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The Financial Express February 13, 2011 7


mates done by the Centre for Microfinance tions are adopted, and to what extent. Howev-
(IFMR)showahighdependenceoninformal er, this issue highlights the need for a coher-
channels for sending money home. Almost ent, well thought-out policy process to tackle
half of the respondents reportedly used in- anevidentlycomplextask.
formal means to remit money to their fami-
lies, and the primary concerns of these re- The way forward

spondents were safety and convenience of Looking at all the alternatives that are being
the remittance. Since banks don’t have a used for financial transactions, reducing
largeextentof ruralpenetrationandimpose costs and raising credit history stand out as
strictKYCnorms,migrantsareforcedtouse paramount concerns.
moreexpensiveandriskyinformalchannels Electronic banking, made possible due to
suchashawalatransfers.Indeed,only about theintroductionof ICTs,canprovetobeapo-
30% of the respondents of this study used tent weapon in the battle to increase finan-
bank networks to remit money as against cial coverage by leapfrogging traditional
49% who would have preferred to use it. banking infrastructure. Amongst the vari-
Those using banks tended to have relatively ous alternatives, mobile banking is seen as

As policy makers pursue financial inclusion to ensure socio-economic higher incomes, which is unsurprising be-
cause, of course, the proportional costs fall
the most viable option to enable universal fi-
nancial inclusion. Allowing financial trans-

development, Aman Srivastava of Indicus Analytics deconstructs the as the transfer amount rises.
Of all the transfer methods, the users of
is a promising idea because of the logistics

complexities of the goal, taking stock of the situation and the need to take a cash couriers were the least likely to prefer
any other method due to the convenience of
involved with it. Mobile phones are ubiqui-
tous and don’t require a large amount of

proactive approach, in the first article of this three-part series doorstep delivery and the relatively inex-
pensive costs.
com towers. They are portable and enable
Indiaalsohasanetworkof 1,50,000postof- transactions to be carried out anywhere and
fices,fargreaterthanthesixty-fivethousand anytime, with automatic record-keeping.
bank branches spread across the country. Amongst ICTs, the setting up of ATMs is
Many people use this network for remit- alsoastepintherightdirection,astheyhave
tances,savingsaccounts,etc.,despite lowercostsof installationthanbankbranch-
es, but unless some standardised colour cod-
ing is introduced for each ser-


PREFERRED BANKS 29% 11% 2% 4% 4%
The remaining 50% of the respondents did not prefer to use a bank. Figures are approximate

INANCIAL INCLUSIONasagoal fact that the per capita number of bank vice rendered, ATMs will not be a useful tool
is gaining greater attention in POPULATION SERVED PER branches is falling in rural areas. In fact, In- COSTS OF TRANSACTION in areas that witness high rates of illiteracy.
government policy circles and is dia currently has just one bank branch per Cards are another form of branchless
a key to continued socio-econom-
BRANCH 16,000 people, a very poor ratio when com- (US$) banking, credit, debit and cash cards are
ic development. Almost 3 billion (IN %) pared to Japan (one branch per 1,960 people) 1.2 gainingpopularity.Whateverthepath,some
people around the world lack access to basic 18000 or Germany (a branch per 1,480 people), or form of a digital payments system is defi-
financial services that have the potential to even Brazil (one branch for 9,300 people). 1.0 nitely valuable, from the point of view of fo-
transform economies and boost livelihoods. 16000 cusing on transaction-based activities and
There is an urgent need for understand- 14000 The current situation cost-effective delivery.
ing the complexities of this goal, so that the With the banking model having underper- 0.6
regulation requiredtoachieveitisproactive formed so far, we have to look at new and in- The bank response
and not reactive, and can encourage large- 10000 novativewaysof bringingpeopleintothefor- 0.4 One way to encourage the spread of banking
scale participation. This topic thus merits a 8000 mal financial system. One model that comes has been through business correspondents
greater understanding and discussion, to mind involves using the cell phone, a de- 0.2 (BCs), which can be a useful alternative or
whichweendeavourtocommencehere.This 6000 vice that India has adopted in a big way supplement to ICTs, depending on their de-
is the first of a three-part series on financial 4000 acrossallsectionsof society.Usingthismod- 0 ployment,andwhichareapracticalsolution

