers whereas some of them opted for only one of the applications.

RRBs follow two patterns for reporting of BCs to Bank branches. In some RRBs, BCs have to report on a daily basis to the bank branch to settle his transaction amount and to keep his machines inside the branch premises whereas in some RRBs, BCs are reporting only twice a week for settling their Cash In Hand and they keep their machine with themselves.

The customers have only been offered saving accounts, also known as NO FRILL accounts under this programme. STS provide all the hardware and technical support to RRBs for enrollments and transactions. No charges are levied on the customers for transactions by RRBs.

As BCs are handling customer cash and have also been provided with the Laptops and POS devices, RRBs have taken Rs.10,000/- and Rs.5,000/- as security deposit from them. These are kept as fixed deposits in the name of the agents with the RRBs’ branches. There are some RRBs who also give an overdraft facility to the agents upto Rs.1,00,000/-.

NO FRILL accounts which are offered under this programme have limited features and only transactions in cash are dealt under them. Cheque facilities are not given to the customers. The only customers can deposit or withdraw amounts are through BCs.

These RRBs are using STS server for opening the accounts and facilitating transactions. The transactions take place on real time basis and are updated on the server. The branch managers of the RRBs have been given the login ids and passwords for the server. This way they can check and monitor all the transactions on the server.

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Achievements:

Enrollment AchievementsIn total around 15000 enrollments were done across all villages through the below mentioned RRBs. The numbers are growing day by day as the awareness is spreading among the masses about the financial services available for them.

The below statistics shows the comparative achievements in the gap of 6 months:

As on November, 2010 As on 15th May, 2011

S.No. RRB Total Accounts

1 Allahabad UP Gramin Bank 1077 1079

2 Assam Gramin Vikash Bank 1050 1200

3 Bangiya Gramin Vikash Bank 512 512

4 Baroda U P Gramin Bank 1003 1003

5 Dena Gujarat Gramin Bank 0 0

6 Haryana Gramin Bank 1240 1240

7 Jharkhand Gramin Bank 1250 1250

8 Pandyan Grama Bank 797 1064

9 Rajasthan Gramin Bank 1033 1518

10 Satpura Narmada Gramin Bank 236 100211 Utkal Gramin Bank 1006 1730

12 Uttar Bihar Gramin Bank 981 1000

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13Vidharbha Kshetriya Gramin

Bank 923 1001

Comparative Chart of Total Enrollments:

Cards Distribution:

Around 13000 cards have been distributed among the customers against the 15000 enrollments. Inspite of hurdles and obstacles in form of people going to their villages on long holidays, shifting their households, etc BC put all their efforts in locating them and giving them their smart cards.

The below statistics shows the comparative achievements in the gap of 6 months:

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As on November, 2010

As on 15th May, 2011

No. RRB Total Cards Issued

1 Allahabad UP Gramin Bank 1077 1079

2 Assam Gramin Vikash Bank 1010 1010

3 Bangiya Gramin Vikash Bank 457 4574 Baroda U P Gramin Bank 1003 1003

5 Dena Gujarat Gramin Bank 0 06 Haryana Gramin Bank 1240 12407 Jharkhand Gramin Bank 1155 11558 Pandyan Grama Bank 797 10479 Rajasthan Gramin Bank 1033 1440

10 Satpura Narmada Gramin Bank 236 100211 Utkal Gramin Bank 1000 156512 Uttar Bihar Gramin Bank 811 943

13Vidharbha Kshetriya Gramin

Bank 923 1001

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Comparative Charts on Cards distribution among all RRBs:

Transaction Achievements:Transactions are happening on a daily basis and even the RRBs are enjoying the float to the tune of Rs.15 Lakhs. Around 37,500 transactions have been reported at the end of May, 2011.

