The Project “Financial Inclusive Banking – Leveraging Technology as a value proposition” takes a close look into the operational aspects and business model of Financial Inclusive Banking – in India. It describes in detail the various technological innovations that help in furthering financial inclusion in India. The Report also presents alternative solutions to overcome the barriers faced in the implementation of currently used technologies. It highlights how Financial Inclusion is being used in India by concerned players and stakeholders as a tool of poverty eradication. The Project begins with a discussion about the scenario of Indian and Global banking penetration. The Project then describes the main concept – Financial Inclusion. It presents a background and vision of Financial Inclusion and also highlights the initiatives taken by the Reserve Bank of India in furthering Financial Inclusion in the country. The various Financial Institutions involved in Financial Inclusive Banking have been enumerated in the Report. The focus of the Report then shifts to Micro Finance and its various operational models. A discussion about the SBLP model and MFI models have been given in the Report. The discussion on micro finance would be incomplete without the mention of Grameen Bank of Bangladesh. Hence, the Report includes a brief introduction to Grameen Bank and its objectives. Using a comparative analysis between Grameen model and SHG model, they research tries to locate the client base of the two models on the poverty scale and suggest methods to improve the models. The Report discusses how technology helps in addressing the issue of high interest rates charged by Micro Finance Institutions. It makes use of a cost break up for the analysis. The key discussion of this project is on the use of technology in extending financial Inclusion in India. In the end the Report gives recommendations that could help in improving the use of technology for Financial Inclusion The work done in the other two phases of the internship has also been explained in this Report. All the reviewed chapters on Payment Systems have been discussed in the Report. Also the

chapters on Retail Banking that were developed during the Asset Development phase have been briefly discussed in the Report.

Table of Contents
ABSTRACT.................................................................................................................. 1 Table of Contents....................................................................................................... 2 1. INTRODUCTION...................................................................................................... 4 1.1 Purpose of the Project...................................................................................... 4 1.2 Scope of the Project.......................................................................................... 5 1.3 Methodology and Data Collection.....................................................................5 1.4 Limitations........................................................................................................ 6 1.5 Utility of the Project.......................................................................................... 6 1.6 Work Outline..................................................................................................... 6 2 PHASE I: ASSET REVIEW & CERTIFICATION.............................................................8 2.1 Chapters in the Course..................................................................................... 8 3. PHASE II: ASSET DEVELOPMENT..........................................................................13 3.1 Chapters Developed....................................................................................... 13 4. THE INDIAN AND GLOBAL BANKING SCENARIO....................................................18 5. FINANCIAL INCLUSION......................................................................................... 21 5.1 Goal of Inclusive Finance................................................................................21 5.2 Background.................................................................................................... 23 5.3 RBI & Financial Inclusion................................................................................. 24 5.4 Financial Inclusive Banking – Services............................................................26 5.5 Financial Inclusive Banking – Access Barriers.................................................28 5.6 Agents of Financial Inclusion..........................................................................28 5.7 Microfinance................................................................................................... 34 5.8 Evolution of Microfinance in India...................................................................34 5.9 Micro Finance Models..................................................................................... 34 5.10 The Grameen Bank Success Story................................................................38 5.11 Why not SHG in Bangladesh and Grameen in India?....................................39 5.12 Comparative Analysis – Grameen Model and SHG Model.............................41 5.12.1 On the Basis of Groups...........................................................................41 2

5.12.2 On the Basis of Loans.............................................................................43 5.12.3 On the Basis of Sustainability.................................................................44 5.12.4 On the Basis of Outreach........................................................................45 5.12.5 On the Basis of Empowerment...............................................................46 5.12.6 Comparison Operating Cost Ratio.........................................................47 5.12.7 Comparison of Interest Rates.................................................................48 5.12.8 Zone Wise Coverage of SHG’s in India...................................................49 6. Levers of Financial Inclusion................................................................................ 52 6.1 Technology - Addressing the Issue of High Interest Rates..............................53 7. LEVERAGING TECHNOLOGY.................................................................................57 7.1 Management Information System...................................................................57 7.2 Automated Teller Machines............................................................................62 7.3 Hand Held Devices......................................................................................... 67 7.4 Personal Digital Assistants.............................................................................. 73 7.5 Simputers....................................................................................................... 74 7.6 Smart Cards.................................................................................................... 75 7.7 Biometrics....................................................................................................... 77 7.8 Mobile Banking............................................................................................... 79 7.8.1 CAM Technology....................................................................................... 86 7.9 Information Dissemination Technologies........................................................86 8. RECOMMENDATIONS............................................................................................ 90 9. REFERENCES........................................................................................................ 93 10. ABBREVIATIONS................................................................................................. 94


List of figures & tables Figure 1: Average population per bank branch Figure 2: Deposits (Region Wise) Figure 3: Credits (Region Wise) Figure 4: Alternate Financial Institution Activities – Developing Countries Figure 5: Comparison of OCR of MFI’s Figure 6: Interest Rate Comparison of MFI’s Figure 7: Zone wise Coverage of SHG’s in India Figure 8: Population distribution in India Figure 9: BPL Population distribution in India Figure 10: Poverty Scale Figure 11: Financial Inclusion Levers. Study Micro Finance and its models Perform a comparative analysis of various micro finance models 4 . INTRODUCTION 1.1 Purpose of the Project The primary objective of this Project is to determine how technology can play a role in furthering Financial Inclusion in India by addressing various issues associated with financial Inclusion. Figure 12: Cost of funds as a % of gross loan portfolio Figure 13: Loan losses as a % of gross loan portfolio Figure 14: After Tax Profit as a % of gross loan portfolio Figure 15: Interest Income Break up Figure 16: Biometric ATMs Figure 17: Scrip Terminal Figure 18: A Mobile ATM Figure 19: Hand Held Device Figure 20: Near Field Communication used in SBI Tiny project Table 1: Average Population per Branch Table 2: Percentage Population with a bank account Table 3: Model Comparison – Group Basis Table 4: Model Comparison – Loan Basis Table 5: Model Comparison – Sustainability Basis Table 6: Model Comparison – Outreach Basis Table 7: Model Comparison – Group Basis Table 8: Comparison of various types of MIS 22 23 24 34 47 48 49 50 50 50 52 53 54 54 55 64 66 67 67 71 22 24 42 43 44 45 46 59 1. The Project aims at: • • • • Developing a thorough understanding of Financial Inclusion Study the penetration of banking in India and abroad.

Although there are several Financial Institutions which are involved in promoting Financial Inclusion but this Project scope is limited to Micro Finance Institutions only. Of the various factors that promote Financial Inclusion. Phase II: Asset Development Methodology: In this phase learning was done by developing a new asset and the topic assigned was Retail Banking. The Project also discusses commonly deployed micro finance models in India.2 Scope of the Project The study mainly focuses on the Indian scenario of Financial Inclusion. 5 . The phase had three tasks: • • • Study the Asset Add questions to existing Question Bank Take an online Course Certification and successfully complete the same. It tries to resolve various issues associated with micro finance by means of extensive use of technology. the study in this Project focuses mainly on leveraging technology.1.3 Methodology and Data Collection Phase I: Asset Review and Certification Methodology: In this phase learning was done by reviewing an existing FTC Asset on Payment Systems. The asset comprised of following chapter-wise artifacts: • • • • • Documentation Presentation Question Bank Answer Key GIF format file of the Question Bank. The entire research Project is based on secondary data. 1.

For TCS. 1. databases etc. this Report could serve as study material for associates. The Report is basically study-based and involves statistical analysis of interest income. articles. Databases etc. 1. It helps in understanding how Financial Inclusion can help in poverty eradication.4 Limitations The study is based on secondary data obtained from various sources. Data Collection: The data for development is secondary and has been obtained from sources such as: • • • Online Reports. Books on the subject. A research based on primary data would have definitely given a better insight and findings on the topic. The method used for analysis would be the interpretation of data.6 Work Outline SIP activity comprised of 3 tasks: • • Asset Study & Review (Learning phase) Asset Development (Work phase) 6 .Data Collection: The data for development was obtained from books and online source like – Reports. graphs etc.5 Utility of the Project The Project serves as comprehensive study material to understand the concept of Financial Inclusion and Microfinance. CGAP etc. Reviews. The reader of the Report can develop a thorough understanding of microfinance models and other related concepts. The work for the Report was done concurrently along with the other phases. Statistical data by RBI. No primary research could be done due to time and resource constraints. For associates engaged in Projects related to Micro Finance it could serve as a good reference and learning material. cost and banking penetration. Articles. United Nations. 1. Phase III: Research Project Methodology: This phase required the preparation of a Research Report on the topics selected.

• Research Report submission. Dry Run and Submission (1 week) 7 . Assignment to Mentors. (Project phase) The SIP Schedule was: • • • • • Initial Familiarization. Topic selection (1 week) Asset Study & Review ( 2 weeks) Asset Development (4 weeks) Research Report submission ( 4 weeks) Project Report finalization.

In this phase the task assigned was: • • To review an FTC module on “Payment Systems” Appear for FTC Certification Test for the same module The certification test was completed successfully with 78% marks. both domestic and global payment systems and applicable standards Understanding the role of Banks and Non-banking institutions in Payments Infrastructure Gaining in-depth knowledge of Payment systems and related infrastructure and activities Learning about modern and future trends in the Payments arena. A brief discussion about evolution of payment systems in India is also given in the chapter. It covers details about the importance of payment system and also the role played by the Central banks in implementing them.1 Chapters in the Course Chapter 1: Basics of Payment Systems This chapter gives an idea about the evolution of the present day payment systems. This certificate program helped in: • • • • Understanding the basics of Payment systems. 2. The Review results along with an additional set of questions for each of the 23 chapters in the module were submitted to the company guide within the time frame. The time allocated for the completion of this phase was 2 weeks. It talks about the various legal enforcements that have to be kept in mind before implementing a payment system. Chapter 2: Core Principles on Systematically Important Payment Systems This chapter covers the core principles of a payment system as established by the International Committee on Payment and Settlement Systems. Chapter 3: Payment instruments 8 .2 PHASE I: ASSET REVIEW & CERTIFICATION The first phase of SIP was a Review phase. The document also discusses the risks associated with the implementation of a Payment System in a country.

The character set used for composing a SWIFT message and the standards used in SWIFT messages have been covered in this chapter. It also gives an introduction to Real Time Gross Settlement Mechanism (RTGS).e. Chapter 7: Introduction to SWIFT This chapter covers in details about Financial messaging Network of a non-profit organization called SWIFT which has been constantly improving the standards for payment services through new technologies and making the payments convenient. It covers the use of standards such as XML. this chapter covers it all. Chapter 9: CHIPS and ACH This chapter talks about two very important Payment systems used in US i. Chapter 4: Clearing and Settlement Systems This chapter helps in learning how payments are settled and cleared within banks with separate details net and gross settlements. CHIPS and ACH. Chapter 6: Standards for global payment system This chapter gives idea about the various technological standards used for Payment Systems throughout the world. have been covered in this chapter. It covers topic such as MICR clearing.This chapter is about the various payment instruments used in daily banking transactions. The role of settlement agents and correspondent banks has also been described in the chapter. It gives details about the conventional and most modern methods used for cheque clearance. services etc. It covers the all the blocks and structures of a SWIFT message. Rosetta Net and an introduction to SWIFT. From the most conventional payment instruments like cheques to the most modern ones like Electronic Transfers. Chapter 5: Process of Check-clearing and MICR The chapter talks about the process of clearance of a cheque. TWIST. All aspects of its network such as the topologies. CHIPS(Clearing House Inter-bank Payments System) is the clearing house for large value 9 . local clearing and outstation clearing of cheques. Chapter 8: SWIFT Messaging system This chapter looks into the messaging system used in a SWIFT financial messaging network. EDIFACT.

