1. finance
2. bank

Approach Paper
on
it-enabled financial inclusion
How to Leverage Technology for
Broad-Basing Financial Inclusion Intiatives
IBA Sub-Committee on IT - enabled Financial Inclusion
Indian Banks’ Association
Department of Social Banking
Unit Nos. 1, 2 & 4, 6th Floor, Centre-1, World Trade Centre Complex,
Cuffe Parade, Mumbai - 400 005.
Tel: +91 (22) 2217 4040 • Fax: 2218 4222 • Website: www.iba.org.in
Sub-Committee
on
it-enabled Financial Inclusion
Convenor
Mr.Kalyan Mukherjee
Executive Director, Andhra Bank
Members
Smt.Soundara Kumar
Chief General Manager
Rural Business (Non Farm)
State Bank of India
Corporate Centre, 1st Floor
Nariman Point
Mumbai – 400 021.
Shri S C Dhole
General Manager (IT)
UCO Bank
Head Office-2
D D Block 3 7 4 Sector-1
Salt Lake, Kolkata
Shri A Srinivasan
Dy. General Manager(TMD)
Indian Bank
Head Office
66 Rajaji Salai
Chennai – 600 001.
Shri C M Raman
General Manager (DIT)
Syndicate Bank
Corporate Office
Gandhinagar,
Bangalore – 560009
Shri A L Nageswara Rao
General Manager
Andhra Bank
Priority Sector Policy,
Dr.Pattabhi Bhavan,
5-9-11 Secretariat Road, Saifababad
Hyderabad – 500 004.
Shri R M Dewan
Dy.General Manager (IT)
Punjab National Bank
Head Office, 5 Parliament Street
New Delhi – 110 001.
Shri R P Tripathi
Shri V Krishnan
Dy. General Manager (IT)
Canara Bank
Naveen Complex,
14 M G Road
Bangalore – 560 001.
Dy.General Manager
Central Bank of India
Priority Sector Department
Maker Tower ‘E”, 21st Floor
Cuffe Parade
Mumbai – 400 005.
Shri Rishabh Bajpai
Shri G S Narang
CTO – Microfinance &
e-governance,
YES Bank Ltd.
48 Nyaya Marg, Chanakyapuri,
New Delhi – 110 021
IBA Sub-Committee on IT-enabled Financial Inclusion
Chief Manager
Punjab & Sind Bank,
CPPD,Bank House, 2nd Floor,
21 Rajendra Place,
New Delhi – 110 008.
2
Approach Paper
on
it-enabled Financial Inclusion
Index
v Executive Summary
4
v Challenges in broad-basing Financial Inclusion
9
v Focus Areas for Financial Inclusion
10
Community Banking
10
Business Correspondent / Facilitator Model
10
Customer Education
11
Credit Counseling
11
Credit Offtake
12
v Approach to Technology Implementation
12
v Choosing the Right Technology Framework
13
v Recommendations for Implementation
16
Need for Standards
17
Recommendations of the Rangarajan Committee
17
Technological Requirements
18
Centralized Hub
18
All-purpose Single Card
20
Online and Offline Model
21
v Points for further Deliberation
22
v Conclusion
23
vAction Points for Banks & Issues to be taken up with
Government and Regulators
26
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IBA Sub-Committee on IT- enabled Financial Inclusion
it-enabled financial inclusion
How to Leverage Technology for
Broad-Basing Financial Inclusion Initiatives
Executive Summary
“Financial Inclusion is the delivery of financial services to all the people in a fair, transparent
and equitable manner at affordable cost. Financial Inclusion has the potential to improve the
standards of life of the poor and the disadvantaged. Financial services permit individuals and
households to manage the risk and uncertainties to save risk free, borrow on better terms, to
invest in a business venture or property and to cope with unforeseen expenses.”
Objectives of a Technology Intervention are broadly to reduce costs of doing business,
enhance business productivity and better manage business risks. The approach to
Technology Implementation therefore requires the need for a phased approach, so as
to stagger capital investment in technology, better align the system to meet business
needs, provision flexibility to incorporate user feedback, and identify a key theme for
which technology should be leveraged. Technology thus chosen should focus on building
interfaces that go beyond transaction recording and collecting information that goes beyond
meeting reporting requirements. It should support different technologies for different
legs of the microfinance value-chain, enable credit scoring, meet not only the regulatory
reporting objectives but also develop better customer insight, business performance
management and efficiencies, as also support the need for collecting enormous amount
of data, both positive and negative. Enablers for technology infrastructure actualization
thus requires a commercial mindset, a positive policy approach, subsidies & incentives for
capital expenditure, developing the BC & BF model, as also exploring outsourcing and
development of a Credit Bureau for better management of business. There is also a need
for building industry standards and collaboration between various stakeholders to ensure
success.
Apex bodies and Banks need to play a major role to:
1. Develop uniform structure and modalities for inclusive growth
2. Develop an actionable technology framework that the whole banking industry can
leverage for the benefit of furthering the financial inclusion objective.
3. Evaluate and recommend suitable technology for Banking Industry with acceptable
standards for contactless cards/biometric facility with interoperability for using
various devices conforming to defined standards.
4. Play an active role in implementation of various components such as (but not limited to) a
IBA Sub-Committee on IT-enabled Financial Inclusion
4
entralized hub/switch for interfacing transactions with CBS systems of Banks, allpurpose single card & support for both online and offline operational models.
5. Arrange pilot testing of transaction updation in different CBS systems and ensure that
results are made available within a fixed time frame.
6. Provide support to maintain/upgrade standards & ensure conformance by
stakeholders.
Introduction
Indian banking sector holds the rather dubious distinction of being over-branched and
under-serviced – one which it would be better off shedding! An embarrassing feature of
our financial services provisioning is that it has largely bypassed a large segment of the
Indian population and institutional support to the ‘poor India’ has only regressed over
the years, pointing to the falling reach of formal banking services to them. A plethora
of reasons exist for this wilful ignorance – from lack of a clear policy framework to
the limiting infrastructure, thus making the financial inclusion proposition an extremely
difficult concept to pursue, both commercially and altruistically. However, a true analysis
of the landscape will also reveal that banking with the poor is more about psychology and
perceptions rather than anything else.
Some of the main hindrances1 of choosing not to do business are:
1. Distance
3. Availability of skilled labour 2. Location constraints
4. Availability of information
Rural Stake: Non-Stop Drop?
Percentage of rural credit given by SCBs fell from 20.1% (1992) to 10.1% (2001)
 Percentage of outstanding credit lent to agriculture between 14-16.5% for public
sector banks and 6-10% for private sector banks (min. requirement is 18%)
C/D Ratio: Falling Regardless of Rules?
 C/D ratio of rural SCB branches fell from 60% in 1991 to 39% in 2001 (requirement 60%)
 Lack of other saving options in rural areas
Physical Presence: Shutting Shop?
 2379 rural SCB branches shut down in 1993-94 and 1994-95
 Non-viable rural branches converted to satellite offices
 Loss of brick-and-mortar branches and personal interface that are crucial factors
