Bridging the rural urban banking divide: what s been done and what needs to be.

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1 Bridging the rural urban banking divide: what s been done and what needs to be. Thought Paper Universal Banking Solution Systems Integration Consulting Business Process Outsourcing

2 Bridging the rural urban banking divide: what s been done and what needs to be. The numbers tell the story. According to the UNICEF, in India: 54% of the urban population gained access to improved sanitation facilities in The corresponding figure was 21% for the rural population. Between 2006 and 2010, 33% of urban children under five were underweight. This number rose to 46% in rural areas. The 2011 Census on Housing, Amenities and Assets says that nearly 93% of urban households have electricity, but only 53% of rural ones do. The story of the great rural urban divide is not new. And it continues to pervade every aspect of life in India from economic, to social to demographic. Financial inclusion is one of the key initiatives taken by the Government of India to reduce the inequality between India s rural and urban citizens. This term came into the limelight a few years ago, when the Reserve Bank of India (RBI), in its annual policy statement of , urged the banking industry to change their exclusionary practices and bring vast unbanked sections within their fold. While there has been some improvement in banking access a few areas are 100% covered disparities remain. In 2011, it was estimated that 68% of urban households used formal banking facilities, versus only 54% of rural ones. Penetration of other financial products, such as insurance and savings, is much lower. Clearly, there s a huge task ahead of the financial services industry. However, before examining the ways in which they can go about fulfilling it, let s take a quick look at what has transpired so far. Much has happened, but it isn t nearly enough Regulatory moves At the highest level, the thrust to financial inclusion is provided by India s Banking Regulations. New private bank licenses are issued with the stipulation that at least 1 branch in 4 will be located in an unbanked rural area with a maximum population of 9,999 (as per the 2001 census). Public Sector Banks are mandated by the RBI to reserve 40% of deposits left over after Cash Reserve and Statutory Liquidity allocations (CRR and SLR respectively) for lending to the Priority Sector and to the economically weaker sections of society. In 2005, Know Your Customer (KYC) norms were eased specifically in the case of small bank accounts to help those who were unable to furnish any documentation to open an account. In these cases, an introduction from an account holder who had undergone a complete KYC assessment was considered good enough. In December 2009, regulations were relaxed to allow domestic scheduled commercial banks to freely open branches after taking general permission in tier III to tier VI areas that had less 50,000 residents. Also, in the North Eastern states and Sikkim, these commercial banks were permitted to open branches in rural, semi-urban and urban areas without having to seek RBI permission each time. Institutional network A number of institutions have been set up with the express purpose of improving financial access 02 Thought Paper

3 in rural areas and encouraging wider usage of banking services among those with accounts. These include Regional Rural Banks (typically sponsored by the Central and State Governments and a Public Sector Bank), Co-operative Banks, Non Banking Finance Companies, Micro Finance Institutions and NABARD (National Bank for Agriculture and Rural Development), which as its name suggests, is engaged in lending to smalltime farmers, weavers, traders, craftsmen and the like. When large commercial banks directly participate in the financial inclusion business, they typically use a hub and spoke model to deliver their services in unbanked areas, wherein the bank is the hub that is connected to multiple spokes, which could be correspondent agents, Micro Finance Institutions, Rural Banks, the postal network, local small businesses or even influential villagers. Other financial institutions, such as insurance and asset management firms have also done some innovative things. For example, the Life Insurance Corporation of India is known to penetrate the remotest of locations with a one-man setup, responsible for all activities, starting from collecting applications and premiums to delivering the policies to their respective holders. Initiatives This network of institutions and agencies described above fulfills the inclusion agenda with a number of ground level initiatives. Some of the notable ones include the Kissan Credit Card scheme devised jointly by RBI and NABARD to provide cheap and easy cash credit facilities to farmers, Loan Melas providing loans on the spot, and Mobile Vans, which literally take the bank to every doorstep in places where there are no branches or ATMs. Introduction of no-frills accounts, which are free of a minimum balance maintenance clause, and at par checks (which allow timely access to funds even if the branch where the account is held is located far away) have also contributed to the cause. But there s still a long way to go The fundamental problem is that financial inclusion has no impetus, other than the push from the Government and regulators. Banking institutions work at financial inclusion mainly because it is a regulatory obligation; hardly anyone pursues it as a great business opportunity. That s because the current circumstances don t make for a strong business case. Setting up physical infrastructure branches and ATMs complete with staff and equipment is very expensive, and cannot be justified by the low value transactions that are a feature of any unbanked market. Given the sad state of Indian infrastructure, building even a single outlet takes time and effort, unlike in the developed world, where branches are erected overnight. What s more, recovering hundreds of thousands of unsecured outstanding loans can be a logistical nightmare. There are also other practical difficulties, such as the target customers lack of identity documents or their distrust of the banking system, which make it harder to get them on board. Going down the virtual route of Internet and mobile banking addresses the cost issue to quite an extent, but is only possible in places where there is network coverage. That still leaves vast tracts of land out of the equation. But even as penetration of such areas necessitates a physical presence of some kind (banking agent/ mobile van/ kiosk/ local office), it is possible to employ a technology-led model in other places that have electrical and telecom connectivity. Indeed, technology is the only solution for building a financial inclusion business quickly and viably. For example, Public Sector Banks Thought Paper 03

