Financial Inclusion – Use of Technology

Importance: As per our analysis there was no question in the RBI exam in 2016. But this is a very
hot topic these days so we definitely expect some questions on this topic in the coming exam. Never
leave your future on the analysis of the past. And you never know this might be one of the topics in
the essay

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 Contents
1 Introduction....................................................................................................................... 4
2 Types of Financial Inclusion .................................................................................................. 4
3 Financial Inclusion – General Measures .................................................................................. 5
4 Financial Inclusion – Role of Technology................................................................................. 7
4.1 Internet Enabled Kiosks and PC’s .................................................................................... 8
4.2 ATM’s......................................................................................................................... 9
4.3 Biometric Handheld device ...........................................................................................10
4.4 Financial Inclusion using Mobile Telephones ...................................................................10
4.5 Smart Cards and POS ...................................................................................................12
4.6 Other Points related to Use of Technology ......................................................................12
5 Other Technological Developments in the Banking Area ..........................................................13
6 Other Notifications by RBI ...................................................................................................14
7 MCQ’s (Multiple Choice Questions) ......................................................................................15

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 1 Introduction
Financial Inclusion is the availability of financial services to the poor people not only in urban areas
but also in the remote areas like villages far away from the city. Some people define financial inclusion
only as the opening of bank account for an individual but financial Inclusion is a very broad term.
Below is the list of services which are included in the ambit of financial services

Benefits of Financial Inclusion

1. Financial Inclusion leads to economic growth as savings of poor are mobilized and put to
productive use
2. It helps poor stabilize their income and build some assets or savings
3. It helps in increasing financial literacy of the poor people

2 Types of Financial Inclusion

The question is how do we do financial Inclusion and where does technology plays a major role? Now
there are two types of people

1. Poor in Urban areas: These people are easy to be provided bank services because the only
challenge which we have to make them banked is financial illiteracy. Most of them do not

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 know the process or are hesitant to open ban accounts. If proper information and help is given
they are ready to be banked

2. Poor in remote areas: The real problem is with respect to people in the remote areas. Not
only they are illiterate but they also do not have any banks nearby. So even if you make them
illiterate they cannot avail financial services till the time they are provided with the
infrastructure to do so. Banks are reluctant to do so because it is not profitable for them to
open branch in each and every village. That is where technology comes in. Through
technology even remote locations can be banked.

In the next sections we will discuss some general measures which have taken for financial inclusion
which are applicable both for remote and urban areas. Then post that we will discuss what role
technology can play in financial inclusion particularly in remote areas

3 Financial Inclusion – General Measures

1. Banking Correspondents (BC): BC is a representative authorized to offer services such as cash

transactions where the lender does not have a branch or people are illiterate and need help to
operate in the banks. These BC’s charge a commission from the bank for enrollment of clients,
transactions, deposits etc. RBI has laid out some regulations regarding who can become Banking
Correspondent. The below diagram gives an idea regarding who can become a BC.

There primary responsibilities are

1. Creating Awareness about savings and other products

2. Educating people on benefits of saving money

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 3. Helping people in availing loans and filling forms
4. Doing some transactions on the behalf of the bank

2. No Frills Account: Many people do not like the idea of minimum deposit that needs to be
maintained in the bank. RBI has given guidelines to the banks to make available a basic banking
'no frills' account either with 'NIL' or very minimum balances as well as charges that would make
such accounts accessible to vast sections of the population

3. Simplified KYC Norms: Opening of account is a Herculean task for common man since it warrants
to fulfill KYC norms i.e. submission of address proof and identity proof, whereas majority of
rural/urban poor do not possess them. To facilitate persons belonging to low income group both
in urban/ rural areas, RBI introduced simplified norms (without documentary proof) to open
accounts for those persons who intend to keep balances not exceeding Rs.50000/- in all their
accounts taken together and the total credit in all the accounts taken together is not expected to
exceed Rs.100000/- in a year. However, these accounts requires introduction of existing KYC
complaint account holder. Photograph and address of the customer who proposes to open the
account need to be certified by the introducer.