Disbursement Trends: Differing Drift?
 Slow down in disbursements and no. of accounts for marginal/small farmers & long term finance
 Inter-state variations:
 Kerala and Rajasthan: equitable credit reach for short-term loans
 Bihar: marginal and small farmers favoured for short-term loans
 Punjab: decline in long-term loans for marginal and small segments
1
People living in remote areas are very much discouraged by the cost of transport for approaching the nearest banking centre, which apart from
money also involves spending of time which could be otherwise spent for earning one more buck.
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IBA Sub-Committee on IT- enabled Financial Inclusion
No doubt, quite a few Banks have forayed into rural areas for expanding the horizon
of financial inclusion. But a lot remains to be done because of existence of innumerable
constraints. Further, a standard or uniformity needs to evolve, so that the benefits reach
the really needy people. Things are however changing, and for the good. With products
and services getting increasingly commoditized in today’s maturing markets, building
commercially viable business models for BoP (Base of the Pyramid) has found renewed
focus both in the mind-space of academic thinking and board room meetings – not only
because it has been an unexplored opportunity till now, but also because it constitutes
Bulk of the Population. There is also an increasing realization now that welfare orientation
and commercial prudence are not necessarily disjoint objectives. On similar lines, financial
inclusion is also increasingly being driven by reasons that are beyond philanthropic
considerations and regulatory compulsions.
Financial Inclusion may be defined as the delivery of financial services to all the people in a
fair, transparent and equitable manner at affordable cost. Financial exclusion is the lack of
access by certain consumers to appropriate, low cost, fair and safe financial products and
services from mainstream providers. This exclusion predominantly covers poor, underprivileged, uneducated section of the society and more prevalent in rural areas, and leads
to financial exploitation. Poor therefore perpetually remain at the bottom-end of the
economic order. Financial exclusion further aggravates this poverty. The need of the hour
therefore is to ensure financial inclusion of these under privileged people, so that there
will be better interaction in the society, offering wide choices to all and paving way to a
equitable prosperity.
Source: 1Registrar General India 2 Statistical Sites of respetive governments 10-34 years
3
Mckinsey Global Institute 4 UN Department of Econimic and Social Affairs
IBA Sub-Committee on IT-enabled Financial Inclusion
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Over seventy per cent of people in India still live in villages. As per known macroeconomic
facts, India has over 210 Million households with more than 140+Mn households in the
rural areas.These households and the people living in rural area remain excluded from the
purview of the economic developments as they do not have easy access to the banking and
financial transactions and related facilities, even after 60 years of independence.Technology
has become the driving force of change in the modern world.
While financial inclusion initiative primarily aims to deliver financial services to all the
people in a fair, transparent and equitable manner at an affordable cost, making latest
technologies available in these areas is also one of the prerequisites for overall development
of our country. Technology has become the driving force of change in the modern world
and has not only changed the way we communicate, but has also altered our economic
structures. Technology–even in small amounts–is helping communities overcome
convention and tradition to take leaps forward. As technology – particularly Information &
Communications Technology – becomes advanced, better understood, cheaper and more
accessible, its innovative and new uses are being constantly devised and discovered. In its
broadest sense, ICT may be defined as the technology that facilitates collection, transfer
and transformation of data & knowledge, and hence collaboration across entities, in a
manner that is more efficient, faster and productive than what would have otherwise been
possible. With a renewed interest in reaching out to the unexplored financially excluded
market segments, technology has also taken center-stage. Hence, it is not surprising that
ICT is also being looked upon as an extremely viable option to circumvent the all too
evident problems that have traditionally inhibited any meaningful intervention in this area.
Despite this, majority of people living in rural area actually remain excluded from the
purview of technological advancements that have taken place, even after 60 years of
independence. There exists an acute digital divide (disparity between “haves” and “have
nots” of technology), which describes the fact that a certain section of the society (and
more so, people in rural areas) don’t have access to–and capability to use–modern
technology so as to drive individual economic development. There is, therefore, a need to
bridge this digital divide by ensuring equitable access for all, to these latest technologies.
Indian technology companies have been pioneers and preferred partners for global entities
in business transforming technology initiatives, given high quality of human resources,
policy support and cost arbitrage that India provides. While India has become the brain
and the back-office of the world over the last decade, it is time to now utilize the same
expertise and learning in our own backyard, and better leverage ICT interventions to
enable financially sustainable developmental interventions in general, and financial inclusion
intermediations in particular.
Developments in the field of information and communication technology sector and the
drastic reduction in the costs have spurred its expansion. Introduction of wireless phone
service and the Internet are transforming lives in ways unimaginable only a decade or
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IBA Sub-Committee on IT- enabled Financial Inclusion
so ago. Further, Internet provides tremendous opportunities for economic and social
development, and has become a key medium for communicating information and ideas and
conducting business. It promotes education through distance learning, facilitates scientific
advancements through sharing of research, and expands the reach of healthcare through
telemedicine. It has changed the way we live, learn, and work, and it will continue to
transform our lives. These new technologies have the potential to connect previously
isolated villages and populations, while giving businesses the chance to operate on a global
scale, previously unimaginable. Internet has also opened up new prospects for economic
activity in trade, retail and investment.
The impact is, however, larger than just this. As the world graduates to being a knowledgedriven economy, key cost-components today have changed from being labour and capital
considerations of a classical economy, to R&D, intellectual capital and servicing. Impact of
