Creating Financial Inclusivity: A Case-study of Banking ...

Creating Financial Inclusivity: A Case-study of Banking CorrespondentModel in IndiaKartik Goel 1 , Gaurav Anand 2 and Aakash Kushwaha 31. AbstractThe main aim of our study is to show how the Banking Correspondent Model can createfinancial inclusivity and help in empowering the people financially and equipping them withthe knowledge and the means to optimally manage their money is vital. In our paper we havefirst looked at the very definition of financial inclusion and exclusion and their importance forsociety.Then we have looked at the current scenario of the financial sector of India. We have focusedon how Banking Correspondents can be a possible solution to the problem of financialexclusion and then tried to evaluate the impact of the BC Model in India so far. We have triedto measure the problems that have come in implementation of the BC Model in India andhave tried to give possible solutions for the same. To measure the impact of the BC Model inIndia, we have plotted the Roger’s diffusion curve for the same. We have also given aBanking Correspondent Communication Architecture (BCCA) that we think should be themost important thing while implementation of this model.Field of Research: Financial Innovation to achieve Financial inclusion2. IntroductionFinancial inclusion can be said to comprise of ensuring access of financial services and timely,adequate credit to vulnerable groups (Dr. Rangarajan Committee on financial inclusion) and givingpeople an opportunity to build better lives for themselves and their children (Dr. Subbarao, theGovernor of RBI, 2009). It means that people who don’t have the access to banking should be providedwith that opportunity. It aims at providing appropriate, low-cost, fair and safe financial products andservices or instruments, such as bank accounts, affordable credit, assets, savings, insurance,payments and remittance facility as well as money advice from mainstream providers to all. (RakeshMohan, Deputy Governor, RBI, 2006). It is eventually aimed at providing financial stability so as to haveinclusive growth.Financial Exclusion means lack of access to low cost and safe financial services and banking facilitiesto certain segments of society. It is mainly denial or inaccessibility to basic financial services due tofactors like social and economic position, financial literacy, and distance in travelling, hours of operation(Dr.K.Ravichandran, Financial Inclusion - A path towards India’s future economic growth).The financially excluded sections largely consist of farmers, landless labourers, self employed, urbanslum dwellers, migrants, ethnic minorities, senior citizens and women. The majority of the people livingin rural areas don’t have access to financial services.1 Department of civil Engineering, IIT Delhi, Email: kartikgoel.iitd@gmail.com, Phone: +91-98713123712 Department of Mechanical Engineering, IIT, Delhi, Email: gaurav28a@gmail.com, Phone: +91-98106759353 Department of Civil Engineering, IIT Delhi, Email: kushwaha.aakash@gmail.com, Phone: +91-9990483607

3. Current scenario of financial exclusion in IndiaThere exists a rural-urban divide with respect to banking services in terms of usage. Many people invillages still don’t have bank accounts. This divide has widened in the last decade.Table 1 : Deposit and Loan Accounts in Rural and Urban India (per 1000 persons)PARTICULARS DEPOSIT ACCOUNTS CREDIT ACCOUNTS1996 2006 1996 2006RURAL 322 325 64 62URBAN 699 724 50 115Source: RBI Basic Statistical Returns and Population CensusThe number of deposit accounts (per1000 persons) has increased from 322 in 1996 to 325 in 2006 inrural areas, whereas the comparable figures for urban areas was 699 which increased to 724 in 2006.For credit accounts (per 1000persons) there was a decline in the number of accounts during the period1996 to 2006 in the rural areas. With 70 per cent of the population living in the rural areas, a decline inthe credit accounts and slow increase in the deposit accounts clearly shows the level of financialexclusion.3.1 Financial Inclusion and Development IndicatorCountryTable 2: Composite Index of Financial Inclusion, Poverty, Unemployment & Gini IndexComposite Index ofFinancial inclusion(%of population with accessto financial services) (2008)Poverty(% ofpopulationbelow povertyline)UnemploymentDuring 2000-2004( percent)Gini Index(%)India 48 28.6 4.3 32.5Bangladesh 32 49.8 3.3 31.8Brazil 43 22 9.7 58China 42 4.6 4 44.7Indonesia 40 27.1 9.9 34.3Korean republic 63 - 3.5 31.6Malaysia 60 15.5 3.5 49.2Philippines 26 36.8 9.8 46.1Sri Lanka 59 25 9.0 33.2Thailand 59 13.1 1.5 42Source: World Bank (2006), World Development Indicators, Washington; World Bank (2008), Finance for All –Policies and Pitfalls in Expanding Access; Washington.The above data shows that countries with large proportion of population excluded from the formalfinancial system also have higher poverty ratios and higher inequality. India has a lower percentage ofpopulation with access to financial services even when compared to other developing countries such asSri Lanka, Korea, Thailand and Malaysia, which clearly shows the extent of financial exclusion in India.Lower degree of financial inclusion is leading to higher poverty, unemployment and inequality in incomedistribution.