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inclusionandbeginswithanoverviewof the el to address the needs of society requires a to the challenge of branchless banking. Al-
current state of inclusion in India and the better understanding of these needs. lowingbankingfunctionstobeoutsourcedto
need for enhancing it. Subsequent articles 0 agentssuchaskiranastores,petrolpumpsor
willcoverthemainaspectsof theregulatory Rural Urban Total Deposits vs. cell phones postofficeswouldfurtherthecauseof finan-
regime and introduce some key players as At present, only 45% of adults in India have cial inclusion as these institutions have bet-
well as models, both domestically and inter- access to a bank account. This figure falls to ter retail and distribution networks and are
Source:CGAP Focus Note 32, 2006
nationally. The domestic models can high- 1991 1996 2001 2008 27% for rural households with access to any more likely to be present in isolated rural ar-
lightwhatwe’veachievedsofar,whilethein- Source: Estimates using RBI, Census of India
financialservices(EconomicSurvey2007-08). eas. As many as 8 million accounts had been
ternational models will demonstrate what Further,thereisastrongpositivecorrelation the higher costs of transferring money by openedthroughBCsby2009,asperastudyby
we can still learn and apply. between income levels and bank accounts, this method as well as the limited reach of N Srinivasan. And now, the RBI has asked
velopment. With access to formal finance, indicating that richer people are more likely the web-based instant money order service, bankstoextendservicestoanother72,000vil-
What is financial inclusion? the rural poor need no longer go to money- to have a bank account than poorer ones. which is available at only a thousand offices lages by 2012.
The concept of financial inclusion was best lenders who charge exorbitant rates of in- This correlation transcends the rural/ur- due to infrastructure costs. Of course, there is another change that
summedupbytheRangarajanCommitteein terest. They also have increased security in ban divide. According to RBI statistics, 72% bankscanadopttoencouragefinancialinclu-
2008 as “the process of ensuring access to fi- financial flows such as remittances and can of those earning less than Rs 50,000 a year Lack of access to credit sion—by shifting their revenue model to one
nancial services and timely and adequate cut down on time and money costs to stream- lack a bank account. With 40% of the Indian On the other side of the balance sheet, the that is dependent on transactions and not on
credit where needed by vulnerable groups line the process. The transaction record- householdsearninglessthanRs75,000ayear third census of small scale industries con- accountbalances.Poorerpeople,typicallyen-
such as weaker sections and low income keeping will stamp out money laundering (based on NSSO data), this creates a big chal- ducted in 2001-02 showed that while 14% of gaged in daily wage labour, conduct more fre-
groups at an affordable cost.” and fraud, and so cut into the parallel black lenge for banking coverage. theregisteredunitsenjoyedbankcredit,just quent financial transactions. These transac-
Universalinclusionhasbeenapolicygoal markets that eat into the country’s GDP. It On the other hand, India currently has 3%of theunregisteredunitshadbankloans. tions include the savings remitted back to
for decades and has witnessed the participa- would also boost tax collections. about 730 million phone connections, indi- As per NSSO data, 52% of farm house- families in the instance of migrant workers.
tion, employing various models, of several Perhaps most importantly, it would in- cating a tele-density of about 65%, and is holds do not have access to credit. Of the re- Allowing banks to earn their revenues off
players over the years. As a result, India has crease uptake of the government’s various adding between 10-15 million connections a maining 48%, only 27% have access to credit these transactions instead of deposits would
done quite well in this field relative to its in- social welfare programs such as NREGS, month at a CAGR of 45% over the past five from formal sources. compel them to tap into this financially ex-
come levels, as shown below. However, as Sarva Shiksha Abhiyan, and Janani Surak- years. Using mobile phones as a banking Indebtedness is substantially lower cludedsector.A2008RBIstudyfoundthat87%
with so many other policy goals over the sha Yojana. Additionally, since the govern- platform would enable anytime log-keeping amongst the poorest due to a lack of avail- of the accounts in a district, which was re-
years,progressisstillinsufficientandmuch ment is one of the largest bill payers and mi- and would eliminate travel costs. ability of funds for them. Banks are reluc- portedly 100% financially included, were ly-
more needs to be done. cro-payers in the country, it stands to benefit tant to lend to this section due to the small ing dormant. This was probably because
a great deal from making all its payments Remittances: untapped need loanamountswhicharecostlytoservice.Ad- banks limited their use as they lost money on
The need for financial inclusion flowelectronic.A2010McKinseystudytitled India has about a hundred million domestic ditionally, the debtors have irregular in- eachaccountwithinsufficientfloats.
It is by now well known that financial inclu- Inclusivegrowthandfinancialsecurityfound migrants, by some estimates, and a 30% ur- comes and no transaction history, which However, including cell phones into the
sion is an important tool in aiding the devel- that such automation would lead to savings banisation ratio as per a 2007 UN report. means banks are unable to assess their cred- grand scheme of things means that banks
opment of an economy. Sustaining India’s of about US$ 22.4 billion per year. These effi- These migrants often leave their families in it worthiness. Their borrowings are there- won’t have to do it alone, and can create a
rapid growth in the future will require the ciencies may be brought about by plugging search of better earning prospects, and reg- fore, principally sourced from the informal symbiosis with telecom firms so as to elimi-
