Page | 1 Impact of Financial Inclusion And Ways to Make Financial Inclusion More Effective Md. Danish Post Graduate Diploma in Management Jaipuria Institute of Management, Lucknow A Project Submitted as a Partial Fulfillment of Post Graduate Diploma in Management May 3rd, 2010 - June 19th, 2010
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Impact of Financial Inclusion
And Ways to Make
Financial Inclusion More Effective
Md. Danish
Post Graduate Diploma in Management
Jaipuria Institute of Management, Lucknow
A Project Submitted as a Partial Fulfillment of Post
Graduate Diploma in Management
May 3rd, 2010 - June 19th, 2010
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Impact of Financial Inclusion
And Ways to Make
Financial Inclusion More Effective
SUBMITTED TO:
MR. M.S. Mahanot
Chief Manager, Narhi Branch,
Bank of Baroda
Lucknow
SUBMITTED BY:
Md. Danish
Post Graduate Diploma in Management
Jaipuria Institute of Management,
Lucknow
A Project Submitted as a Partial Fulfillment of Post Graduate Diploma in Management
May 3rd, 2010 - June 19th, 2010
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Declaration
This is to declare that Mr. Mohammad Danish has done his Summer Project Training
in Bank of Baroda - Narhi Branch, Lucknow under kind guidance of Mr.G.M.Dayal,
under the overall supervision of Mr. M.S. Mahanot, Chief Manager - Narhi Branch,
Bank of Baroda, Lucknow. The data obtained and the report of the project has not
been submitted by the investigator for any other degree nor the project work is
published in any of the journals. This is an original work.
Mr. M.S.Mahanot Mr. G.M.Dayal Mr. Mohammad Danish
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Don't walk in front of me, I may not
follow.
Don't walk behind me, I may not lead.
Walk beside me and be my friend.
- Albert Camus
For
S.H.Rizvi
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Acknowledgement I Md. Danish, from Jaipuria Institute of Management, Lucknow would express my sincere gratitude to all those who
have helped me directly or indirectly in this summer internship project.
First, I thank my Project Supervisor Mr. M.S. Mahanot, Chief Manager – Narhi, Bank of Baroda, for his continuous
support in my Summer Internship Project. Mr. Mahanot was always there to listen and to give advice.
Without Mr. G.M.Dayal, this project could not be completed as he guided me at every level and provided relevant
study material and data. I owe a lot to him as he gave me a chance of practical experience in term of a field trip to
Raebareily, “Live Study on Raebareily”.
I also thank Mr. D.K.Pandey, Lead District Manager of Raebareily for taking out time for me from his busy schedule
and integrating my visit with other Bank of Baroda Rural Branches (Dalmau & Maharaj Ganj).
Special thanks goes to my faculty Mrs. Sushma Vishnani who is most responsible for helping me in framing my
Summer Internship Project as well as guided me on structuring my research.
I would like to acknowledge the role of Branch Managers of Dalmu and Maharaj Ganj, Business Correspondent Mr.
Shashi Bhavan, Raebareily‘s Integra service provider manager Mr. Ashish, FLCC counselor Mr.S.N.Lal.Srivastav,
Director of Baroda Swarojgar Vikas Sansthan and Smt. Kalpana Bansal for helping me to make my Live Study
effective by accentuating various aspect of Financial Inclusion and sharing problems faced by them.
I couldn‘t have completed my project report with the help of my friend Miss S.H.Rizvi. She taught me how to write
research papers, made me a better writer by correcting some of my grammatical mistakes, had confidence in me when I
doubted myself, and brought out the good ideas in me. I thank her for her patience bearing with me and correcting my
work when ever and where ever required.
Last, but not least, I thank my family: my parents, Mr. Abdul Haleem Khan and Mrs. Nikhat Khan, for giving me life
in the first place, for educating me, for unconditional support and encouragement to pursue my interests. My sister Uzra
Khan, for sharing her experience of the project writing endeavor with me, for listening to my complaints and
frustrations, and for believing in me.
Thank You All
Md. Danish
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Content
S.No Topics Page No
1. Executive Summary a) About Bank of Baroda b) Vision & Mission Statement c) Bank of Baroda‘s initiative toward Financial Inclusion d) About Reserve Bank of India e) Measure Undertaken by RBI toward Financial Inclusion f) RBI guidelines on Financial Inclusion by Extension of
Banking Services – Use of BFs & BCs g) Measure of Financial Inclusion/Exclusion
09-17
2. Chapter 1 - Introduction a) 11th Five Year Plan & Indian Growth b) Vision of 11th Five Plan c) Disparity & Divide d) Financing Development e) Introduction to Financial Inclusion f) What does Financial Inclusion Means? g) Who are Financially Excluded? h) What are the Problems & Difficulties? i) Understanding the Key Stakeholder j) RBI Initiative for Greater Financial Inclusion
18-32
3. Chapter 2 - IT Solution for Financial Inclusion a) Financial Inclusion through IT b) Role of ICT in Financial Inclusion c) ICT for Financial Inclusion – RBI Initiative d) Electronic Benefit Payment e) Regulatory Framework f) Role of Technology g) Technology & Financial Inclusion
a) SHG Model b) Understanding SHG – Banking Linkage Program and their
Role in Financial Inclusion c) Impact of Bank Linked – SHG Program d) Issues in Bank Linked SHG Program e) Recent Initiative by NABARD f) Micro Finance Initiative by SIDBI
41-52
5. Chapter 4 - Live Study – Launching of Pilot Project in Raebareily District
a) Research Methodology (Part A) - Aim & Objective - Research Question
53-73
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- Research Approach - Research Method - Data Collection
b) Field Study Report (Part B) - Introduction - Pre-requirement of a Financial Inclusion System - Launching of Pilot Project in Raebareily District - Integra‘s iMFAST - About iMFAST - Technical feature of the Product, Integra – iMFAST - Business Correspondent Model - Modus Operandi - Meeting with Shashi Bhavan Chandra (BC) - Financial Literacy & Credit Counselling - In conversation with Mr. S.N.Lal Srivastav, Counselor
at FLCC, Raebareily - Rendezvous with Mr. Shiv Ram - In conversation with Bank of Baroda Branch Manager –
Dalmau
6. Chapter 5 - Data Analysis a) Some Glaring Facts About Financial Exclusion b) Role of Financial Inclusion in Achieving Inclusive Growth c) RBI to Evaluate Progress of Financial Inclusion
74-83
7. Chapter 6 - Interpretation a) State Level Banker‘s Committee (SLBC) b) SLBC Uttar Pradesh Profile c) Strategy & Approach d) Huge Increase in No-Frill Account
84-88
8. Chapter 7 - Findings a) Interaction with LMD – Raebareily b) Interaction with Branch Manager- Dalmau c) Interaction with Branch Manager – Maharaj Ganj d) Interaction with Integra Agent, Mr. Ashish e) Interaction with BC, Mr. Sashi Bhavan f) Interaction with Mr. S.N.Lal Srivastav
89-95
9. Chapter 8 - Measures to Make Financial Inclusion More Effective
a) To broaden the Role of FLCC b) Bridging Product Gaps c) Advance Technology to Minimize the Cost & Provide a
Wider Reach d) Toward Greater Financial Literacy
96-100
10. Bibliography 101
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List of Tables and Boxes
S.No Topics Page No.