4. RBI Guidelines: RBI has asked the lenders to open more brick and mortar branches in villages with
no banking facilities and with a population of more than 5,000. It has been observed that coverage
of banking services in unbanked villages is skewed towards the BC model and the ratio of branches
to BC is very low. For increasing banking penetration and financial inclusion, brick and mortar
branches are an integral component. This will also enable banks to provide quality financial
services and timely support to BC outlets that would help in sustaining and strengthening the
services provided through BCs

5. Licensing Focus on Rural Areas: RBI has mandated that any entity which is given new license to
open a bank have to open at least 25% branches in the rural areas.

6. Establishing of Payment Banks: In August 2016, RBI has given 11 licenses for payment banks.
Payment banks will reach out to people in rural areas and help in financial inclusion.

a. A payment bank is a differentiated bank that will undertake only certain restricted
banking functions that the Banking Regulation Act of 1949 allows. These activities include
acceptance of deposits, payments and remittance services but cannot lend money.
Remittance is nothing but transferring money like a person in Delhi wants to send money
in a village in Uttar Pradesh

b. Most of the payment banks will use mobile as a mode of depositing and transferring the
money. So using mobile one can transfer the money to other mobile of relative, transfer
the money to the bank, transfer the money to a retail shop. So people in rural areas would
be able to transact using mobile

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 For more information on Payment Banks, please read unit on ‘Changing Landscape in Banking
Sector’

7. Small Finance Banks: In September 2016, RBI gave in-principle licenses to 10 entities to set up so-
called small finance banks in a move towards expanding access to financial services in rural and
semi-urban areas. Small finance banks will offer basic banking services, accepting deposits and
lending to unserved and underserved sections, including small business units, small and marginal
farmers, micro and small industries, and entities in the unorganized sector

For more information on Small Finance Banks, please read unit on ‘Changing Landscape in
Banking Sector’

5. Jan Dhan Yojna: Pradhan Mantri Jan Dhan Yojana was announced by the honorable Prime
Minister of India Shri. Narendra Modi in the year 2014, on the eve of Independence Day. Objective
of "Pradhan Mantri Jan-Dhan Yojana (PMJDY)" is ensuring access to various financial services like
availability of basic savings bank account, access to need based credit, remittances facility,
insurance and pension to the excluded sections i.e. weaker sections & low income groups using
technology. Under the Jan Dhan scheme, any individual who is older than 10 years of age and
does not possess a bank account can open one in his or her name with an opening deposit of zero.
It has following benefits
a. Individuals whose Jan Dhan account completes 6 months are eligible to obtain loans of up to
Rs.5000.

b. Mobile Banking is not a new innovation anymore. Various private and public banks offer
mobile banking facilities to customers. However, keeping in mind the economic status of
people below poverty line, Pradhan Mantri Jan Dhan Yojana aims to make available certain
basic financial transactions via ordinary mobile phones and not smart phones. This step will
ensure that even people from rural areas have access to banking options

c. The scheme offers a life cover of Rs.30,000 to customers who comply with certain norms of
the scheme and offers Rs.2,00,000 as insurance sum in the event of death due to accident

d. Each family gets a RuPay debit card along with the Jan Dhan bank account. This ensures easy
withdrawal of money from ATMs.

e. An overdraft facility of Rs.5000 will be offered with Pradhan Mantri Jan Dhan account .

4 Financial Inclusion – Role of Technology

The schemes/Measures we discussed above are the steps taken for financial inclusion. But in rural
areas these schemes would not be effective unless we have the infrastructure for Banking. Technology
comes in very handy here. For example we can create an account of a person in rural area but unless
we use technology to serve without a bank branch the true rural financial inclusion would not happen.
Below are the ways of Financial Inclusion through technology
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 4.1 Internet Enabled Kiosks and PC’s

1. These are the most common forms of delivering Financial Inclusion

2. These are small and self-operated IT-enabled centers that provide customers with banking
features such as cheque or cash deposit , internet banking, non-cash ATM transactions and other
enquiries
3. They are located in areas where most of the villagers visit daily like mandi etc.
4. They are also operational in regional languages