The below mentioned statistics is as on 15th May, 2011

As on November, 2010 As on 15th May, 2011

No. RRB Total Transactions

1 Allahabad UP Gramin Bank 808 1396

2 Assam Gramin Vikash Bank 1635 2778

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3Bangiya Gramin Vikash

Bank 60 604 Baroda U P Gramin Bank 3188 5617

5 Dena Gujarat Gramin Bank 0 06 Haryana Gramin Bank 614 7487 Jharkhand Gramin Bank 801 14968 Pandyan Grama Bank 4468 71229 Rajasthan Gramin Bank 1629 1788

10Satpura Narmada Gramin

Bank 146 52611 Utkal Gramin Bank 2541 676312 Uttar Bihar Gramin Bank 436 1967

13Vidharbha Kshetriya Gramin

Bank 4050 6757

Comparative Charts on Cards distribution among all RRBs:

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Challenges FacedDescription Criticality Cause Solution

RRBs are still not on core banking and are still using STS server for the account opening and transactions done in them High

RRBs are still using the ALPM (Advance Ledger Posting Machine ) old traditional banking method at their end.

They should be on crore banking and accounts should not only open on FI server but also in Banks' CBS.

Connectivity Issues High

As these branches are located mainly in interiors of rural area, connectivity and power failures are another issues faced at their end.

NABARD should explore alternative ways and vendors for providing them power supply and internet connections for uninterrupted operations in the bank branches.

BCs remunerations and travelling claims Medium

BCs are not been paid generoulsy by the branches. Also the delays have been noticed in paying their salaries. BCs are also need some amount towards their travelling expense they incur on a daily basis.

A special budget should be given to the branches for paying salaries and claims of BCs so that they have sufficient funds at their disposal for the same.

Service points for BCs HighNo places have been identified for these BCs to operate from.

Banks should provide BCs with the proper service points where he can stationed himself for serving customers.

Limited access to the BCs High

As blocks in the villages are widely spread, its difficult for the BCs to service all the customers frequently.

More BCs should be appointed by the banks to service all the blocks on a daily basis.

Security deposits of BCs Medium

As RRBs do not have very strigent policies for security deposits from BCs, irregularities have been found in depositing the same with the banks.

Uniform policies ahould be followed across all branches.

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Awareness of the programme among the masses Medium

Limited ways and budget for campaigning and awareness of the programme.

More exercises should be done by the banks for making customers aware of the services available for them.

Trust and faith of the villagers Medium

As villagers are not aware of the programee, the fear of being cheated is always there among the customers.

Programmes should be designed to have interactive session with the customers on their needs on products and introducing their existing products.

Working Pattern Medium

As villagers are not awarworking through the day, BCs at times have to work towards the evenings for enrolling and serving them.

BCs employed should be flexible in their working hours. They should be informed about the same at time of their recruitment.

Limited resources at the branches High

Less no. of IT savvy employees and computers at the bank branches, makes it difficult for them to assist BCs with the technical issues.

Training on computers and other applications should be held for bank staff from time to time making them more IT savvy.

Inadequate Bank Staff LowBanks branches have inadequate staff.

Branches should be given adequate staff so that they can also take active part in this programme.

IDBRT Revolution:

Several banks and technology solution providers have ventured to provide information and communication based solutions for financial inclusion. The lack of common technical standards has impaired the pace of ICT deployment for Financial Inclusion and has led to vendor dependence for technology components. This has made solutions deployed by a particular bank solution provider specific making a customer of a bank unable to interoperate across all outlets of the same bank. IBA and IDRBT teamed up to provide a solution to this problem by holding a 'Workshop on Open Standards for Financial Inclusion' in February 2009. During this workshop it was decided to constitute a "Technical Committee on Open Standards for Financial Inclusion" comprising of a few select banks like State Bank of India, Punjab National Bank, Union Bank of India, Corporation Bank, South Malabar Gramin Bank,

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UCO Bank, NABARD and institutions like IIT Kanpur and National Informatics Centre (NIC). This Committee as its first step has drafted standards for smart card based solution for financial inclusion. Herewith we publish the following for review by all stakeholders - the public, the banks and solution providers. After receiving responses from stakeholders the final standard specifications will be made available to the banking industry.

