Declaration

I hereby declare that the project report on the topic “Financial Inclusion: Policy Initiatives and
Assessment of ICT based Initiatives for NREGA Beneficiaries in District Amritsar” is submitted
to the Reserve Bank of India for the partial fulfillment of summer internship as a part of the
curriculum of MBA, UIAMS.

This report is record of the original work done by me, Aarti Katoch between 18, June 2010 to 30,
July 2010 during the period of this internship at Chandigarh regional office of Reserve Bank of
India under the guidelines of Mrs. Anitha Srinivasan, DGM and Mr. Susheel Raina, AGM, Rural
Planning and Credit Department.

Aarti Katioch

This is to certify that Ms. Aarti Katoch has successfully completed the project on the topic
“Financial Inclusion: Policy Initiatives and Assessment of ICT based Initiatives for NREGA
Beneficiaries in District Amritsar” under my guidelines. Her conduct throughout the
accomplishment of the task was excellent and I wish her all the best for her future endeavours.

Place: Chandigarh Mrs. Anitha Srinivasan,

Date: (DGM, RPCD)

Mr.Susheel Raina,
AGM,
(AGM, RPCD)

1
 Acknowledgement
I would like to express my gratitude to the Reserve Bank of India that they provided me with the
opportunity to accomplish my goal particularly the Rural Planning and Credit Department.

I express my heartfelt gratitude to Sh. Jasbir Singh, present Regional Director. RBI, Chandigarh
who gave me an opportunity to work on the project titled financial inclusion.

I owe enormous intellectual debt towards my guide Smt. Anitha Srinavasan, DGM & Mr.
Susheel Raina, AGM, RPCD for giving me valuable insight into my field of study. I would like
to thank and sincerely appreciate my mentors for their encouragement and continuous guidance
in a friendly atmosphere.

I extend my sincere thanks and gratitude to all the staff members specially Mrs. Peeyoosh Nag,
AGM, DAPM for providing me the support. Also during this project I had frequent interaction
with officers and staff of other departments at RBI Chandigarh, I appreciate their willingness to
co-operate and share information with me.

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

capabilities to accomplish this project.

I would like to thank my pal Ankita Rapa and colleagues for their cooperation and help during
my work. I would also like to thank staff of Oriental Bank of Commerce, Regional Office,
Amritsar for the cooperation they provides me during my field visits.

Last but not the least, I would like to acknowledge the invaluable contribution of my beloved
parents for their good wishes and for being my side all the time and encouraging me to fulfill my
duty with determination.

2
 Background
I, Aarti Katoch, student of University Institute of Applied Management and Sciences, Panjab
University, Chandigarh joined The Reserve Bank of India as summer trainee in partial
fulfillment of the requirements for the degree of Masters of Management Studies. The report is a
record of original project done by me between June 18, 2010 to July 30, 2010 during the period
of my summer internship at Reserve Bank of India, Chandigarh under the guidance of Smt.
Anitha Srinivasan (DGM) and Mr. Susheel Raina (AGM, RPCD).

Approach adopted
For the present work, I studied the basics of the topic and previous work done on it. My first goal
was to have in depth knowledge of the theoretical part of the subject than to have first hand
experience of it in the field. For this purpose, I visited Regional office of Oriental Bank of
Commerce in Amritsar. I also visited some of the villages like Chogawan & Kirlgarh of district
Amritsar for the field study and survey. I conducted a survey among the rural people of these
villages to know the level of penetration of banking in these interior rural areas and what are the
perspectives of the people regarding banking services.

3
 Executive Summary
Access to safe, easy and affordable credit and other financial services by the poor and vulnerable
groups, disadvantaged areas and lagging sectors is recognized as a pre-condition for accelerating
growth and reducing income disparities and poverty. An open and efficient society is always
characterized by the unstrained access to public goods and services. In this concern both the
government and the Reserve Bank of India have been pursuing the goal of financial inclusion
over the last several decades through various initiatives for example- opening of no frill
accounts, lead bank scheme, easier credit facility, simplified KYC norms, use of ICT solutions,
building FLCC & EBT through banks etc.

Now-a-days ICTs {Information and Communication Technologies} are being used in many
fields specially in banking to improve the efficiency, reliability and ease of operation. They are
widely used in the form of mobiles ATMs, biometric smart cards, mobile banking and so on.
Branchless banking in the form of Business Correspondents and Business Facilitators is one of
the major initiatives of RBI in this direction through which they are able to reach the unbanked
population.

The project report includes the understanding of the Business Correspondent model and its
working i.e. the enrollment process and the transactions through biometric smart cards. The
survey was also conducted among rural people to know the penetration of banking in the interior
areas of district Amritsar. Project also focuses on the problems of the BCs and the rural people
and includes the suggestions on the basis of research conducted.

Microfinance and Information and Communication Technology (ICT), in their own right, can be
argued to have a lasting impact on the social and economic order. However, to have an even
more profound impact, these different approaches to orchestrating change- social and economic-
will have to integrate and collaborate, in a way that ensures actualizing of a more holistic
development framework that beat leverages the respective strengths of both microfinance and
ICT.

4
 Table of Contents
Chapter Title Page(s)

I. Introduction 7-12

Why Financial Inclusion?

Who are Excluded?
Causes of Financial Inclusion
Consequences of Financial Inclusion

II. Financial Inclusion – Defined 13-15

Indian Scenario

III. Some Indian Initiatives 16-22

Initiatives of Reserve Bank of India

Initiatives of NABARD
Other Institutions

IV. IT enabled Financial Inclusion 23-31

Branchless Banking
Business Correspondents/Facilitator Model
ICT and Financial Inclusion

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

VI. Survey 37-51

Overview of the Model

Enrollment Process
Transaction Process
Achievement so far
Field issues
Methodology

5
 Findings from the Survey
Problems of BCs and Rural Population

VII. Some suggestions 52-54

VIII. Questionnaire 55

IX. Abbreviations 56-57

6
 Chapter I

Introduction
Access to safe, easy and affordable credit and other financial services by the poor and
vulnerable groups, disadvantaged areas and lagging sectors is recognized as a pre-
condition for accelerating growth and reducing income disparities and poverty. Access to
a well-functioning financial system, by creating equal opportunities, enables
economically and socially excluded people to integrate better into the economy and
actively contribute to development and protects themselves against economic shocks. In
most developing countries, a large segment of society, particularly low-income people,
has very little access to financial services, both formal and semi-formal. As a
consequence, many of them have to necessarily depend either on their own or informal
sources of finance and generally at an unreasonably high cost. The situation is worse in
least developed countries (LDCs), where more than 90 per cent of the population is
excluded from access to the formal financial system.

Inclusive finance, including safe savings, appropriately designed loans for poor and low-
income households and for micro, small and medium-sized enterprises, and appropriate
insurance and payments services can help people to enhance incomes, acquire capital,
manage risk, and come out of poverty. It has been well recognized that access to financial
services facilitates making and receiving financial payments and reduces transaction
costs. Furthermore, access to financial services contributes to higher production and
social protection, as the financial sector – through stored savings, credit and insurance –
serves as a measure of crisis mitigation. Broader access to financial services has,
however, attracted less attention despite the emphasis it has received in the theory.

