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Financial Inclusion by Channelizing Existing Resources in India

Purti Sharma
Economist, India Development Foundation, Gurgaon
inancial inclusion proceeds towards integration of people who are economically and socially excluded from access to easy, safe and affordable credit and other nancial services. Due to lack of nancial inclusion among the lower income households, their protection from external

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Electronic copy available at: http://ssrn.com/abstract=1477765

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economic shock becomes miniscule. As a result, income disparity leads to vicious circle of poverty which continues to persist in the lower income groups. According to IISS (Invest India Incomes and Savings Survey, 2007), 55 percent of all the households do not have bank accounts, 97 percent do not have any health insurance and 61 percent do not have life insurance1. These missing nancial markets among the lower income groups could be because of demand and supply side constraints. From the supply side, operating cost is considered as one of the major obstacle in promoting nancial inclusion. Salaries to staff, travelling expenses, commissions, expenses on promotion of groups, staff welfare expenses, amortisation and depreciation, rent on hired buildings and other overheads - all constitutes the operating cost. For instance, operating cost in the case of Canara Bank for opening a new (no-frills2) account was Rs. 48 and cost of each transaction (deposit/remittance) was Rs. 1012. To reach break even, the average amount of deposit required depends on the number of transactions. The break even average deposit level required was Rs. 1911 (for 12 transactions a year) and Rs. 11,465 (for 72 transactions a year)3. These costs are critical for operating the formal banking system. By looking at the general proles of various banks, it can be examined that the number of employees has decreased, on the other hand, business and prot per employee has increased in the SBI and various national banks (Table 1). Thus, we can at least analyse that bank has efciently employed their resources. The total factor productivity (TFP) enables disaggregation of output change into two major components, namely, output change due to change in efciency and output change attributable to change in technology. And the combination of both of these components (resource allocation and technology adoption) should reduce operational cost. The combination which minimises the cost component is necessary for the lower level of income bracket because majority of the population works in un-organised sector and are less educated. From the demand side, the higher cost of nancial services (including the transportation cost) discourages inclusion. It is argued that the operating cost is higher for maintaining large number of account with lower average deposits. As a result, we

Financial inclusion by introducing electronic payment system is one of the solutions to reach the masses

found the lopsided distribution of banks and lack of availability of formal institutional credit has occurred. And thus, it is unviable for the banks to extend banking services to lower income groups. For example, for the no frills savings account of the HDFC bank, service charges for collecting an outstation cheque is roughly around Rs. 50 (varies by banks) for a cheque value of more than Rs. 500 (Table 2). On the other hand, the service charges for transferring money using electronic medium like mobile and net banking is free of cost from the service providers side. But there is lower penetration of cellular phones and internet in rural India. Along with that, the xed and the variable costs for cell phones makes it costlier for owning cellular phones and thereby availing phone banking facility would be still a distant dream for most of rural India. While competitive market forces are increasingly expanding cellular network to cover rural India, internet penetration will still take some time. For example, to avail mobile banking services minimum one time xed cost would be approx. Rs. 1,000 for buying a mobile hand set plus telecom operators monthly service charges. The other electronic payment transfer facilities like electronic bill payment cost around Rs. 25 per quarter per customer ID, phone banking- non Interactive voice response (IVR) cost around Rs. 50 per call (agent assisted calls), debit card cost to Rs. 100 per year as annual fee, visa money transfer cost to Rs. 20 (plus taxes) per transaction etc4 are too costly compared to small deposit denominations and lack of critical network of users. Financial inclusion by introducing electronic payment system is one of the solutions to reach the masses. But in India this solution is not feasible because poor households are out of the domain of formal banking system and the large number of lower deposits reduces the banks protability. Secondly, the concept of virtual money banking, technology usage and trust on technology is difcult to promote among people who are nancially excluded as well as are nancially illiterate. Thirdly, majority of the population that belongs to poor class are working in un-organised sector with irregular incomes. And nally, lack of infrastructure availability (i.e disruptive electricity, low cellular phones and internet penetration etc) makes it challenging to initiate electronic payment system. To mitigate the nancial inclusion problem for the poor class

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Table 1: Prole of the Banks

SBI & its Associates 2003-04 No. of Ofces No. of Employees Business per Employee (in Rs. lakh) Prot per Employee (in Rs. lakh) Operating Expenses No. of Ofces No. of Employees Business per Employee (in Rs. lakh) Prot per Employee (in Rs. lakh) Operating Expenses No. of Ofces No. of Employees Business per Employee (in Rs. lakh) Prot per Employee (in Rs. lakh) Operating Expenses No. of Ofces No. of Employees Business per Employee (in Rs. lakh) Prot per Employee (in Rs. lakh) Operating Expenses
Sources: RBI