1. Pros & Cons of Various Technologies (Table 1- (7.37)) 39
2. SHG Financed from 2001-02 to 2006-07 (Table 2) 43
3. SHG Post Office Linkage Program (Box V.2) 47
4. Micro Financed Development & Equity Funds (Box V.3) 48
5. Employment & Unemployment (Table 3) 76
6. Earner Having a Bank Account (Table 4) 77
7. Sources of Loan (Table 5) 77
8. Progress of No-Frill Account in Indian Banking (Table 6) 80
9. Physical Progress under SGSY Since Inception (Table 7) 81-82
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EXECUTIVE SUMMARY
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ABOUT BANK OF BARODA A saga of vision and enterprise
It has been a long and eventful journey of more than a century across 25 countries. Starting in 1908
from a small building in Baroda to its new hi-rise and hi-tech Baroda Corporate Centre in Mumbai is
a saga of vision, enterprise, financial prudence and corporate governance.
It is a story scripted in corporate wisdom and social pride. It is a story crafted in private capital,
princely patronage and state ownership. It is a story of ordinary bankers and their extraordinary
contribution in the ascent of Bank of Baroda to the formidable heights of corporate glory. It is a
story that needs to be shared with all those millions of people - customers, stakeholders, employees
& the public at large - who in ample measure, have contributed to the making of an institution.
Mission statement
To be a top ranking National Bank of International Standards committed to augmenting stake
holders' value through concern, care and competence.
Bank of Baroda‟s Initiatives toward Financial Inclusion
Bank of Baroda has adopted the ‗whole village approach‟ as part of its mandate for enabling for
financial inclusion by extending banking services to the country‘s rural population. To give rural
India access to finance and to enable economic independence, Bank of Baroda has introduced a slew
of services that extend credit facilities to small and marginal farmers, agricultural laborers and
cottage industry entrepreneurs. Villages in Dungarpur district of Rajasthan were among the first
500 villages to benefit from the Bank‘s financial inclusion and total integrated village development
programme.
In the past too, the Bank has taken a number of initiatives such as opening of specialised outlets of
Gram Vikas Kendras (GVKs) and Multi Service Agencies (MSAs). The Baroda Swarojgar
Vikas Sansthan (BSVS) was another initiative for capacity building and provided appropriate
training for skill up-gradation to unemployed youth and women for employment.
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The Baroda Kisan Credit Card (BKCC) is yet another facility offered by the Bank to empower the
farmer. The credit card designed exclusively for the benefit of the farmers aims to provide them the
opportunity to manage and utilize their funds in the manner they deem fit. The Kisan Credit Card
provides adequate and timely support to farmers for their production needs, which include among
others, purchase of quality inputs, investment requirements like purchase of agriculture
implements/tractor etc, farming expenses towards farm maintenance, unforeseen family expenses
and maintenance of non-farm activities.
As part of the Bank‘s commitment to Corporate Social Responsibility in its centenary year, i.e.,
2007-08, BoB launched the Baroda Grameen Paramarsh Kendra (BGPK) – a centre for
knowledge sharing, problem solving and credit counselling for the rural communities. The BGPK is
an effort to narrow the “knowledge gap” in financial literacy, better farming practices and
technology adoption. It offers rural communities a diversity of opportunities including market linked
prices, value addition services offered by various institutions, women empowerment and
employment opportunities for rural youth. The BGPK centre helps in spreading financial awareness
among rural masses through village level meetings and helps them to choose suitable banking
products. As part of information sharing and problem solving process, it holds interface sessions
with the specialists from institutions like agriculture universities, Kisan Vikas Kendras and NGOs
working in the rural development sector. The centre also provides extension services to the farmers
by encouraging their participation in Grameen melas, and organising television and radio talks. Each
of the BGVK centre also maintains a small library containing books, journals and audio-visual aids.
Information on the prices of agriculture commodities in various mandis across the country is also
provided, enabling the farmers to sell their products at the best prices. The farmers are also provided
credit counselling on repayment pattern and rescheduling of loans and fresh credit during situations
of rural distress. Another important initiative is the Baroda Kisan Group Loan – a joint liability
scheme – for purchase of heavy agricultural machinery like tractors, power-tillers, etc. either by
farmers having larger holdings with irrigation facilities or group of farmers with irrigation facilities.
The Bank also provides credit for purchase of second hand tractors to farmers interested in dry-land
farming or having a small land holding. Production credit is also provided for raising various crops
from the point of preparatory tillage till harvesting, for landowners or permanent tenants or
leaseholders or sharecroppers. It encourages the development of irrigation facilities; this covers
sinking of wells/bore wells, lifting of water by installation of pump sets, transporting of water
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through field channels, water saving systems like drip irrigation/sprinkler irrigation etc. for farmers.
It also extends working capital to dealers/ distributors/traders of agricultural inputs like seeds,
fertilisers, livestock inputs like cattle feed, medicine etc. and supply of agriculture machinery/
irrigation systems.