7
Why Financial exclusion?

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

services in an appropriate form due to problems associated with access, conditions,
prices, marketing or self-exclusion in response to discouraging experiences or
perceptions of individuals/entities. Definitions of financial exclusion in the literature vary
depending on the dimensions such as ‘breadth’, ‘focus’ and ‘degree’ of exclusion. The
‘breadth’ dimension is the broadest of all definitions linking financial exclusion to social
exclusion which defines financial exclusion as the processes that prevent poor and
disadvantaged social groups from gaining access to the financial system (Layton and
Thrift, 1995). The ‘focus’ dimension is in the middle of the spectrum that links financial
exclusion to other dimensions of exclusion. It defines financial exclusion as the potential
difficulties faced by some segments of population in accessing mainstream financial
services such as bank accounts/home insurance (Meadows et al., 2004). The definitions
laying emphasis on the ‘focus’ also vary significantly to include various segments of
population such as individuals, households, communities, and businesses. The ‘degree’
dimension, which is the narrowest of all definitions of financial exclusion, defines
financial exclusion as exclusion from particular sources of credit and other financial
services including insurance, bill-payment services and accessible and appropriate
deposit accounts (Rogaly, 1999). Finally, definitions of financial exclusion vary
considerably according to the dimensions such as the concept of relativity, i.e., financial
exclusion defined relative to some standard (i.e., inclusion). This line of thinking defines
the problem of financial exclusion as that emanating from increased inclusion, leaving a
minority of individuals and households behind (Kempton et al., 2000).

Both the Government and the Reserve Bank have been pursuing the goal of financial
inclusion over the last several decades through building the rural cooperative structure in
the 1950s, the social contract with banks in the 1960s and the expansion of bank branch
networks in the 1970s and 1980s. These initiatives have paid off in terms of a network of
branches across the country. Yet the extent of financial exclusion is staggering. Out of the
600,000 habitations in the country, only about 30,000 have a commercial bank branch.
Just about 40 per cent of the population across the country has bank accounts, and this

8
ratio is much lower in the north-east of the country. The proportion of people having any
kind of life insurance cover is as low as 10 per cent and proportion having non-life
insurance is an abysmally low 0.6 per cent. People having debit cards comprise only 13
per cent and those having credit cards only a marginal 2 per cent.

The National Sample Survey data reveals that, in 2003, out of the 89.3 million farmer
households in the country, 51 percent did not seek credit from either institutional or non-
institutional sources of any kind. These statistics, staggering as they are, do not convey
the true extent of financial exclusion. Even where bank accounts are claimed to have
been opened, verification has shown that these account are dormant. Few conduct any
banking transactions and even fewer receive any credit. Millions of people across the
country are thereby denied the opportunity to harness their earning capacity and
entrepreneurial talent, and are condemned to marginalization and poverty.

Who are excluded?

Landless
Labourer
Migrants

Senior Ethnic
citizens Minorities

Women
Self
Employed
Financiall
y
Marginal excluded Socially
Farmers Excluded
Groups

Unorganized
Urban Slum
Sector
Dwellers
Enterprises

9
 Poor infrastructure and
physical access act as
deterrent.

From the supply side,

distance from branch,

From the demand side, Why this branch timings,

lack of awareness, low Financial cumbersome

incomes / assets, social documentation and

Exclusion?
exclusion, illiteracy act procedures, language

as barriers. are common reasons for

exclusion.

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

Causes of financial exclusion:

The exclusion of large numbers of the rural population from the formal banking sector
may be for several reasons from the supply side, such as:

• Persons are unbankable in the evaluation/perception of bankers,

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

• The person is bankable on a credit appraisal approach but distances are too long
for servicing and supporting the accounts and expanding branch network is not
feasible and viable,

10
 • High transaction costs particularly in dealing with a large number of small
accounts,

• Lack of collateral security,

• Inability to evaluate and monitor cash flow cycles and repayment capacities due
to information asymmetry, lack of data base and absence of credit history of
people with small means,

• Human resources related constraints both in terms of inadequacy of manpower

and lack of proper orientation/expertise,

• Adverse security situation prevailing in some parts of rural India,

• Inadequacy of extension services which is crucial to improve the production

efficiency of the farmers leading to better loan repayments.

From the demand side, there are several reasons for the rural poor remaining excluded
from the formal banking sector, such as:

• High transaction costs at the client level due to expenses such as travel costs,
wage losses, incidental expenses,

• Documentation,

• Lack of awareness,

• Lack of social capital,

• no availability of ideal products,

• Very small volumes / size of transactions which are not encouraged by formal
banking institutions,

• Hassles related to documentation and procedures in the formal system,

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

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

Consequences of financial exclusion:

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

the most disadvantaged groups and communities and, as a result, contributes to a much
wider problem of social exclusion. Broadly, the issue of cost of financial exclusion may
be conceived from two angles, which are intertwined.

• First, the exclusion may have cost for individuals/entities in terms of loss of
opportunities to grow in the absence of access to finance or credit.

• Also, financial exclusion leads to higher charges for basic financial transactions
like money transfer and expensive credit, besides all round impediments in basic/
minimum transactions involved in earning livelihood and day to day living.

• It could also lead to denial of access to better products or services that may
require a bank account.

• It exposes the individual to the inherent risk in holding and storing money –
operating solely on a cash basis increases vulnerability to loss or theft.

• Individuals/families could get trapped into a cycle of poverty and exclusion and
turn to high cost credit from moneylenders, resulting in greater financial strain
and unmanageable debt.

• Second, from the societal or the national perspective, exclusion may lead to
aggregate loss of output or welfare and the country may not realize its growth
potential.

• At the wider level of the society and the nation, financial exclusion leads to social
exclusion, poverty as well as all the other associated economic and social

12
 problems. Thus, financial exclusion is often a symptom as well as a cause of
poverty.

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

among the most disadvantaged groups and communities and, as a result,
contributes to a much wider problem of social exclusion.

• The more tangible outcomes of financial exclusion include cost and security
issues in managing cash flow and payments, compromised standard of living
resulting from lack of access to short-term credit, higher costs associated with
using informal credit, increased exposure to unethical, predatory and unregulated
providers, vulnerability to uninsured risks, and long-term or extended dependence
on welfare as opposed to savings (Chant Link and Associates, 2004).

13
 Chapter II

Financial Inclusion – Defined

Chapter III
By financial inclusion, we mean delivery of banking services and credit at an affordable cost
to the vast sections of disadvantaged and low income groups. The various financial services
include savings, loans, insurance, payments, remittance facilities and financial counseling /
advisory services by the formal financial system. An open and efficient society is always
characterized by the unrestrained access to public goods and services. As banking services
are in the nature of public goods, financial inclusion should therefore be viewed as
availability of banking and payment services to the entire population without discrimination
of any type.

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

• Through state-driven intervention by way of statutory enactments

• Through voluntary effort by the banking community itself for evolving various strategies
to bring within the ambit of the banking sector the large strata of society.

In India the focus of the financial inclusion at present is confined to ensure a bare minimum
access to a savings bank account without frills, to all. Internationally, the financial exclusion
has been viewed in a much wider perspective. Having a current account/savings account on
its own, is not regarded as an accurate indicator of financial inclusion. There could be
multiple levels of financial inclusion and exclusion. At one extreme, it is possible to identify
the ‘super-included’, i.e., those customers who are actively and persistently courted by the
financial services industry and who have at their disposal a wide range of financial services
and products. At the other extreme, we may have the financially excluded, who are denied
access to services only for deposits and withdrawals of money. But these persons may have
only restricted access to the financial system, and may not enjoy the flexibility of access
offered to more affluent customers.