upliftment and participation of its entire leakages (diversion of benefits to unintend- ularly send their savings home. Latest esti- sector, largely for purposes of non-produc- nate the problems stemming from their rev-
population. Small wonder then, that the In- ed groups), reducing transaction costs (in- tive household consumption, and are unse- enue models. In such a symbiotic relation-
dian delegation at the annual meet of the cluding time and effort) and administrative cured as they have no assets to offer as collat- ship, we will witness the emergence of
World Economic Forum this year adopted as costs (such as audits, reconciliations, etc).
AVERAGE ANNUAL INCOME eral. Sourcing these borrowings from the several players.
its theme the phrase ‘Inclusive growth.’ We At present, the government desires that IN RS AND % OF PEOPLE informalsectoragainleadstocostlytransac-
have managed to jump on to a high growth all the NREGA payments, tens of millions of WITH BANK ACCOUNTS tions going unrecorded, thus creating a vi- Key players
trajectory, but have not yet ensured the par- whicharedistributedannually,bemadeelec- cious cycle of financial exclusion. Many big players can aid in this cause of fur-
ticipation of all sections of society. Achiev- tronically via biometric smartcards. This, Agriculture wage labour 14% Microfinance emerged as an alternative thering inclusion, either through their deep
ing that confronts us with the challenges of however, is a money-losing scheme for both 21,295 tothebank-creditsystemaboutfourdecades pockets, or their extensive retail networks.
scalingnewmodelswhileensuringahighde- banks and their business correspondents Wage labour—non-agriculture 25% ago. However, it also suffers from many limi- These players can include internet service
gree of consumer protection. The latter due to high rates of dormancy and ‘carding 31,676 tations in the present form. The self-help providers, payment system operators, tech-
point is particularly important since the tar- rampages’ to increase penetration. The gov- Own account workers 25% group-bank linkage programme, which is nologyproviders,mobilenetworkoperators,
get population comprises the economically ernment offer banks Rs 50 subsidy for each 33,100 managedbyNABARD,isthelargestmicrofi- banks, retailers, etc. Particularly important
vulnerable sections. card issued, as well as 2% of the throughput Streetvendors 39% nance programme in the world with a reach will be the roles played by SBI, ICICI, Airtel,
Unfortunately,despitethefocusonthepri- as a fee, but this is insufficient for deploying of 54million.Butitisheavilysubsidisedand Vodafone, Reliance, India Post, Public Call
ority sector, banks have been unable to the smartcards and setting up the requisite focuses only on credit delivery. Similarly, mi- Offices (which has a network of 400,000 out-
Other self employed workers 50%
achieve this balance, and have therefore, infrastructure. cro-finance institutions (MFIs) serve a large lets), NABARD and the UIDAI. Their active
shiedawayfromeffortstopromoteuniversal In rural areas, people typically use bank 59,687 number of borrowers, but their penetration involvement will require an enabling regu-
Self-employed in primary production 45%
inclusion. The current lack of transaction accounts to: receive payments from such so- has not crossed 3% (World Bank, 2006). This latory environment. Let us see how this sto-
history that has arisen from availing the ser- cial welfare schemes, receive remittances, 60,078 is again due to high transaction costs. ry plays out.
vices of the informal financial sector means andstoretheirmoneysafely.Andbanks,typ- Part time earners 49% In fact, Andhra Pradesh, which accounts In the next article in this series, we will
that banks are not able to conduct credit ically, do not have an incentive to encourage 64,507 for a quarter of the micro-lending industry, cover the existing set of financial sector reg-
checks on poorer people, and fear higher de- such financial inclusion for a variety of rea- Shopkeepers 67% witnessed a recent spate of farmer suicides ulations, particularly in terms of barriers
fault rates in case they extend lending to this sons as listed above. Further, since bank 100,044 due to overcharging and coercive recovery and opportunities, which have an impact on
segment. Additionally, since they earn their branchesarefrequentlysituatedfarfromthe Private salaried workers 68% methodsbyMFIs.Asubsequentordinanceis- inclusion. The challenge of making regula-
revenuesfromfloats(sizesof deposits),their target populations, even people have no in- 105,670 suedbythestategovernmenttocurtailthein- tion meet the needs of the poor will need in-
costs of servicing a poorer person’s account centivetotravellargedistancestotransactin Government salaried workers 90% dependenceof theseMFIsledtoloanrecover- putsfrommanystakeholders;whatisimpor-
(i.e. smaller deposit sizes) frequently exceed any capacity. 140,001 ies plunging to 10-20%, and a consequent halt tant is to create a conducive ecosystem that
their revenues from it. A 2010 IFMR study on remittances (cov- Self-employed professionals86% infreshlendingandabilitytoserviceexisting does just that.
Financial inclusion can channel the pop- eredlaterinthisarticle)foundthattherecip- 319,555 clients. This led to the RBI setting up the The writer is an economist at the Centre for
ulation into the formal sector and so enable ients in its sample spent an average of 40 Businessmen 95% MalegamCommitteetoaddresstheproblems Financial Inclusion, Indicus Analytics. You
better record-keeping of transactions. minutesintravellingand50minutesinwait- 478,985 in the micro-lending sector. The committee’s can reach him at
Through this, credit history may be moni- ing for their transactions at local bank Note bar refer to income in Rs and % figure refers report, which came out in January, recom- aman.srivastava@indicus.net
tored, ensuring a more sustainable model of branches. This reluctance of banks to serve to percent with the bank mends better regulation of MFIs. It remains
Source: IISS, 2007
lending/borrowing, so crucial to rural de- the financially excluded is illustrated by the tobeseenwhetheranyof theserecommenda- (To be continued next week)