It tells about the use of Payment Gateway. types of PayPal account. Its tells how these settlements take place to avoid any risk and also talks about CLS – the intermediary of all across border transactions and the workings and functions of the CLS. Chapter 10: EFT and ECS This chapter deals with the Electronic Fund Transfer and Electronic Clearing Services. Chapter 13: Continuous Linked Settlement This chapter discusses about the rise of foreign transaction or cross border transaction. fee structure of PayPal and legal Implications of PayPal Chapter 15: Payment gateways This chapter provides an understanding of payment gateways. 10 . Check-21 Act has been discussed briefly. It gives understand of the technology behind it. and functions. This chapter covers both these topics in detail. It also tells how checks are processed after their truncation. its structure and different operational models of e-check. Chapter 14: PayPal This chapter offers clear view of the most popular peer-to-peer (P2P) money transfer system PayPal. In this chapter. its structure.transactions while ACH is an electronic network used for financial transactions. process flow of Payment Gateway and B2B /B2C Transactions via Payment Gateways. It talks about the use of PayPal. which not only gives benefits to customers but provides safe and secure service through different modes charging very minimal transaction fees. The difference between check conversion and check truncation has also been given. A detailed procedural description and the Indian perspective of both these topics have been covered in this chapter. Chapter 12: E-Check This chapter is a discussion about Electronic check which is a technological innovation in the financial space. Chapter 11: Check truncation This Chapter gives understanding about the process of Check Truncation and the reasons behind emergence of this technology.

associated risks and challenges. It also discusses various types of mobile payments. and what measures should be taken to avoid them by fixing a limit to the different risks. Chapter 19: Trans-European Automated Real Time Gross Settlement This chapter is a peek into upcoming European Union-wide Real Time Gross Payment systems.Chapter 16: Cross border payments This chapter gives an understanding about the working of the cross-border transaction. its components. Chapter 20: E-Money This chapter tells how Electronic currency has become a reality in some parts of the world and has replaced hard currency. It also discusses about the standards that need to be complied with by banks to make cross border payments. This chapter also deals with the core functioning of TARGET. its accounts and various modules. Chapter 21: Risk and Liquidity issues in payment systems This chapter gives an insight into various risks faced by the parties during settling down the payments. Chapter 17: Mobile Payments This chapter talks about the nuances of the Mobile or M-payments. which is expected to change the payment scenario for all the participating European nations. This payment system is named TARGET. process involved in payment cycle. various entities involved. Chapter 18: Single European Payments Area This chapter gives an idea about Single European Payments system (SEPA) which is a new concept as applicable for 25 European countries. This chapter helps in learning about electronic Money. 11 . key features of E Money and various kinds of E Money. SEPA intends to implement common standards for retail payments across the group of countries participating in this initiative. This chapter also discusses the risks involved while settling down the payments through net settlement process and deferred settlement process. various players in the M-payment cycle and various technology vendors and their role. process to make payments through E money. SEPA is being rolled out in a phased manner and is expected to go completely “Live” by 2010.

It discusses the diverse roles played by these institutions in the Payment System. It also gives detailed insight into the Automated Clearing House. 12 .Chapter 22: Role of Regulatory Bodies This chapter gives a complete understanding about the regulatory bodies in the context of the payments scenario and the various Regulations associated with it. Chapter 23: Role of Non-bank institutions in Payment System This Chapter talks about Non-bank Institutions in payment systems and their activities.

Branch Banking and Unit Banking Gaining in-depth knowledge of Retail Banking products and services Developing an understanding of various Retail Banking channels Learning about present and future trends in the Retail Banking. presentation. PHASE II: ASSET DEVELOPMENT The Second phase of SIP was work phase.1 Chapters Developed Chapter 1: Evolution and History of Banking Topics covered in chapter are: • • • The history of banking Evolution of banking since inception Major events in the banking history Chapter 2: Retail Banking – Features & Characteristics Topics covered in chapter are: • • • Key features of retail banking Services offered by retail bankers Prospects of retail banking Chapter 3: Retail Banking – Financial Accounting Topics covered in chapter are: • The basic concepts of financial accounting 13 . The time allocated for the completion of this phase was 4 weeks. In this phase the task assigned was: • • • • • • • To develop a new course on “Retail Banking” comprising of 15 chapters Prepare documentation.3. Question Bank and Answer key for each chapter. This phase helped in: Understanding the basics of Retail Banking Understanding Core Banking. 3.

Physical Topics covered in chapter are: • The conventional banking channel 14 . Chapter 5: Retail Banking – Products and Services – Lending of Money Topics covered in chapter are: • • • Money lending services offered by retail banks. Latest innovations in bank loans Importance of loans for a bank. Latest innovations in bank deposits Importance of deposits for a bank.• • Various accounting tools Interpretation of financial Reports Chapter 4: Retail Banking – Products and Services – Acceptance of Money Topics covered in chapter are: • • • Money acceptance services offered by retail banks. Chapter 6: Retail Banking – Products and Services – Subsidiary Services Topics covered in chapter are: • • • The various subsidiary services provided by banks The need for these subsidiary services The channels that support these services Chapter 7: Retail Banking – Operations Topics covered in chapter are: • • The operations of a bank Core Banking Solutions Chapter 8: Channel Services .

General Topics covered in chapter are: • • • The uses of payment systems The payment system mechanisms Need and importance of payment systems Chapter 12: Payment System – US Topics covered in chapter are: • • • • The payment systems used in US The technological aspects of the US payment systems Fedwire SWIFT and ACH Chapter 13: Payment System – Europe 15 .• • • Branch Banking Services Front Office Banking Tasks Bank Tellers Chapter 9: Channel Services .Electronic Topics covered in chapter are: • • • Various electronic delivery channels Services available through e-channels Future delivery channels Chapter 10: Payment System – India Topics covered in chapter are: • • The payment systems used in India RBI EFT and RTGS systems Chapter 11: Payment Systems .

Topics covered in chapter are: • • • The payment systems used in Europe The technological aspects of the European payment systems SEPA Chapter 14: Payment Cards Topics covered in chapter are: • • • The various types of Payment Cards The Evolution of payment Cards The technology behind Payment Cards Chapter 15: Clearing & Settlement Systems Topics covered in chapter are: • • • • How are payments settled and cleared within banks? Net and Gross settlements. 16 . Real Time Gross Settlement Mechanism (RTGS). The role of settlement agents and correspondent banks.

“The stark reality is that most poor people in the world still lack access to sustainable financial services. Together. The great challenge before us is to address the constraints that exclude people from full participation in the financial sector. we can and must build inclusive financial sectors that help people improve their lives. 17 . 29 December 2003.” -UN Secretary-General Kofi Annan. whether it is savings. credit or insurance.

Considering the fact that the rural population has decreased over the years due to socio-economic reasons such as migration to urban areas.4. 18 . THE INDIAN AND GLOBAL BANKING SCENARIO It would be ideal to have an overview of the penetration of Banking in India and at the global level before moving further into the discussions on Financial Inclusion. it can be said that there is a lack of focused banking growth in rural areas. the population per branch office has increased. At the national level. Some of these indicators and the performance of India on these indicators have been given below: • Average Population per Branch Office (APPBO) The average population served per branch office is a good indicator of banking penetration. Reserve Bank of India The population served per branch as decreased in the urban areas while the same has increased for rural areas. There are several indicators which depict the penetration of banking in a country. The trend under this indicator in the last decade is as under: Figure 1: Average population per bank branch Source: Business Statistical Returns. indicating that branch expansion has not kept pace with the population increase.

• Deposits and Credit accounts (Region Wise) 19 . is about sixty per cent of the urban areas. Reserve Bank of India The number of deposit (current and savings) and credit accounts per 1000 population is given above in table 1(Above). Similar situation is also evident even in case of credit accounts per 1000 population. It is seen that the deposits (current plus savings) accounts per 1000 population in the rural areas.• Number of Accounts per thousand population Deposit (C+S) Accounts per 1000 population Region/State Northern Region North Eastern Region Eastern Region Central Region Western Region Southern Region All India Rural 338 186 185 242 263 393 270 Urban 652 281 413 375 526 486 483 Credit Accounts per 1000 Population Rural 55 35 45 45 46 136 64 Urban 71 41 47 49 121 185 104 Table 1: Average Population per Branch Office Source: Business Statistical Returns.

Except for certain European countries. most of the remaining countries have 20 . This shows the huge gap that exists in the penetration of banking in India • Percentage Population with a bank account Table 2 shows a list of countries where the percentage of population with a bank account is low. Reserve Bank of India About 2/3rd of the Indian population resides in rural and semi urban areas.Figure 2: Deposits (Region Wise) Source: Business Statistical Returns. yet they account only for about 22.3% of the credits accounts. Reserve Bank of India Figure 3: Credits (Region Wise) Source: Business Statistical Returns.7% of the deposits and 17.

in The term Financial Inclusion was coined at the start of the New Millennium. insurance. pensions.4 Table 2: Percentage Population with a bank account Source: Business CGAP. Within a decade Financial Inclusion has become the common goal for most of the national banks of various developing nations.3 Tanzania 6. A lot of efforts need to be diverted towards achievement of higher banking penetration in these countries. Financial Inclusion is seen as an important tool of eradicating poverty from the face of the earth.0 Brazil 43. local money transfers and international remittances 21 .7 Swaziland 35. Country/Location Percentage Population with bank account Botswana 47. payments.3 Namibia 28.iibf. It is essential that banking facilities must be made available to each and every individual without any discrimination.below 50% penetration of banking.org. Banking is a service meant for public good. leasing and factoring.4 South Africa 31.1 Goal of Inclusive Finance According to the United Nations the main goals of Inclusive Finance are as follows: • Access at a reasonable cost of all households and enterprises to the range of financial services for which they are “bankable. 2007 5.” www.0 Djibouti 24. – Definition Source: 5.0 Mexico City 21. The idea behind Financial Inclusion is to make Banking affordable and accessible to all.8 Lesotho 17.0 Columbia 39. short and long-term credit.” including savings. mortgages. FINANCIAL INCLUSION “Financial Inclusion is the delivery of banking services at affordable costs to vast sections of disadvantaged and low income groups.

wherever feasible. and performance monitoring by the market. so as to bring cost-effective and a wide variety of alternatives to customers (which could include any number of combinations of sound private. Source: United Nations.• Sound institutions. non-profit and public providers). 2006 22 . guided by appropriate internal management systems. industry performance standards. as well as by sound prudential regulation where required • Financial and institutional sustainability as a means of providing access to financial services over time • Multiple providers of financial services.

In fact. financial services are accessible only to a minority of the population. A sector of the economy that provides “access” to every individual to the basic financial services is called an “Inclusive” financial sector.2 Background In most developing countries. Although the financial sectors of these countries are expanding. a large majority of the people in the developing countries rarely enter the bank premises. savings and payments services for everyone. They have no access to credit from a formal financial institution. The use of financial services in developed countries is also not much different. but they do not have access to any source of formal credit. but the story again is that they do not have any access to savings or payments services. These people are also insurable and they have the earnings to pay for their insurance premium regularly. But again they do not have access to insurance. They rarely transact through financial institutions. It provides access to credit. livestock. insurance. The basic question that needs to be answered is: “Why are there so many bankable people who still remain unbanked?” Who are the people and firms who are excluded from full participation in the financial sector — those who should be but are not using formal financial services? The Unbanked persons are creditworthy people and firms who have the capacity to generate income and repay whatever they borrow. crops and livelihood are insured. A large section of “unbanked” people are those people who desire for a safe place to save and assemble assets and also seek a reliable way to transit money. This is a reflection of a growing concern about development and poverty eradication policies at the national and local levels. but they must be able to choose to use them according to their needs. the financial assets mainly remain concentrated in the hands of a few. including through microfinance and microcredit”. in particular for the poor. The limited use of financial services by people in developing countries has become an international concern. The Heads of State and Government officials meeting at the September 2005 World Summit at the United Nations stated that: “We recognize the need for access to financial services. Inclusive finance does not mean that everyone who is eligible to use these services necessarily makes use of them.5. and neither their lives. Vast majority of the people in these developing countries do not have a savings account. 23 .

In the Annual Policy of the Reserve Bank for 2004-05. on equitable basis. self-employed and those employed in unorganized sector. Internet Banking facility. this implies that a “No-frill” Bank account would not be issued frills like ATM Card.” www. KYC Norms are details which a customer has to furnish in order to open a bank account.org. • Relaxed KYC Norms In order to free customers from the procedural hassles of opening a new bank account.in Recent RBI Initiatives • N o-Frills Bank Accounts The RBI in its Annual policy for the year 2004-05 advised banks to make available ‘nofrills’ account. No-frills bank accounts are bank accounts which require low or ‘nil’ minimum balance. greater competition and diversification of ownership of banks leading to both enhanced efficiency and systemic resilience in the banking sector. This ensured that both rural and urban customers do not face any difficulty in opening a new bank account.5. especially of seeking public deposits on a highly leveraged basis.rbi. and consequently they should be obliged to provide banking services to all segments of the population. the banks have been bestowed with several privileges. The initiative resulted in the opening of 6 million new ‘no frills’ bank accounts between March 2006 and 2007. RBI simplified the Know Your Customers (KYC) procedures. Accordingly.3 RBI & Financial Inclusion RBI laid emphasis on “Financial Inclusion” for the first time by the RBI in its annual policy 2004-05. the Governor. etc. • General Purpose Credit Cards (GCC) 24 –Quotation Source: . Dr. in particular pensioners. While commercial considerations are no doubt important. Debit Card. Reddy said “There has been expansion. there are legitimate concerns in regard to the banking practices that tend to exclude rather than attract vast sections of population. However.

An offer of such an OTS would help in restoring a customer’s borrowing relationship with the formal system. There are a large number small Non Performing Assets (NPA’s) with banks. the high concentration of bank branches in metropolitan areas and low in rural/semi urban became a concern for the RBI. This would eliminate the need to go back to any informal agents like moneylenders. These intermediaries could be used as business facilitators (BF) or business correspondents (BC) by commercial banks. the Reserve Bank permitted commercial banks to make use of the services of non-governmental organizations (NGOs/SHGs). • Expansion of bank branches Over the years. which allows the holder to withdraw up to the specified limit. To ease this problem.Banks have been asked to introduce General purpose Credit Card (GCC) facility up to Rs. • One Time Settlement Schemes (OTS) The Reserve Bank has instructed banks to offer one time settlement offers to customers who are unable to pay loans with principal amount is less than Rs 25000. This facility is a type of revolving credit. since 2006.25000 at their rural and semi urban braches. the Reserve Bank allows opening of new branches by any bank only on the criteria that at least half of their new branches should be opened in under-banked areas which are notified by the RBI from time to time • Encourage use of IT 25 . • Use of Intermediaries In January 2006. micro-finance institutions and other civil society organizations as intermediaries for providing financial and banking services.