14
 Policy initiatives
Initiatives of the Reserve Bank of India

Reserve Bank of India in its annual policy statement of April 2005 recognized the
problem of financial exclusion and has, since then initiated several policies aiming at
promoting financial inclusion. Some of the major initiatives aimed at promotion of
financial inclusion include:

• No Frills Accounts: Taking the view that access to a bank account can be considered
a public good, in 2005, RBI directed all banks to offer at all branches the facility of
‘no frills’ account to any person desirous of opening such an account. These accounts
have ‘nil’ or low minimum balances and charges, and have limited facilities. Since
2005, over 39 million no frills accounts have been opened. However, there are certain
barriers that inhibit the active operation of such accounts like the time and cost
involved in reaching the nearest branch where the accounts have been opened. Hence,
branchless banking has been allowed to ensure that these accounts are more
accessible to their holders.

• Easier Credit facility: Banks were asked to introduce a General Purpose Credit Card
(GCC) facility to be issued by banks without insistence on collateral or purpose, with
a revolving credit limit up to Rs. 25,000. However, total number of GCCs issued by
banks as at end-March, 2009 was only 0.15 million.

• KYC regulations for small value clients and transactions: One significant area,
where it was found that regulation could be a challenge in achieving greater financial
inclusion is in regard to Know Your Customer (KYC) norms. In a country where
most of the low income and poor people do not have any document of identity or
proof of address it is very difficult to have KYC norms that insist on such documents.
At the same time, to ensure integrity of financial transactions, it is necessary that each
customer is properly identified before accounts are opened. In rural areas, this is
addressed by asking for identification by local officials and requiring a photograph of

15
 the account holder. Drives for financial inclusion locally have been achieved through
active involvement of government in the identification process. In big towns and
cities where there are a large number of migrants who do not have any documents,
fulfilling KYC norms and opening a bank account continue to be a challenge. As a
proportional regulatory dispensation having regard to the degree of risk, RBI has
simpler KYC norms for small value accounts where the balances in the account do
not exceed about Rs 50,000 and where the annual credits in the account do not exceed
about Rs 2,00,000. There are similar dispensations for walk-in clients for small
remittances and payments not exceeding Rs 50,000.

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

India (UIDAI) to issue a Unique Identification Number (UID) with biometric
recognition to every resident of the country. It is expected that by latter part of this
year, the UIDAI will begin issuing UIDs and roll out 600 million UIDs in a phased
manner by 2014. UID enrolment would be done with the help of State Government
machinery and other Registrars. Banks could benefit by synchronizing opening of
bank accounts for those who will be enrolled through this exercise. Government is
also looking into the possibility of converting food and fertilizer subsidies into cash
payments which will flow through bank accounts. This project is a unique
opportunity to leverage UID, bank accounts and mobile telephony services. Using
UID for fulfilling KYC for small value accounts will facilitate financial inclusion. In
a country with deep penetration of mobile phones, this is expected to give a boost to
the financial inclusion while ensuring the integrity of financial transactions.

• 100% Financial Inclusion Drive: The Reserve Bank launched a financial inclusion
drive targeting one district in each state for 100% financial inclusion. In the light of
the experience gained, coverage has been extended to other areas/districts. For the
purpose, external evaluation of the quality of 100% financial inclusion reported by
banks was carried out.

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

region and prepare an appropriate State-specific monitorable action plan RBI has set
up a Committee on financial sector plan for the North-eastern region headed by

16
 Deputy Governor of Reserve Bank of India, with members from financial institutions
and banks, State Government from the North-Eastern states and academics.

• Use of ICT Solutions for Enhancing Outreach of Banks: The Reserve Bank has
been encouraging the use of ICT solutions by banks for enhancing their outreach with
the help of their Business Correspondents (BCs). The BCs carry hand-held devices,
which are essentially smart card readers. The information captured is transmitted to a
central server where the accounts are maintained. These devices are used for making
payments to rural customers and receiving cash from them at their doorsteps.

Mobile phones have also been developed to serve as card readers. Account holders
are issued smart cards, which have their photographs and finger impressions. Certain
banks have been using this technology in Andhra Pradesh, Karnataka and
Maharashtra. Pilot studies have also been carried out in Mizoram and Uttarakhand.

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

major factor for financial exclusion; Reserve Bank is taking a number of measures for
increasing financial literacy and credit counseling. A multilingual website in 13
Indian languages on all matters concerning banking and the common person has been
launched by the Reserve Bank on 18 June 2007. Comic type books introducing
banking to schoolchildren have already been put on the website. Similar books are
being prepared for different target groups such as rural households, urban poor,
defense personnel, women and small entrepreneurs. Financial literacy programs are
being launched in each State with the active involvement of the State government and
the SLBC. Each SLBC convener has been asked to set up a credit-counseling centre
in one district as a pilot and extend it to all other districts in due course. A Centre for
Financial Education & Excellence is proposed to be set up in RBI's College of
Agricultural Banking at Pune.

• EBT through Banks: The Reserve Bank is in consultation with state governments to
encourage them to adopt Electronic Benefit Transfer (EBT) by banks.

• Mandated priority sector lending: Priority sectors broadly include agriculture and
allied activities, micro and small enterprises, education, housing and micro-credit. All

17
 domestic commercial banks are required to allocate 40 per cent of their lending to the
priority sectors. For foreign banks, the requirement is 32 per cent and export credit is
also included in their case. Credit extended by banks to SHGs, micro finance
institutions, to NBFCs for on-lending to priority sector, and to regional rural banks
for agriculture and allied activities has been included in the definition of priority
sector. Investments made by banks in securitized assets, representing loans to various
categories of priority sector which are originated by banks and financial institutions,
are also included in priority sector. A bank can also purchase priority sector lending
from another bank though participatory notes. Any shortfall in priority sector lending
is required to be deposited in special funds maintained by NABARD/SIBDI/NHB,
which are used for funding rural infrastructure/micro-enterprises/housing sectors. As
on March 31, 2009, the coverage under priority sector was to the tune of 51 million
loan accounts. While it could be argued that mandated credit distorts allocative
efficiency of the banking system, I would like to emphasise that no subvention is
involved as interest rates are deregulated and all the usual prudential norms for
income recognition, asset classification and provisioning, as also standard risk
weights are applicable, which ensures that such loans do not add undue risk to the
bank’s balance sheet.

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

the current laws in India, every bank requires a license from RBI for opening a
branch. This legal requirement has been used as a regulatory tool for furthering
financial inclusion. Statutory approvals for branch licenses in more lucrative centres
are linked to the number of branches opened in under -banked districts and States, as
also other factors such as fulfilling priority sector obligations, offering no frills
accounts and other parameters to gauge achievements in financial inclusion and in
customer service.

• Unbanked villages having population more than 2000: In order to push up the
inclusion process Reserve Bank has set the time limit of March 2012 for the banks to
reach out in any mode i.e. brick & mortar or ICT mode to the unbanked villages
having population more than 2000. The sub-committees at District level have

18
 identified such villages and in the State of Punjab 1581 such villages have been
identified. These villages have been allotted to the banks and banks have already got
them Board approved Financial Inclusion planes for the roll outs in those villages.
ICT is considered the key and driven for reaching out into these villages.