Employment is provided to the unemployed technical personnel through the Agro Service Centre.
The Bank also facilitates the setting up of agri-clinics and agribusiness centres by agriculture
graduates. To address the needs of rural infrastructure the Bank provides credit for the construction
of farm building/structures like cattle sheds, thrashing yards, fencing etc. to the individual farmer or
firms engaged in agricultural activity and are of long term nature. Credit is also provided for
construction/expansion/ modernisation/renovation of rural godowns and cold storages.
Other services provided by the Bank include, development of horticulture including production,
processing and marketing of various fruit, vegetables, plantations and flowers, from the nursery to
the point of market, by individual farmers, firms, organisations like co-operative societies. A number
of allied activities, like dairy, poultry, fisheries, sericulture, mushrooms and apiculture are also
encouraged by the Bank. To ensure financial inclusion for the Scheduled Caste and Scheduled
Tribes who have been provided/allotted land by the State government, the Bank finances their
purchase of farm implements, irrigation systems and bullocks etc.
The Bank has also allied itself with NGOs to encourage the formation of credit linked SHGs in the
villages. Under the Dungarpur Project, the Bank works through the People‘s Education and
Development Organisation (PEDO), a NGO working in rural development.
This initiative of the Bank has already brought about a change in the lives of people. Bank of Baroda
has also announced plans of adopting more villages across the country. It plans to disburse credit
worth Rs 1 billion, over the next three years in these villages.
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ABOUT THE RBI
The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the
Reserve Bank of India Act, 1934.
The Central Office of the Reserve Bank was initially established in Calcutta but was permanently
moved to Mumbai in 1937. The Central Office is where the Governor sits and where policies are
formulated.
Though originally privately owned, since nationalisation in 1949, the Reserve Bank is fully owned by
the Government of India.
Preamble
The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as:
"...to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary
stability in India and generally to operate the currency and credit system of the country to its
advantage‖
Measures undertaken by Reserve Bank of India towards Financial Inclusion
In November 2005, banks were advised to make available a basic banking, no-frills account with low
or nil minimum stipulated balances as well as charges to expand the outreach of such accounts to
vast sections of the population. Several banks have since introduced such 'no-frills' account with and
without value-added features. According to the information available with the Reserve Bank, about
five lakh no-frill accounts have been opened until March 31, 2006, of which about two-third are
with the public sector and one-third with the private sector banks.
In order to ensure that persons belonging to low income group, both in urban and rural areas do not
encounter difficulties in opening bank accounts owing to procedural hassles, the know your
customer (KYC) procedures for opening accounts has been simplified. The Reserve Bank has
directed banks to make available all printed material used by retail customers in English, Hindi and
the concerned regional language. More recently, in January 2006, banks were permitted to utilise the
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services of non-governmental organisations (NGOs/SHGs), micro-finance institutions and other
civil society organisations as intermediaries in providing financial and banking services through the
use of business facilitator and business correspondent models.
To extend hassle-free credit to bank customers in rural areas, the guidelines on general credit card
(GCC) schemes were simplified to enable customer‘s access credit on simplified terms and
conditions, without insistence on security, purpose or end-use of credit. With a view of providing
hassle free credit to customers, banks were allowed to issue general credit cards akin to Kisan credit
cards. A simplified mechanism for one-time settlement of loans with principal amount up to
Rs.25,000 which have become doubtful and loss assets as on September 30, 2005 was suggested for
adoption. In case of loans granted under Government-sponsored schemes, banks were advised to
frame separate guidelines following a state-specific approach to be evolved by the State-Level
Bankers Committee (SLBC). Banks have been specifically advised that borrowers with loans settled
under the one time settlement scheme will be eligible to re-access the formal financial system for
fresh credit. Banks were advised to give effect to these measures at all branches for achieving greater
financial inclusion. Initiatives have also been undertaken towards achieving greater financial
inclusion in the North-Eastern region, which had perennially remained under-banked.
The Reserve Bank considers that IT-enabled services can meet the challenges which need to be
addressed for increasing the scope and coverage of financial inclusion such as lack of adequate
infrastructure, higher transaction costs and low volumes of transactions. The Reserve Bank has
already initiated action in the North-Eastern region.
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RBI Guidelines on Financial Inclusion by Extension of Banking Services –
Use of Business Facilitators (BFs) and Business Correspondents (BCs)
Based on queries received from certain banks, we had clarified that there is no objection to banks
engaging individuals as Business Facilitators (BFs) depending on the comfort level of banks, subject
to their taking adequate precautions and conducting proper due diligence before engaging
individuals as BFs.
In the light of the announcement made in paragraph 92 of the Budget Speech 2008-2009 by the
Honorable Finance Minister, Govt. of India, it has been decided to permit banks to engage retired
bank employees, ex-servicemen and retired government employees as Business Correspondents
(BCs) with immediate effect, in addition to the entities already permitted, subject to appropriate due
diligence. While appointing such individuals as BCs, banks may ensure that these individuals are
permanent residents of the area in which they propose to operate as BCs and also institute additional
safeguards as may be considered appropriate to minimise agency risk.
Further, with a view to ensuring adequate supervision over the operations and activities of the BCs
by banks, it has been decided that every BC will be attached to and be under the oversight of a
specific bank branch to be designated as the base branch. The distance between the place of
business of a BC and the base branch, ordinarily, should not exceed 15 Kms in rural, semi-urban
and urban areas. In metropolitan centres, the distance could be upto 5 kms. However, in case a need
is felt to relax the distance criterion, the matter can be referred to the District Consultative
Committee (DCC) of the district concerned for approval. Where such relaxations cover adjoining
districts, the matter may be cleared by the State Level Bankers' Committee (SLBC), which shall also
be the concerned forum for metropolitan areas. Such requests may be considered by the
DCC/SLBC on merits in respect of under-banked areas or where the population is scattered over
large area and where the need to provide banking services is imperative but having a branch may not
be viable, keeping in view the ability of the base branch of the bank making the request to exercise
sufficient oversight on the BC.