the information revolution is just beginning to be felt. The effect it is having on business
decision-making, policy, strategy and more increasingly on commerce – the explosive
emergence of Internet as a major, and perhaps eventually the major worldwide distribution
channel for goods, services, and managerial & professional jobs – is truly transformational.
This is profoundly changing economies, markets, and industry structures; products and
services and their flow; consumer segmentation, consumer values, and consumer behaviour;
jobs and labour markets. However, even with the advent of e-commerce2, one area where
progress of India is consistently slow is its backbone, which is rural India. Rural India
has therefore not been able to take advantage of ICT (Information and Communication
Technology).
While the effect that technology can have in addressing the issue of outreach and
circumventing the problem of lacking physical infrastructure has been talked about a lot,
it actually goes much beyond that. At a macro level, technology can help achieve a variety
of business objectives, and have a multi-dimensional positive impact on it. On one hand,
it can help lower the costs of doing business by not only reducing transactional costs but
also eliminating costlier, time & labour intensive workflows. On the other hand, it can lead
to enhanced business productivity by bringing
in efficiencies, effectiveness and economies of
scale and scope in business processes. Further,
it can enable structures for better management
control and insight, by helping monitor and
mitigate business risks in a timely manner. All
this can act as a perfect launch pad for building
and growing a successful enterprise.
Interestingly, all the above are also exactly the
kind of challenges faced by financial inclusion
interventions and it may therefore not be
incorrect to infer that technology can probably
2
e-commerce can be defined in broader terms as not only trade in goods and services across internet
but also new ways of conducting business and communicating with customers, suppliers and colleagues.
IBA Sub-Committee on IT-enabled Financial Inclusion
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play a central role in realizing the large objective of sustainable development of the world
economic order. All this therefore has relevance to current deliberations because this is
the kind of transformational effect that is also being envisioned for the till-now deprived
sections of our society. Hopefully, with the help of an enabling technology framework,
a focussed mindset and a motivated soul, we will be able to make a lasting impact on
economic development so as to alleviate poverty during our lifetimes!
Challenges in broad-basing Financial Inclusion
Some of the challenges that need to be overcome with a technology intervention
are listed below:
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Distance and reach
Environmental factors viz. terrains, high temperature locations, dust, humidity, storage
conditions different parts of the country
Use of Alternate models like Business Facilitators and Business Correspondents
Lack of Communication last mile
Arriving at a suitable delivery model
Storage of high volume low ticket data, part of CBS
KYC norms, account opening and Master data
Contingencies for link failure / BCP
Servicing of the equipments
Increasing the branch network in rural areas
Business Correspondent / own manpower
Choice of ideal and standardized technology solution across banks.
Handholding through Networks by establishing strong links with NGOs, Government
and other extension agencies, community based organizations etc.
Development of new products and services to meet the emerging needs of customers
brought in through financial inclusion.
Lack of marketing facilities
High density of population in some states such as UP, BIHAR, MP etc.
Awareness about technology usage, handling & storage of smartcards by rural
consumers
While the challenges are formidable, the technological advancements that have taken place
particularly in communication sector have provided with a lot of viable solutions to help
overcome the difficulties. The other side of the coin is vast untapped market in rural
areas – a virtual gold mine to be excavated. The need of the hour is developing a suitable costeffective model to serve the under-privileged and in the process Banks also stand to gain by way
of newer business opportunities.
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IBA Sub-Committee on IT- enabled Financial Inclusion
Focus Areas for Financial Inclusion
Community Banking
At present, Banks are offering the services only through their branches.The branches have
not been opened at far flung areas, leaving a gap in meeting the requirement of rural masses.
The time and cost involved in this exercise can’t be afforded by the rural persons. Thus all
the rural population is not financially included. But opening a branch at every village is not
feasible and viable due to the inadequate power supply, non–availability of digital network
for the seamless connectivity and migratory nature of the village population.
Business Correspondent / Facilitator Model
Majority of financially excluded groups are from poor, socially under privileged, disabled,
old as well as children, women, uneducated, ethnic minorities and mobile population. The
only way to include the leftover segment to banking stream is to reach them at their place
of residence or work i.e. by providing doorstep banking through cost effective technology
driven model Business Correspondents/ Business Facilitator (Private/ Public) with the use
of Technology will provide the desired result.The model will be successful only if it has the
acceptability and confidence of the rural folks.
BCs & BFs need to be involved as they are not only operating in a similar domain, but
they also have high acceptability and respectability in the area.Tie up arrangements
with Banks which has wherewithal ability to finance, accounting etc. with the BC
and BF that has a better ability to handle the last mile activities will help in increasing
the outreach of financial inclusion initiatives. The model will benefit society as a
whole. It will uplift the social and financial excluded poor thus developing the
society as a whole. The petty savings of the poor will be brought into the banking
stream. The droplets will add up to ocean.
With the objective of speedier adoption of BC and BF model, so as to accelerate
the process of financial inclusion, IBA should come up with recommendations on
various operational aspects:
1. Make recommendations on how operational efficiency can be improved upon and costs
driven down (wherein more specific learnings can be derived from various
international benchmarks, which are then applied to the Indian context) be included
in the framework.
2. Provide guidelines on how to better manage risks related to –
i. Loans to entities possessing un-collateralizable & extremely illiquid assets
ii. Information asymmetry about rural customers
iii. Possibility of a moral hazard observed in repayment behaviour
iv. Risk sharing mechanisms with B-F/Cs
IBA Sub-Committee on IT-enabled Financial Inclusion
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3. Lay down a clear technology adoption policy, covering all aspects related to mobile