• Lead bank scheme: One of the major initiatives taken by Reserve Bank of India to
fulfill the credit needs of rural sector of the economy, particularly agriculture, small-
scale industry and services sectors remained virtually neglected. The study group
which was presided over by Prof. DR Gadgil recommended in Oct.’69 the adoption
of an “Area approach” for the development of credit and banking in the country on
the basis of local conditions. The Scheme emphasized making specific banks in each
district the key instruments of local development by entrusting them with the
responsibility of locating growth centers, assessing deposit potential, identifying
credit gaps and evolving a co-ordinate approach to credit deployment in each district,
in concert with other banks and credit agencies.

• In 1989, the Service Area Approach (SAA) was adopted wherein service area villages
were identified and assigned to bank branches based on their proximity and contiguity
and by adopting a cluster approach. Credit plans were prepared on an annual basis for
the service area of each branch which involved co-ordination between the various
developmental agencies and credit institutions. Due to allotment of villages to
designated bank branches, the activities of the ‘service area branches’ were restricted
to the allotted villages and they were unable to provide financial assistance outside
their service areas, despite being in a position to do so. Similarly, borrowers
belonging to these villages were required to approach the ‘designated bank branches’
for their credit needs and were not in a position to avail of services of any other bank
branches, irrespective of whether they were satisfied with the services provided by
the designated bank branches or not. When bankers do not give the desired attention
to certain areas, the regulators have to step in to remedy the situation. This is the
reason why the Reserve bank Of India is placing a lot of emphasis on Financial
Inclusion.

19
 • Reserve Bank has created the funds i.e. Financial Inclusion Fund (FIF) and Financial
Inclusion Technology Funds (FITF) with NABARD with the purpose of helping the
banks of adoption/implementation of Technology in the inclusion process.

Initiatives of NABARD

• Allowing banks to open accounts for Self Help Groups

An important regulatory dispensation that facilitated financial inclusion was given in the
early 90s, when banks were allowed to open savings accounts for Self Help Groups
(SHGs), which were neither registered nor regulated. An SHG is a group of 15 to 20
members from very low income families, usually women, which mobilises savings from
members and uses the pooled funds to give loans to those members who need them, with
the interest rates on deposits and loans being determined entirely by members. National
Bank for Agriculture and Rural Development (NABARD) launched the SHG–Bank
Linkage Program in 1992 to forge the synergies between formal financial system and
informal sectors. Under this programme, banks provide loans to the SHGs against group
guarantee and the quantum of loan could be several times the deposits placed by such
SHGs with the banks. The recovery rates of such loans have been good and banks have
found that the transaction cost of reaching the poor through SHGs is considerably lower
as such cost is borne by the SHG rather than the bank. Interest earned from group
members is retained in the group. The penetration achieved through SHGs has been very
significant. As per NABARD’s report on status of microfinance (2008-09), about 86
million poor households are covered under the SHG-Bank Linkage program with over
6.1 million saving-linked SHGs and 4.2 million credit-linked SHGs as on March 31,
2009. The initial phase of SHG movement saw concentration of SHGs in the southern
parts of the country, but now the SHGs have spread more to the eastern and north eastern
regions where the extent of financial exclusion is greater. The Government of India has
also been using the SHGs for subsidy linked credit schemes for the poor. NABARD
offers grant assistance to NGOs that promote SHGs and link them to banks.

20
 Other institutions

• Micro Finance Institutions (MFIs)

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

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

• A society registered under the Societies Registration Act, 1860,

• A trust created under the Indian Trust Act,1880 or public trust registered under
any State enactment governing trust or public, religious or charitable purposes,

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

under any State enactment relating to such societies or any multistate cooperative
society registered under the Multi State Cooperative Societies Act, 2002 but not
including:

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

Regulation Act, 1949 or

 a cooperative society engaged in agricultural operations or industrial

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

• MFIs could play a significant role in facilitating inclusion, as they are uniquely
positioned in reaching out to the rural poor. Many of them operate in a limited
geographical area, have a greater understanding of the issues specific to the rural
poor, enjoy greater acceptability amongst the rural poor and have flexibility in
operations providing a level of comfort to their clientele.

• There are several legal forms of MFIs. However, firm data regarding the number
of MFIs operating under different forms is not available. It is roughly estimated
that there are about 1,000 NGO-MFIs and more than 20 Company MFIs.

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

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

21
 taken to finance intermediation for providing financial services to their target
clients adopting innovative delivery approaches.

Chapter IV

IT enabled Financial Inclusion

Financial inclusion is the key driver of an inclusive society and an inclusive economy.
Over the years, multiple definitions of Financial Inclusion have been given including the
one given by Rangarajan Committee on Financial Inclusion (2008). To define e-Financial
Inclusion, one could extrapolate the above and state as innovative applications of ICT for
delivery of financial & payment services and adequate credit where needed, at an
affordable cost to the vast section of disadvantaged and low-income groups, who
currently are unbanked.

To be able to ensure that the challenges of banking the unbanked are met effectively and
converted into growing and sustainable business for banks, there is no alternative to
adoption of ICT solutions on a very large scale and range. ICT solutions are required to
capture customer details, facilitate unique identification, ensure reliable and uninterrupted
connectivity to remote areas and across multiple channels of delivery, offer multiple
financial products (banking, insurance, capital market) through same delivery channel
while ensuring consumer protection, develop comprehensive and reliable credit
information system so essential for efficient credit delivery and credit pricing, develop

22
 appropriate products tailored to local needs and segments, provide customer education
and counseling , enable use of multimedia and multi -language for dissemination of
information and advice.

Branchless banking

With 600,000 villages in the country, it was impossible to provide access to a bank
account for every household through branch banking. At the same time, electronic
banking for such a populace where cash forms the dominant payment mechanism, is
unlikely to become a reality for quite some time. Keeping in view these ground realities,
RBI issued the business correspondent guidelines in 2006, which paved the way for
branchless banking through agents. The guidelines allowed, for the first time, commercial
banks to offer simple savings loan and remittance products through agents, who were
allowed to undertake banking transactions, including ‘cash in cash out’ transactions at
locations close to the customer. Banks were advised as part of risk management to adopt
ICT solutions including biometric identification of the customer. The agents are required
to deposit bank’s cash balances beyond certain limits with the bank’s branches by end of
day or the next day. Initially, the regulations restricted the entities that could act as
business correspondents to “not for profit” entities such as NGOs/ cooperatives / post
offices etc. This was because we were concerned about the risk of reckless pushing of
products by agents whose sole incentive was earning commission; it was also felt that
local community based organisations and NGOs had the trust and confidence of the local
population. Over the last few years, the list of persons who can be appointed as business
correspondents has been relaxed to include individuals such as retired government
officials , school teachers, defence personnel as also “for profit” local “mom and pop”
shops, petrol pump/public call office operators etc entities that usually deal in cash in the
villages. Another regulatory requirement was that the business correspondents appointed
for direct contact with the customers should be within 30 km from a designated base
branch of the bank to ensure proper oversight of such agents and minimise agency risk.
The distance criteria can be increased in consultation with the district consultative
committee, a forum for bankers and government officials that meets each quarter.
Initially there was a restriction on the bank in recovering any charge from the customer

23
 for such doorstep service as it was expected that the savings in cost of setting up a branch
would be sufficient incentive. Branchless banking illustrates an area where there have
been progressive relaxations of the regulations for furthering penetration while ensuring
consumer protection.