(Amount in rupees crore) 2005-06 14190 270608 2826.53 16.58 15759 35590 473725 8761 55 25549 254 20344 28632.73 765.29 5554 6129 103339 11226 71 11639 2006-07 14611 255699 3509.87 21.78 15988 37227 473179 10401 65 27267 264 26444 29871.67 753.89 7407 6984 136121 12018 82 15176 2007-08 15512 248425 4314.37 25.66 16994 38726 466368 13233 84 29604 278 33114 36963.72 1314.63 10355 8265 166334 13327 105 20268

2004-05 13921 277508 2270.99 15.16 13410 Nationalised Banks 34988 471297 7202 49 23629 Foreign Banks 234 15750 25597.32 330.04 4119 5539 82959 10402 39 8161

13782 280676 1810 23.68 12117 34460 471951 4864 47 20417 209 12654 25108.56 641.77 3450 4988 72119 9324 113 6547

Other Scheduled Commercial Banks

households, solutions need to be devised for redundancy of all these issues. The electronic payment system for the poor household is not a perfect solution for promoting banking activities. The electronic payment system is outstanding proposal if it follows top to bottom approach. The access to formal banking system among the rich class is higher in comparison to the middle and the poor income groups; however usage of electronic payment system is very low in all the classes at present in India. The adoption cost as well as the benet of using electronic payment system is higher. So, the initial adoption cost can be incurred by rich income groups. It is also important to do so because it has been found that the job security increases the chances of owning the electronic cards. And higher volume of

transactions reduces the transaction cost and the xed income reduces the default risk. Over the period of time, the growing competitive markets are expected to reduce the adoption cost and the spillover effect which would lead to the mass adoption.

Solutions for Poor Class Households

Aim is to create smaller networks of people having access to formal banking system (by offering lower rate of interest using no frill accounts) Integrate smaller networks to themselves and in turn form a bigger network of households having access to formal banking system Induction of electronic banking payment system should

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Table 2: Service Charges for No Frills Savings Account

the habit of thrift and savings among citizens of the country. The emphasis, Phone Banking - IVR Free as the words small savings suggest, is Phone Banking - Non IVR Rs. 50 per call (Agent assisted calls). to bring the small depositor into the ATM Card Free fold of the savings movement. Post ATM Card - Transaction charge for Balance enquiry: Free & Rs.17.80 (plus taxes) Ofce Savings Banks were opened in Partner banks- SBI & Andhra Bank per cash withdrawal 1882. Some of the small savings BillPay Rs. 25 (plus taxes) per qtr per Customer ID schemes i.e. Public Provident Fund Mobile Banking Free and Senior Citizen's Savings Scheme Net Banking Free are also operated through designated branches of nationalised banks and Visa Money Transfer Rs. 20 (plus taxes) per transaction four private banks i.e. ICICI, IDBI, Debit Card - Annual Fee - Regular Rs. 100 per year (plus taxes) Collection of outstation cheques at 1) Cheque value Rs. 0 to Rs. 500 -No charges HDFC and UTI Bank. The post HDFC bank's location 2) Cheque value Rs. 501 & above Re. 1 per ofces are not meant to replace banks 1000 (Min Rs. 50) because it can not execute the * Credit on receipt of clear funds function of money multiplier. But *Figures are for HDFC Bank nationalised and commercial banks Source: HDFC website can use post ofces infrastructure to facilitate various banking happen as result of spill over effect from the top of the services. pyramid, especially after the cost of service charge for using The existing Indian Post Ofces are strategically perfect electronic payment is reduced source available to promote inclusive nancial growth especially It is important not to introduce electronic payment system for for poor population. Its connectivity enables us to reach the poor class because majority of the remotest corners of the country. By utilising population in this category are illiterate existing Post Ofces infrastructure, and the cost of deploying electronic developing technology and connecting payment services for the large number of existing user with technology and expanding account having lower deposit would not user base would be one of the solutions for be protable nancial inclusion. Since Post ofces can Introduction of formal banking system not provide credit to its customers, banks should be encouraged by known faces and post ofces can collaborate together in and trusted institutions like post ofces. offering various nancial services by All the Government welfare programmes managing channels/technological strengths. targeted for the poor should be linked The net collections in the small savings with banks. All the monetary benets should be routed schemes (gross collections minus withdrawals by subscribers) through banks only. have increased from Rs. 100 crores in 1948-49 to Rs. 96,788 Thus, the solutions for nancial inclusion lies in channelizing crore (Net) in 2004-2005. 100 percent of net collections mobiexisting resources and building up a platform for public private lized in small savings schemes in a State/UT are transferred to partnerships using technology. There are three important the concerned State/UT Govt. as investment in special securities constituents for inclusive growth i.e. infrastructure, advanced issued by that Government. All deposits under small savings technology and users network which are mandatory for providschemes are credited to the 'National Small Savings Fund' ing easy, safe and affordable nancial services. (NSSF). All withdrawals by the depositors are made out of the Encouraging small saving scheme among the poor was accumulations in this fund. The balance in the fund is invested in considered a priority concern of the Government. The primary special Government securities as per norms decided from time objectives of the small savings programme have been to promote to time by the Central Government. In nutshell, post ofces can

