1

Digital Financial Services and Financial Inclusion

by

PARAMESWARAN. NPrincipal Advisor

Telecom Regulatory Authority of India (TRAI)

Access to banking services: Status

• 144.8 m households use banking services in India (58.7% of overall households)

• 91.4 m households in rural areas use banking services (54.4%)

• 53.4 m households in urban areas use banking services (67.8%)

• A bank branch in India for a population base of about 12,000 persons– about 102,400 bank branches in the country

• a bank branch in rural India for a population base of about 22,000 persons – About 38,000 branches for rural population of 833 m

• a bank branch in urban India for a population base of about 6,000 persons – About 64,400 branches for urban population of 377 m

Financial Inclusion Financial Inclusion: Ensuring access to financial

services needed by weaker sections and low-income groups at an affordable cost

To achieve financial inclusion, Reserve Bank of India has advised banks to open basic banking ‘no –frills’ accounts for such target groups.◦ More than 100 m ‘no-frills’ accounts have

already been opened. As per the anecdotal evidence –

75% of such accounts are lying dormant as low-income households are generally reluctant to access their bank accounts◦ Banks are not available in their neighborhood

(Insufficient reach of banking infrastructure)◦ visiting the nearest bank branch means not

only expenditure on transport but also the loss of a day’s wages.

Impediments to financial Inclusion through traditional banking

• There is only one branch to serve a rural population of 22,000.

• Demand Side Impediments– poor accessibility of banking services– when accessible, the high costs incurred

by households to access such services• Supply Side Impediments

– Operating a large number of tiny accounts and micro transactions through bank branches (brick and mortar) is uneconomical.

– Opening even a small branch entails costs, and commercial banks may simply find this economically non-viable.

5

Financial Exclusion – Why did We Fail?

Absence of Banking

Technology

Absence of Reach and

Coverage

Absence of Viable Delivery

Mechanism

Not having a Business Model

Rich have no compassion for

poor

6

Why Are We Talking of Financial Exclusion Now?

Focus on Inclusive Growth

Banking Technology has arrived

Realisation that Poor is bankable

The Indian Way- Multi Agency Approach

Financial Stability and Development Council (FSDC) mandated to focus on Financial Inclusion and Financial Literacy

Financial Sector Regulators including the Reserve Bank committed to FI Mission

Financial Inclusion is a mammoth task- financial services through mainstream financial institutions to 600,000 villages

What has been done so far

ICT based Business Correspondent (BC) Model for low cost door step banking services in remote villages .

Board approved Financial Inclusion Plans (FIPs) of banks for 3 years,

Roadmap to cover villages of above 2000 population

Availability of minimum four banking products through ICT model has been ensured .

Mandatory opening of 25 % of new branches in unbanked rural centers.

Know Your Customer (KYC) documentation requirements significantly simplified for small accounts.

Guidelines for convergence between Electronic Benefit Transfer and FIP have been issued.

For Financial Access and Education Imperatives to succeed…

Collaboration is the key to SuccessGovernments- Central and State ; RBI, IRDA, SEBI, PFRDA, NHB and other regulators ; Banks, Insurance Companies, MFs , other FIs and Intermediaries, Industry Associations ; NGOs and Consumer Organizations ; Global Co-operation

Establishing an appropriate Business Delivery Model through the involvement of all stakeholders is critical to making Financial Inclusion a reality

Access to financial services and Financial Education must happen simultaneously

It must be continuous and must target all sections of the population simultaneously

9

What is the solution? Solution – Technology driven service delivery

models The best candidate amongst such models is

mobile banking. Why?

◦ There are about 350 m mobile connections in the rural areas.

◦ A large number of mobile subscribers in rural areas do not have access to banking facilities.

◦ For both the citizens and the banks – transacting through a mobile phone would be about 10 times cheaper than through a bank branch.

◦ Demand side: mobile banking will make banking services affordable and immediately accessible.

◦ Supply side: mobile banking would be cost effective; it would make small value transactions made by low-income citizens economically viable to the banks.