Banking Correspondent/ Facilitator model

In January 2006, the Reserve Bank of India issued a new set of guidelines allowing banks
to employ two categories of intermediaries- Business Correspondents (BCs) and Business
facilitators (BFs) - to expand their outreach. BCs are permitted to carry out transactions
on behalf of the bank as agents. The BFs can refer clients, pursue the clients’ proposal
and facilitate the bank to carry out its transactions, but do not transact on behalf of the
bank. These intermediaries can be NGOs, SHGs, MFIs, community based organizations,
IT enabled rural outlets of corporate entities, post offices, insurance agents, well
functioning panchayats, Village knowledge centers, agri clinics/agri business centers,
krishi vigyan kendras and other Civil Society Organizations that provides financial and
banking services through the use of business facilitator and correspondent models.
Services provided by these intermediaries are:

• Collection and preliminary processing of loan applications including verification

of primary information/ data.

• Identification of borrowers and fitment of activities

• Creating awareness about savings and other products and e3ducation and advice
on managing money and debt counseling

• Processing and submission of applications to banks

• Promotion and nurturing Self help groups/Joint Liability Groups

• Post-sanction monitoring

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

groups and others

24
 • Follow-up for recover

It’s a big challenge to provide banking facilities closer to the customer, especially in
remote and unbanked areas, while keeping transaction costs low. And for the purpose, IT
enabled services are introduced and pilot projects are initiated utilizing smart
cards/mobile technology to increase their outreach. Accordingly banks are urged to scale
up IT initiatives for financial inclusion speedily while ensuring that solutions are highly
secure, amenable to audit, and follow widely-accepted open standards to ensure eventual
inter-operability among the different systems.

ICT and financial inclusion

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

many fields to improve the efficiency, reliability and ease of operation. One of the sectors
where ICTs are being used extensively is banking. They are widely used in the form of
mobiles, ATMs, intelligent core banking systems and so on. Before going into those
details let us look at the Indian scenario. India has a large section of society which is very
traditional and people have the habit of saving money. In most cases they use to save the
money in their house itself. And the cash transfer takes place personally by hand to hand.
So there is a need for proper banking facilities to manage the money and make cash
transactions at affordable price.

25
 Very difficult to
access, costly and
Banks which time
Customer who
provide financial need financial
services services

Uses technology to Low cost and easy

access data from to access
the banks

ICTs which
enable the
financial
inclusion

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

low-income population. In recent years, this sector has also caught the attention of
commercially oriented businesses- given the significant market opportunity at the base of
the pyramid, which help in the betterment of our citizens. Microfinance and Information
and Communication Technology (ICT), in their own right, can be argued to have a lasting
impact on the social and economic order. However, to have an even more profound
impact, these different approaches to orchestrating change- social and economic- will
have to integrate and collaborate, in a way that ensures actualizing of a more holistic
development framework that beat leverages the respective strengths of both microfinance
and ICT.

The objective of leveraging ICT for microfinance delivery geared towards actualizing
specific projects that are cost effective, productive enhancing and sustainability sensitive.
Specific technology concepts that have been proven to have tremendous impact in other
industries- such as modular IT architecture design, standardization approach and
outsourcing- therefore need to be evaluated in the microfinance context. Known ICT
concepts and approaches, when applied in the manner outlined above. Establish the fact
that skill-sets and approaches required by the IT industry to service other sectors are

26
 equally applicable and relevant to the social sector in general and microfinance in
particular. This, when coupled with the sizing of the microfinance opportunity, will make
a compelling business case for the IT industry. Further, it will encourage IT firms to
provide impactful solutions geared towards meeting challenges and opportunities of the
microfinance sector.

The ICT Paradigm

With renewed interest in reaching out to financially excluded market segments and the
role that technology is proven to be capable of playing in addressing business
productivity, cost efficiency and risk management issues, it is not surprising that ICT is
being looked upon as an extremely viable option to circumvent the all too evident
problems that have traditionally inhibited meaningful intervention in the area of
microfinance. All of this makes the subject of microfinance and ICT application quite
central to the poverty reduction and financial inclusion agenda, irrespective of whether
one is microfinance or an ICT.

Key Challenges in ICT Adoption

Introducing ICT however comes with its own set of challenges. Apart from more
technical aspects (such as choosing an ideal and standardized technology solution,
developing an awareness about technology usage, handling new technology devices,
ensuring proper maintenance and servicing, etc.), that MFIs will have to struggle with
other issues that are more people oriented and less related to technology per say. From
handholding of employees at various levels, to working through the cost constraints in
making technology investments that make a tangible difference to operational and
profitability paradigms, to developing a mindset of embracing changes that it may bring
out in processes and 14 day to day working, ICT adoption has to grapple with many
softer issues, like challenges of awareness, politics, access, relevancy, meaningful in use,
sustainability and coordination.

Delivery Channels

27
 The most important aspect of inclusiveness is the delivery channel. So it is essential to
develop multiple delivery channels that leverage locational presence as well as direct and
indirect modes of outreach. Not all interventions will, however, be relevant from the
beginning, and as pointed out earlier as well, investing in relevant field technologies will
have to go in tandem with the larger business considerations, and operational issues that
these technologies aim to resolve.

Providing financial services to less privileged is costly, in part, because they transact in
small amounts of money, often live in sparsely populated areas, and rarely have
documented credit histories. Mobile Banking can actually be one key element in
addressing this challenge, especially in the rather unique paradigm that most developing
economies face in dealing with a “cash-only transaction”. It can play an important role in
payment products, and when coupled with prepaid cards, can also facilitate in making
microcredit disbursements and repayments efficient and cost effective. When coupled
with other parallel developmental schemes catering to the same population, channel can
be further leveraged to reach out to the relevant set of people. Specifically talking about
the use of mobile phones as a financial services delivery channel, Mobile Banking and
Commerce has actually gained increasing acceptance amongst various sections of the
society in previous years. The reasons for its growth can be traced back to technological
and demographical developments that have influenced many aspects of the socio-cultural
behaviour in today’s world. Further, fast, secure and user-friendly mobile
telecommunication technologies are critical towards realizing commercial viability goals,
through the use of this alternative delivery channel for microfinance.

Challenges in the Smart Card Based Solution for Financial Inclusion

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

• There is lack of standardization of the solution across the industry

• A central agency that ensures that standards are complied with.

28
 o Test and certify the smart cards and bank

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

store and in transit.

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

• Aggregate banking industry demand for all technology components of the

financial inclusion solution such as bank cards, bank terminals and the
intermediate or backend servers.

• Develop an industry wide security management framework (the key management

system) and maintain the necessary infrastructure for its operation. Training and
hand holding the banks in financial inclusion implementation.

To overcome these issues following remedial actions has been taken:

Standardization

The IBA-IDRBT Committee on Open Standards for Financial Inclusion is addressing the
following aspects relating to standards:

• The card numbering scheme

• The smart card data architecture

• The business correspondent card data architecture

• The terminal functionality

• Key management scheme

Card numbering scheme

There is necessity for a uniform card number for financial inclusion bank cards across the
industry. Normal debit/credit cards use the card number to route the cardholder server.

29
 Hence the bank terminal/ATM and the backend switch need to identify the card presented
using the card number to get authorization for the banking transaction from the host
server. The scheme to be followed as under:

Length of the card number: 19 digits

• 9- national scheme

• 356- country code

• XXXX- bank identification number

• XXXXX- branch code

• XXXXX- account number

• X- checksum

The bank identification number (BIN) will be issued by a central agency. In case a
particular branch has more than a 1 lakh customer’s bank may opt for additional BIN.