Where currently BCs are operating beyond the distance limits specified above, DCC/SLBC may be
kept informed and steps may be taken to conform to the stipulated limits within six months time,
unless specific approval is accorded by the DCC/SLBC on the grounds indicated in paragraph 4
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above. Needless to add, in the context of scaling up of BF/BC model which is a huge challenge
given the size of the country, banks should bring to the notice of RBI any important issues to
facilitate taking prompt corrective steps. The implementation of the BF/BC model should be
monitored closely by controlling authorities of banks, who should specifically look into the
functioning of BFs/BCs during the course of their periodical visits to the branches. Further, banks
should also put in place an institutionalized system for periodically reviewing the implementation of
the BF/BC model at the Board level.
Measurement of Financial Inclusion/Exclusion
While the importance of financial inclusion has been widely accepted, much less is known about
how inclusive the financial systems are and who has access to which financial services. The literature
on financial inclusion lacks a comprehensive measure that can be used to indicate the extent of
financial inclusion across countries. Though indicators of the depth of banking system, capital
markets, and insurance sector are widely available, there is less information available about the
degree of financial inclusiveness. Lack of information is more conspicuous in developing countries
where there is little systematic information on who is served by the formal financial sector, which
financial institutions or services are the most effective at supporting access by poor households and
small enterprises, or what practical and policy barriers may be hindering the accessibility. Individual
indicators, viz., number of bank accounts and number of bank branches that are generally used as
measures of financial inclusion, can provide only partial information on the level of financial
inclusion in an economy. Financial services or products rendered by banks, postal savings banks,
credit unions, finance companies, micro-finance institutions (MFIs), and other formal and quasi-
formal non-bank institutions generally form the basis for measuring the financial inclusion.
It is often observed that people may have access to financial services, but may not wish to use them.
Such voluntarily excluded persons, it is argued, should be included in measures of access even if they
do not use financial services. However, even among the voluntarily excluded, this may in reality be
because such services are unaffordable, unsuited to their needs, or because the potential users fear
that they will be declined upon request. Among the involuntarily excluded from services such as
credit, some represent high credit risk that lenders are discouraged to prudently serve them.
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There are various measures of access to finance. For instance, access to finance can be measured in
terms of access to certain institutions (such as banks, insurance companies, and MFIs or in terms of
access to the functions that such institutions perform, or the services that they provide (such as
payments services, savings or loans and credits). Yet another approach is to look at details on the
uses of specific financial products such as debit cards, credit cards, life insurance and home
mortgages, among others. However, these are highly country-specific. The core access indicators
often used are generally based on institutional distinctions concerning specifically the degree of
formality of the financial institutions.
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CHAPTER 1
INTRODUCTION
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Eleventh Five Year Plan and Inclusive Growth
Despite having an impressive growth of GDP at 8.7% during the 10th plan period, making India
one of the fastest growing economies in the world, large sections of the Indian population still
remain poor and do not have access to basic services.
The Eleventh Five Year Plan stresses the importance of inclusive growth and the plan is developed
keeping this as the main theme. Some of the major findings of the Planning Commission placed in
the public domain include:
Growth being not perceived as being sufficiently inclusive for many groups, specially
Scheduled Castes (SCs), Scheduled Tribes (STs), and minorities.
The percentage of population below the official poverty line is still at 28% (302 million) in
2004-05 based on the 1973-74 per capita incomes which were much lower.
National Family Health Survey – 3 shows that almost 46% of the children in 0 to 3 years‘
age group suffered from malnutrition in 2005-06.
The number of illiterate persons still exceeds 304 million, making India the country with the
highest number of illiterate persons in the world.
A person is poor because the endowments of capital, land, labour and skills are meager and
access to these is limited. The poor is trapped in the vicious circle of illiteracy, disease and ill-
health preventing them from getting the most out of the one asset that they have the labour.
The plan thus lays stress that access to basic facilities such as health, education, clean
drinking water, etc. impacts directly on welfare, in the longer run and determines economic
opportunities for the future.
Vision of Eleventh Five Year Plan
The 11th Plan provides an opportunity to restructure policies to achieve a new vision based
on faster, more broad-based and inclusive growth. It is designed to reduce poverty and focus
on bridging the various divides that continue to fragment our society. The 11th Plan must
aim at putting the economy on a sustainable growth trajectory with a growth rate of
approximately 10 per cent by the end of the Plan period. It will create productive
employment at a faster pace than before, and target robust agriculture growth at 4% per
year. It must seek to reduce disparities across regions and communities by ensuring access to
basic physical infrastructure as well as health and education services to all. It must recognize
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gender as a cross-cutting theme across all sectors and commit to respect and promote the
rights of the common person. The first steps in this direction were initiated in the middle of
the 10th Plan based on the National Common Minimum Programme adopted by the
government. These steps must be further strengthened and consolidated into a strategy for
the 11th Plan.
Rapid growth is an essential part of our strategy for two reasons.
o It is only in a rapidly growing economy that we can expect to sufficiently raise the
incomes of the mass of our population to bring about a general improvement in
living conditions.
o Rapid growth is necessary to generate the resources needed to provide basic services
to all. Work done within the Planning Commission and elsewhere suggests that the
economy can accelerate from 8 per cent per year to an average of around 9% over
the 11th Plan period, provided appropriate policies are put in place. With population
growing at 1.5% per year, 9% growth in GDP would double the real per capita
income in 10 years. This must be combined with policies that will ensure that this
per capita income growth is broad based, benefiting all sections of the population,
especially those who have thus far remained deprived.
A key element of the strategy for inclusive growth must be an all out effort to provide the
mass of our people the access to basic facilities such as health, education, clean drinking
water etc. While in the short run these essential public services impact directly on welfare, in
the longer run they determine economic opportunities for the future. It is important to
recognize that access to these basic services is not necessarily assured simply by a rise in per
capita income. Governments at different levels have to ensure the provision of these services
and this must be an essential part of our strategy for inclusive growth. At the same time it is
important to recognize that better health and education are the necessary pre-conditions for
sustained long-term growth.