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 4.2 ATM’s
Everyone knows about ATM’s. They are part of our integral life. But in villages the ATM’s are slightly
different as per their needs and requirements

1. Micro ATM:
a. Simply put, it’s a mini version of an ATM, but instead of a bulky machine that spits out
cash, it’s a small handheld device.
b. It is just like a debit card machine which is used in urban areas to pay money to the
merchants. They can be taken from one place to another
c. These machines are typically used by business correspondents (agents who represent
banks in rural areas) of banks to connect customers who are far away from branches.
In this case the human being (the business correspondent) acts as the cash cache for
the ATM. He collects deposits and feeds in data and also pays out from his pocket and
debits the account.
d. The micro ATM’s are connected to bank servers through internet and updates with
respect to debit/credit happen on the bank servers
e. They cost less as compared to bulky ATM’s as bulky ATM’s involves cost such as rental,
AC, security guard etc.
f. The downside of a micro ATM is that it cannot provide `anytime' money. Either the
shop will close down or the BC might not be in town at the time when the account
holder requires funds

2. Biometric ATM: Many of the people in rural area are illiterates. They do not use micro ATM’s on
account of PIN and Password related issues. Introduction of Biometric ATMs enables the illiterate
and semi-literate customers to avail ATM facilities on par with literate customers. Under this,
Thumb impression of the cardholder will be scanned and transfer the same to central server as
one time measure. ATM dispenses cash and other services only after verifying the thumb
impression of the cardholder with that of finger print available with the bank’s server.

3. Mobile ATM’s

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 a. Mobile ATMs are designed for providing ATM facility to the rural folk as well as other
customers. The Van would move to the pre-determined places on certain days. Opening
of accounts also can be undertaken during the visits to the rural areas. This can be used
at weekly mandis/markets effectively.
b. They are less costly as no permanent infrastructure is required and it can cover huge area
if it goes to one area on a particular day in week
c. Disadvantage is that it would not be available 24*7

Note: Micro ATM. Bio Metric ATM and Mobile ATM are not mutually exclusive. Micro and Mobile
ATM can also have biometric facilities. Micro ATM is also a mobile by nature.

4.3 Biometric Handheld device

Biometric Handheld device is also a combination of Micro ATM and Biometric ATM. In these micro
ATM’s which are handheld devices comes with a feature of biometric authentication and hence
called Biometric Handheld device

4.4 Financial Inclusion using Mobile Telephones

In India there might not be bank branch in rural area but surely there would be a mobile phone. The
penetration of mobile phones is much deeper than the bank branches. Mobile phones can be used in
two ways

1. Mobile banking:
a. Mobile banking refers to the availability of platforms that allow users to access financial
services (transfers, payments, receipts or investment) from mobile devices. We can
access them through a regular internet browser or a mobile application especially
designed for this kind of services.
b. Even SMS through mobile can tell you about your transaction
c. It’s like a normal online banking where you need to enter your username/password etc.
to make a transaction
d. It is more used in urban areas. In rural areas people would not be inclined towards
entering in username/password etc. and do a transaction. But nevertheless educated
youth in rural areas can use this service to pay exam fee etc. instead of travelling to a city

2. Mobile Payments: Refers to the process of using mobile devices to pay for a product or service
from any place
a. By sending a message SMS
b. By using PPI (Prepaid Payment Instruments) based on mobile Apps like PayTM

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 c. By using one of the payment banks like Vodafone M-pesa or Airtel Money
d. By using Unified Payment Interface (UPI)

All the above techniques are the same. They are based on mobile apps which allow you to transfer
money to another person or to the shopkeeper. Mobile payments are more of a use in rural areas
where people can transfer money through mobile to an agent and get back the cash

For more information on the PPI, Payment Banks and UPI please read out notes on the ‘Changing
Landscape in Banking Sector’