The other important aspects relating to standards of the financial inclusion are smart card
hardware, smart card data architecture, business correspondent card, terminal
functionality specifications (hardware and software) and smart card securities.

Demand aggregation and economies of scale

There is need for a central agency to assist banks in the technology and business aspects
of the financial inclusion implementation. The central agency will aggregate demand for
the banking industry for all technology components of the implementation including
smart cards and handheld bank terminals. This will enable the industry to exploit
economies of scale. The central agency will make available to banks sample request for
proposal templates, acceptable maximum pricing of technology components and empanel
equipment suppliers and solution providers. The agency will support the industry by
drawing up and making available sample service level agreements that will assure quality
of service as well as end-to-end securities.

30
 Quality assurance

Card manufacturing facilities need to be audited for assuring quality standards. Regular
audit needs to be undertaken to ensure data security standards are followed in storage and
transport of bank cards and terminals.

De-duplicate services

The central agency may provide de-duplication services to banks in order to remove
ghost customers from the system. Ghost customers are those who operate more than one
account to avail of government benefits several times. De-duplication is a method that
goes through all the biometric fingerprints in the system systematically and identifies
customers who get benefits from government scheme such as pension/wages several
times. This reduces fraud considerably.

31
 Chapter V

Progress in ICT based FI in Punjab

Second phase of 100% financial inclusion

After the completion of first phase of 100% financial inclusion by providing basic
banking services to all rural households in the state of Punjab by either opening of
deposit accounts including under general credit card scheme, banks have started rolling
out their ICT driven Business Correspondent Model in the State. It has not attained this
scale, only plots have been rolled out.

Some of the banks like PNB, OBC and SBI have initiated the process of providing Bio
Metric cards in identified villages and the summary of the latest progress is given below:

Punjab National Bank- Rural

Sr. no. Particulars PNB (Fatehgarh PNB(Taran PNB(Muktsar)

Sahib) Tarn)

1. Number of villages 15 30 13
covered

2. Number of households 4450 10358 7167

in these villages

3. Number of accounts 5270 4495 4953

opened

4. Amount of deposit Rs. 1054871 Rs. 13311 Rs. 22494

collected

5. Number of Bio Metric 5018 1024 2257

32
 cards issued

6. Whether transaction in Yes Yes Yes

Bio Metric Card started

7. If yes to 6 above. Debit 6292 Debit 27 Debit 352

Number of transactions Credit 33816 Credit 145 Credit 610
held

State Bank of Patiala and Oriental Bank of Commerce- Rural

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

1. Number of villages covered 8 13

2. Number of households in these 2500 2117

villages

3. Number of accounts opened 1333 1431

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

5. Number of Bio Metric cards 864 1182

issued

6. Whether transaction in Bio Yes Yes

Metric Card started

7. If yes to 6 above. Number of Debit 577 Debit 3452

transactions held Credit 1146 Credit 2321

State Bank of India

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

33
 1. Number of villages 155 40
covered

2. Number of households 8159 9719

in these villages

3. Number of accounts 8167 16759

opened

4. Amount of deposit Rs. 127474 Rs. 1096187

collected

5. Number of Bio Metric 4600 6557

cards issued

6. Whether transaction in Yes Yes

Bio Metric Card started

7. If yes to 6 above. Debit 47 Debit 4784

Number of transactions Credit 96 Credit 5784
held

The SBI has also started implementation of IT enabled BC BF model in some other
district of Punjab. The brief of the same is as follows:

District Enrollment of accounts Number of biometric cards issued

Hoshiarpur 3400 1334

Amritsar 3200 780

Taran tarn 3226 340

Kapurthala 274 56

Fatehgarh Sahib 4678 0

Ferozpur 7656 0

Mohali 487 0

34
 Ropar 45 0

Jalandhar 23 0

Moga 126 0

Oriental Bank of Commerce has also started implementing BC BF model for payments
under NREGA in Amritsar district and the progress is summarized below:

Number of villages covered 768

Total number of beneficiaries 78935

Number of beneficiaries enrolled 76246

Accounts opened 75425

Cards issued 56472

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

Sr. no Particulars (Ludhiana) Urban

1. Number of kiosk established 2

2. Number of accounts opened 5199

3. Number of ID cards issued 4384

4. Amount deposit collected Rs. 405024

5. Number of transactions Debit 338

Credit 841

It is a non smart card based project where the account holders would be issued ID cards
for identification and the bio metrics of the customer would be captured in the system.

(source…SLBC, Punjab)

35
 Chapter VI

Survey
Objective

The main purpose of the survey was to get information about the business correspondent
model, it’s working and how the inclusive process is carried out and what makes it a
favourite choice to reach out to the unbanked villages without going for brick and mortar
structures. The special focus of the study was on the field work of business correspondent
i.e how the various transactions are being done to provide door to door banking facility
through biometric smart cards. Another objective of the study was to conduct a survey
among the people of rural area availing these services and their opinion regarding
banking facilities provided to them.

36
 I was asked to study the BC model of Oriental Bank of Commerce rolled out in district
Amritsar with technical collaboration with FINO (financial information network and
operation). The BC is actively engaged in making payments to NREGA beneficiaries i.e.
The National Rural Employment Guarantee Act (NREGA) that aims at enhancing the
livelihood security of the people in rural areas by guaranteeing hundred days of wage
employment in a financial year, to a rural household whose members volunteer to do
unskilled manual work. The daily wages of the NREGA beneficiaries in block
Chowgawan is Rs. 123 per day.

Overview of the model

FINO is the technology partner for OBC in district Amritsar. FINO provides end-to-end
core banking technology solutions including smart cards to microfinance partners, banks
and Non-Governmental Organisations (NGO) involved in serving low-income
households in the urban and rural regions in India as business correspondents of large
institutions. It serves the unbanked sector and also services the technology requirements
of entities engaged in servicing the bottom of pyramid customers. One of the biggest
challenges in the micro banking industry is the huge amount of paperwork and human
effort traditionally involved in supporting micro-transactions and credit scoring potential
customers. Other hurdles include Information gap, accessibility and reach, infrastructure,
illiterate populace & fool proof identity. High costs coupled with low returns did not
make microfinance viable beyond a certain threshold, thus hampering growth. The
concept of FINO was germinated to overcome all the above mentioned hurdles and make
financial services available to the unbanked. FINO act as a business correspondent that
covers various regions in blocks for the purpose of providing banking facilities to the
rural population.

I conducted the study in Chogawan block of district Amritsar. The branch of Oriental
Bank of Commerce in association with FINO in block Chogawan covers around 113
gram panchayat i.e 108 villages. They have enrolled around 8500 NREGA beneficiaries
by issuing biometric smart cards for the payment of wages. After enrollment of the

37
 beneficiaries, the main purpose of the BC is the disbursement of the funds to the
beneficiaries at door step whenever required by them.

Enrollment of the beneficiary

FINO ensures that announcements for enrollment were made in Gurudwara / panchayat
well on time so that adequate numbers of persons gather on the day of enrollment.

On the enrollment day the Block Supervisor (FINO) organizes an area for verification of
KYC. After a worker-customer is found KYC compliant he is moved to the enrollment
area. Though the field staff of FINO is trained to complete the process whenever it is
possible the branch manager from OBC also accompanies him.

FINO gathers all ten fingerprints, photo, signature and other details so that smart cards
and bank accounts can be opened in the name of each beneficiary. This process is known
as “enrollment”. Enrollment is performed by the sub agents of FINO who gather client
details using a laptop with fingerprint reader, digital camera and signature reader with full
power backup facility.