The existing Indian Post Offices are strategically the perfect source available to promote inclusive financial growth

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Figure 1: Top to Bottom Approach for Introducing Electronic Banking

Large Network of Electronic Banking CRITICAL MASS Small Network of Formal Banking

Rich Middle

Introduce e-payments system in banking Spill Over Effect of e-payment system with the critical mass adoption Introduce Banking by creating local groups using known faces & trusted institution and later link it to the larger network of electronic banking system

Poor

act as an important enabler through which various nancial services can be extended while the technological spill-over effect is taking place in the banking sector.

transmitting messages. There are various services offered by Indian Post Ofces that are:

Technology
The adoption of technology in payment and settlement systems Indian post ofces network forms the largest postal system in reduces the cost of providing services with wider adoption of the world with an array of about 1.55 lakh post ofces in India these technological products. It would play a pivotal role in (Table 3). Out of the total number of the Indian post ofces, 90 reducing operating cost and would enable transfer of payments percent are in the rural areas and 10 percent are in the urban in real time. The technology needs to be inducted in a big to areas. On an average, a post ofce covers an area of 21 sq. km make transactions with the Post ofces hassle free. At present, and serves 5,687 and 19,891 people in rural and urban respecthere are only ve percent of the total post ofces which are tively. The connectivity of the post ofces are not only reected computerised. Computerisation of the Post ofces can bring in sheer size and numbers, but also in the average distance transparency and accountability. All payments to the public travelled for availing postal facilities which is around three km could be uploaded on the network and the public can have for all India. option of availing these services through various technological In the last 150 years, the Post ofces have redened connecprocesses, thereby, minimising the physical visits (includes tivity by expanding its wide range of services from mere transportation cost of the consumer). The increasing penetration of technology in the Post Ofces can also encourage Table 3: Postal Network in India partnership deals with nancial institutions, insurance companies, banks and logistics in the remotest corner of Total number of post ofces in the country 155204 the country. The entire organisational structure can Total number of post ofces in rural areas 139046 be linked with the central government and Panchayats to run various developmental schemes especially Total number of post ofces in urban areas 16158 in the rural area. Population served by a post ofce* 7166 One of the recent initiatives in this direction was Population served by a post ofce (in rural area) 5687 launch of e-bill post/e-payment. e-Bill Post is a Population served by a post ofce (in urban area) 19891 facility for accepting payment of bills or payments Area served by a post ofce (sq. km.) 21 from many-to-one in post ofces. The amount Average distance to be travelled for postal facilities (in km.) 3 collected is consolidated electronically in a web based Central Server on line, and the information is Sources: Department of Post

Infrastructure and Facilities of Post Ofces

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Table 4: Main Services Offered by Indian Post

Communication services Letters, Post Cards, etc. Transportation services Parcel, Logistics, etc. Financial services Savings Bank, Money Order, Insurance, etc. Value added services Speed Post, Service, Business Post, Direct Post, etc.

electronic access of nancial services can affect decision to adopt if and only if cost and benets are higher. So the rate of change with which new technology is adopted will decide the operational cost and inclusion.

Network

available to the e-Bill Post/e-payment user at any time. The trafc for e- Bill Post service was 25 lakh users through which the amount of revenue earned was about Rs. 128.13 lakh in the year 2006-075.In the span of three years, this facility grew to about 38 percent. For increasing network of technology users, educating illiterate population especially in rural locations is the biggest challenge. However, this can be over come by out of home (OOH) media service which can be placed at each Post Ofce. This would not only help in educating people about how to use technology (both pictorially and verbally), but also advertise various nancial options available to them and their benets. The larger the technologically driven nancial network, greater are the benets for adopting it. For widening the technologically driven network of nancial services, adoption cost and its benets would play a key role for the existing users. So, building trust on money transactions through technology is a key challenge to encourage people for adopting electronic medium. Initially the adoption has to be top to bottom down approach to build the network effect and the competition for reducing the higher service cost. The potential adopters would be encouraged if technology will help them in reducing cost and time spent on it. For example, having a large network of compatible mobile phone users for instance makes new users more likely to join. The existence of alternatives between physical access and