There exists a broader portfolio of services that needs to be directed to the clients in order to achieve sustained inclusion. realizing the important role that Rural and Co-operative banks could play in Financial Inclusion. 26 . a regulatory and supervisory framework has been implemented to weed out the non viable banks in an orderly manner through consultations with the Registrar of cooperative societies and sector representatives.The Reserve Bank of India has been encouraging the use of Information Communication Technology (ICT) solutions by banks for enhancing its outreach with the help of their Business Correspondents and other intermediaries.4 Financial Inclusive Banking – Services Financial Inclusive banking is not limited to the extension of credit to the poor and weaker section of the society. 5. • Restore customer confidence In recent years. Some of the services in the portfolio of Financial Inclusive Banking are: • • • • • • A No-frills banking account for making and receiving payments A savings product suited to the pattern of cash flows of a poor household Low cost money transfer facilities Small loans and overdrafts for productive. • Vision 2020 RBI’s vision for 2020 is to open nearly 600 million new customers' accounts and service them through a variety of channels by leveraging on IT. This step has helped restore customer confidence in these banks. personal and other purposes Micro-insurance (life and non-life) Other services tailored to the needs of the clients.

27 . flexible. The need is for convenient. the poor and low-income people want the type of financial services that can fulfill their needs and help them to better manage their households and businesses. the demand for these services is latent and such demands can be met by innovative financial services. In all cases.There are a large number of reasons why poor and low-income customers do not want or are not offered more access to formal financial services. permanently available. reliable and safe financial services. affordable. In some cases the demand cannot be satisfied by the financial products or delivery methodology currently being offered. Sometimes.

private and notfor-profit organizations who work for the cause. 5. various types of Financial Institutions have stepped forward and taken initiatives for serving poor and lower income clients.5. They are also referred as organizations with a “double bottom line” or “alternative financial institutions. and non-bank financial intermediaries. economic and political challenges in their economies and also continue to serve those who have always been denied access to financial services. Governments and voluntary donors have played a decisive role in supporting the innovative service approaches of the alternative financial institutions. These institutions encounter the social.” Micro Finance Institutions are considered to be one such financial service providers and they comprise of NGOs. Most of the countries have a large number of such institutions. The factors are: • • • • • • • • • • Cultural Norms Gender Factor Age Factor Legal Identity Level of Literacy Geographical Location Level of Income Type of Occupation Government Regulations Service/Product Provided. microfinance banks.5 Financial Inclusive Banking – Access Barriers There are certain factors which play a decisive role in shaping the market for financial services used by poor and low-income people. Some of these factors act as constraints that limit customer demand for financial services. Some of these organizations have both social as well as financial goals. There exists mix of public.6 Agents of Financial Inclusion In the last 25 years. 28 .

State Development and Agricultural banks also serve as a channel for all government transfers. They capitalize on their networks to provide financial services. micro-credit services etc. payments. Providing financial services to low and middle income households is often a profitable business for a commercial bank. • Postal savings banks The strength of these institutions is the large distribution networks they cover. they treat microfinance as their core business activity. They mainly offer savings and payment/transfer services.The main agents of Financial Inclusion are: • Commercial banks These are banks which offer simplified savings accounts. handicraft industry etc. or receivables to the farmers and other priority sectors. MFI banks usually include a social dimension in their operations. Due to the vast coverage that financial inclusion requires. They operate under structured frameworks adapted and serve a client base which is perceived as risky and unprofitable by commercial banks. these banks usually tie up with other NGOs and MFIs to act as intermediaries for them. Unlike commercial banks. Postal Savings Banks are the leading financial service provider. to the clients. money transfer. • State development and agricultural banks These are Government established and owned banks which help in fostering the development of the priority sectors such as agriculture. The role of these institutions in extending financial inclusion is very vital. There services are particularly useful in rural areas as they can efficiently manage small account balances. • MFI banks Micro Finance Institutions generally operate as independent entities or as the subsidiaries of larger banks. In quite a lot of the countries. Their main aim is to promote government policy initiatives to reach clients who are considered non-bankable by conventional commercial banks. They provide services tailored specifically to reach people with low to medium income and other small and medium 29 . fee-for-service activities.

They usually expect lower returns from their operations. The shareholders of such institutions value the social responsibility of the bank. Some of these banks are also privately owned banks for community service. and loans. • Financial cooperatives and credit unions They comprise of: o Municipally-owned savings and loan institutions o Member-owned financial cooperatives like credit unions. Such banks need smaller paid-in capital for start up. or decreased rates on loans or spent for improvement of services such as remittances and insurance. These institutions work on a not-for-profit basis. additional interest on savings. These institutions may have the authority to take deposits under specified conditions. Some of these banks are started for sufficing government mandates of providing financial services to people who do not have access to savings. • Non-governmental organizations 30 . They serve small and medium enterprises. • Licensed Non-bank financial intermediaries They are former microcredit NGOs that have been converted under special legislation and also finance companies. • Rural banks and community banks They are small financial intermediaries which are owned by local individuals. Any earning which these institutions make is redistributed to the members in the form of dividends on share capital. These banks may also be organized in form of a cooperative. Their offerings include non-collateralized credit products and services.enterprises. They fund their operations from funding by public or private sources. They are controlled and operated by their members. or local/regional governments.

They are governed by a number of civil and commercial laws. They are not subjected to bank regulation and supervision and hence they have the authority to mobilize funds from public. Their main goal is the welfare of the poorest poor. Donors are the main source of funds for NGOs. Their services may be of three types: • • • Remittances Credit Account-to-account deposit transfers. • Transfer payment companies They are specialized money transfer companies that provide fast and safe transfer of funds for low and middle-income clients. government providers.These are organizations that cater financial services (mainly credit) along with other services like health and education. and mutual and cooperative insurers. Its main categories are: o Non-bank private retailers 31 . These institutions either work directly or act reinsurance providers to larger organizations. They may either be for-profit or not-for-profit institutions. • Insurance companies They are insurance providers which provide insurance to poor and low-income customers. They are fee-based and profitable and have the capacity to attract new customers to saving and loan services.

selfhelp groups and mutual assistance groups. employees of larger businesses and government departments. deposit services. They can be quite small. Figure 4: Alternate Financial Institution Activities – Developing Countries Source: CGAP 2007 The figure above shows the alternate financial institution activities in developing countries. or local community members. • Contribution of State Banks is also comparable to that of MFI’s. organized between group of friends. pawns. Some of the important observations that may be made from the figure above are: • Contribution of Micro Finance Institutions is significantly high in both savings accounts and loan holdings. o Informal mutual assistance groups This group consists of Rotating savings and credit associations (ROSCAs). Alternate financial institutions here imply institutions other than commercial banks. NGOs.They are private commercial retailers who engage exclusively in financial services such as moneylenders. They may be private retailers such as small grocery stores. and large retailers. 32 . They may also be large in size like entire community. agricultural service providers and agrobusinesses.

The contribution of MFI’s is more significant as they are institutions solely dedicated to the poor and low income customers. By far MFI’s are the most important agent of Financial Inclusion. MFI’s have a dimension of social well being in their daily operations. 33 . There are several MFI’s worldwide which have helped in shifting Financial Inclusion to a higher level. Banks like Grameen Bank have shown the potential that MFI’s hold.

9 Micro Finance Models At the international level a lot of work and efforts had been put in for development of micro Finance since the 1980s. This programme was remarkably successful. NABARD and Small Industries Development Bank of India (SIDBI) have taken numerous initiatives over the years to give push to the micro finance movement in India. it was. the Reserve Bank. 5. The various informal and flexible services offered to lowincome borrowers for meeting their daily consumption and livelihood need has made micro finance movement grow at a rapid pace across the world.rbi. these institutions were unable to cater completely to the small and frequent credit needs of most of the poor. The emergence of the micro finance movement in India could be traced back to the self-help group (SHG) . Over a period of time.in It has been recognized that micro finance helps the poor people in meeting their needs for small loans and other financial services. the banking sector has witnessed large scale branch expansion. This has in turn has also influenced the lives of millions of poor positively. Soon other approaches like micro finance institutions (MFIs) also emerged.5.bank linkage programme (SBLP) started in 1992 by National Bank for Agricultural and Rural Development (NABARD). despite of the large number of formal financial institutions. credit and other financial services and products of very small amounts to the poor for enabling them to raise their income levels and improve their living standards.” www.Definition Source: 5. Micro finance is an evolving and diverse field. This necessitated the search for alternative policies and reforms that could help in reaching out to the poor.8 Evolution of Microfinance in India After the nationalization of banks in 1969. This has shifted the focus of bankers from class banking to mass banking.org.7 Microfinance “Micro finance is the provision of thrift. The concept of micro finance is all informal and 34 . . Realizing the potential of micro finance. however realized that. There is no particular approach or model that can fit in all conditions.

The SBLP has made remarkable progress since its inception. The micro finance movement has gained huge momentum in India in recent years.2 million and the outstanding savings was that of Rs. The number of SHGs having saving bank accounts with the banking sector was 4. there are two main models being used in India. In terms of coverage also this model is regarded as the largest micro finance programme in the world. On March 31.513 Crore. 35 . As a result.12. The SHG-bank linkage programme (SBLP) model The micro finance institution (MFI) model. Currently. These are: • • SBLP The SHG Bank Linkage Programme model was initiated as a pilot project by NABARD in 1992. 2.flexible. It has evolved as a dominant model in terms of number of borrowers and loans outstanding. each model has to be tailored according to the circumstances and the local needs.9 million SHGs under SBLP had an outstanding bank loans of Rs.366 Crore. 3. 2007.

in March 2008.5. guided and financed by banks. This model has been successful in attracting the attention of the poor populations that or otherwise difficult to reach directly through banks. The different models that have emerged under the SBLP are: • • • Model I: SHGs promoted. MFI Model While the SBLP model leads the list of model of micro finance used in India. These MFIs are scattered across the country and due to the multiplicity of registering authorities. banks can serve small rural depositors and also pay them the market rate of interest. With the help of self-help groups. which are registered under Section 25 of the Companies Act. As per the Bharat Micro Finance Report of Sa-Dhan. MFIs in India exist in forms like: • • • • • Trusts registered under the Indian Trust Act Societies registered under the Societies Registration Act. Model II: SHGs promoted by NGOs/ Government agencies and financed by banks. 1956 NBFCs registered with the Reserve Bank.954 crore.Most of the self-help groups use NABARD's SHG-bank-linkage program. 1860 Co-operatives registered under the Mutually Aided Cooperative Societies Acts of the States Non-banking financial companies (NBFC)-MFIs. SHGs aggregate their individual savings into a single deposit and thus minimize their bank transaction. the MFI model has also gained great momentum in the recent past. 36 .1 million clients with an outstanding micro finance portfolio of Rs. the 223 member MFIs of Sa-Dhan had an outreach of 14. Attempts have been made by some of the associations of MFIs like Sa-Dhan to capture the business volume of the MFI sector. there is no reliable estimate of the number of MFIs. Model II has been the most successful. Model III: SHGs promoted by NGOs and financed by banks using NGOs/formal agencies as financial intermediaries. The most frequently used estimate is that their number is likely to be around 800. The MFI model in India exists in diverse institutional and legal forms.

37 . subject to appropriate due diligence. supervision and recovery. The MFI acts as an agent – it takes care of all relationships with the client. monitoring. Such refinancing through securitization enables the MFIs greater access to funds. The BC model uses the MFI’s ability to get close to poor clients – a necessity for savings mobilization from the poor – while relying on the financial strength of the bank to safeguard the deposits. in addition to entities already permitted earlier. before securitizing them and selling them to the bank. According to the announcement made by the Union Finance Minister in the Union Budget 2008-09. MFIs (other than NBFCs) and other civil society organizations as intermediaries in providing financial and banking services by using business facilitator and business correspondent (BC) models. an NBFC. supervision and recovery. from first contact through final repayment. Another variation of this model is where the MFI. 2008. the bank is the lender and the MFI acts as an agent for handling items of work relating to credit monitoring.Bank Partnership Model Banks can use MFIs as their agent for handling credit. The BC model allows banks to perform financial transactions at a location much closer to the rural population. banks were permitted to engage retired bank employees. while the borrower is the individual. In this model. the Reserve Bank allowed commercial banks to utilize NGOs. exservicemen and retired government employees as business correspondents (BCs) with effect from April 24. Banking Correspondents In January 2006. holds the individual loans on its books for a while.

the capital city of Bangladesh) in 1979.org . more income". investment. launched an action research project to examine the possibility of designing a credit delivery system to provide banking services targeted at the rural poor. more investment. more income.5. low saving & low investment". The Grameen Bank Project (Grameen means "rural" or "village" in Bangla language) came into operation with the following objectives: • • • Extend banking facilities to poor men and women Eliminate the exploitation of the poor by money lenders Create opportunities for self-employment for the vast multitude of unemployed people in rural Bangladesh • Bring the disadvantaged. the Grameen Bank Project was transformed into an independent bank by government legislation. With the success in Tangail.grameen-info. Today Grameen Bank is owned by the rural poor whom it serves. more savings. while the remaining 10% is owned by the government. 38 Content Source: www. Head of the Rural Economics Program at the University of Chittagong.10 The Grameen Bank Success Story The origin of Grameen Bank can be traced back to 1976 when Professor Muhammad Yunus. injection of credit. into virtuous circle of "low income. the project was extended to several other districts in the country. within the fold of an organizational format which they can understand and manage by themselves • Reverse the age-old vicious circle of "low income. In October 1983. The action research demonstrated its strength in Jobra (a village adjacent to Chittagong University) and some of the neighboring villages during 1976-1979. mostly the women from the poorest households. Borrowers of the Bank own 90% of its shares. With the sponsorship of the central bank of the country and support of the nationalized commercial banks. the project was extended to Tangail district (a district north of Dhaka.