Even if we succeed in achieving broad-based and inclusive growth, there are many groups
that may still remain marginalized. These include primitive tribal groups, adolescent girls, the
elderly and the disabled who lack family support, children below the age of three and others
who do not have strong lobbies to ensure that their rights are guaranteed. The 11th Plan
must pay special attention to the needs of these groups.
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The private sector, including farming, micro, small and medium enterprises (MSMEs), and
the corporate sector, has a critical role to play in achieving the objective of faster and more
inclusive growth. This sector accounts for 76% of the total investment in the economy and
an even larger share in employment and output. MSMEs, in particular, have a vital role in
expanding production in a regionally balanced manner and generating widely dispersed off-
farm employment. Our policies must aim at creating an environment in which
entrepreneurship can flourish at all levels, not just at the top.
To stimulate private investment, policy induced constraints and excessive transaction costs
need to be removed. To increase the number of successful entrepreneurs a competitive
environment must be created which encourages new entrants and provides enough finance
for efficient enterprises to expand. Competition also requires policies to curb restrictive
practices, particularly those that deter entry, for example, preemptive acquisition of property.
To achieve such an environment it is imperative that the reforms agenda be pursued with
vigor. Though licensing controls and discretionary approvals have been greatly reduced,
there are many remnants of the control regime that still need drastic overhaul. Quantitative
controls, where they exist, should give way to fiscal measures and increased reliance on
competitive markets subject to appropriate, transparent, and effective regulations. The
burden of multiple inspections by government agencies must be removed and tax regimes
rationalized. A major component of the 11th Plan must be to design policies that spur
private sector investment while encouraging competition by guarding against monopolistic
practices. Continued commitment to the developmental and social roles of banking is
important to ensure that the benefits are widespread.
While encouraging private sector growth the 11th Plan must also ensure a substantial
increase in the allocation of public resources for Plan programmes in critical areas. This will
support the growth strategy and ensure inclusiveness. These resources will be easier to
mobilize if the economy grows rapidly. A new stimulus to public sector investment is
particularly important in agriculture and infrastructure and both the Centre and the States
have to take steps to mobilize resources to make this possible. The growth component of
this strategy is, therefore, important for two reasons:
o It will contribute directly by raising income levels and employment
o It will help finance programmes that will ensure more broad based and inclusive
growth.
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All this is feasible but it is by no means an easy task. Converting potential into reality is a
formidable endeavor and will not be achieved if we simply continue on a business-as-usual
basis. There is need for both the Centre and the States to be self critical and evaluate
programmes and policies to see what is working and what is not. Programmes designed to
achieve specific objectives often fail to do so even though substantial expenditure is incurred
on them. It is therefore necessary to focus on outcomes rather than outlays, including a
disaggregated level to examine their impact on different groups and genders. The practice of
gender budgeting already begun by the central government should extend to the states, so
that performance is judged on the basis of gender disaggregated data. Particular attention
must also be paid to SCP/TSP guidelines for expenditure and monitoring of outcomes.
Disparity and Divide
There are many divides. Foremost among these is the divide between the Rich and the
Poor. Poverty is declining, but only at a pace which is no longer acceptable given the
minimalist level at which the poverty line is fixed. There is also a divide between those who
have access to essential services such as health, education, drinking water, sanitation etc., and
those who do not. Groups which have hitherto been excluded from our society such as SCs,
STs and some minorities and OBCs, continue to lag behind the rest.
Another important divide relates to Gender. It begins with the declining sex ratio, goes on
to literacy differential between girls and boys and culminates in the high rate of maternal
mortality. Differentials in educational status and economic empowerment are heavily biased
against women. Special, focused efforts should be made to purge society of this malaise by
creating an enabling environment for women to become economically, politically, and
socially empowered. Measures to ensure that society recognizes a woman‘s economic and
social worth, and accounts for the worth of women‘s unpaid work, will be a concomitant of
this.
The divide between Urban and Rural India has become a truism of our times. The central
government has already adopted a multi-pronged strategy to reduce this divide in its various
dimensions. For example, the Bharat Nirman programme addresses gaps in rural
infrastructure and covers irrigation, road connectivity, housing, water supply, electrification,
and telephony; the National Rural Employment Guarantee Act (NREGA) attempts to
ensures a social safety net as it provides guaranteed employment in rural areas and at the
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same time has the capacity to build rural infrastructure especially if resources from other
programmes are pooled in; the Sarva Shiksha Abhiyan and National Rural Health Mission
are ambitious programmes for providing elementary education and primary health services
respectively. All these programmes indicate the priority being given by the Government to
Rural Development and are meant to give a new hope to rural India. While making these
provisions for rural India, the 11th Plan must also provide basic amenities to the growing
number of poor in urban areas.
Regional backwardness is another important issue. Differences across states have always
been a cause of concern but there exists imbalances within states as well. Backward districts
of otherwise well performing states, present a dismal picture of intra-state imbalance and
neglect. The Centre and the states will together have to deal with this problem on a priority
basis otherwise discontent; injustice and frustration will only breed extremism. The spread of
Naxalite movement to more than hundred districts in the country is a warning sign. There is
anger and frustration where communalism has left scars. This is the direct fallout of the
failures of the state apparatus to create an environment where the bulk of the people reap
the benefits of development.
Special efforts must be made to give the people a sense of fairness, dignity and hope. The
Backward Regions Grant Fund is meant to address the problem of regional imbalance so
that the growth momentum is maintained.
Financing Development
One of India‘s strengths is that it has a financial system comprising commercial and
cooperative banks, various types of non-bank financing organizations, capital market
institutions, and insurance and pension funds. Indian skills are evident in financial markets
and institutions all over the world and the Indian financial system has evolved to meet many
specific needs, improving considerably over the years with an expansion in depth and
variety.