IntroductionWith smartphone and tablet ownership globally on the rise 1 , it is a safe assumption that this directlycorrelates to an increase in the number of people interacting with the Web via mobile devicesA Time Magazine Poll 2 found that 40% of Americans believe that the mobile internet has affected theway they live their lives. With the majority of users showing signs of smart phone addictions that keepthem glued to their devices for anything and everything, these statistics just further underscore thatfirms need to cater to their mobile-toting customers, while still taking heed to traditional desktop users.In order to remain ‘in the customer’s view’, financial firms must stay current and leverage the mobileWeb to establish a meaningful presence on their customers’ devices. Recognizing this necessity, manyfinancial services firms are providing mobile optimized Web sites catering to the mobile-broadbandsubscribers by:Creating a seamless mobile experience reminiscent of traditional desktop Web sitesUsing innovative strategies in providing financial content for mobile consumptionHowever, one overarching question remains: exactly what content should be mobile accessible?DALBAR’S Mobile InSIGHT analyzes financial services firms’ offerings and recognizes those who create ameaningful user experience fit for mobile consumption.1 Source: http://www.pewinternet.org/fact-sheets/mobile-technology-fact-sheet/2 Source: 2012 TIME Mobility Poll: http://content.time.com/time/interactive/0,31813,2122187,00.html4 Mobile InSIGHT – Mobile Web Report | DALBAR © 2015

Table 5: No. of BCs appointed by private sector banksPRIVATE SECTOR BANKS1 Bank of Rajasthan Ltd NIL NIL2 Catholic Syrian Bank Ltd NR NR3 City Union Bank Ltd NR NR4 Development Credit Bank Ltd NR NR5 Dhanalakshmi Bank Ltd NR NR6 The Federal Bank Ltd 2 687 Yes Bank Ltd NIL NIL8 HDFC Bank Ltd NR NR9 ICICI Bank Ltd 38 13665910 IndusInd Bank Ltd NR NR11 ING Vysya Bank Ltd NIL NIL12 Jammu & Kashmir Bank Ltd NR NR13 Karnataka Bank Ltd NIL NIL14 Karur Vysya Bank Ltd NIL NIL15 Kotak Mahindra Bank Ltd NR NR16 Lakshmi Vilas Bank Ltd NIL NIL17 Nainital Bank Ltd 1 53218 Ratnakar Bank Ltd NR NR19 SBI Comm. & Inter. Bank Ltd NIL NIL20 The South Indian Bank Ltd NIL NIL21 Tamilnad Mercantile Bank Ltd NIL NIL22 Axis Bank Ltd 3 676000Total 44 813259NR- Not Reported6. Problems and ChallengesAlthough the Banking Correspondent Model has experienced some success, there have been severalhurdles and challenges. We have looked at some of the challenges in terms of different factors. Theyare:6.1 Operational Issues:a) Cash handling- Allowing BCs to handle cash is the biggest challenge. Ninety-nine percent of thefinancial transactions are in cash, warranting high-cost cash-handling operations and added operationalrisks. Moreover, clients tend to perceive that the BCs are the owners of the transactions and notfacilitating them on the banks’ behalf.