Advantages of Common Standards

· Common standards facilitate pan India deployment by the bank.

· Common standards would bring in demand aggregation and economies of scale in procurement and deployment.

· Common standards help in accelerating ICT deployment and avoid vendor lock in for all technology components.

· Common standards enhance convenience to customers and provide inter-bank and intra-bank access.

To address these issues IBA and IDRBT teamed up to organise a workshop on “Open Standards for Financial Inclusion”. After deliberations of the various issues, a “Technical Committee on Open standards for Financial Inclusion” was constitutedcomprising of a few select banks like State Bank of India, Punjab National Bank, Union Bank of India, Corporation Bank, South Malabar Gramin Bank, UCO Bank, NABARD and institutions like IIT Kanpur and National Informatics Centre (NIC). This Committee ‘IBA – IDRBT Technical Committee on Open Standards for Financial Inclusion’ has been working since February 2009. The first draft of the technical standards specification deals with the smart card based solution standards which relate to the following areas: the card numbering scheme, the smart card hardware, the smart card operating system, the smart card architecture, the bank terminal functionality and the security framework (the key management system). The draft also deals with a migration path for adoption of these standards and certification for adherence to these standards. The draft report is now placed in public domain for suggestions and comments by all stake holders such as public, banks, technology solution providers, microfinance institutions, NBFCs, NGOs, self help groups etc. We are confident that finalisation of these open standards will facilitate an efficient roll-out of the Financial Inclusion projects which will be user friendly and nonproprietary by making bank terminals interoperable.

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Smart Card based Solution for

Financial Inclusion

Information technology should enable banks to provide services that have the following business requirements:

• Banking services such as deposits, withdrawals, remittances, loans, insurance, micro-pension, funds transfer etc. are to be provided.

• Every customer must be identified uniquely by some universal means that can be recorded and proved to auditors/regulators and the banker/customer beyond doubt. Biometric authentication by fingerprint has stood the test of time. Some standards and industry norms are available for this technology which needs minimal capture-verification set up in terms of cost, user acceptance and user convenience. Biometric authentication using fingerprints have proved to be more secure than PIN authentication.

• Both online and offline transactions must be possible. The transactions through the BC may not be available at branches. If necessary where the bank branch needs to handle transactions a bank terminal may be provided at the branch. Balance enquiry and mini-statement showing minimum last five transactions must be possible at all terminal locations.

• No transaction should be lost in the entire system.

Figure 1: Model of Smart Card based Solution

The model proposed for extending banking services initiative is outlined in Figure 1. Each customer is given a smart card with his primary account number and other personal details such as address, nominee details, contact information and transaction history stored within it. The smart cards are to be used at bank handheld terminals owned by a bank and operated by business correspondents. The Terminal Operator Card and the Customer Card is mutually authenticated. The customer is authenticated using the biometric fingerprint of the customer stored in the smart card. These bank

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Smart CardServer

FI Terminal

Bank

Host

terminals are to have connectivity through any communication channels such as Global System for Mobile communications (GSM), Code Division Multiple Accesses (CDMA), Public Switched Telephone Network (PSTN), Ethernet depending upon the type of connectivity available at the local place of operation. However connected, the communication finally will reach the back-end intermediate Financial Inclusion Server (held by service provider/Bank). All customer details and account information including current balance is held by the FI Server which will regularly update the bank host. The smart card is used for customer authentication, whenever transactions are made at bank terminals. The solution also requires card lifecycle management, bank terminal lifecycle management, bank terminal operator management, solution provider and bank business rule management.

Standardization

The IBA-IDRBT Committee on Open Standards for Financial

Inclusion has addressed these aspects relating to standards:

a. The Smart Card Numbering Scheme

b. The Smart Card Operating System

c. The FI Customer Card Data Architecture

d. The FI Terminal Operator Card Data Architecture

e. The Terminal Functionality Specification

f. Key Management System

Observations

Suggestions

Way Forwards19