40 per person. It was very well supported by donors in Bangladesh. Bihar and Orissa.90 per person. from their neighbours in Bangladesh. As a matter of fact.$ 9. 1997 . be that Grameen is more acceptable in Bangladesh and less in India. It therefore seems odd why such diverse system have evolved in the two countries over the years. militarist Government India – More mature as a democracy as compared to Bangladesh Bangladesh as a country has less experience of democracy than India. India on the other hand has always scored low on Development aids.$ 1. Reason 2 – Dependence on Donor Funds Bangladesh – Development Aid 1985 . They have often been criticized for being over-disciplined or even militarist. or UP. It may. the differences between Northern and Southern India are actually more pronounced than those between poor communities in West Bengal.$ 1. This is one the reason why the Grameen Model is more predominant in Bangladesh. for that reason. by staff and members alike. of meetings with imposed seating systems and the necessity for strict adherence to pre-set schedules. 1997 . Its people are more used to military governments. They are used to a more disciplined and less individualist form of governance.5. Grameen as an Institution works with strict discipline and guidelines.90 per person For the Initial two decades of its operation. Reason 3 – Social Set Up Bangladesh – More Homogenous 39 . with its tradition of saluting.00 per person India – Development Aid 1985 .11 Why not SHG in Bangladesh and Grameen in India? The poor population in India is not so different from its counterpart in Bangladesh. Grameen was predominantly a donor based model. Few reasons for these differences may be as follows: Reason 1 – Form of Governance Bangladesh – More used to disciplined.$ 11.

any branch can do business with one or a number of SHGs. 40 . Bangladesh is 3 times more densely populated than India. It may therefore be easier in Bangladesh to persuade people to join together in groups and centers which follow a standardized system. In short densely populated areas serve a suitable market for Grameen MFI’s. This could be one of the reasons for Grameen to be more successful in Bangladesh. The freer and more flexible SHG system may be more appropriate for the Indian situation. The Indian banks are also compelled to direct a substantial proportion of their credit to the so-called ‘priority sectors’ and ‘weaker sections’. Reason 4 – Population Density Bangladesh – 850 per square Km India – 300 per square Km Grameen Model requires more frequent meetings with its members as compared to the SHG model. Grameen MFI’s prefer operating in areas which can provide them a stronger customer base so that more number of clients could be served per visit.India – Less Homogenous Bangladeshi village communities are generally more socially and economically homogeneous and less divided by caste. The SHG linkage system is ideal for banks. than their Hindu equivalents in India.000 branches in rural areas. This makes it costlier to operate a Grameen MFI. Bangladesh does not have such a well developed network of Rural Banks. without making significant changes to its operating procedures. Reason 5 – Bank Network Bangladesh – Relatively Under developed India – Strong RRB network The Indian banks have over 70. In order to make up for the higher cost.

the bank performs the task of a wholesaler because the bank’s responsibility is just the allocation of loan to the SHG.10000 Savings & Credit Usually through NGO’s Monthly Low Table 3: Model Comparison – Group Basis A Grameen group is of smaller size as compared to an SHG group. The Degree of autonomy enjoyed by a SHG Group is more than that by a Grameen Group. The SHG in turn acts as the retailer to distribute the loan further to the members. the group performs the entire task of allocation of loans and repayment. The role played by the Lending Institution differs in both the models.12.1 On the Basis of Groups Parameters Client Type Group Autonomy Group Role Role of Lending Institute Savings Credits Service Focus Promotion Meetings Group Discipline Grameen Groups (5 Members) Low Consumer Retailer Rs. 5000 . While in a Grameen Group the entire task of allocation of loans and repayment is in the hands of the bank staff. the degree of discipline is lower Less frequent meetings and the use of NGO’s for promotion helps SHG’s in lowering their operation cost 41 . the degree of responsibility of the members is higher Since autonomy in an SHG is higher. 20-100 per month Rs. 2000 – 5000 Credit Bank Staff Weekly High SHG Groups (15-20 Members) High Retailer Wholesaler Rs.5.12 Comparative Analysis – Grameen Model and SHG Model 5. This is because in an SHG. Observations: • • • In an SHG. 5-25 per week Rs. In the SHG model.

• The SHG model appear to be a better group structure based on the comparison of the group parameters 42 .

12.2 On the Basis of Loans Parameters Loan Amount Access Speed Flexibility Cost Microfinance Informal SHG SHG Grameen Moneylender Relatives MFI Group MFI Medium Variable Medium Medium Medium Variable Medium High High Medium LowMedium Medium Fixed Low MediumHigh Variable-High Medium High High High LowVariable Medium High High Variable Formal Bank High Low Low Low Low Table 4: Model Comparison – Loan Basis Loan which is the most important Financial Service offered by any Micro Finance Institution is an ideal tool for comparison of the models being used in the Institutions. those running on the Grameen model provide loan of smaller amounts but the interest they charge is slightly on the higher side While institutions which run on the SHG model provide loan of low to medium amount but the interest rate they charge is lower Grameen Model MFI’s are able to cater to clients down the poverty scale SGH model MFI’s can cater to clients little higher up on the poverty scale This shows that both the models focus on catering to different range of clients 43 . Observation: • • • Formal Banks or the Commercial Banks provide loans which cater to the needs of high to medium income groups and hence are an infeasible options for MFI Clients The informal sector like moneylenders cater to medium to low income groups but again the cost of loans from such sources is generally on the higher side The best option for low to medium income clients is loan from Microfinance Institutions.5. Their loan amounts are low and the cost of loans is lower than that charged by the formal and informal sources Findings: • • • • • In case of Microfinance Institutions.

covering all its operational expenses. in spite of the fact that SHG members usually pay a lower price for their loans than members of Grameen groups 44 . Grameen MFI’s work with higher number of low skilled staff and SHG MFI’s work with lower number of high skilled staff Findings: • In India the SHG system is more economical. at the same time Grameen MFI’s end up paying higher operational expenses SHG MFI’s enjoy the existing infrastructure of Rural Banks and hence require lesser cost of institutional development In terms of staff.5. Observations: • • • • MFI’s working on Grameen Model have a higher return on their investments as they a charge a higher rate of interest as compared to their SHG counterparts But.12.9% More Money Left with Clients 14-36% Lower High Low in Number High Salary More Skilled Less Management More vulnerable to Switching 23.3 On the Basis of Sustainability Parameters Average Yield (As per M-CRIL) Interest Rate Charged Operational Overheads Cost of Institutional Development Staff Grameen • • • • • • • • • • SHG 8. in the short to medium term at any rate. and thus more financially ‘sustainable’.7% • More money drawn out of • clients 29-41% Higher Less High in Number Low Salary Less Skilled More Management • • • • • • • Management Groups Durable and Long Lasting • Table 5: Model Comparison – Sustainability Basis Economic sustainability refers to the capacity of an MFI to be operational for a period of time.

4 On the Basis of Outreach Parameters Self Exclusion Regulations for Group formation Management by Clients Chances of Exclusion by other Members Institutional Supervision Grameen Group Pressure Strict Less Low High SH Group Pressure Lenient More High Low Table 6: Model Comparison – Outreach Basis Outreach here signifies the penetration of the services. the biggest question which arises is that: Are these SHG’s actually catering to the clients which lie down the poverty scale? • So in terms of outreach. Observations: • • • • Self exclusion of the clients due to group pressure is a problem common to both types of MFI’s Group formation decisions are more guided by the banks in Grameen model while it is not so in SHG Model There are set upper income limits for group formation in case of a Grameen MFI while there are no such limits In a SHG MFI. neither system reaches the very poorest Given the very rapid growth of the SHG system in India.12. 45 . chances are higher that a poor member is excluded from the group by other more affluent members Findings: • • The observations seem to suggest that SHGs are probably rather less likely to include poorer people than Grameen groups. Here we try to find out which of the two group systems reaches and benefits the poorest people most effectively. it is the Grameen Model which scores over the SHG Model. It implies the number and type of clients an MFI can reach to.5.

thereby they enjoy a higher sense of responsibility SHG groups are more vulnerable to threats such as being used as channels for Government Grants and Political propaganda Grameen group being strongly controlled by the banks are less prone to such threats Findings: • • • • SHG membership is thus more empowering. but at the same time more vulnerable. and expose them to greater risks Grameen Groups are less empowering. Observations: • • • • • Higher degree of autonomy associated with SHG group give them a sense of social well being Decision making in case of a Grameen Group is totally in the hands of the banks Decision making in SHG Groups is in the hands of the SHG members.5 On the Basis of Empowerment Parameters Client Responsibility Lenders Attitude Decision Making Group Composition Internal/External Threats Grameen Less Less Friendly More by MFI Not totally Member Controlled More Protected SHG More More Friendly More by Client Member Controlled Less Protected Table 7: Model Comparison – Group Basis Empowerment here explains how micro-finance has enabled large numbers of poor people to improve their social and even their political status. It is non economic empowerment that we compare in the analysis. SHGs are a more empowering instrument than Grameen groups. thus may be more readily accepted by poorer clients SHG Groups are more empowering and hence are likely to be more acceptable to more affluent clients 46 .12. but they also demand more of their members.5.

The entire data set consists of equal number of small. Reasoning: The higher OCR for Grameen MFI’s can be attributed to the higher operational overheads they incur. 16 working on the Grameen Model and 16 on the SHG Model. From the above graph we can conclude that for a Grameen MFI the Operating Cost Ratio is usually higher than that of a SHG MFI. 5.12. The net effect is that the OCR of Grameen MFI’s is higher.The following analysis is based on data collected for 32 different microfinance institutions. Since the entire task of promotion and management of a Grameen Group lies with the bank staff. Moreover the loan portfolios that the Grameen MFI’s provide are usually of smaller value as compared to SHG loan portfolios.6 Comparison Operating Cost Ratio Comparison of OCR of MFI's 70 Operating Cost Ratio 60 50 40 30 20 10 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Micro Finance Institutes Figure 5: Comparison of OCR of MFI’s Op Cost Ratio (Grameen) Op Cost Ratio (SHG) Operating Cost Ratio for a Microfinance Institution is defined as the ratio of Operating Cost for a year divided by the total outstanding loans. 47 . the operational cost is bound to be higher. medium and large scale Microfinance Institutions both for the Grameen and SHG Models.

Reasoning: The higher interest rates charged by Grameen MFI’s may be attributed to the higher operational cost they have to incur in order to sustain their operations. we analyze the penetration of SHG region wise. Both the Operating Cost Ratio and Interest Rates Comparison suggest that SHG MFI’s perform better than Grameen MFI’s. 48 . Grameen MFIs have to charge higher interest rates because their loan portfolios are of smaller value. Again. The smaller the loan portfolio the higher is the interest rate it attracts. But before drawing upon any final conclusion.7 Comparison of Interest Rates Figure 6: Interest Rate Comparison of MFI’s The above plot is for the interest rates charged by various Microfinance Institutions. This is essential because disbursement of smaller loans attracts higher cost in terms of staff cost. it may be noted that the interest rates charged by Grameen Microfinance Institutions is comparatively higher that the Interest rates charged by the SHG MFI’s.12.5. throughout India.

5.000 500.000. But these two regions have an SHG coverage way below the southern region.000.000 1.000 2.8 Zone Wise Coverage of SHG’s in India Microfinance Coverage 3. It may be noted that just 15% of the people below poverty line live in the Southern Region.000 Number of SHG's 3.000 2. It may be seen that the southern region is way ahead of the other regions in terms of number of SHG’s.000.500. The Eastern and Central Region together serve as the home for almost 60% of the BPL population.500.000 0 Mar '04 Mar '05 Mar '06 Mar '07 Years Figure 7: Zone wise Coverage of SHG’s in India Northern North Eastern Region Eastern Region Central Region Western Region Southern Region All India The above graph explains the coverage of SHG’s in India.500.000 1. The probable reason for the southern regions to perform better than the other regions are: • • • The higher level of literacy in the southern region is ideal for the growth of SHG coverage The SHG movement made a head start in the southern region The Lower level of poverty in Southern Region creates an ideal customer base for SHG’s 49 .12.