Smart Cards

There are two cards. One, customer card and two, BC card. Agent has a mapping card
and completes the login process through the handheld device. Then the machine
downloads the customer database of the agent. Thereafter, the operations i.e. enrollment,
normal operations etc happen. The finger print reader authenticates the card holder and if
biometric data matches, transaction is authorized. This eliminates chance of fraud /
skimming

The customer card is a biometric card that works on the finger prints. It stores customer
ID, signature for verification, and has 10 pockets for various products. A customer can
put through a transaction and get a receipt. He can get history of transactions upto last 10

38
 transactions. Since Fax roll is used and the print does not last, when required he can
request for normal transaction. From the base-branch of OBC he can get a pass book also.

Sub-agents

The sub-agents employed by FINO were ex-servicemen, teachers, local graduates, Ex-
OBC staff, Kirana shopkeepers etc. In order to have some sort of control over the sub-
agents, he is required to give a Fixed Deposit on his name for Rs 5,000/- as a security
deposit to FINO. The cash in transit is secured through the cover of ICICI Lombard. The
other controls are through machine. The machine stops working if the accounts are not
squared up at the end of the day. Not more than 200 transactions and 4 transactions per
customer per day can be put through.

Steps in enrollment process:

a. The Business Correspondent (BC) receives list of beneficiaries to enroll for the
benefit scheme from the Block Development Office.

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

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

Officer and/or the Village Panchayat Sarpanch. Beneficiaries are enrolled based
on KYC norms i.e. on verification of the Job Cards, Ration card or voter ID.

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

and other details of the beneficiaries are captured.

e. The soft copy of the information and the enrollment ID is sent to the head office
of the FINO in Mumbai. They verify the various details and give account number
to each ID.

f. The head office sends this account number and soft copy of the information to the
concerned bank and hard copy to the FINO i.e smart card with specially designed
chip containing beneficiary’s information and 10 fingerprints. But the card is
activated only after approval of the bank.

39
 g. Bank matches the job card number and other information for the validity and
activates the smart card only in case if it completes the KYC norms.

h. This whole process takes around 3 weeks and smart card is physically handed
over to the beneficiaries by the village coordinator of the business correspondent.

BC receives list of Enrollment

BC organizes visit
beneficiary from process starts in
to the enrollment
the BDO the presence of
location
BDO or sarpanch

Head quarter
checks the Send softcopy of
Fingerprint
completeness of filled enrollment
acceptability
the application and applications to BC
passes
fingerprint head quarter
acceptability

Card packaged
Personalization of and dispatched by
smart card head quarter

Send beneficiary
Card handed to
data to bank for
beneficiary by BC
account opening
official
or smart card
activation
Enrollment
process is
completed

40
 Enrollment process

Transaction process

The account of the beneficiary is uploaded with the amount on daily basis. This is done
by uploading the credit transaction file of concerned bank i.e OBC to the FINO server
which then further uploads the beneficiary’s account with money. When there is need of
any transaction, agents of the business correspondent visit the locations for the
disbursement of the funds. They need to visit the village ones in a week but more than
one visit is also possible in case of beneficiary’s demand. All the agents have their port of
transaction device through which all the transactions are done. There are around 70 such
devices in rural Amritsar out of which 11 are in Chogawan block.

Further steps involved in transaction are:

a. Agent of the business correspondent after reaching the location initiates begin of
day (BOD) by authenticating himself. Authentication is done by using their smart
card containing their personal information and 10 fingerprints in the chip. Agents
insert the smart card in the device which further asks for any of the 10 fingerprint
for authentication. If authentication fails, no further transactions can be permitted.

b. Once the agent’s smart card is authenticated, the beneficiary will be asked to
provide his/ her smart card for authentication purposes. The authentication
consists of a photo match as well as finger-print match using the biometric finger-
print scanner. If any of the above fails, the transaction is rejected, and the
beneficiary will be provided with a transaction advice including the reasons for
transaction failure.

41
 c. On authentication of the customer, the amount is deducted from the account of the
beneficiary and paid to him. Agent also prints 2 copies of receipt, one for
customer and another for FINO.

d. After the transactions get over, the settlement of the port is done. This means no
further transaction can be permitted for the day.

e. The data is uploaded on the FINO server and transferred to the concerned bank i.e
OBC. The withdrawal entry to the account holder is done by the bank.

42
 Money is credited
to beneficiary’s
account
Start of
transacti
on

Authentication of the Authenticatio

agent’s smart card n failed
(begin of day)
Transaction
Ok
stops

Authentication of Authenticatio
the beneficiary’s n failed
smart card
Authenticati Print 2 copies of
on transaction receipts
succeeded including transaction
failure
Fingerprint Fingerprint
verification verification
failed
Fingerprint
Print 2 copies of
verification
transaction receipts
succeeded
including transaction
failure
Agent completes
transaction

Agent prints 2
copy of
transaction
receipt

Agent disburses
cash to
beneficiary

End of
transaction

Settlement of port
Transaction process

43
Achievement so far

• OBC have covered 768 villages in district Amritsar to cover NREGA beneficiaries. The
number of accounts opened of the beneficiaries is 75,425 and the cards issued till now are
56,472.

• Maximum attendance for enrolment is ensured by making announcements in Gurudwaras

and Panchayat meetings. Village Sarpanch also helps in ensuring full attendance by
sending his staff / field functionaries / office bearers to beneficiary’s houses.

• BC observed that creating biometric database, taking photographs, and then keying in of
the beneficiary details resulted in slow enrollment process. So, in consultation with OBC
they have devised new simplified application form wherein details are filled up and
during the enrollment process only biometric data is captured and photos taken. The other
details like name etc are digitized / keyed in by the backup office in the evening or next
day at some other location which is fully equipped to complete the enrollment process.
This has helped in speeding up the process for enrollment.

• The BC has put in place fine backup policy. The machines are replaced within 2 hours of
reported breakdown/ malfunctioning. Also the sub agent carries enough of backup
battery power for enrollment so that process is not halted due to erratic power supply.

Field issues

• In rural areas the density of population is low. The retail agent (sub-agent) has to cover
vast areas and the transport cost is prohibitive.

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

• Punjab govt gives details of beneficiaries in handwritten hard copy. So the backend
operations are more.

44
• Bank manager accompanies them only on some occasions. Definitely it makes a big
positive difference when he comes. When he doesn’t it is very difficult to solicit
customers for general financial inclusion.

• Finding sub-agent for BC is very difficult. They have special staff that is exclusively on
the job of finding sub-agents.

• The BCs are required to surrender the cash after 24 hours in the branch and for this they
need to travel long distances thus increasing the cost of operations.

• Villagers who are tied up with BC sometimes want to visit the base branch for
transactions. But his operation is not allowed because under BC setup, transaction is
possible from POT terminal only which is with BC. This operational restriction should
not be there. Account holder should be able to access his account from POS terminal and
base branch also to which he is attached with.
Methodology

Data was collected from same location i.e villages under Chogawan block. Survey was
conducted among people of these villages. The questionnaire consisted of 15 questions.
The main purpose of the survey was to look into various aspect of financial inclusion i.e
information regarding number of accounts, type of accounts, any loan taken from the
bank and reason for the same etc.