There are several problems in areas of cooperative banking and in reaching finance to small-
scale industry. Solving these problems expeditiously is critical for ensuring inclusiveness of
growth. The Vaidyanathan Committee has laid out a road-map to revitalize rural credit
cooperatives but the situation regarding finance for micro and small non-agricultural
enterprises (MSE) is even worse than for farm credit. Unlike agriculture, MSEs have to face
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direct competition from the corporate sector which not only has access to equity markets
but also appears able to preempt bank credit when it is tight. This lack of a level playing field
can have serious consequences for employment if thereby the corporate sector is able to
wrest markets from those MSEs which are otherwise competitive. A continuing
commitment to priority lending for both agriculture and MSEs remains therefore an
essential feature of the development banking required for growth. Nonetheless, the overall
financial system needs to be strengthened and developed through improved regulatory
mechanisms in line with international best practices and by liberalizing to encourage
competition.
There is an urgent need for financial innovation so to incorporate inclusive growth in the
economy. The insurance and pensions sectors are major sources for long-term finance for
infrastructure, and policies need to evolve to encourage the development of a healthy and
well-regulated industry. The need to manage risks of various types calls for new insurance
products. As Indian corporates acquire positions abroad, they will need to hedge themselves
against various risks. The need to encourage innovation and new entrepreneurship will
require encouragement of venture capital funds which are as yet in their infancy. A
comprehensive review of policy in the area is necessary and should be undertaken in the
11th Plan.
Micro-finance is another new development in which Indian institutions have acquired
considerable expertise and where up scaling holds great promise to expand the nature of
financial services offered to micro enterprises and also to make these the springboard for
entrepreneurial development. The 11th Plan must ensure that our policies are sufficiently
flexible to support the development of micro-finance. Interest rates in the micro-finance
sector have to be significantly higher than in the banking sector reflecting the much higher
cost of doing business. This sometimes attracts criticism but they still remain much lower
than rates charged by money lender and therefore provide competition to money lenders.
There have been incidents of state governments imposing restrictions on microfinance
institutions in a manner which does not appreciate the ground realities. Such excessive
regulation can prevent the development of a healthy and competitive micro-finance sector
which could compete with usurious money lenders.
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Introduction to Financial Inclusion
Before elaborating on what exactly Financial Inclusion is we must comprehend the concept of
Inclusive growth. To explain the concept of Inclusion we need to understand the meaning of
INDIA and BHARAT. These are known as two names for the same country and ironically they are
extreme contrasts to each other. India is said to be the Land of Opportunity, Land of Fashion Designer,
Land of Information Technologies, Land of Automobile and Jet planes etc. Bharat on another hand depicts a
picture which is a Land of Scarcity, Land of Snakes Charmers, Land of Traditional Crafts and Land of Bullock
Carts etc. The crux is there is an India that is Global and there is a Bharat that is Local. The aim of
Inclusive growth is to make “India and Bharat make One, Connected and Integrated”. To
achieve this aim, following are some main objectives of Inclusive growth:-
Give equal opportunity, capabilities, opportunities and rights to all.
To make our country free of poverty, deprivation and exclusion.
Freedom from hunger, disease and illiteracy.
Financial inclusion is not only the process of ensuring access to financial services or making
available timely and adequate credit when needed by vulnerable groups, such as weaker sections and
low income groups, at an affordable cost but the definition of financial inclusion is much wider. It is
not only providing accessibility of the entire range of financial products and services, it must also be
appropriate, it must also be fair and it must be transparent. In that sense, we can say that 95 per cent
of the population is financially excluded, with most of us not knowing what an appropriate financial
product is suitable for us. Today, what we are seeking to do is first improving access to various
financial products and services for the entire population and ensuring that such access is provided
by mainstream institutional players. Enabling people to get credit from small institutions, money-
lenders and the like is not financial inclusion.
What does Financial Inclusion mean?
One of the major steps taken by government for poverty alleviation is Financial Inclusion. Role of
Financial Inclusion is very wide and covers various aspects of the financial need of an individual.
Eminent personalities like Mr. Pranab Mukharjee, Mr. C. Rangarajan Mr. Duvvuri Subbarao, Mrs.
Usha Thorat and Dr. K.C.Chakrabarty given their definition, explaining the scope of Financial
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Inclusion. I see Financial Inclusion as a “Mechanism that bridges the financial gap of an
Individual”. Before elaborating it we must comprehend the meaning of Gaps.
Financial Gaps according to me represents the lack of financing opportunity and improper financial
infrastructure for vulnerable group who need formal system of finance at an affordable cost. Apart
from this other factor which contributes in widening the gap between the financial institution and
investors are lack of awareness about the financial products, unaffordable products, high transaction
costs, and products which are not convenient, inflexible, not customized and of low quality.
According to Mr. C. Rangarajan, the Chairman of the Committee on Financial Inclusion defines
financial inclusion as “Process of ensuring access to financial services and timely and adequate credit where needed
by vulnerable groups such as weaker sections and low income groups at an affordable cost”.
It is said Financial Inclusion will promote thrift and develops culture of saving and also enables
efficient payment mechanism strengthening the resource base of the financial institution which
benefits the economy as resources become available for efficient payment mechanism and
allocation.
In Financial Inclusion two terminologies are used very commonly, the first thing is a check-in
account, what we in the system call a No-Frills Account. And the next stage is immediate credit.
Today, what the poor wants is accessibility to immediate credit. As most of the data shows that 80
per cent of the credit requirement of the poor is not for business or entrepreneurship but, it is for
meeting a financial emergency, like health, or urgent domestic needs. While the Reserve Bank of
India in 2005 facilitated that every no-frills account can be opened with a readymade overdraft, the
question that arises is how many banks have opened a no-frills account with a readymade overdraft
facility. This immediate credit stage is followed by introduction of various savings products, i.e.
other types of savings, followed by remittances and payments services. This is followed by
insurance, especially health insurance, mortgage, life insurance, housing loans, and then by financial
advisory services. Entrepreneurship credit comes at the last.
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Who are Financially Excluded?
They are basically the underprivileged sections of the society, i.e., farmers, small vendors, agricultural
or industrial labourers, people engaged in unorganized sectors, unemployed people, women,
children, old people, and the physically challenged. The extent of financial exclusion become clear
from these figures: only 40 per cent of the people have a check-in account, 20 per cent have taken life
insurance products, 0.6 per cent has taken non-life insurance products; only 2 per cent have access to
credit cards. This gives us the scope of business opportunities that are there if we can reach out to
all the people. Today, geographically, only 5.2 per cent of the country‘s villages have a bank branch.
