Digital Financial Services and Financial Inclusion
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Digital Financial Services and Financial Inclusion byPARAMESWARAN. NPrincipal AdvisorTelecom Regulatory Authority of India (TRAI)
Access to banking services: Status
144.8 m households use banking services in India (58.7% of overall households)
91.4 m households in rural areas use banking services (54.4%)
53.4 m households in urban areas use banking services (67.8%)
A bank branch in India for a population base of about 12,000 persons
bout 102,400 bank branches in the country
a bank branch in rural India for a population base of about 22,000 persons
About 38,000 branches for rural population of 833 m
a bank branch in urban India for a population base of about 6,000 persons
About 64,400 branches for urban population of 377 m
Financial Inclusion: Ensuring access to financial services needed by weaker sections and low-income groups at an affordable cost
To achieve financial inclusion, Reserve Bank of India has advised banks to open basic banking ‘no –frills’ accounts for such target groups.
More than 100 m ‘no-frills’ accounts have already been opened.
As per the anecdotal evidence –
75% of such accounts are lying dormant as low-income households are generally reluctant to access their bank accounts
Banks are not available in their neighborhood (Insufficient reach of banking infrastructure)
visiting the nearest bank branch means not only expenditure on transport but also the loss of a day’s wages.
Impediments to financial Inclusion through traditional banking
There is only one branch to serve a rural population of 22,000.
Demand Side Impediments
poor accessibility of banking services
when accessible, the high costs incurred by households to access such services
Supply Side Impediments
Operating a large number of tiny accounts and micro transactions through bank branches (brick and mortar) is uneconomical.
Opening even a small branch entails costs, and commercial banks may simply find this economically non-viable.
Financial Exclusion – Why did We Fail?
Absence of Banking Technology
Absence of Reach and Coverage
Absence of Viable Delivery MechanismNot having a Business ModelRich have no compassion for poor
Why Are We Talking of Financial Exclusion Now?
Focus on Inclusive Growth
Banking Technology has arrived
Realisation that Poor is bankable
The Indian Way- Multi Agency Approach
Financial Stability and Development Council (FSDC) mandated to focus on Financial Inclusion and Financial Literacy
Financial Sector Regulators including the Reserve Bank committed to FI Mission
Financial Inclusion is a mammoth task- financial services through mainstream financial institutions to 600,000 villages
What has been done so far
ICT based Business Correspondent (BC) Model for low cost door step banking services in remote villages .
Board approved Financial Inclusion Plans (FIPs) of banks for 3 years,
Roadmap to cover villages of above 2000 population
Availability of minimum four banking products through ICT model has been ensured .
Mandatory opening of 25 % of new branches in unbanked rural centers.
Know Your Customer (KYC) documentation requirements significantly simplified for small accounts.
Guidelines for convergence between Electronic Benefit Transfer and FIP have been issued.
For Financial Access and Education Imperatives to succeed…
Collaboration is the key to SuccessGovernments- Central and State ; RBI, IRDA, SEBI, PFRDA, NHB and other regulators ; Banks, Insurance Companies, MFs , other FIs and Intermediaries, Industry Associations ; NGOs and Consumer Organizations ; Global Co-operationEstablishing an appropriate Business Delivery Model through the involvement of all stakeholders is critical to making Financial Inclusion a reality Access to financial services and Financial Education must happen simultaneouslyIt must be continuous and must target all sections of the population simultaneously
What is the solution?
Solution – Technology driven service delivery models
The best candidate amongst such models is mobile banking.
There are about 350 m mobile connections in the rural areas.
A large number of mobile subscribers in rural areas do not have access to banking facilities.
For both the citizens and the banks – transacting through a mobile phone would be about 10 times cheaper than through a bank branch.
Demand side: mobile banking will make banking services affordable and immediately accessible.
Supply side: mobile banking would be cost effective; it would make small value transactions made by low-income citizens economically viable to the banks.
=> Mobile telephone can be leveraged to achieve the goal of financial inclusion.
Goal of Mobile banking –
To enable funds transfer from an account in any bank to any other account in the same or any other bank on a real time basis
Modes of Mobile Banking
Voice Response (IVR)
Short Messaging Service (SMS)
Wireless Access Protocol (WAP)
Stand-alone Mobile Application Clients (Mobile Apps)
Unstructured Supplementary Service Data (USSD)
Using SIM tool Kit (STK)
Comparison of Various Modes of Mobile Banking
S. No.ModeHandset RequirementCost per transactionEase of Provisioning to the subscriber1IVRAny phoneHighThere is no need for separate provisioning for the subscriber to use these modes.2SMSAny phoneMedium3USSDAny phoneMedium4WAPGPRS enabled phoneLowThe TSP is required to enable the services for the subscriber.5Mobile AppsSmart phoneMediumThe subscriber may have to download a client on his phone.6STKPre-programmed phoneMediumThe TSP is required to change/ program the SIM of the subscriber.
IVR, SMS and USSD score high against the yardsticks of ease of provisioning, overall affordability and availability across all mobile handsets.
TRAI has mandated that every access provider shall facilitate the banks to use SMS, USSD and IVR to provide banking services to its customers.
Present Status of Mobile Banking in India
Some banks in India, such as State Bank of India (SBI) and ICICI Bank have already launched mobile banking services through various modes:
SMS, USSD, Mobile App
National Payment Corporation of India (NPCI) has already launched Immediate Payment Service (IMPS), an instant, 24X7, interbank electronic fund transfer service through mobile phones and other channels (Internet or ATM).
Department of Telecommunication (DoT) has allocated a USSD code *99# to
for mobile banking services through the USSD gateway of NPCI and asked the TSPs to connect to it as per the requirement of service in consultation with NPCI.
Regulatory Interventions for facilitating Mobile Banking
TRAI has issued the ‘Mobile Banking (Quality of Service) Regulations.
Every TSP shall facilitate the banks to use SMS, USSD and IVR to provide banking services to its customers.
TRAI has issued a tariff order for USSD-based mobile banking.
Two leading mobile operators have launched m-commerce services.
DBT and Mobile Banking : Tools for Financial Inclusion
DBT : A system of transferring cash benefits directly to the poor
Brings millions of people into the financial system (Financial Inclusion)
Leads to better targeting of beneficiaries
Mobile Banking: Use of a mobile phone to carry out banking transactions
Cuts down the cost of transaction (Facilitates under-banked citizens)
Makes small value transactions made by low-income citizens economically viable to the banks
With the facility of mobile banking at the disposal of rural masses, they would be inclined to save and eventually use all financial products relevant to them
Government’s Jan Dhan Yojana scheme155.8 m bank accounts have been opened under the Pradhan Mantri Jan Dhan Yojana (PMJDY) covering 99.74 per cent of households Guinness Book of World Records has recognised the achievements made under PMJDY.In its citation, the Guinness Book said: "Most bank accounts opened in one week as part of the Financial Inclusion Campaign is 18,096,130 and was achieved by the Department of Financial Services, Government of India from August 23 to 29, 2014."
Challenges Ahead & Future Action
Expectations are huge
Perceived more as an obligation than a business opportunity
Physical capacity of banks including RRBs need to be enhanced
Delivery Model - right mix of low cost Brick and Mortar Structures & BCs
Need for Intermediate Structure
Appropriate Business Model for FI activity for Banks, Technology Providers and BCs