4% Eastern Region. 32% Figure 9: BPL Population distribution in India Conclusion: Figure 10: Poverty Scale From the above analysis it is clear that if we map the two models on the poverty scale. 3% Eastern Region. The actual poor or the poorest of the poor are left unserved by SHG MFI’s. 15% Central Region. 22% Northern North Eas tern Region Eas tern Region Central Region W estern Region Southern Region W es tern Region. 29% Northern North Eastern Region Eastern Region Central Region Western Region Southern Region Central Region. 15% Western Region. 14% Northern. 50 . 7% North Eastern Region.Population Distribution Southern Region. we find that the SHG cater to clients located higher up on the Poverty Scale while the Grameen MFI’s cater to clients poorer than the SHG clients. 25% Figure 8: Population distribution in India Below Poverty Line Distribution Southern Region. 13% North Eas tern Region. This makes it clear that the great success enjoyed by SHG model in India is more in Number and less in value. 21% Northern.

Recommendations: In order to achieve a more valuable Financial Inclusion in India it is essential that the SHG model also covers the clients located further down the poverty scale. In doing so. it is essential that this rise in OCR be compensated by either: • Making fundamental changes in the SHG model o The high degree of autonomy given to groups in SHG model should be restricted o There should be stricter norms for entry in SHG like Annual Income Cap o Guidelines for SHG’s must be made stricter to ensure prompt repayment • Leveraging Technology to bring down the operational cost (To be explained in the preceding sections of the report) 51 . So. the OCR of the MFI’s is likely to go up.

Technology appears to be the most important lever. Technological solutions are required to: • • • • • • • • • • Capture customer details Facilitate unique identification Ensure reliable and uninterrupted connectivity to remote areas Ensure connectivity across multiple channels of delivery Offer multiple financial products through same delivery channel Ensuring consumer protection Develop comprehensive and reliable credit information system Develop appropriate products tailored to local needs and segments Provide customer education and counseling Enable use of multi-media and multi-language for dissemination of information and advice. Extensive use of technology has the ability to address prominent Inclusive Finance issues. But considering the future goals of Financial Inclusion.6. 52 . Each lever has its own important role to play. Levers of Financial Inclusion Figure 11 (below) depicts the four levers that can help in raising the levels of financial inclusion in any country.

Micro Finance institutions on the other hand claim that high interest rates enable them to: • • • Make their business Sustainable and Permanent Allow expansion of services Eliminate the need of subsidies. They are: • Cost of funds: Figure 12: Cost of funds as a % of gross loan portfolio Source: CGAP Report 2007 o Funds are available to MFI’s at a repayment rate of around 8% o This rate is higher than that for commercial banks. which can be reduced through extensive use of Technology.1 Technology .Addressing the Issue of High Interest Rates Micro Finance Institutions have always been criticized for charging interest rates which are normally much higher than those charged by commercial banks. Cost Analysis This analysis aims at finding the most important component of the interest income on loans issued by Micro Finance Institutions. There are four components of the interest income generated by any microfinance company. 53 .Figure 11: Financial Inclusion Levers 6.

So there is not much that they can do to reduce the cost of funds. • Loan Losses: Figure 13: Loan losses as a % of gross loan portfolio Source: CGAP Report 2007 o Average default rates are low around 2% o Loan losses due default have very little effect on MFI interest rates o Loan losses are quite low in most MFIs o Strong monitoring in MF loan also helps in keeping the default rates down. • Profits: o Profit is the most controversial component of the interest income since is subject to the control of the management 54 .o MFI’s tend to price takers when it comes to borrowing or funding.

• Administrative Expenses: o Tiny loans require higher administrative expenses o Comprises of 11% of interest income in 2006 o Administrative cost decreases with the age of the MF institution. 55 . which is not very significant.Figure 14: After Tax Profit as a % of gross loan portfolio Source: CGAP Report 2007 o Median Return for Micro Finance Institutions was 12.5% in 2006 (Lower than that of banks) o Elimination of profit component would reduce interest rates by only 1/7 th.

Figure 15: Interest Income Break up Source: CGAP Report 2007 o As seen from figure 9. Profit Income or Cost of Funds that causes the interest rates to be high • The greatest single component that contributes to the high interest rates is the operational or administrative expenses • Most of the components of Administrative expenses can be reduced using better technology • Hence. Administrative income constitutes the biggest share of the interest income. o Apparently. technology can address the issue of High Interest rates. Technological Training Management Information Systems Monitoring Publicity. it is the operating/administrative expenses which are to be targeted for reduction o The components of operational expenses are:       Staffing Resources . each of these components can be significantly reduced using technology. So.Human. 56 . Conclusion of cost analysis • It is not Loan losses. if used extensively.

While a few MFIs are making good use of this technology. LEVERAGING TECHNOLOGY A lot of effort has been invested on the development of cost effective products and solutions for Financial Inclusive Banking. scalability and ease of use are the most important factors which decide the fate of any new innovation. Although there are numerous solutions and products available in the market. any banking innovation needs to have the right combination of all the three above mentioned factors. In order to find wide range acceptability. needs to have a bank-office MIS in place before attempting to make use of any front-end application or delivery channel. The main reasons for this include: • • • • • • • • • Insufficient organizational and human capacity Unavailability of suitable MIS applications for microfinance Diversity in business processes and frequent changes in procedures Risk of failure of the MIS Diversity of geography and language Unavailability of vendors and their capacity to implement and support IT solutions High cost of IT solutions for MFIs Lack of commitment of management and key decision-makers within an MFI Lack of awareness about the importance of IT. The back-office MIS is the backbone of any Information System solution. 7. Various Pilot projects on the latest technological innovations have be launched over the years. 57 .1 Management Information System Any Microfinance institution.7. whether big or small. the majority are facing difficulties in getting the right solution. our discussion in the report shall be limited to the products which have evolved as the most successful innovations in inclusive banking. We will also discuss about some other promising technologies and their application in microfinance. Cost effectiveness. with a very few of them finding real success.

g. type of transactions and reporting There is no of-the-shelf software available that can address the requirements of every MFI Those MIS that are available are complex and costly for adoption by MFIs MFIs lack human and organizational capacity to develop or select an appropriate MIS MFIs operate in remote and difficult areas where communication and power infrastructure do not exist. fulfilling the whole information requirements of the organization.g. Specialized Vendor Package etc. Some of the reasons for these difficulties are: • • • • • • Microfinance operations are unique and complex. Such systems are existent with banks or regulated MFIs. customer characteristics.Despite the advances in MIS. Paper based MIS Semi-automated System: More than 50% of MFIs are operating in a semi-automated mode. the spreadsheet is the common tool being used either in conjunction with a manual system or with an MIS application that does not fulfill the information requirements of the MFI. Within this category. Excel Based MIS Fully Automated System: Only Few MFIs are fortunate enough to have a fully automated and integrated MIS. practical experience shows that the acquisition of a suitable MIS is not simple. compared to commercial retail banking The Microfinance sector is still evolving and lacks standardization in its procedures. Open Source MIS. The majority of non-regulated MFIs have semi-automated systems. 58 . Organizations having manual systems are either small micro-credit programs or NGOs.g. and are therefore constrained from using IT equipment required to run MIS applications. E. Many MFIs are struggling with their MIS. E. which involve maintenance of records in forms and ledgers. E. Information Systems currently used by MFI’s Manual System: Some MFIs still rely on manual systems. methodologies.

store information. is crucial in decision making. Therefore. water or any other disaster Reporting is very cumbersome. and convey information to the user. time consuming and difficult. The primary roles of the MIS are to capture information.Cost Excel Spreadsheet Specialized Vendor Package Custom Made Open Source Application Low High High Low Data Reliability Low High High High Scalability Poor High High High Data Exchange Capability Poor Medium Medium High Design Flexibility Low Medium High High Table 8: Comparison of various types of MIS Disadvantage of manual systems: Some of the disadvantages of manual Information Systems are: • • • • • • • • • Too laborious and time consuming Prone to Errors Data manipulation and analysis is very difficult Maintenance of large amount of data is almost impossible Data and information is not secured Loosely controlled Highly inflexible (addition of new products and change in business processes cannot be made) Business continuity is at risk in case of damage to information due to fire. information and data is considered among the most valuable assets fundamental to the success of an organization. MIS can add substantial value in achieving both the objectives: 59 . Benefits of computerized MIS to Microfinance There is no doubt that “the right information” at “the right time” at “the right place”. create new information. The two major objectives of MFIs are Outreach and Sustainability.

• A major advantage of MIS is that it provides easy access to accurate and up-to-date information. and senior management can get a full picture of the portfolio performance and quality. efficiency and effectiveness of business procedures so that timely adjustments can be made • • • • • • Use of ICT helps make MFI services more interactive. and transactions in less time To meet target market needs. loan officers get information on loans that need follow-up. For example. Recommendations: 60 . repayments. objectives and strategy Key performance indicators provide an overview of the organization’s performance. introduction of new products and setting procedures is easy and can be quickly applied throughout the branch network It can also provide the flexibility to integrate with other applications and delivery mechanisms MIS lowers transaction cost. better controlled and with minimum opportunity for errors Information is produced in user-required formats. such as disbursements. setting priorities. reduces risk of failure. deposits. withdrawals and money transfers are completed faster. which facilitates better understanding. increases productivity. and pushes the boundaries beyond bricks and mortar infrastructure to carryout business. branch managers can monitor daily progress of the branch. as they are able to manage more products. It is also useful in tracking historical information of clients • • • Activities. Customers also get quick information on their accounts. accessible and transparent In terms of innovation. ICT provides full flexibility to structure products and services to the needs of its target group Efficiency and productivity of staff is increased. customers. payments and balances • Detailed information is captured on customers and their activities that can then be used to assess client business to assess impact.

The implementation of the right MIS still remains a big challenge faced by MFIs. having an appropriate core MIS first before other systems: keeping in mind the strategic importance of 61 . MFIs should get their core MIS right before opting for any kind of delivery system The software industry needs to do more in developing quality software for microfinance sector Capacity within institutions to manage technology is the key to successful implementation and operation of its MIS. One of the most important realizations to be made by MFIs is “first things first” i.• MFIs should invest in relevant technologies after thorough and careful assessment of their requirements. Some of the players have already started getting the benefit by using MIS and similar IT solutions. The requirement should be addressed in perspective of current needs and future plans • • • So far the core MIS of MFIs has been neglected. Innovations in ICT have transformed traditional approaches to microfinance. while the majority of the MFIs have yet to realize the importance of its use to achieve outreach and sustainability. MIS is a strategic investment for MFIs Progressive policies that make ICT accessible and affordable to the majority of the population are important for encouraging the use of ICT within microfinance and for the development of the microfinance sector. Such systems reduce the organizations overall efficiency and ultimately their sustainability • • MFIs can get maximum benefit by investing in technology. Conclusion The use of ICT can rightfully be to the strategic advantage of MFIs. facilitating growth and reducing cost. Efforts are also made from various corners of the world in overcoming these challenges. MFIs should employ skilled IT professionals on their staff • MFIs must adopt MIS solutions that not only meet their needs but are also manageable by the MFI from all aspects.e. and putting in a better MIS solution that works for them. In some cases small and medium size MFIs go beyond their needs in adopting an MIS that ultimately becomes a drain on their resources.

If the institution can partner with an existing ATM network and/or network operating company.ICT to the microfinance industry. such as in smaller population centers More low-cost funds are available because ATMs make it easier for clients to deposit savings. renewed efforts are required from all the stakeholders to overcome the challenges faced by the microfinance industry in taking on IT. . Bank ATM’s are considered by banks when the transaction volume puts pressure on staff and operating do not suit client needs and when the bank decides to offer a wide range of financial services. cash withdrawal. 7. the institution’s operating expenses will be less. accept deposits etc. • Up-front equipment acquisition cost or network participation fee 62 Flexible account access allows clients to access their accounts at their convenience Bank/MFI personnel are not required to be present for transactions and have more time to serve clients Increased hours of operation fit client schedules More clients can be reached beyond the branch network. Benefits of an ATM • • • • • Cost Costs differ depending on the technology provider and how the ATM network is operated. ATM’s are best suitable for banks and financial institutions that accept savings and want to serve their customers at multiple locations or even during nonbusiness hours.2 Automated Teller Machines Automated Teller Machines (ATMs) conduct transactions which would otherwise require staff attention like furnishing account information. The use of ATMs frees bank staff to focus on personalized services as the machines potentially deliver a broad range of services.