banking, use of low cost ATMs, etc.
4. Chalk out the roadmap for investments in technology for financial inclusion frameworks
that can be leveraged by multiple Banks, while also inviting partnerships from reputed
Technology Institutions from across the world to help.
5. Give incentives to financial sector that will encourage them to enter this market – like
provide viability gap funding to cover operational risks, etc.
6. Lay down guidelines for outsourcing of banking related activities – given that BF &
BC model is primarily an outsourcing contract, and yet a clear framework on how
these contracts should be structured and what precautionary measures need to be
taken, is not provided for.
7. Set up of separate rating agencies with the objective of trying to reduce information
asymmetry – one each for the potential BF & BC and the other for the end-customer,
so as to enable Banks to take a view on who to do business with and who to bank
with.
8. Broaden the definition of financial inclusion, as it is very critical to include the urban
poor as well as financial needs other than credit in it.
Customer Education
Persons in unbanked remote villages are situated in the far flung areas still depend on local
moneylenders and are denied of the affordable banking services. The role of BC/BF in the
present model is an important one. They are not only the first point of contact with the
customers but they are required to educate the customer also about the benefits of having
an account with the bank. The strength of public domain like strong banks with the reach
of the private agencies to the far flung areas. Some of the agencies can be out of NGOs,
Farmers Clubs, SHG, Co-operatives, Community Based Organizations; IT enabled rural
outlets of corporate entities. The role of Bank’s Farmer Training Colleges and Information
Kiosks will be in addition to the BC and BF Model for Financial Inclusion.
Credit Counselling
Credit counselling is important for ensuring success of farmers in the remote areas. They
must be informed the credit facilities available in the bank to meet out their various needs
crop loan, loan for farm mechanization as well as personal loans to meet out petty needs.
The BC/ BF can play an important role in spreading the credit schemes and by providing
them credit counselling to choose from the various options available to them.
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IBA Sub-Committee on IT- enabled Financial Inclusion
Credit Offtake
Specific to credit offtake, there exists a multitude of cards like Kisan Cards, Debit Cards,
Credit cards–some usable online, while some used more as token of identity.There is a felt
need that with the advancement of technology, a person in a remote area should be able
to access his accounts/avail his credit limits with the use of only one card which should
also double up as his multi-purpose bio-metric enabled identity card.
Various options available for meeting the above objective, the issues involved and the
problems to be overcome are discussed in the rest of this paper.
Approach to Technology Implementation
As outlined before, ICT can help realize
multiple business objectives – such
as reducing cost of achieving financial
inclusion to enhancing productivity and
efficiency levels of such an intermediation
to even better managing business risks.
However, given a long gestation period
in introducing technology in any existing
process, the even longer learning curve
(that often involves unlearning as well)
and huge capital investments required for it,
implies that ICT infrastructure enablement for sustainable financial inclusion needs to be
a well thought out strategy. Further, technology tends to have the maximum impact when
a key theme for leveraging technology is identified, and then all the decisions that follow
rally around this central thought process. For instance, the kind of technology decisions
taken by a financial inclusion intervention focused on reducing its transaction costs will
be very different from another financial
inclusion intervention that wants to
be more productive in its outreach
and delinquency management efforts.
While the former may focus on basic
automation of back-office processes, the
latter will be better off in introducing
field technologies and a more robust
platform that helps in growing its scale
of operations, and more objective and
analytically driven credit decisions.
Hence, technology investments that may appear financially unviable in one case may actually
turn out to extremely rational and profit-oriented decisions in another.
IBA Sub-Committee on IT-enabled Financial Inclusion
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Further, technology adoption in itself is neither cheap, nor are its impact immediately
evident. It is therefore also important to have a phased approach to ICT infrastructure
enablement. Staggering capital investment in technology not only helps in better alignment
of the system towards business needs, but also provides flexibility towards incorporating
user feedback, thus making the whole process much more pertinent to the vision that
drives the initiative.
It is also important to appreciate that technology adoption should not be done for its
own sake because sometimes not pursuing a particular technology can lead to better
marginal returns. Classic example in the financial inclusion intermediation context could
be the idea of setting up kiosks that are principally used as extensions for sharing market
information and price discovery. While such interventions have made sense in the past, as
the cost of acquiring mobiles decreased faster than computers, even as voice network grew
faster than data network, setting up a computer kiosk only for information dissemination
only is becoming unviable as same can be achieved much more cheaply over the mobile.
Therefore, kiosks now – and more increasingly in the future – will have to become the
access points of more and more services in a manner that can differentiate them better
against competing technologies, for such interventions to be financially and practically
viable. Therefore, to derive maximum benefit out of any financial inclusion intervention
that relies on technology, it should focus beyond just automation and digitization for its
sake, to building capabilities, providing network externalities and leading to substantial
improvements in the core capabilities – in manners that are difficult to realize otherwise.
Technology actually creates value by transforming business processes and industry
structures. However, over time, costs of acquiring these – or sometimes alternative to
these – capabilities also spiral downwards. According to a popular maxim, the cost of a
technology halves and computing speed doubles every eighteen months. Therefore, as
these technologies become increasingly affordable and standardized, the productivity gains
or cost savings also become marginal, to the extent that they tend to be quintessentially
commoditized – which if adopted do not give any advantage, but not adopting them have
real costs and disadvantages associated with them. Extending the case above, as mobile
penetration increases and is now increasingly being used for dissemination of market
information, farmers who do not use this communication medium will loose out in