7. Banking Correspondent Communication ArchitectureIntroduced in January 2006, the banking correspondent model in India is still in its infancy. The study ofthe impact of BC model so far clearly indicates the lack of financial literacy among the people in therural areas as the major hindrance in its successful implementation. In order to look at the adoptionissues of the BC model in India we have tried to evaluate it from the point of view of the diffusion ofinnovation theory. In the book Diffusion of Innovations, Rogers suggests a total of five categories ofadopters in order to standardize the usage of adopter categories in diffusion research. The categoriesof adopters are: innovators, early adopters, early majority, late majority, and laggards (Rogers 1962,p. 150).1. Innovators - Innovators are the first individuals to adopt an innovation. In our case thePanchayat Heads and the financially literate individuals like the teachers in the schools or thehigh level officials in post offices, hospitals will be the first ones to adopt the BC model.2. Early adopters - This is the second fastest category of individuals and has the highest degreeof opinion leadership among the other adopter categories who adopt an innovation. The SelfHelp Groups (SHGs) are most likely the early adopters for the BC model. Since the SHGsthemselves are village-based financial intermediaries their opinion will have an importantinfluence on the other people. Even though the BC model is still in its introductory stage and asof yet has only been able to gather the innovators and early adopters but looking at its growthwe can also predict the early majority, late majority and laggards.3. Early majority - Individuals in this category adopt an innovation after a varying degree of time.The forward looking youth and individuals in constant contact with the innovators and the earlyadopters form this category of adopters.4. Late Majority - Individuals in this category will adopt an innovation after the average member ofthe society. The late majority includes the working class people with low income and savingslike the farmers or those having shops etc. or in other words the common man in the ruralareas belong to this category. They may feel safer by keeping whatever they earn withthemselves rather keeping it in banks. It is only through proper communication and financialliteracy that they can be included into the mainstream.5. Laggards - Individuals in this category are the last to adopt an innovation. This includes peoplewith a very low level of income. They will have no motive behind using the BC model.

Figure 1 : Roger’s diffusion curve for measuring effectiveness of the BC ModelPanchayatHeadsFinanciallyLiteratepeople likeTeachersSelfHelpGroups(SHGs)YouthPeople incontactwith I & EALow Incomeand LowSavingsindividualslike farmersPeople withextremelylow level ofincomes8. SolutionsSolutions can be several to address the various problems. Selection of updated and efficienttechnology is a must. The system must be made more secure by incorporating both card and biometricaccess. The BC model should be capable of handling multiple products and services. The infrastructureand system should be made flexible. It should be made interoperable, which means that customerscan transact from the branch or other BCs. The technology and infrastructure should be robust andeasily upgradable. Importantly, it should be cost effective. Training of BCs and financial literacy must beemphasized.Solutions can be several to address the various problems. Selection of updated and efficienttechnology is a must. The system must be made more secure by incorporating both card and biometricaccess. The BC model should be capable of handling multiple products and services. The infrastructureand system should be made flexible. It should be made interoperable, which means that customerscan transact from the branch or other BCs. The technology and infrastructure should be robust andeasily upgradable. Importantly, it should be cost effective. Training of BCs and financial literacy must beemphasized.9. ReferencesBarman,D., Mathur, H.P. and Kalra, V. (2009) "Role of Microfinance Interventions in, FinancialInclusion: A Comparative study of microfinance models”, The Journal of Business Perspective, Vol. 13,No. 3, pp. 51-59.Beck,T., Kunt, A.D. and Peria,M. "Reaching out: Access to and use of banking services acrosscountries," Journal of Financial Economics, Elsevier, Vol. 85 No.1, pages 234-266.Bryson, J.R. and Buttle, M. (2005) "Enabling Inclusion Through Alternative Discursive Formations: TheRegional Development of Community Development Loan Funds in the United Kingdom", The ServiceIndustries Journal, Vol. 25, No. 2, pp.273-288.

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