• • • •

Set-up fee to install and network the ATMs Usage fee, either per transaction or on a monthly basis Monthly or annual service fee for support Communications charges for dial-up, leased lines, or wireless data links

Initial costs are high, particularly if the institution is establishing a self-supported network. Individual ATM purchase prices are around Rs. 8-10 lakh. Magnetic cards cost Rs. 20-35 each and smart cards usually cost Rs. 250-400. ATMs that use smart cards do not require a real-time Internet connection, since the ATM can obtain some client financial data from the microchip on the smart card. Wireless internet service may be required where communications systems are expensive or unreliable. ATM - Issues in Financial Inclusive Banking ATMs introduce a further level of complexity for operations staff although it saves staff time overall. Even in areas where infrastructure is reliable, many practical challenges must be addressed as demonstrated by the mainstream banking sector. • • • • • • • • • Bulky machines result in high cost of installation of ATMs Cash security is a major concern in ATMs located in at remote areas Continuous supply of electricity in villages is still a distant dream in India, this hampers the installation of ATM’s in remote areas Routine maintenance of remote ATMs is cumbersome Illiterate and semi-literate clients face difficulty in operating ATMs Security concerns related to PIN based Authentication Absence of Internet connection in remotely located corners of the country Existing processing and management reporting systems need to interface with each other Hardware, software and communications require support and ongoing upgrades.

The various options that can address the above issues are as follows: Voice Command Based/Talking ATMs


A Talking ATM is a type of Automated Teller Machine (ATM) that provides audible instructions so that persons who cannot read an ATM screen can independently use the machine. All audible information can either be delivered privately through a standard headphone jack on the face of the machine or a separately attached telephone handset. Information is delivered to the customer either through pre-recorded sound files or via text-to-speech speech synthesis. Talking ATMs can be a useful aid for bank clients who find it difficult to operate ATMs. It is a big boon for illiterate who are unable to read the on screen instructions.

Biometric ATMs One of the major requirements for efficiently reaching the rural masses is to ensure that the technologies deployed are user friendly and do not assume ant technical knowledge on the part of the user. Moreover, the system should also allow the easy identification of the user with minimum intervention from the client’s side. The above requirements can be satisfied by Biometric ATMs.

Figure 16: Biometric ATMs

To boost Micro financing initiatives, banks are deploying Biometric Solutions with ATMs. Establishing the identity of a rural depositor through biometrics makes it possible for illiterate or

semi-illiterate people to become part of banking user community. In recent years, the importance of biometrics has grown tremendously with an increasing demand for security of unique identification of individuals. Biometric identification can be via face, voice, retina or iris, and fingerprint. ATMs with Biometric support eliminate the need for PIN entry as customers are authenticated by thumb impressions. The underlying operation of an ATM remain the same, the only difference is the mode of identification. For the use of Biometric ATMs, it is important that the EFT network supports finger print authentication. In case of India, the EFT network supports fingerprint authentication. Biometric ATMs are an ideal way of eliminating risk due to PIN based authentication. The use of Biometric ATMs also restricts the transferability of ATM cards because in a Biometric ATM, bank accounts can be operated only be the account holder and no one else. Solar Powered ATMs Power cuts are a frequent scenario in rural and semi-urban India. In such a case it becomes difficult to keep the ATM’s functional throughout the day. Solar Powered ATMs have evolved as an answer to this problem. Solar Powered ATMs run on direct current (DC) from batteries powered by a solar panel. Such ATMs can serve as the key to ATM deployment in some of the most remote corners of the globe. Solar panels are easy to set up and would enable an ATM to operate for long periods without battery changes. In areas with high levels of sunlight or where usage is light, continuous operation is possible using this technology. Using just two batteries, one will run the ATM while the other is being recharged using solar power. The amount of sunlight required will depend on usage. In sunny parts of the world, however, even with high usage, continuous operation is possible. Scrip Terminals/ Cashless ATMs A Scrip Terminal is a specialized ATM which dispenses receipts called Scrips instead of cash. The receipts in turn can be exchanged at various trading establishments near the place where terminals are located. They can also be exchanged for cash at specific retailers. This relieves the user of the need to carry cash and also eliminate the cost of stocking and periodically replenishing the balance of cash in the ATMs for the banks concerned.

As many pensioners arrive at the same time. They will be prompted to choose which account they want to withdraw from.Scrip Terminals are also an ideal way of sending Government grants directly to the beneficiaries. One is for the customer to keep for their records. the amount. and then they will be asked for their PIN number. goods and/or services. Scrip terminals have the following advantages over conventional ATMs: • • • • • • • • • Cost advantage in terms of installation and running cost Allows bank to increase their rural presence at a much lower cost Ease the tasks for business correspondents Address security issues as the scrips go through the cycle of authorization Endless opportunities by tie-ups with post offices. authentication and Operation Customers simply swipe their card. queues and delays are a common scenario. public distribution systems etc No need to replenish cash Machines are secure even in remote areas Lower power requirement Can be solar powered. and follow the instructions on the terminal's screen. the pensioners have to travel long distances to the nearest treasury or bank to receive their pensions. Leakage of Government grants before reaching the actual beneficiary has been one of the major concerns in India. Under the present method of dispensing pensions. the customer hits the enter button to send the transaction to the processor. The deployment of scrip terminals into rural areas will reduce the time taken for pensioners to access their social grants. and one that the customer will turn in to the merchant to redeem for cash. Use of Scrip Terminals can help in transferring the purchasing power directly to the beneficiaries. or a combination of both at the merchant's cash register. and an approval code is sent back to the machine. Once these steps are completed. 66 . Once the transaction has been approved. the terminal prints a two part receipt.

Figure 17: Scrip Terminal Mobile ATMs Mobile ATM is the term used for ATM’s installed in a bus or van.In US. the use of Cashless ATM Scrip machine terminal continues to grow in popularity as people discover its ease of use and overall hassle free operation.3 Hand Held Devices 67 . Infact. ICICI Bank and SBI have also initiated this service. Implementation: Canara Bank and Andhra Bank both flagged off their fleet of Mobile ATMs in the year 2007. These vehicles travel to far off regions and thus help in extending banking services to people residing in far flung areas. Cashless ATM Scrip machine is one of the fastest growing payment systems in years. Figure 18: A Mobile ATM 7.

Key features of a Hand held devices are: • • • • • Capability to work uninterrupted in a completely offline environment Can function on the field on any means of connectivity that is available in the country GSM/GPRS. It has a 2-4-line display.Figure 19: Hand Held Device A Hand held device with contact card is a compact & portable device. easy to carry in field and ideal for a rural/semi-urban scenario. deposit. new product request & alerts • • • • Transaction processing and settlement Store and forward mechanism used for uploading field transactions originating on handhelds Agent / Entity wise detailed transaction reports for all the transactions Integration with Core Banking System and other third party systems through customized interfaces 68 . withdrawal. a thermal printer with eight hours of battery life. These devices are ideal for use by business correspondents and bank agents on field duty. 16-key keypad. account to account transfer. CDMA and the telephone line Device has backward compatibility to support magnetic stripe cards Embedded fingerprint scanner in the device enabling biometric validation of a customer in the field in offline mode Support for various financial/non-financial transactions in offline mode in field such as. standing instruction.

as well as with other NFC devices. They have provided over $36 million in loans to close to 140. SKS calculated that this system would save about $2. SKS gave clients smart cards and equipped loan officers with hand-held terminals.000 in costs per branch per year. The objective was to speed loan administration. the drought-prone deccan region. 69 . charges & blocking of cards Support for remote parameter configuration such as. SKS Microfinance is one of the fastest growing microfinance organizations in the world.000 women clients in one of the poorest parts of India. is a short-range high frequency wireless communication technology which enables the exchange of data between devices over about a 10 centimeter (around 4 inches) distance. In order to reduce loan delivery costs to their rural customers in sparsely populated parts of Andhra Pradesh. with a current portfolio of $14 million and a 99% ontime repayment rate. maximum cumulative & account balance Settlement among multiple banks using the same infrastructure. and is thereby compatible with existing contactless infrastructure already in use for public transportation and payment. Implementation: Founded in 1998.• • • • • • Support for pushing backend updates to smart card such as. maximum daily withdrawal amount. An NFC device can communicate with both existing ISO/IEC 14443 standard smartcards and readers. Barriers for the use of Hand Held Devices: Connectivity Issues: Most of the hand held devices work only in the Online Mode Hand held devices are often too bulky for loan agents to carry Cost of the device. NFC is primarily aimed for usage in mobile phones. interest run. Certain technologies addressing the problems associated with Hand Held devices are: 7.3. reduce errors and increase officer productivity. Even with the additional costs of cards and terminals.1 Near Field Communication Devices Near Field Communication or NFC.

NFC compatible mobile phones can be used by loan agents for performing bank transactions in remote areas. micro credit. micro insurance. withdrawal and balance enquiry are generated in the mobile The BC needs to select the relevant option and feed the amount of transaction through the mobile keypads and send the message to the backend server The server authenticates the message. processes the transaction and sends an update back to the mobile. fingerprint unit and transactions printer . which in turn writes back to the card When the card is brought close to the printer. The Model for use of Near Field Communication Devices that is best suitable for microfinance is as follows: • Customers are issued RFID cards containing their extensive ID profile. the chip embedded in the card gets charged When the card with charged chip is brought close to the mobile phone. a printer and a NFC capable phone The Business Correspondent carries portable equipment .which operate on portable battery with a stand-by time of up to 10 days Customer identification takes place by matching of photo and fingerprint The fingerprint unit matches the fingerprint on the card with client fingerprint.NFC mobile. Benefits of using NFC technology: • • Works both in offline and online mode Data is transferred either in form by SMS or GPRS 70 • • • • • • • • • . Once authenticated. These cards contain details about multiple accounts. transaction report is printed in triplicate The BC keeps working capital in an aggregator account with the bank providing the service Services include savings accounts. These devices can act as a better option than the usual hand held devices. cash withdrawal and can be used for routing government payments. message templates for deposit. biometric fingerprint of the user and the last known balance • • Loan agents carry peripherals such as a biometric device.

Zero Mass initially started with coverage of nine villages and registered 2. SBI has appointed a Non-Government Organization (NGO) named Zero Mass as its business correspondent (BC). No Frills bank accounts along with RFID cards were offered to the customer through the Business Correspondents. The project has been successful and it is expected to cover over 100000 users within a year of its launch 71 . Pithoragarh and Medak in the States of Mizoram.400 customers in the first phase. These cards can be operated using the NFC technology. Implementation: Various commercial banks have started pilot projects with the NFC technology.• • • • • Cheaper option than the hand held device transactions Enhanced security due to use of Biometric Authentication Excellent battery backup of the devices Wide range of services may be offered Helps MFI’s in bring down operational cost. State Bank of India is the pioneer amongst all the Indian Banks using NFC Technology. Uttarakhand and Andhra Pradesh respectively. State Bank of India (SBI) has launched the SBI Tiny project in December 2006 on making available banking facility to the presently excluded sections of population of Aizwal.

Axis Bank has catered to 8900 beneficiaries belonging to 24 villages of the Raghunathpally mandal in Andhra Pradesh. 72 . The clients have been offered Zero Balance Savings Account for extending basic banking facilities through Business Facilitators and Business Correspondents.Figure 20: Near Field Communication used in SBI Tiny project Under a similar Pilot Project.

10 . efficiency. Loan officers can even fill out loan applications forms on the PDA and calculate the indicators used for loan review and approval. review clients ready to apply for their next loans and refer to historical client information. while working in the field. Since PDAs are a platform that can run various software programs. Virtually all client data and client visit records are stored electronically and are immediately available in a device small enough to fit in a shirt pocket. Chief Barrier – Cost Software costs for the implementations described below range from Rs. hardware costs 73 . several MFIs are using PDAs to save on relatively high labour costs. Using PDAs. banks and MFIs can use the tool to improve performance in a range of tasks. improve loan officer efficiency. and accuracy of field staff Improved monitoring of delinquent loans Improved time management Faster and more accurate credit approval process (with the potential for automatic approval and credit scoring in the field) Reduced volume of paper records.35 lakh including development of the PDA application software. where increasing competition is forcing MFIs to lower costs and improve service. increase data accuracy and access in the field. In some cases.4 Personal Digital Assistants PDAs are small handheld digital computers that can run specialized programs to manage FIs and client data and perform financial calculations. loan officers can consult an electronic list of borrowers in arrears to plan collections visits. Benefits of using PDA’s: • • • • • • Standardization of work procedures Increased productivity. In addition. MFI loan officers are not the only users of PDAs. MFIs have implemented PDA technology to enable client group members to collect their own data more quickly and accurately. the interface between the PDA and the MIS and adaptations to the MIS necessary to integrate the PDA technology.7. They may want to employ PDAs to standardize their credit methodology and operating policies. In Latin America.