realizing market prices for their surplus produce.
Finally, it is also important to choose a technology implementation approach that is closely
aligned to the financial inclusion initiative’s broader business objectives, capital investment
capacities and internal technology management capabilities.
Choosing the Right Technology Framework
A variety of technologies are available in the market today, which can potentially play a
meaningful role in financial inclusion initiatives. From smart-cards to mobile phones, a lot of
technologies have also been explored and discussed on various forums in recent times.
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IBA Sub-Committee on IT- enabled Financial Inclusion
While each one of these alternatives has its own merits and de-merits, what needs to be
explored in any significant measure is to look at building platforms using some or all of these
technologies working in tandem, such that such a solution best leverages the advantages
of each of these technologies in a pragmatic way. It may therefore be worthwhile to look
at the microfinance value-chain as comprising of multiple types of transactions and then
choosing a technology that is best suited for each such ‘type’, from the perspective of
economic feasibility and contextual applicability. Also, the focus will then have to shift
from evaluating a particular technology per say, to the problem that it seeks to solve at a
broader level. Further, appropriateness of using a particular technology in a given context
will become more obvious if such an approach to decision–making is adopted.
Just to take forward the above point with a specific example, true advantage of smart
card is its ability to store information in an offline mode. Further, lower marginal cost of
provisioning multiple services interactively also differentiates smart card interventions, as
it may be difficult to achieve the same by any other delivery interface. However, in cases
where network accessibility is not a problem – and it is increasingly becoming less of an
issue in semi–urban and rural villages – or in interventions where medium term objectives
do not envisage providing multiple services through the same delivery channel, high cost of
smart cards may be economically unjustifiable? Further, even otherwise, instead of trying
to adapt smart cards so that they are able to carry out every type of transaction, it may
be a more prudent approach to also look at alternatives (like digital pens, for instance)
that will help in more economically carrying out transactions that are not interactive in
nature. Similarly, while the mobile phone is a good delivery channel because of network
externalities, it needs to evolve beyond just registering a presence as a voice-enabled
channel that has limited ability in carrying through a financial transaction.
As should be obvious then, one size doesn’t necessarily fit all! Therefore, if financial
inclusion intermediations truly seek to leverage technology for transformational impacts,
they should focus on 2 key aspects while taking decisions pertaining to it:
 Build technology-enabled interfaces that go beyond enabling transactions
 Use technology to capture information that goes beyond meeting reporting
requirements.
What this implies is that it will be prudent to explore aspects of
technology enablement beyond delivery channels, so as to also build core-backend
that facilitates capturing of more insightful & rich customer information, enhancing business
performance and realizing productivity gains.
Further, a plethora of business and pricing models are available today: such as open-source
models, pay-per-use models and development of customized solutions. Each of these has its
own pros and cons. For instance, an open-source solution may be overall cheaper, but may
require substantial internal technology capabilities for managing the application. Pay-per-
IBA Sub-Committee on IT-enabled Financial Inclusion
14
use models are best suited when a perpetual variable expense is preferred over any capital
investment, and can also potentially insulate the initiative from future technology shocks.
Customized solutions will require upfront investment and strong management support,
but will render maximum flexibility in adapting technology to differentiated service and
business requirements.
Discussion of any financial inclusion technology intermediation cannot be complete
without talking about the need for implementing a Credit Scoring framework. Credit
scoring has been in use over the past three decades by banks to score consumer credit
applications and to predict applicants’ probability of being “good”. However, it also needs
to be understood that credit-scores only help in predicting (with a level of accuracy that
is directly linked to the quality of data captured and the algorithm of the model used)
customers’ willingness to repay. It is of little use for ascertaining their ability to repay, for
which traditional methodology like cash-flow, debt-burden and income analysis still apply.
The key to implementing credit scoring is developing a comprehensive database of
information, for both approved and rejected applications. Given the asymmetric nature of
information about the poor, this database of information should encompass capturing all that
is known about the potential/actual customer (or can be known without over-burdening
the application process). The data should include both qualitative and quantitative data.
Once a significant historical base has been developed, the qualitative data can be analyzed
to generate a statistically significant probability model of a customer’s willingness to repay.
Measures must be incorporated in the loan origination process to ensure the quality and
completeness of the data is maintained. Capture of quantitative data (income, expense,
cash flow, balance sheet, margin analysis) in the database for each application will not play
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IBA Sub-Committee on IT- enabled Financial Inclusion
a role in statistical credit-scoring, but over time may be useful in benchmark-evaluations
and sensitivity-analysis of the likelihood of sufficient cash generated to repay the loan
according to agreed terms. This form of analysis is not credit scoring, but more attuned to
traditional corporate credit analysis on a small scale.
Further, there is more to risk management than credit scoring. The issues of credit risk at
the borrower level are one subset within the broader risk management functions. Other
risks, such as market, geo-political, operational, regulatory and human factor risks are still
significantly important aspects, which need to be dealt within manners similar to those
that are applied in conventional financial analysis.
Finally, other aspects worth mulling over, for any technology
intervention, are:
Portability – to reduce effort required to support applications across heterogeneous
platforms, programming languages & variety of compilers
 Flexibility–to support a growing range of multimedia data-types, traffic patterns, and
end-to-end quality of service requirements
 Extensibility – to support successions of quick updates and additions to take advantage
of new requirements and
emerging markets