Sample size: 60

45
 Results:

population

18, 23%
30, 37%
<2000
2000-4000
32, 40% >4000

Figure 1. Monthly Income

Figure 2. Saving Practices

46
 Figure 3. Number of Accounts

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

47
 Figure 5. Sources of Loans

Figure 6. Smart Card Holders

48
 Figure 7. KCC/GCC/SCC holders

Figure 8. Life Insurance Policy

49
 Figure 9. Monthly bank visits

Findings from the survey:

• Out of surveyed population, 50% of the population is earning less than 2000 per
month, 32% is earning in between 2000-4000 and only 23% is earning more than
4000.

• Saving habits among population with earning more than 4000 per month is found to
be more i.e. above Rs 500 per month. However population with earning in between
2000-4000 per month, they save less than 500 a month.

• From the survey conducted, it was found that 27% of the population is not having
bank account, 56% is having at least 1 bank account and 17% of population is having
2 and more than 2 bank accounts.

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

• Out of 60 households, 44 are having bank accounts and out of these only 6 i.e. 14%
household has availed loan facilities from the banks. However 10 i.e. 22.73% of
households availed loans from the local moneylenders.

50
 • The total number of population having biometric smart cards is 43% and rest of them
i.e. 57% is not having smart cards.

• Out of surveyed population, only 20% is having KCC/GCC/SCC and rest of them
i.e.80% is without these credit cards.

• It is also seen that the population with saving habits, only visit the branch ones in a
month. Others with bank accounts but with no savings rarely visit the branch.

Problems of BCs and rural people:

• Most of the business correspondents face problems during enrollment procedure. The
data they get from the server about job card numbers and other details sometimes
found to be different from the original data with beneficiaries.

• Another major problem for BCs is that instead of using business correspondence
sarpanch of the village enroll the beneficiaries through post office where there is no
need of the presence of individual beneficiary. In such case sarpanch gets advantage
as he can get the money of the individual beneficiary by taking their thumb
impression.

• Rural population rarely trusts on the technological aspects when it comes to money.
So they are hesitant in using smart cards.

• The agents of the business correspondents can exploit or cheat the rural population
easily as most of the people are illiterate and they are not able to understand the
transaction process. Also the transaction slips are in English language which cannot
be understood by them.

• The cost incurred by bank on each card is Rs125 which is personalized by the FINO
main office but the card is activated only after approval of the bank. If the customer is
not fulfilling KYC norms, card remains deactivated and loses are incurred by the
bank.

51
 • Sometimes bank is not able to understand the problems of the rural people as they are
connected by the BCs only. There is rare contact in between the bank and the
population when transaction and the enrollment procedure is done.

Chapter VII
Some suggestions
Changes are good but people resist change. Earlier, it was a difficult target to achieve the
first phase of 100% financial inclusion by providing basic banking facilities. Now new
ICT based solutions are being rolled out for the purposes which are not easily understood
by the rural population and they hesitate in accepting it. Main reason behind this is
illiteracy and no knowledge about the advantages of such initiatives. So is needed to take
some initiative to enhance the financial inclusion in rural areas like:

• First of all it is very important to conduct awareness camps in the interior areas of the
rural population so that they are well informed about the various banking services and
policies made for them by the government. The sarpanch of the village should be
taken into confidence so that he can motivate the people to attend these camps.

• BC can be scaled up as financial literacy delivery route also as they have one to one
interaction with the rural poor. Some structured training modules focusing on
financial literacy aspects can be arranged for BCs for onward dissemination. This will
help in creating one more channel for spreading financial literacy in remote areas
where it is needed the most. This can be additional source of income for the BC and
as such will be more motivated to integrate. They should also be informed about the
ICT initiatives taken by the bank. The responsibility of the whole block should be
under the concerned branch.

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 • In case of savings accounts, the account balance can be stored on the card itself thus
facilitating the BC to conduct transactions on the savings accounts even if the smart
card reader is not connected to the back end server.

• The smart card issued by the BC should be multipurpose financial inclusion card with
GCC/KCC/debit cum credit card on the single card and it should be acceptable across
all ATMs/ merchandise outlets.

• Commissions for BCs need to be high for the initial stages. In order to achieve the
scale govt. beneficiary payments like old age pensions need to be mandatorily routed
through these BCs.

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

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

• The beneficiaries are illiterate people and they can be exploited by the agents. We can
test with speaking POS machines that speak in local language when the transactions
are held.

• There must be some grievance handling system by the branch. There should be visits
of the bank officer to the areas where transaction and enrollment process is done so
that he can look into the problems faced by the customer.

• Support of the state govt / district administration is the key to success of the BC
setup. Gram Panchayats should not be allowed to disburse the physical cash to
beneficiaries because of the skimming / leakage history.

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

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

• More concern should be given to the population with bank accounts but not availing
services out of it by providing them financial assistance on timely basis. The main
reason behind it is that they do not visit branch as the saving habit is nil. They are not

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 aware of the other services like loans, micro insurance etc which can be informed
through these camps.

• Elder people are more reluctant in accepting changes as compare to younger ones. It
is very important to provide knowledge to the rural people when they are at young
age about the banking system and what best they can get by availing banking
services. These should be taught at lower level of schooling when they can be
influenced easily.

• The students who pass out of RSETIs can be trained for becoming BCS/BFS and
initial capital required is made available through bank loan.

• Mobile Banking can play an important role in payment products, and when coupled
with prepaid cards, can also facilitate in making micro credit disbursements and
repayments efficient and cost effective. When coupled with other parallel
developmental schemes catering to the same population, channel can be further
leveraged to reach out to the relevant set of people.

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 QUESTIONNAIRE
o Name:

o Age:

o Sex:

o Monthly income:

o Number of family members:

o Number of earning members:

o Number of accounts:

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

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 o Savings per month in the account:

o Any loan taken from the bank Yes No

o If yes, what was the purpose

o Any smart card and transaction done Yes No

Yes No
o Any debit/credit card/ GCC/ KCC/ SCC and any transaction done

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

o Any debt taken from relatives, money lenders etc: Yes No

o If yes, purpose for which loan was taken:

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

Yes No
o Any life insurance:

List of abbreviations used

ATM Automated Teller Machine

BCs Business Correspondents
BDO Block Development Office
BF Banking Facilitator
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 BIN Bank Identification Number
BOD Begin of Day
CDMA Code Division Multiple Access
DLRC District Level Review Committee
EBT Electronic Benefit Transfer
FI Financial Inclusion
FINO Financial Information Network and Operation
GCC General Credit Card
GSM Global System for Mobile Communication
IBA Indian Bankers Association
ICT Information and Communication Technology
IDRBT Institute for Development and Research in Banking Technology
IT Information Technology
KCC Kissan Credit Card
KYC Know Your Customer
LDCs Least developed countries
MFIs Microfinance Institutions
NABARD National Bank for Agriculture and Rural Development
NBFCs Non Banking Financial Companies
NGO Non Governmental Organization
NHB National Housing Bank
NREGA National Rural Employment Guarantee Act
POS Point of Sale

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 POT Port of Transaction
PSTN Public Switched Telephone Network
R&D Research and Development
RBI Reserve Bank of India
RRBs Regional Rural Banks
RSETI Rural Self Employment Training Institute
SAA Service Area Approach
SCC Service Credit Card
SHG Special Help Group
SIDB Small Industries Development Bank
SLBC State Level Banker’s Committee
UID Unique Identification Number
UIDAI Unique Identification Authority of India
RSETI Rural Self Employment Training Institute

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