=> Mobile telephone can be leveraged to achieve the goal of financial inclusion.

Mobile Banking Goal of Mobile banking –

To enable funds transfer from an account in any bank to any other account in the same or any other bank on a real time basis

Modes of Mobile Banking

Interactive Voice Response (IVR)◦ Short Messaging Service (SMS)◦ Wireless Access Protocol (WAP)◦ Stand-alone Mobile Application Clients (Mobile Apps)◦ Unstructured Supplementary Service Data (USSD)◦ Using SIM tool Kit (STK)

Comparison of Various Modes of Mobile Banking

S. No. Mode Handset Requirement

Cost per transaction

Ease of Provisioning to the subscriber

1 IVR Any phone High

There is no need for separate provisioning for the subscriber to

use these modes.2 SMS Any phone Medium

3 USSD Any phone Medium

4 WAP GPRS enabled phone Low The TSP is required to enable the

services for the subscriber.

5 Mobile Apps Smart phone Medium The subscriber may have to

download a client on his phone.

6 STK Pre-programmed phone Medium

The TSP is required to change/ program the SIM of the

subscriber.

Þ IVR, SMS and USSD score high against the yardsticks of ease of provisioning, overall affordability and availability across all mobile handsets.

• TRAI has mandated that every access provider shall facilitate the banks to use SMS, USSD and IVR to provide banking services to its customers.

Present Status of Mobile Banking in India

Some banks in India, such as State Bank of India (SBI) and ICICI Bank have already launched mobile banking services through various modes:◦ SMS, USSD, Mobile App

National Payment Corporation of India (NPCI) has already launched Immediate Payment Service (IMPS), an instant, 24X7, interbank electronic fund transfer service through mobile phones and other channels (Internet or ATM).

Department of Telecommunication (DoT) has allocated a USSD code *99# to DoFS for mobile banking services through the USSD gateway of NPCI and asked the TSPs to connect to it as per the requirement of service in consultation with NPCI.

Regulatory Interventions for facilitating Mobile Banking

TRAI has issued the ‘Mobile Banking (Quality of Service) Regulations. ◦ Every TSP shall facilitate the banks to use

SMS, USSD and IVR to provide banking services to its customers.

TRAI has issued a tariff order for USSD-based mobile banking.

Two leading mobile operators have launched m-commerce services.

DBT and Mobile Banking : Tools for Financial Inclusion DBT : A system of transferring cash benefits

directly to the poor◦ Brings millions of people into the financial

system (Financial Inclusion)◦ Leads to better targeting of beneficiaries

Mobile Banking: Use of a mobile phone to carry out banking transactions◦ Cuts down the cost of transaction (Facilitates

under-banked citizens)◦ Makes small value transactions made by low-

income citizens economically viable to the banks

With the facility of mobile banking at the disposal of rural masses, they would be inclined to save and eventually use all financial products relevant to them.

Recent initatives Government’s Jan Dhan Yojana scheme155.8 m bank accounts have been

opened under the Pradhan Mantri Jan Dhan Yojana (PMJDY) 

covering 99.74 per cent of households Guinness Book of World Records has

recognised the achievements made under PMJDY.

In its citation, the Guinness Book said: "Most bank accounts opened in one week as part of the Financial Inclusion Campaign is 18,096,130 and was achieved by the Department of Financial Services, Government of India from August 23 to 29, 2014."

TRAI 16

Challenges Ahead & Future Action

Expectations are huge Perceived more as an obligation than a business

opportunity Physical capacity of banks including RRBs need to be

enhanced Delivery Model - right mix of low cost Brick and Mortar

Structures & BCs Need for Intermediate Structure Appropriate Business Model for FI activity for Banks,

Technology Providers and BCs Digital and Physical Connectivity Infrastructure necessary for scaling up: Handheld

Devices , Cards, Technology Vendors Universal KYC across regulators Extension from banking products to other financial

products

Thank You

TRAI 18