Predictability & Efficiency
– to provide low latency
to delay-sensitive real-time
applications
&
high
performance to bandwidthintensive ones

Reliability – to ensure
that applications are robust,
fault tolerant, and highly
available

Quality – to ensure
performance

Speed – to enable quick
development and delivery of business critical applications

Recommendations for Implementation
IBA and IDRBT have to play a major role in synchronizing the different requirements of
the Banks as enumerated above and provide the technological solutions within a time
frame. We would further like to add that various banks are using different solutions at the
core level and their approach and status of computerization is at different levels.
IBA Sub-Committee on IT-enabled Financial Inclusion
16
Broadly, the following aspects need to be adequately addressed:






A uniform structure for enrolment of customers, conforming to extant KYC
norms needs to be developed and followed by all the Banks for the purpose of
Financial Inclusion.
Standards to be prescribed for the use of proximity/near field smart cards which are
interoperable in different devices.
A centralized hub/switch to be established on the lines of ATM switch for interfacing
with the CBS systems of different Banks.
Service area approach should be adhered for extending financial inclusion with specific
villages to be allotted to specific Banks.
Banks should endeavour to bring total prosperity and growth in the allotted villages,
developing them into multiple and microeconomic hubs of modern India.
Qualification and Training of Business Correspondents (e.g.; similar to insurance
agents)
Need for Standards
Standards need to be set up in following areas:








For identifying and appointing the BC /BF
Terms and conditions, agreement to be signed between the banks and BCs
Fidelity and insurance coverage for the field level agents
Standard for data storage in these devices
Standard for secured data transmission and related issues
Accounting standards for agents’ financial transactions with Banks
Centralized hub/switch to be established onlines of ATM Switch, for interfacing with
the CBS Systems of different Banks
Service area approach may be adapted, for extending financial inclusion with specific
villages to be allotted to specific Banks
Recommendations of the Rangarajan Committee
Further, the above implementation should be done while accommodating the various
recommendations of the Rangarajan Committee, such as:

Facilitate seamless integration of Regional Rural Banks with the main payments system,
by providing computerization support to them.
 Leverage technology to open up channels beyond branch network and creating
required banking footprints to reach the unbanked, with the objective of extending
banking services similar to those dispensed from branches.
 Ensure that nearly all pilot models converge on certain essential components and
processes to be followed in a technology application.
 Evaluate whether the operating costs of the various models being pursued are
17
IBA Sub-Committee on IT- enabled Financial Inclusion





minimized, and can be easily absorbed by banks as the increase in business volumes so
as to justify the incremental operating costs.
Focus on substantially lowering of costs by a building business case of infrastructure
sharing for enabling nationwide financial inclusion, thus conferring large scale benefits
and also facilitating effortless transfer of funds between various entities.
Encourage Business Facilitators/Correspondents to play an active role in financial
inclusion, by supporting them with technology applications and capacity building.
Seek government sponsorship and support for making payments under National Rural
Employment Guarantee Scheme and Social Security Payments thru’ such technology
based solutions, so as to render further viability to the business case.
Create a national data-base, sectoral, geographic and demographic reports, and also
a payment system benefiting the cardholders from the underprivileged/unbanked
population.
Evolve common minimum standards for ensuring interoperability between systems,
by working jointly and closely with the various technology suppliers and banks.
Technological Requirements
Centralized Hub
A critical requirement for taking technology in the remote areas is integration and
synchronization with the Core Banking System of respective Banks.
Towards this end if IDRBT is able to host a centralised Financial Inclusion System depicted
as the intermediary Transaction Processing System in the above diagram it would be of
immense help to the industry due to the following reasons:
Core Banking System (Finacle / Flexcube / FNS)

Intermediate Transaction Processing System


Smart Card
Hand Held Devices
(Mobile, PDAs, POS, POT etc)
Contact
(Magnetic Strip)
Contactless
(RFID)


Vendor Support
Personalization


Standardize the technical specifications for the above
including interface (data interchange formats) with major CBS solutions running in the country
Invoke Price Discovery Mechanism using RFP route for the standardized technical components
(in various bands say 1 to 50 K, 50,001 to 1 Lac & so on for supplies)
IBA Sub-Committee on IT-enabled Financial Inclusion
18

The level of comfort for the banks would be higher in case of the passthrough system
being hosted by an accredited organization like IDRBT as oppose to the same being
resident on the premises of a vendor.
 It would provide an opportunity to device standard messaging formats for uploading
and downloading data from the CBS systems of the member banks.
 The economies of the scale that would accrue in such an option would bring down
the cost of processing and financial inclusion transactions substantially.
Benefits to customers:









Access to banking facility in unconnected areas
Economical vis-à-vis personal visit to the branch
Availability of multitude of different banking products and services at their location
Enable microfinance disbursement
SHGs can be served at their doorstep. Presently a large number of SHGs are coming
to branches daily, as they require routing their transactions through banks. Under the
above model, banking services will be brought to their doorstep, saving time for SHGs.
Collection of fees in colleges/schools
Payment of pension at the residence of the pensioner
Payment of salary to employees at their company, factory, office etc.
Setting stalls in exhibitions, fair, outdoor locations etc. for catering to customer
requirements
Benefits to Banks:





Expand reach of Bank’s financial inclusion services for people in remote/unbanked
locations
Enhance social responsibility of the Bank by way of taking technology to the common
man
Economies of operation–Low transaction cost vis-à-vis branch based
Competitive edge in tapping untapped business potential
Building long-term relationship with customer, enhancing trust & loyalty towards Bank
All-purpose Single Card
Presently, various types of cards are floated by various Banks. Debit Cards, Credit Cards,
Kisan Credit Cards, Swarojgar Credit Card, Artisan Credit Card, Bhumiheen Kisan Card,
Kisan Samadhan Card, Laghu Udyami Trade Card, etc. are some of the cards issued by
19
IBA Sub-Committee on IT- enabled Financial Inclusion
various Banks. There is a felt need to replace these individual purpose specific cards to a
single card containing all the possible features.
An ideal card needs to have all the features as detailed below:





Card to contain the full particulars of the account holder with limits sanctioned/
available, balance outstanding, photo, finger prints, etc. with provision for data updation
and the unique citizenship number, if any allotted in future.
Cover working capital, consumption loan and OD Limits
Card should be operable both in online and offline systems
Operable in ATMs/POS/POTs
Contactless smart card chip must be conforming to CCEAL L5+ security certification.
The software operating system on the smart card must confirm to ITSEC5 standards.
The contactless interface must conform to global standard ISO 14443A.
The card should be issued to all the underprivileged as a matter of routine after taking
care of the KYC norms as applicable. If cards are issued free of cost only one card from
any Bank should be provided and holding of more than one card from different banks
should be avoided. If consumer needs more cards from different banks, it must be on
chargeable basis.
The cards should also be used for:

Providing Govt. benefits/subsidy/services to the customer
 Getting the required information of the customers on his family
 Making utility payments
 Micro credit / micro insurance facilities
The fruits of technology should thus be made available to the underprivileged by providing
them with a multi-purpose proximity / near field contact / contactless (RFID) Smart card
for availing the basic banking facilities along with other benefits Government propose to
provide for their upliftment.The data needs to be updated in one common smart card that
need to facilitate carrying out transactions at POS/POT/ATMs and Branches. Through the
Business Correspondents, using hand held or mobile ‘Point of Transaction’ terminals the
banking should be taken to the doorsteps of the downtrodden. User friendly, (e.g. voice
enabled / local language user interface etc.) Point of Transaction models using bio-metric
authentication need to be put in use for benefiting the illiterate customers to effect their
transactions.
Online and Offline Model
Depending upon the topography & availability of infrastructure, two models are envisaged
for meeting the requirements of the Bank and the customers.
IBA Sub-Committee on IT-enabled Financial Inclusion
20
Highlights of Online Model
In view of the expansion of network connectivity even in the remote areas by way of GSM/
GPRS/CDMA besides WIMAX facility, Banks may go in for an online model which needs
to have the following features:
1. All the Banks, having internet Banking facilities may explore using the channel for the
updation of transactions. The Internet Banking channel would enable online updation
of transactions. The authorized Bank official/business correspondent will be provided
with separate User-id and Password for enabling transactions by the customers.
2. Specific accounts (like accounts of a particular branch / accounts opened in aspecific
area) can be attached to operator with daily limits.
3. In view of the high illiteracy prevailing in the rural areas, a convenient medium like a
proximity / near field contact / contactless smart card has to be used.
4. The card will hold personal particulars of the customer along with his finger prints (at
least two fingers say right and left index fingers).
5. Card will have amount outstanding, along with last 5 or 10 transactions in the
account.
6. For enrolment of customers, a small kit containing a laptop, finger printer reader, web
camera, small printer, etc. may be used to capture the details of the account –holders
for opening no-frill accounts. This will be a one time affair in each village and the
villages may be revisited for enrolment periodically.
7. For the operations of the accounts, a small hand held device (or set of devices)
called “Point Of Transaction” (POT) like ‘Point of Sales Terminals’ with facility to
authenticate fingerprints, contactless smart card reader/writer, receipt printer has to
be used.
8. The terminals preferably to be voice enabled in the regional language so that
the accountholders will know what transactions the customer has made and the
amount.
 Receipts for transactions (preferably in local language) are to be given then
and there.
 Business Correspondents/facilitators may be used for operations.
 Following transactions at the minimum are to be enabled:
 Balance Enquiry
 Statement of Account
 Cash Withdrawal
 Cash Receipt
In course of time, the facilities may be improved or enhanced.
Precautions to be taken:
21
IBA Sub-Committee on IT- enabled Financial Inclusion

Customers may be allowed to operate their account only through the cards given to
them
 Business facilitator has to be given suitable threshold limit for cash transactions
 Suitable procedures to be evolved for operation during holidays
Highlights of Offline Model:
Offline mode on lines of online model without connectivity is envisaged in remote areas.
The accounts will be opened similar to online model with usage of proximity / near
field contactless smart card. The transactions will be done through a “Point of Transaction
(POT)” device (or set of devices) using Business correspondent/bank officials. The
transaction terminal (POT) will record all the transactions happened during the day and
will be uploaded into the CBS system at the end of the day or at pre-defined intervals.
Before start of the day, the transaction terminal will be refreshed and made in sync with
the CBS System. Facility will be available in the device for updating the entries in the
proximity / near-field contactless smart card given to the customers.
Needless to mention that considering the huge amount of geographical as well as the
unbanked populace to be served by the financial inclusion initiative, IBA would rather than
taking on a prescriptive approach rely more on collaborative methods to serve the social
cause. Accordingly, emerging options like use of Mobile telephone that does away with the
need for having a Smart Card for authentication and transaction initiation would also get
explored as and when these technology mature.
Points for further Deliberation

Multiple vendors available in market offer IT–enabled Financial Inclusion products and
services. So, it is advisable that vendor selection and valuation be done at IBA level,
as Banks can get advantage of aggregating demand and leveraging a better negotiating
platform, as opposed to when they will do it individually.This should be done with the
objective of provisioning for a basket of standardized solutions & vendor options.

It may be prudent to decide the commercials based on transaction volumes & other
logistics at IBA level itself, so that the project can be implemented in Banks–without
time lag at each Bank that will result if they were to independently negotiate terms.

In case trial runs are conducted by each Bank independently, it may result in loss of
considerable time. Alternatively, if the vendor is approved centrally by the IBA and
Banks decide to leverage that option, they can right away initiate the implementation
process.