4 such as Punjab National Bank, Oriental Bank of Commerce and Punjab and Sind Bank have taken the initiative to provide the Regional Rural Banks under their guardianship with core banking software, which has enabled them to extend Anytime Anywhere banking services through ATMs and Internet, to customers. We need more actions to bridge the divide Huge efforts are needed to realize the nation s goal of reaching formal financial services to all its 600,000 villages. Some time ago, the RBI directed banks to formulate a roadmap for bringing villages with a population above 2,000 within the ambit of their services by March 2012, and also distributed 73,000 villages to different banks for their attention. The regulator also mandated that all databases containing rural transactions be brought under the core banking umbrella by the end of One of the most significant milestones in financial inclusion is the Aadhaar initiative that aims to provide unique identification to every Indian citizen. Several banks are currently working with the Unique Identification Authority of India (UIDAI) to enroll individuals and give them bank accounts. They are also engaging with the authorities to convince them to route Government subsidies and other payments through the formal financial network. Rural and Co-operative Banks, which are the mainstay of inclusion, should be allowed to leverage the existing technology infrastructure (such as ATM networks) and data resources of the large banks that they re associated with. The State Bank of India has mooted the concept of Web enabled kiosk banking in outreach areas. More should follow their lead by installing new generation ATMs or Kiosks that can double as mini banks offering basic banking facilities, such as account opening and cash deposit. The best way to go about this is by launching a pilot in one rural branch before replicating it in the remaining centers. It is also necessary to teach the local population to use these devices. Technology companies can also play a more active role in financial inclusion. In many countries of Africa and South America, network operators have stepped into the role of financial provider by offering very attractive mobile money transfer and payment services. IT vendors can participate in this agenda by acting as a channel or authorized agent of a bank, and taking on the responsibility of receiving service requests, inwarding applications, issuing receipts to customers and forwarding soft files along with the physical applications to the local hub for processing. Come to think of it, IT companies can handle most banking activities, from account opening to loan processing, as long as they don t involve the handling of cash. Many Regional Rural Banks are losing money. In 2005, PNB launched a drive to merge several of its RRBs. More such actions are required. In the long run, the goal should be to consolidate the fragmented banking landscape in outreach areas which is currently dotted with small time lenders and a plethora of small institutions into a robust and effective financial system. 04 Thought Paper

5 References 1. Press Note on Release of Data on Houses, Household Amenities and Assets, Census 2011, March 13th 2012, in/2011census/hlo/data%20sheet/hlo%20 Press%20Release% pdf 2. Unicef Statistics, infobycountry/india_statistics.html livemint.com/2011/09/ /financial- Inclusion--A-road-I.html 4. aspx?mode=0&id=5068, org.in/scripts/notificationuser. aspx?mode=0&id= Financial Inclusion A Road India Needs to Travel, September 21st 2011, Deepak Sinha Lead Consultant, Infosys Thought Paper 05

6 About Finacle Finacle from Infosys partners with banks to transform process, product and customer experience, arming them with accelerated innovation that is key to building tomorrow s bank. For more information, contact [email protected] Infosys Limited, Bangalore, India, Infosys believes the information in this publication is accurate as of its publication date; such information is subject to change without notice. Infosys acknowledges the proprietary rights of the trademarks and product names of other companies mentioned in this document.