The Post ofces can be biggest facilitator in bringing low income groups under the umbrella of saving and investment opportunities by including workers from un-organised sector. The Post ofce banks are the largest saving banks in the country in terms of having more than 17.39 crore accounts and deposits amounting to Rs. 3,51,589.95 crore as on 31st March, 2007. The total amount of savings with the post ofces has been accounted for about 8.20 percent of Indias GDP at factor cost (current prices) during the year 2007-08. The untapped rural market has also shown faster growth in the insurance sector. The rural postal life insurance has grown at the rate of 34.2 percent in terms of value of business in the year 2005-06 and 2006-07 respectively. In the same year, it has increased from Rs 25,229 crore to Rs. 33,865 crore (Table 5). The active number of rural insurance policies till the 2006-07 was around 52 lakh which grew at 11.5 percent from the previous year. Similarly, one of the oldest and important nancial services offered by post ofces is transfer of money by using money orders without opening a bank account. This service is popular among rural labourers who works in un-organised sector and wants to remit amount for small denominations. There were 991 lakh money order issued in the year 2006-07 (Table 6). The average value of money order in the same year was around Rs. 782.72. The post ofces are like one stop shop for providing a range of banking6 and insurance services like term deposits, mutual

Table 5: Rural Postal Life Insurance

Items No. of Policies* upto the year Value of Business upto the year (Rs. in Crore) Average sum Assured per Policy (in Rs.)
Sources: Department of Post

2002-03 1795070 7464.53 47654.8

2003-04 2666485 12385.11 54932.09

2004-05 3738798 18520.93 53958.05

2005-06 4702776 25229.65 61107

2006-07 5246673 33865.66 88002

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Table 6: Inland Money Orders During the Year 2002-2003 to 2006-07

Items Number issued(in Lakh) Value of M.O. Issued (Rs. in lakh) Commission (Rs. in Lakh) Average Value of Money Orders (In Rs.)
Sources: Department of Post

2002-03 1050.30 865000.40 29923.70 823.57

2003-04 1101.47 687502.40 31137.50 624.17

2004-05 1015.98 705216.51 32031.40 694.12

2005-06 957.90 718342.93 32792.43 749.91

2006-07 991.00 775670.57 34791.64 782.72

funds, pension, etc. Various initiatives have been taken by Department of post to make growth inclusive for economically exclusive population. In collaboration with State Bank of India, an extensive network of Business Facilitators and Business Correspondents covering one lakh villages in phase one under the Rural and Agri Business Group (RABG) has been experimented. In partnership with Oriental Company Insurance Limited, the post ofces in the year 2006 launched accidental death insurance cover for one year of Rs. 1,00,000 at the low annual premium of Rs. 15 for its account holders. The memorandum of understanding (MoU) has been signed between Postal Department and Rural Development Department for payment of the wages to the workers under National Rural Employment Guarantee Scheme (NREGS). The 300 nance marts are planned to provide products like Insurance, Postal Life Insurance, Rural Postal Life Insurance, Credit, Saving etc. Instant Money Order (iMO) is an online Money transmission service which was launched in 2006. Presently it is available in 812 centres (till 2008). The electronic transmission of money orders (eMO) system was commissioned in the year 2008. Grameen Sanchar Sewak project was conceptualised to provide accessibility to public telephone to the rural population at their doorsteps by using latest Wireless in Local Loop (WLL) technology.

be introduced in post ofces so that day to day transactions can be done. Secondly, all the post ofces should be computerized, connected with internet and should have PCO booths. Thirdly, the telephonic transfer of payments should be encouraged by developing a technology wherein receipts of transfers of payments can be obtained. It would be signicant achievement because most of the rural population working in un-organised sectors are illiterate but can understand number system based technology. Fourthly, for opening new accounts Know your customer norms should be routed through post ofces. Fifth, the monetary benets for the poor under various government schemes should be routed through post ofce accounts. Finally, the wage payments in the un-organised sector should also be routed through formal banking system for encouraging faster nancial inclusion.

Endnotes and Additional Thinking

1 2

3 4

Dataworks ,Invest India Income and Saving Survey, 2007 No Frills Savings Account allows maintaining the account without any minimum or average balance requirement. Generally, no frills saving account is opened for people who does not have a bank account & has an annual income of less than or equal to Rs. 50,000/- or does not have a bank account & is a beneciary under a Government Welfare Scheme. Report on currency and nance 2006-08 Vol. II. HDFC bank website Service charges & fees applicable to customers as on July, 2008. India Post Annual Report 2007-08. Banking services available in Post ofces are Saving Account, Recurring Deposit, Time Deposit, Monthly income Scheme, Public Provident Fund, Senior Citizens Saving Scheme, Kisan Vikas Patras and National saving certicates.

Conclusion and Recommendations

All the above initiatives should eventually lead us towards nancial inclusion if collaborative actions are taken together. Lack of channelizing existing recourses, catastrophic policy implementation and lower technological penetration and adoption are the main causes of nancial exclusion. So, we recommend that the facility of opening current account should

(The views expressed in the article are personal and do not reect the ofcial policy or position of the organisation).

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