NFC

Near-field communication (NFC) is a set of communication protocols that enable two electronic
devices, one of which is usually a portable device such as a smartphone, to establish
communication by bringing them within 4 cm (2 in) of each other. NFC devices are used in
contactless payment systems like payment from a mobile to the merchant

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 4.5 Smart Cards and POS
Smart card is nothing but the cards which stores information about the customer and its transaction
details.

a. It looks like a normal debit or credit card but is more than that. It stores information i.e. finger
print and the photo of the customer.
b. To use it’s plugged in the hand-held device to do the transaction and customers face and finger
print is matched with those on the card to do the authentication. So in this case no internet is
required as information on the card is matched with that of customer during each transaction.
c. Cash is taken or given to the customer and transaction is recorded on POS (hand-held device)
and the smart card
d. Later the POS is connected to Bank servers when internet is available to transfer the transaction
details
e. History of the transaction details is also stored on the smart card to be referred in future
f. The disadvantage is that there is a risk of customer withdrawing more money than the balance
in the account as during transaction no real time matching is done between money to be
withdrawal and actual balance

4.6 Other Points related to Use of Technology

1. RBI in 2007 announced $12 million of Financial Inclusion Technology Fund (FITF) to promote
and enable technology adoption

2. RBI also launched two initiatives for Financial Inclusion

a. SBI Tiny – In this each customer was given a smart card. When the transactions were done
on the hand held device the transactions got recorded in the smart card. The card was then
brought near to the printer to print the record of the transaction

b. GOAP (Government of Andhra Project): This was a pilot project done with govt. of Andhra
Pradesh. In this the technology was similar to that of the SBI-Tiny project.

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 3. T-banking: It is about using cable wires for doing transactions. Every house has a television and
a cable connection. This idea is still in discussion stage and obviously would require television
sets which are capable of doing transactions through card swipe or any other means

5 Other Technological Developments in the Banking Area

There are some other technological developments in the banking area which are not necessarily only for
Financial Inclusion but can used as a measure for Financial Inclusion. These developments are given below

1. CBS: A major technological development in banking sector is the adoption of the Core Banking
Solutions (CBS). CBS is networking of branches, which enables customers to operate their
accounts and avail of banking services from any branch of the Bank on CBS network, regardless
of where the customer maintains his/her account. The customer is no more the customer of a
Branch as he becomes the Bank’s customer. Thus, CBS is a step towards enhancing, customer
convenience through, any-where, anytime Banking. It is important to leverage on to this
technological advancement to look at areas beyond CBS that can help in not just delivering quality
and efficient services to customers but also generating and managing information effectively

2. White Label ATM’s: Another major technological development, which has revolutionized the
delivery channel in the banking sector, has been the growth of Automated Teller Machines (ATMs).
The banking space has seen considerable growth through the ATMs, but the same had been
restricted principally to the urban/metro areas.

In the above context, RBI reviewed the extant policy on ATMs and it was decided to permit non-
banks to set up, own and operate ATMs to accelerate the growth and penetration of ATMs in the
country. Such ATMs will be in the nature of White Label ATMs (WLA) and would provide ATM
services to customers of all banks. Non-bank entities proposing to set up WLAs have to make an
application to RBI for seeking authorization under the Payment and Settlement Systems Act
2007

3. Development of National Payment Systems: The payment system could be broadly divided in two
segments:
a. Paper-Based payments
b. Electronic Payments
Paper-based Payments:
Use of paper-based instruments (like cheques, drafts etc.) account for nearly large percent of the
volume of total non-cash transactions in the country. Reserve Bank had introduced Magnetic Ink
Character Recognition (MICR) technology for speeding up and bringing in efficiency in processing
of cheques. Recent developments in paper-based instruments include launch of Speed Clearing
(for local clearance of outstation cheques drawn on core-banking enabled branches of banks) and
introduction of cheque truncation system (to restrict physical movement of cheques and enable
use of images for payment processing).