It is not that efforts have not been made earlier to promote financial inclusion. One of the prime
aims of the cooperative movement was bringing financial inclusion. The setting up of State Bank of
India in 1956, the nationalization of banks, the introduction of the Lead Bank Scheme, establishing
Regional Rural Banks, evaluation of the Service Area Approach, and formation of Self-Help Groups
were all steps taken to take banking services to the general masses. But, despite such measures only
10 per cent of the population has access to the institutional credit system. A major reason for our
failure to promote financial inclusion has been Technology. Without technology we cannot reach
out to the people. Banking technology is only of recent origin and business delivery model is yet to
evolve. Today, it is clear that we will not be able to promote financial inclusion with a branch-based
delivery mechanism. We have to experiment with new types of delivery mechanisms, what we can
call the ICT-Based Delivery Mechanism.
Here, the problem is that we do not have a business model as to how such a mechanism will be
viable. One must remember here that giving a subsidy does not necessarily lead to a better delivery
mechanism. So, it is important that any service that seeks to cover the poor and the excluded must
be at an affordable cost but never at a loss. We must not exploit the poor, but he must pay the full
cost otherwise there will be leakages. Any such delivery mechanism will be ineffective and the
system will be doing greatest disservice to the poor. When we say that we must give the credit to
poor at a cheaper rate, we have to realize that if the formal system fails to give credit to the
excluded, the alternative is a far costlier option.
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The 11th Five Year Plan also talks about inclusive growth. Inclusive growth cannot come without
financial inclusion. Today, globally, the mainstream financial institutions have realized that the poor
are bankable. And the technology to make this possible is also there. The Banking Correspondent
Model is one of the most revolutionary reforms which have taken place in our banking system.
However, it is one that we are not taking the full advantage of. Under the KYC/GCC guidelines, the
poor need not go every time for a transaction to a bank branch. For opening branches in unbanked
rural centres, the rules have also been liberalized. Similarly, we have a liberalized policy for ATMs.
Today, no license is needed for setting up ATMs. But the ATMs will work only if bank have
customers. We have opened lots of no-frills accounts, but not even 1 per cent of such accounts have
been extended overdrafts despite the rules allowing this. Simply opening a no-frills account is not
financial inclusion. It is just the beginning. The available statistics and this Study reveal that we have
opened over 28.23 million no-frills accounts, but less than 11 per cent of them are active. Opening
no-frills accounts will not give any help to the poor if they do not conduct any transactions. Today,
the number of rural bank branches is only 31,727 as against more than 600,000 villages in the
country. Similarly, the number of ATMs is 44,857 with a majority of them being in metros and
urban centres. Again, there are 470,237 points of sale (POS) but these are of little use to the rural
poor as they cannot deliver cash, which is what they need. Today, a bank branch covers a population
of 16,000. So, it is clear that bank branch-based delivery model will not work. We have to go for a
different delivery mechanism.
What are the Problems and Difficulties?
The problem is that while there are islands of excellence, large ocean of deprivation and non-
performance remain. It is clear that scaling-up of activities is just not possible. This is because of the
fact that transaction costs are high. But, here it should be clear that such costs should be shared by
all stakeholders. It must be shared by the State if it feels that it will lead to development. It has to be
shared by the bank, provided they feel that there is a future business in this. It must be borne by the
customer also if he gets the banking service or product he needs at his doorstep. The key here is to
effectively work out this cost. Today, with the technology we have on our side, we can provide all
State services and benefits directly to the poor. But there is no reason why the banks should not be
paid for this as it helps the State to reduce its cost of administration of such service. Similarly, if a
bank feels that this will become a profitable business in future, it should be first prepared to invest in
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this business. So, it is important that we work out an appropriate business model for promoting
financial inclusion. It is true that the existing Banking Correspondent model is too restrictive. So
changes are to be made in the existing guidelines to make it more flexible and operative. But easing
the policy is only one part of it. For inclusion to succeed, we need to be clear that we want inclusion
to happen and we are ready to work for it. We may give everything but if we don‘t have the
determination and involvement and if we do not believe that it is a viable business, we will not
succeed. Strong collaboration among banks, technical service providers, BC service providers is
what is required. Currently, this is lacking. Further, if we believe inclusive growth and financial
inclusion is part of the development process, without the involvement of the State at the
implementation (local) level, it will not succeed. An example of this is Punjab National Bank, when
we started doing financial inclusion, we started with 30 pilot projects and in one year we could open
only 2 lakh no-frills accounts. But in Rajasthan when we co-opted the State Government, we opened
26 lakh no-frills accounts in just 40 days. Also, given the size and scale of the task on hand, it is
important that big players in the technological field become part of the process. Their interest in this
area is vital. We require much larger institutional players in the area of technology, research and
development, and for evolving cost-effective business solutions to ensure success of financial
inclusion.
Today, when we are in the midst of a global meltdown it is the right time to focus on financial
inclusion. The meltdown globally has brought more focus on inclusive growth. Today, everybody‘s
attention has shifted from the West to the East, from the US/Europe to India, China, and Asia, and
this is an opportunity. Focus on domestic consumption and investment - This will not come without
linking the people with the banking system. Focus on increased social sector spending - If we want
to make spending more productive and more efficient, its delivery has to be through a bank account.
Today, everybody is saying that we must give subsidies directly to the poor. In fact, Dr Meghnad
Desai, the noted economist said that everything should be given to the poor in cash and put directly
into their bank accounts. This is because this is much more beneficial to the poor. Financial
inclusion is necessary not only for the poor; it is a must for ensuring the sustainability of our society.
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Understanding Key Stakeholders in Financial Inclusion
One has to first define who the stakeholders are: viz., banks, NBFCs, insurance companies, market
players, pension funds, postal system. Then define the regulators such as Reserve Bank of India
(RBI), Insurance Regulatory and Development Authority (IRDA), Telecom Regulatory Authority of
India (TRAI), and Securities and Exchange Board of India (SEBI); institutions and think-tanks and
certainly the government. Unless all these stakeholders come together and there is some kind of a
broad consensus on what needs to be done, the purpose of the study would not be adequately
served.