Portable. 6000 – 10000 per PDA and annual software maintenance costs ranging from Rs. battery-powered. is a user.5 Simputers The Simputer (Simple. Multilingual Computer). touch-sensitive screens. Inexpensive. an e-Library Games 74 Customized to local requirements Solves the Last Mile Problem .friendly and inexpensive handheld computing device.range from Rs. powerful connectivity options Uses locally relevant icons. particularly suitable for illiterate people. Most institutions contract an outside firm to handle the development of the software and the user interface. and text-to-speech features in different Indian languages Has option of extendable memory and multimedia-enabled Easier access to information Reduced total cost of ownership Security and Efficiency . developed by scientists at the IISc and a software company in Bangalore. 7. 2.4 lakh per year. Benefits • • • • • • • Cost Approx 300-550 USD Software package bundled with Simputer include: • • • • • • • • Scheduling Calendar Voice Recording and Playback Khatha (A simple spreadsheet) Internet and network connectivity Web browsing and email.

such as the numeric markers of the client’s fingerprint. Requirements for Smart Card Implementation • • • • Reliable electrical power for card readers Dial-up facility to periodically update central processing site Processes. such as automated teller machines (ATMs) or personal digital assistants (PDAs) and may function effectively only with reliable electric and communications networks.6 Smart Cards Smart Cards can be used for financial services. implementing smart cards generally requires the purchase and implementation of associated technologies. such as managing savings accounts. and central management information system (MIS) Benefits: • • • • Automated transactions More secure user identity and account information Built-in limits on credit and other accounts With stored data. speeding up the process and improving accuracy. account balances and individual credit or other limits are loaded onto the card through a recording device attached to a PC. During visits to a branch office. less or no need for reader to access central server 75 . stolen or damaged cards and enrolling clients Software integration between cards. readers.• • Java ME and DotGNU (a free software implementation of . policies and staff resources for handling lost. Smart cards may be part of a fully computerized information system that can transmit data from a central site to the client instantly. As part of an integrated system. however. Banks and financial institutions that seek to automate transactions for clients or are attempting to reduce the use of paper in operations may consider smart cards using smart card readers. disbursing loans or making transfers. During enrollment.NET) are also available FLASH player 7. may also be stored on the card. all relevant client information. Some unique form of personal identification. the smart card functions as an electronic passbook on which transactions can be recorded once.

yet they can operate their account at their convenience through the Business Correspondent. 76 . or CAD) Set-up or installation fee to deploy card readers Monthly or annual service fee for support Communications charges (modem dial-up. 5000 . it recognizes and authenticates transaction based on the fingerprints of the account holder stored in the chip embedded in the card.• • • Cost No repetitive form filing Quicker administrative functions Improved transaction accuracy The following are indicative costs for contact cards with microprocessor chips. The customers need not visit a branch. The Focus Areas for this project is the densely populated Mumbai sub-urban area especially near market centers and surrounding local railway stations and subsequently to entire Mumbai. In this model. there was a necessity for facilitating their remittances to the places where they originally belong. The Biometric technology eliminates the probability of impersonation and embezzlement. Hence. even the illiterate hawkers can now transfer the amounts instantly through this network across the country (as biometric card technology can effectively function at the places where CBS network is not available). leased lines) Implementation: A number of the hawkers in Mumbai are immigrants who faced problems in sending money back home. It is safe.15000 for each card reader (Card Acceptance Device. Union Bank took the initiative to open no frill Savings a/c using specially simplified KYC Account for such clients. as it allows only the account holder against the impressions of the account holder. Rs. Through biometric smart card technology. since these are the most commonly used smart cards for microfinance applications. The advantage of the card is that instead of pin number. Union Bank has taken technological service support from FINO (Financial Information Network & Operations) and Business Correspondent services from FINO FINTECH FOUNDATION with KEY foundation as Business Facilitator. 250-400 per card. • • • • • Rs. All account holders were issued biometric cards.

voice pattern and gait. doubling up as an entitlement identifier/social security card For government payments like pension. documents. a Debit or a Credit card. as a prepaid debit.7 Biometrics Biometrics technology measures an individual’s unique physical or behavioral characteristics. Although the technology is still new. prepaid cards for rural credit 7. Biometrics technology may be an option for any organization that uses physical cards.5 Million hawkers in the next 3 years. such as fingerprints. facial characteristics. a Check. life insurance Banks can use for ‘No Frills Account’. This will allow one card to serve multiple purposes. subsidies. low. It is a multiple accounts and purposes single card with a choice to be used in one or more combination of different accounts available. a bank. or identification numbers to secure data stored in electronic format on a computer or Automated Teller Machine (ATM). utility payments – healthcare. data repository for essential information relating to the card holder Biometric identification. Cash. to recognize and confirm identity.cost biometric solutions may be more convenient and secure than the passwords and personal identification numbers (PINs) that these institutions currently use to restrict access to financial data. a Stored Value. a Gift.the . an ATM. Multiple Application/Accounts Smart Cards Multiple Application Smart Cards are like normal smart cards but they can hold Information related to multiple accounts belonging to an Individual.shelf packages can be installed to restrict staff access to systems or files-the 77 . Since biometric applications can be simple – off .Union Bank has served over 68000 hawkers with this scheme and looks forward to serve another 2. crop insurance. growing awareness of the importance of data security is increasing adoption steadily. Recently SBI has offered such cards under the Tiny Initiative. For some organizations. passwords. a “Smart Card”. Multi-application smart card system – A Financial Inclusion initiative by IDRBT • • • • Store of electronic cash.

With these biometric applications. 250.biometrics link a person to an action Convenience-clients have no identification number or password to remember. Requirements for Biometric Technology • • • • • Reliable electrical power for card or biometric readers Solid processes and adequate staff for managing card systems and enrolling clients Software integration between cards. System integration may require changes in other pieces of hardware that cannot readily be anticipated.technology is available to almost any computerized institution. • A smart card for each client costs Rs. It is important to use proven products and stable vendors. . The implemented biometric system must be more efficient than the alternatives • • • Benefits • • • • • Cost The following are indicative costs of a biometric fingerprint system that verifies identity and passes match/no-match results to other software. The system integrator should be carefully chosen because hardware/software integration will be the hardest task.400 per card. Biometric technologies are too complex to plug in and activate immediately. on a Smart Card). biometrics technology to secure individual client transactions generally requires additional implementation. is also required to store each client’s biometric template. some portable client-held device. Local verification-clients hold their identity information (e. some users will object to it. However.. so a policy must be developed for this. The costs below assume the use of smart cards. since these systems furnish the greatest potential and flexibility for MFI applications. 78 Greater security .g. readers. and central MIS Although studies show strong acceptance of biometric technology. such as a Smart Card. so there is no need to verify identity via a central repository or server Verification is swift and does not require staff User identity is stored safely and is tamper free.

As on 31st March 2008. 4500 10000. Acceptance of transfer of funds instruction to beneficiaries of same or another bank in favor of pre-registered beneficiaries has also commenced in a few banks. which lowers the costs of serving low-income customers. which have had difficulty providing profitable services through traditional channels to poor clients. m-payments. transactions enquiry. This raises the price of the reader but increases security and eliminates the need to integrate multiple components. Some banks have started offering information based services like balance enquiry.• • • Software programming routines to develop the reader-MIS interface cost Rs. which is roughly one fourth of the whole population. store value in an account linked to their handsets. there were more than 261 million mobile phone subscribers in India. RBI. m-transfers.8 Mobile Banking The terms m-banking. 40000 100000 A set-up or installation fee to deploy card readers will be charged Basic fingerprint readers cost Rs. We are on the verge of introducing mobile payment solutions in a large scale in the country. The mobile subscriber base is growing @ 8 million subscribers every month. see m-banking/m-payments as a form of “branchless banking”. stop payment instruction of cheques. 2500 -6000. transfer funds. or fingerprint/card readers cost Rs. particularly concerning security and taxation. Some smart card readers come with built-in fingerprint capability to authenticate the bearer of the actual card. Mobile Banking in India Mobile Banking is the most promising technology to look forward to as far as Financial Inclusion in India is concerned. m-banking or even access credit or insurance products. etc. Financial institutions. Government regulators see a similar appeal but are working out the legal implications of the technologies. and m-finance refer collectively to a set of applications that enable people to use their mobile telephones to manipulate their bank accounts. 7. to ensure a level playing 79 . m-payments. location of the nearest ATM / branch.

unless such arrangements have been authorized by the Reserve Bank under the Payment and Settlement System Act. The RBI guidelines on Mobile Banking were a much awaited by Commercial Banks throughout the country. 2007. banks offering mobile banking service must ensure that customers having mobile phones of any network operator is in a position to avail of the service The long term goal of mobile banking framework in India would be to enable funds transfer from account in one bank to any other account in the same or any other bank on a real time basis irrespective of the mobile network a customer has subscribed to. banks may enter into bilateral or multilateral arrangement for inter-bank settlements. Even 80 . facilitating interbank settlement. As per the guidelines issued by the Reserve Bank with respect to mobile banking transactions in India: • • • • • Only licensed banks with physical presence in India will be permitted to offer mobile banking services The services shall be restricted only to customers of banks and holders of debit/credit cards Transactions shall only Indian Rupee within national boundaries Banks may also use the services of Business Correspondent for extending this facility to their customers The guidelines issued by Reserve Bank on “Know Your Customer (KYC)”. with express permission from Reserve Bank of India. a robust clearing and settlement infrastructure operating on a 24x7 basis would be necessary • Unless a nationwide mobile banking framework is in place. A number of commercial banks have rolled out pilot mobile banking services. has come out with operative guidelines on the same in October 2008.field and compliance in the areas of mobile banking. • • • Only banks who have implemented core banking solutions would be permitted to provide mobile banking services Within six months. “Anti Money Laundering (AML)” and combating the Financing of Terrorism (CFT) from time to time would be applicable to mobile based banking services also. • To meet the objective of a nation-wide mobile banking framework.

transparent and transaction based fees. without the customer initiating a request for the information. SMS Banking service is operated by using both pull and push messaging. including micropayments to merchants. Currently. Typically push messages could be 81 . Expectations of a fully excluded customer from Mobile Banking are as follows: • • • • • • Small Savings: The ability to small and infrequent savings Security: To be able to keep little money that can be kept safe Ability to make person to person transfers Accessibility in terms of ease and low cost Convenient and easily understood procedures Low. Some are offered entirely by banks. and long-distance remittances. The various ways of implementation of mobile Banking are as follows: SMS Banking: SMS banking is a technology-enabled service offering from banks to its customers. purposes and structures vary from country to country. rather than account based fees. and users—to determine the shape of mbanking/m-payments services in the developing world. Mobile Banking System offers a variety of financial functions. P2P transfers between individuals. Exploration research is underway—between banks. others entirely by telecommunications providers. rather. Following are the key considerations that need to be kept in mind before deciding the overall framework: There is no universal form of m-banking. permitting them to operate selected banking services over their mobile phones using SMS messaging. different institutional and business models deliver these systems. These customers’ needs as mentioned above translate into the following requirements for mobile banking set up. there is a long time before mobile banking is utilized to its full capacity. regulatory agencies. and still others involve a partnership between a bank and a telecommunications provider. Push messages are those that the bank chooses to send out to a customer's mobile phone.though an initiative has been taken. donors. bill-payments to utilities. hardware and software providers. mobile operators.

check or credit cards. Instead of paying with cash. Transactional payments have been popular in Asia and Europe but are now being overtaken by other mobile payment methods such as mobile web payments (WAP) and Direct Mobile Billing. • Direct Mobile Billing 82 .either Mobile marketing messages or messages alerting an event which happens in the customer's bank account. a consumer can use a mobile phone to pay for wide range of services and digital or hard goods. using a mobile phone. Examples of pull messages for information include an account balance enquiry. or requests for current information like currency exchange rates and deposit interest rates. Pull messages are those that are initiated by the customer. Advantages for Microfinance: • • • • • Affordable Technology 24x7 access to banking facility Simple to use Concerns: Lack of data encryption Ease of use by illiterate Clients Mobile-Payments: Mobile payment is new and rapidly-adopting alternative payment method – especially in Asia and Europe. such as a large withdrawal of funds from the ATM or a large payment using the customer's credit card. The merchant involved is informed of the payment success and can then release the paid for goods. etc. There are four primary models for mobile payments are: • Premium SMS based transactional payments This is where the consumer sends a payment request via an SMS text message to a short code and a premium charge is applied to their phone bill. for obtaining information or performing a transaction in the bank account. as published and updated by the bank.

• Mobile web payments (WAP) In Mobile WAP payments the consumer uses web pages displayed or additional application downloaded and installed on mobile phone to make a payment. It uses WAP (Wireless Application Protocol) as underlying technology. 83 . This is known to lower the success rate (conversion) for payments. After two-factor authentication involving PIN and One-Time-Password.This is where the consumer uses mobile billing option during checkout at an ecommerce site such as an online gaming site to make a payment. thus bypassing banks and credit card companies altogether. These systems can be integrated with directly or can be combined with operator and credit card payments through a unified mobile web payment platform. It is true alternative payment method that does not require use of credit/debit cards or pre-registration at online payment solution such as PayPal. Benefits of such a form of payment are: o High Customer Satisfaction o Ease of Use A number of different actual payment mechanisms can be used behind a consistent set of web pages: o Direct Operator Billing A direct connection to the operator billing platform requires integration with the operator. o Credit Card A simple mobile web payment system can also include a credit card payment flow allowing a consumer to enter their card details to make purchases. This process is familiar but any entry of details on a mobile phone is known to reduce the success rate (conversion) of payments. This type of mobile payment method is extremely prevalent and popular in Asia. Subsequent payments also require a PIN code to be used. o Online These require customers to register with a personal PIN before making payments. the consumer's mobile account is charged for the purchase.