Electronic Payments:

Remember those days of long queues in bank for withdrawal of money. What you do. Write a
cheque, go to bank, stand in queue and take the token, wait for your number to be announced by
ding dong bell, you numbers announced you go to withdrawal window and request for good quality
currency notes and that fellow angrily look upon you and gives you what he has. So how are that
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 experience and what revolutionary experience you get today? Thanks to the information technology
and the upgrades in our banking sector and thanks to Reserve bank of India (RBI) for introducing
the paperless work called electronic funds transfer (EFT) mechanism.

Many of us are using internet banking facility almost daily but are unaware of the terms so called
RTGS, NEFT and ECS words. Let us understand the meaning of each and every term in detail
here and try to adapt to this latest technology in use.

i. NEFT: This is a better version of RBI-EFT system. In RBI-EFT there is a limit in location,
whereas in NEFT there is no geographical location problem and only requires both the bank
to be NEFT enabled system. Under NEFT, the transfer takes place either on the same day
or on the next day, depending on the time of instructions given. NEFT is on net settlement
basis. NEFT involves four settlement cycles a day 9.30 am, 10.30 am, 12 pm and 4 pm. Thus
if a customer has given instruction to its bank to transfer money through NEFT to another
bank in the morning hours, money would be transfers the same day, but if the instruction is
given later during the day, money would be transferred next day.

ii. RTGS: RTGS is an instantaneous funds-transfer system, wherein the money is transferred
on a ‘real time’ basis and hence, happens in a real time mode. With this system you can
transfer money to other bank account with maximum 2 hours. In this system there is a limit
that you have to transfer money only above Rs 1 lakh and for money below Rs 1 Lakh
transactions, banks are instructed to offer the NEFT facility to their customers. This is
because; RTGS is mainly used for high value clearing. As of now, customers can use the
RTGS facility only up to 3 pm and inter-bank transactions are possible up to 5 pm .

iii. ECS: This system is used mainly for credit and debits of low value transactions which are in
large or frequent transactions. ECS can be divided into two types: ECS Debit, which involves
a transfer of funds from your account and ECS Credit which takes place when money comes
into your account. If you opt for monthly interest paying fixed deposit scheme then your
monthly interest are getting credited to your account by ECS Credit instruction. Other
transactions are dividend received on your investments, your monthly salary credit, refunds
from an IPO subscription, etc. Similarly, an ECS Debit involves making utility bill payments
directly from your bank account, EMI payments on loans, undertaking investments, et c .

6 Other Notifications by RBI

1. Lending to Minority Communities: In terms of Reserve Bank's extant guidelines on lending to
priority sector, a target of 40 per cent of Adjusted Net Bank Credit (ANBC) or Credit Equivalent
amount of Off-Balance Sheet Exposures (OBE), whichever is higher, as on March 31 of the
previous year, has been mandated for lending to the priority sector by domestic scheduled
commercial banks and foreign banks with 20 and above branches. Within this, a sub-target of 10
per cent has been mandated for lending to weaker sections which includes, among others,
persons from minority communities

2. Lending to Self Help Groups (SHG): To scale up the SHGs linkage programme and make it
sustainable, banks were advised that they may include SHG linkage in their corporate
strategy/plan, training curriculum of their officers and staff and implement it as a regular business
activity and monitor and review it periodically. Some more steps taken are

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 a. Separate Segment for SHG’s under priority sector: In order to enable the banks to report
their SHG lending without difficulty, it was decided that the banks should report their lending
to SHGs in their repots.
b. Relaxed Margin and Security Norms: As per operational guidelines of NABARD, SHGs
may be sanctioned savings linked loans by banks (varying from a saving to loan ratio of 1:1
to 1:4). However, in case of matured SHGs, loans may be given beyond the limit of four times
the savings as per the discretion of the bank
c. Presence of Individual defaulters should not be negative for SHGs: The defaults by a
few members of SHGs and/or their family members to the financing bank should not ordinarily
come in the way of financing SHGs per se by banks provided the SHG is not in default to it.
However, the bank loan may not be utilized by the SHG for financing a defaulter member to
the bank.

7 MCQ’s (Multiple Choice Questions)

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