1. Government
Planning Commission
Ministry of Communications & Information (MoCIT)
Ministry of Rural Development (MoRD)
Ministry of Finance (MoF)
Economic Advisory Council 2. Players
Banks
NBFCs
Insurance Companies
Market Players
Pension Funds
Postal System 3. Regulators
RBI
IRDA
TRAI
SEBI 4. Academia
IIT
IISc
5. Institutions & Think Tanks
NABARD
Banking Codes and Standards
Board of India
IDRBT
NIPFP
IGIDR
ICRIER, NCAER, CMIE, IDF, BCG etc.
6. Civil Society
NGOs
MPFI
E-Communities 7. Industry
Technology Providers, (FINO, Integra, A Little World, Atom, Nokia, Intel, etc)
BCs & BFs
ICT industry
Telco‘s
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RBI‟s Recent Initiative for Greater Financial Inclusion
Reserve Bank of India initiative aim to ―connect people‖ with banking system and not just opening
account has given impetus to greater financial inclusion. This includes meeting the small credit needs
of the people, giving them access to the payments system and providing remittance facilities. This
has led to some notable developments:
No Frills Accounts: In November 2005, RBI asked banks to offer a basic banking ‗no-
frills‘ account with low or zero minimum balances and minimum charges to expand the
outreach of such accounts to the low income groups.
Easier Credit facility: Banks were asked to introduce a General Purpose Credit Card
(GCC) facility up to Rs. 25,000. However, total number of GCCs issued by banks as at end-
March, 2009 was only 0.15 million.
Simpler KYC Norms: In order to ensure that people belonging to the low income groups,
both in urban and rural areas, do not encounter difficulties in opening bank accounts, the
'Know Your Customer' (KYC) procedure for opening accounts was simplified for those
accounts with balances not exceeding Rs 50,000 and credits thereto not exceeding
Rs.100,000 in a year.
Use of Information Technology: Banks have been 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. Two of the important initiatives are:
o Smart cards for opening bank accounts with biometric identification. These help the
customers get banking services near their doorstep.
o Link to mobile hand held electronic devices for banking transactions. In October
2008, the RBI advised banks on issues relating to technology, security standards, and
customer protection.
EBT through Banks: The Reserve Bank is in consultation with state governments to
encourage them to adopt Electronic Benefit Transfer (EBT) by banks.
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100% Financial Inclusion Drive: The Reserve Bank launched a financial inclusion drive
targeting one district in each state for 100% financial inclusion. To make it viable RBI
advised banks to:
o Ensure provision of banking services nearer to the location of the no-frills account
holders through a variety of channels.
o Provide GCC/small overdrafts along with no-frills accounts to encourage the
account holders to actively operate the accounts.
o Conduct awareness drives of the facilities offered to the no-frills account holders.
o Review the extent of coverage in districts declared as 100 per cent financially
included.
o Efficiently leverage on the available technology enabled financial inclusion solutions.
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CHAPTER 2
INFORMATION TECHNOLOGY
SOLUTIONS
FOR
FINANCIAL INCLUSION
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Financial Inclusion through Information Technology
The use of IT solutions for providing banking facilities at doorstep holds the potential for scalability
of the FI initiatives. Pilot projects have been initiated using smart cards for opening bank accounts
with bio metric identification. Link to mobile or hand held connectivity devices ensure that the
transactions are recorded in the bank‘s books on real time basis. Some State Governments are
routing social security payments as also payments under the National Rural Employment Guarantee
Scheme through such smart cards (see pictures below). The same delivery channel can be used to
provide other financial services like low cost remittances and insurance. The use of IT also enables
banks to handle the enormous increase in the volume of transactions for millions of households for
processing, credit scoring, credit record and follow up.
Point of Transaction Machine
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Pensioners with Bio-metric cards line-up to receive payments
Biometric validation of Smart Card
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Role of ICT in FI
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 multi media and multi -language for dissemination of information and
advice.
ICT for FI - RBI initiatives
I now turn to the specific initiatives of RBI in regard to ICT for Financial Inclusion. The very first
initiative was emphasizing the use of IT solutions while adopting the agency or BC model for
financial inclusion. A paper placed on the RBI website has envisaged a scheme with RBI support for
providing satellite connectivity for remote area branches. The reports of three working groups set up
by RBI to consider support to RRBs and UCBs in computerizing their operations and adopt IT
solutions for financial inclusion have been placed in public domain for comments. These groups
have recommended that the IDRBT could offer interest free loans to UCBs and RRBs for adoption
of IT. Based on comments and response RBI will be firming up these schemes. Recognizing the
penetration of mobile phones (including amongst the low income population) and the enormous
opportunities they offer in extending the banking outreach. RBI had placed a paper on mobile
banking in the public domain and the guidelines are now being finalized. The NFS is able to offer
nationwide networking of ATMs and can facilitate banking transactions including remittances
through ATMs linked to the NFS. Effective from April 1, 2009 a customer will be able to use any
ATM (including other bank ATMs) to operate his /her account at no cost. Other initiatives include
those aimed at ensuring quicker, safer currency and funds transfer. In fact RBI has put on its web-
site yesterday an approach paper on rationalization of service charges for usage of electronic
products, which would facilitate easier movement of funds at lower costs.
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Electronic Benefit Payments
Recognizing the several advantages of using bank accounts for disbursal of government benefits,
many State Governments have decided to disburse NREGA payments social security benefits
electronically through no frills bank accounts and in some States with such accounts operated
through smart cards with bio–metric identification. A Committee set up by RBI examined the
various models through which such payments can be made and has recommended a bank led model
with sharing of costs between Government and banks. Appropriate support from the RBI or the
Financial Inclusion Technology Fund could also be thought of in the initial stages. Such accounts
that have been opened to receive government benefits/payments can become the base for a host of
other financial services and facilitate the objective of financial inclusion.
Regulatory framework
The regulations relating to IT solutions for banking services in general and financial inclusion in
particular relate to ensuring integrity of banking system and ensuring customer protection. These