USSD is a standard for transmitting information over GSM signaling channels. It is mostly used as a method to query the available balance and other similar information in pre-paid GSM services. USSD is typically used as a 'trigger' to invoke independent calling services that doesn’t require the overhead and additional usage. Barriers for implementation of Mobile Banking: • • • • • • • • • Limited Connectivity in remote areas Apprehensions about Security Limited data transfer capacity (Using SMS) Data Transfer through MMS (Costly) Data Transfer through GPRS (Complex) Difficulty in using Menu Based applications Difficulty in using keypads Interoperability between Network Providers Absence of a dedicated clearing and settlement mechanism for mobile banking 84 . Implementation: USSD is the base of payment methods such as SharEpay in South Africa. It is generally associated with real-time or instant messaging type phone services.Unstructured Supplementary Service Data Unstructured Supplementary Service Data is a functionality of all GSM phones. Example USSD codes: *101# *109*72348937857623# After entering a USSD code on your GSM handset. and mPay in Poland. while SMS is similar to mail. Response times for interactive USSD-based services are generally quicker than those used for SMS. Mobipay in Spain. There is no store-andforward capability. The function that is triggered when sending USSD is network-dependent and depends on the specific services the operator is offering. USSD is similar to telnet. such as is typical of other short-message protocols. the reply from the GSM operator is displayed within a few seconds. As an analogy.

The service is free of charge.000. credit cards) M Commerce (Mobile Top Up. The service is presently available on java enabled mobile phones over SMS/ GPRS/ WAP as also non java phones with GPRS connection. The customers will have to register for the services Daily transaction limits for fund transfer and bill/ merchant payment will be Rs. The following functionalities are provided as a part of SBI’s Mobile Banking: • • • • • Funds transfer (within and outside the bank –using NEFT) Enquiry services (Balance enquiry/ Mini statement) Request services (Cheque book request) Bill Payment (Utility bills. all customers can avail the mobile banking service with the Bank irrespective of the service provider for their mobiles.e.000.00 • • The service will be carrier-agnostic i. The services for other non-Java mobile phones are under development and will be offered using Unstructured Supplementary Services Data (USSD). SBI has so far (as on 10 May 2009) received only 10.5000. SBI life insurance premium) Business Rules Governing SBI Mobile Banking Services: • • The Mobile Banking Service will be available to all the customers having a satisfactory running account (Current/ Savings). which it launched in December 2008. State Bank of India (SBI) has received poor response for its mobile banking product. However.30.• Most mobile applications support only English language Implementation: SBI Freedom is SBI’s new mobile Banking service for its customers.000 registrations for mobile banking but hopes to attract more clients to avail the service in the 85 .10. the cost of SMS / GPRS connectivity will have to be borne by the customer. Merchant payment.00 respectively per customer with an overall calendar month limit of Rs. The service can be availed over the free GPRS facilities offered by various mobile service providers.00and Rs.

months ahead. Reasons for the poor response could be that people are not techno-savvy and keep apprehensions about the safety of this service. It will take some time for mobile banking to pick up.

7.8.1 CAM Technology
Ekgaon Technologies an organization which provides technical, managerial and strategic support to community led initiatives in rural areas by the SHGs/MFIs has come up with their flagship “CAM” technology solution which enables online MIS for SHGs using mobile camera. It provides for a web-based, real time cost-effective MIS with secure access. The technology and related components of the “CAM” solution include a CAM browser for capturing the bar codes printed on paper forms, CAM forms containing the accounting information and a CAM server which gets the captured details through wireless interface or the Internet (SMS/MMS/SMTP). A notable feature of the application is its language independence for illiterate or non-English speaking users. It also has the facility to provide audio guide to the users. The solution could be used by a business correspondent/business facilitator to capture the activities of the SHGs for the banks to understand the operational direction of the SHGs for timely interventions.

7.9 Information Dissemination Technologies
Some of the technologies that can help in educating and keeping the masses informed about the latest financial innovations are as follows: • • Information Kiosks Call Centers using vernacular toll-free IVR Systems

Using call centre service can help farmers in getting suggestions and advice for their problems related to farming practices. These call centers can help enquire about the latest agricultural techniques


7.10 Financial Information Network & Operations Ltd (FINO) – Initiative
The FINO team has developed a platform using a biometric enabled multi application hybrid smart cards and biometric enabled handheld devices to cater to the needs of Local Financial Institutions (LFIs) serving the rural masses. The platform has been sized for 12 - 50 mn customers at the moment but can easily be expanded if the needs are larger. FINO's solution is a comprehensive solution which encompasses three key components: 1. Core banking system component which is built as a shared back end banking engine that provides accounting, MIS, reporting and monitoring facility for all asset and liability products that the micro sector requires. 2. Distribution component that enables “offline” data capture from end user specific unique, biometric enabled hybrid multi-application Smart Cards. These smart cards can hold upto 15 different types of end consumer financial and non-financial relationships on a single card. In the field, these cards can interact with various offline channel enablers like FINO's biometric enabled Point of Transaction devices (POT), Mobile POS/PDAs etc. and existing magnetic stripe based on-Line networks of ATMs, PCs, POS and Kiosks. Captured end consumer data is periodically transferred to a centralized location using connectivity options like PSTN (GSM/CDMA options are being planned). Authentic identification and non-repudiation of transactions is achieved through the biometric finger print templates stored in the card of the end user. The finger print verification is done at the device level where a live fingerprint of the end user is captured and verified using against the stored fingerprint template on the card. 3. Credit Bureau component which enables creation of knowledge base and financial credit worthiness, credit rating profile of the end user. Benefits of FINO System o Biometric Identity FINO offers a biometric fingerprint enabled smart card that allows foolproof customer identification without any requirement for a PIN / password as in traditional channel delivery systems. This is a completely offline solution and requires only a smart card reading device and a fingerprint sensor at any point of transaction

o De-duplication By capturing the customer’s fingerprint for each smart card that is issued, FINO's robust fingerprint identification engine ensures that there will be no duplicate identity created for the same customer. o Numbering Logic FINO systems rely on multiple number logic thereby ensuring security and uniqueness of transactions in the system. o Besides the above internal numbering logic, FINO systems have a provision of mapping account ID belonging to back-end of a third party entity. For example account ID in core banking solutions of Banks etc. Such a provision ensures that there is a seam less flow of information specific to a consumer not only internal to FINO system but also in third party back ends. o IT Application on Card FINO’s smart card can provide a highly secure off line transaction platform to run any application thereby saving on the costs associated with on line systems. Since all rural transactions are based on “human relationships” and are made possible by “human interactions” (agent based systems), FINO system ensures that that the system does not change the “way of working” for agencies serving the rural sector. Currently FINO smart cards are provisioned to support 15 different types of financial and non-financial applications. These applications can be from a single principle entity or multiple entities. How FINO Smart Cards can bring down the Cost of credit delivery for agencies Low cost of ownership FINO systems have been developed with a perspective of being an “Independent Sectoral resource”. The solutions are on offer on a utility model “Pay as you use” concept. Being able to provide an end to end biometric enabled hybrid smart card solution comprising of back end core banking module, distribution module and core banking module ensures that FINO is a one stop shop for all the needs of MFIs, co-op banks, credit franchisees in traditional credit disbursement system in India as well as for Banking correspondents as per the recent guideline by RBI. With FINO system integration services MFIs can easily integrate FINO system within their existing delivery model. FINO system can also be integrated easily with existing on line channel delivery

Point of sale etc.systems like ATMS. FINO's best in class core banking solution is scalable and upgradable thereby ensuring that LFIs can easily design and offer a suite of products to the rural masses. Consumers are uniquely identified by the biometric finger print authentication at the field level (devices). customizable. Thus the using the same card the end consumer can interact with multiple LFIs at marginal cost to the new LFI. Thus for existing FINO consumers other LFIs can just focus on growing their business rather than worry about operational issues of identity creation. Shared Demographic Data FINO smart card ensures that there is one time collection of demographic data for a particular consumer. loans. Thus for every new product/application the LFI only needs to develop a product application which can be remotely ported on the smart card in the field. 89 . Kiosks. Shared Biometric enabled Multi application card FINO Smart cards are unique IDs for the consumer and hold the consumer demographic data. FINO will develop the product application specific to the LFI and can port it on the same card. relationships and finger print on the card. insurance etc.. cheque/Demand draft clearing and settlement is greatly reduced. FINO systems are highly flexible. FINO enrollment application is being designed to cater to one time data collection for all relationships such as savings. This mechanism ensures that once the data is collected for a particular local financial institution the same can be used by other financial institutions serving the same rural geography. Low cycle times With FINO electronic infrastructure cycle times associated with product features like fund transfers. In addition FINO system also provides for “origination services” in the field thereby ensuring that the communication for new relationship is communicated quickly to the principals. scalable and ready for deployment keeping in mind the methods of operation adopted by various financial institutions operating in local country. In addition FINO card can store upto 15 financial and non-financial applications.

RECOMMENDATIONS Technology Investment Decisions Key questions that management of a financial institution should analyze while considering technology investments are: • • • • • • • What are the cost implications of implementing the identified technology? What are the alternatives considered? What are the criterion and processes that were used to select this identified technology and vendor? What returns can be expected? What are the requirements to implement the technology? What are the steps required to change key business processes and ensure full advantage of the new technology? What is the vendor’s capacity to provide technical support? Sharing IT Infrastructure Small MFI’s which cannot afford the latest technological tools should come together and share the IT infrastructure. Creation of Common Data Standards Common data standards will ensure interoperability of components of financial inclusion solution and thus provide a long lasting cost efficient solution for delivery to end customers. The 90 . creation of a National Credit Reference Bureau through IDRBT or like organizations that can deliver “Real Time” Credit information would be a great support to Micro Credit decisioning and ratings. This will help them in bringing down the cost of delivery to clients and hence help the MFI’s to scale up their operations Creation of Credit Bureaus A lot of efforts and money has to be diverted for the credit assessment of Individual clients.8. MFI can save on the assessment cost if there is an authority or bureau which can provide real time details about an individual’s borrowing and bill paying habits. So.

following components of a financial inclusion solution could be considered for common data standards: • • • • • Smart cards Handheld devices Interfaces & communications Bio metric ATMs Data storage Creation of common data standards shall also ensure that the industry does not depend on individual vendors and components are not company specific and do not become redundant This will help banks in bringing down cost by a great extent. it should be capable of adding value to the operations of the Institute. The model has achieved great success in terms of number of groups it caters but the range of clients which it covers does not 91 . Rework the SHG Model The model analysis done in the project shows that the SHG model (the most predominant models of microfinance in India) suffers from certain loopholes. capable of running for continuous hours with batteries Easy to integrate with most of the MIS platforms Ensures security by using Biometric or other foolproof identification Scalable Interoperable Adheres to commonly used data standards And most importantly. Features of an Ideal Technological Product for Inclusive Banking: • • • • • • • • • Works both in Offline and Online Modes Easy Navigation or operation of devices – No Menu Driven Options if clients are the end users Power efficiency.

include the poorest of the poor. The model may be improved by improved by bringing in the following changes: o The high degree of autonomy given to groups in SHG model should be restricted o There should be stricter norms for entry in SHG like Annual Income Cap o Guidelines for SHG’s must be made stricter to ensure prompt repayment o Technology must be leveraged to reduce operation cost 92 .

REFERENCES Books: • • Microfinance – An Introduction. PRAHLAD. April 2006 Research Papers: • • Microfinance Institutions in India – By HDFC The New Moneylenders: Are the Poor Being Exploited by High Microcredit Interest Rates? – CGAP.Dr. Wharton School Publication Magazines: • • Bank Quest – Indian Institute of Banking and Finance. what are the differences? – Malcolm Harper. March 2008 CAB Calling – Reserve Bank of India. 2007.microcreditsummit. ICFAI Publication C. 2007 Building Inclusive Financial Sectors for Development – United Nations.accessed on 11 Apr ‘09 93 .org . 2006 Papers published by Reserve Bank of India Financial Inclusion and Financial Literacy: Andhra Bank's Initiatives . 2007 • • • • IDRBT workshop on open standards for financial inclusion – IDBRT. K. 2009 • Grameen Bank groups and self-help groups. Ramakrishnan • Enabling Banking for Rural Communities Using CAM ICT Framework – Tapan Parikh Websites: • www. The Fortune at the Bottom of the Pyramid.9.K.

in .accessed on 01 May ‘09 Online Database: • EBSCO (Through TCS Login) 10.• • • • • www.accessed on 21 Apr ‘09 www.co.org.accessed on 18 Apr ‘09 www.in .org .net .org .i4donline.worldbank.accessed on 13 Apr ‘09 www.accessed on 19 Apr ‘09 www.uncdf. ABBREVIATIONS ECA – Europe and Central Asia MENA – Middle East and North Asia LAC – Latin America and Caribbean EAP – East Asia and Pacific MF – Micro Finance MFI – Micro Finance Institution SBLC – SHG Bank Linkage Programme SHG – Self Help Groups RBI – Reserve Bank of India CGAP – Consultative Group to Assist the Poor NPA – Non Performing Assets 94 .rbi.fino.

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