As Bank’s data will be shared by third party, technology security audit becomes
mandatory and proper measures need to be put in place either through legal
framework or through contractual obligations for safeguarding confidentiality needs
IBA Sub-Committee on IT-enabled Financial Inclusion
22
and bank’s interests. Preferred model is to have separate Financial Inclusion
(FI)
servers at corporate office in custody of Bank and vendor should only provide a
data file of transactions / new accounts opened for importing into FI server
on periodic intervals, which can be populated in the CBS server later on.Transactions
from proximity contactless smart card to transaction terminal to backend server and
back to the smart card should conform to global security standards and must employ
secure encryption standard like 3DES/AES or PKI.

There is a need to put in place proper data storage & retrieval framework,since the Banks
require the financial data for the past ten years to cater to legal requirements.
Conclusion
Banks have a major role in extending banking facilities to rural areas for inclusive growth
and availability of financial facilities to common man across the country. In this context,
commercial orientation may be important for achieving financial inclusion. From policy
–makers focused on development, to Bankers & FIs willing to reach out to the poor, to
vendors providing technology-enabled financial inclusion platforms, everyone needs to
understand that while doing social-good is a respectable motivation, philanthropy on its
own may not always be able to ensure sustainability. Philanthrocapitalism – or the marriage
of philanthropic considerations with capitalistic approach is therefore the order of the
day.
On the other hand, IT industry will also need to collaborate with a renewed focus beyond
short-term sales maximization of hardware and software.To that effect, efforts are needed
for agreeing on industry standardizations for technologies relevant for building platforms
for financial inclusion, such as m-commerce, biometrics, etc.
Industry standardization is also relevant in this context. While it can lead to network
externalities3 that will play a crucial role in technology adoption, it also has spillover effects
as it initially leads to economies of scale and catalyzes innovation. This is of extreme
relevance in markets that have not attained a certain level of maturity, like that of financial
inclusion.
Policy support is also extremely important for a successful financial inclusion intermediation,
and the apex body has a major role to play in bringing economic transformation through
inclusive growth, with the help of the Banking Industry. While broader regulatory
support for financial inclusion is anyways needed, providing financial assistance for capital
expenditure in research, development and implementation of technologies relevant for the
whole industry – in form of subsidies and incentives, will go a long way in achieving financial
inclusion agenda. Further, Business Correspondent model and technology outsourcing
guidelines needs to be further thawed out, so that they become relevant to the present
context.
On a final note, even though financial services provisioning for poor people promises
immense market and social returns, a market for this has to be built from ground-up, where
3
Network Externality may be referred to as the change in benefit that in individual gets when incremental number of people
use the same product or service as the person.
23
IBA Sub-Committee on IT- enabled Financial Inclusion
financial intermediation has to be supported by accompanying social and developmental
interventions, so that there is a positive reinforcing affect on future production levels &
employment patterns. Technology also has a role to play in this context, be it through
efforts like tele-medicine, e-learning, etc. or from making available underlying technology
infrastructure like networks.

IBA Sub-Committee on IT-enabled Financial Inclusion
24
it-enabled financial inclusion
How to Leverage Technology for
Broad-Basing Financial Inclusion Intiatives
Action Points for Banks
&
ISSUES TO BE TAKEN UP WITH
GOVERNMENT and regulators
25
IBA Sub-Committee on IT- enabled Financial Inclusion
Action Points for Banks & ISSUES TO BE TAKEN UP
WITH GOVERNMENT and regulators
1. Synchronize different requirements of member Banks and facilitate provisioning of
technological solutions within an agreed time frame.
2. Evaluate whether operating costs of various models pursued are minimized, and can be
absorbed by Member banks as business volumes increase, so as to justify incremental
operating
3. Build a business case of infrastructure sharing for enabling nationwide financial
inclusion, thus conferring large scale benefits
4. Come up with recommendations to leverage technology to open up channels beyond
branch network and create required banking footprints to reach the unbanked, with
objective of extending banking services similar to those dispensed from branches.
5. Ensure that nearly all pilot models converge on certain essential components and
processes to be followed in a technology application.
6. Recommend a uniform structure for enrolment of customers, conforming to extant
KYC norms, which will be followed by all the Banks for the purpose of Financial
Inclusion.
7. Come up with an empanelled list of vendors, instead of each Member Bank trying to
separately choose these and conduct independent trial runs, as it may result in loss
of considerable time. Member Banks should however still be allowed to reserve their
right to not leverage this option.
8. Decide on commercials, based on transaction volumes & other logistics, so that
project can be implemented across participating member Banks.
9. Standards for use of proximity / near field contactless smart card which is interoperable
in different devices should be recommended.
10. Standards for secured data transmission and data storage should be recommended.
11. Recommend common minimum standards for ensuring interoperability between
systems, by working jointly and closely with the various technology suppliers and
banks.
12. Facilitate vendor selection and evaluation, so that Banks get advantage of aggregating
demand and leveraging a better negotiating platform. This should be done with the
objective of provisioning for a basket of standardized solutions & vendor options.
13. Implement proper data storage & retrieval framework, since Banks require the financial
data for the past ten years to cater to legal requirements.
IBA Sub-Committee on IT-enabled Financial Inclusion
26
Action Points for Banks & ISSUES TO BE TAKEN UP
WITH GOVERNMENT and regulators
14. As Banks' data will be provided by third party, technology security audit is mandatory.
Therefore, proper measures should be put in place either through a legal framework
or through contractual obligations, so as to safeguard confidentiality needs as well as
Banks' other commercial interests. At a transcation level, preferred model should have
separate Financial Inclusion (FI) servers at corporate office of member Banks, and
these should be in custody of respective Member Banks themselves. Vendor should
only provide data files of transactions / new accounts opened for importing into FI
server on periodic intervals, which can be populated in the CBS server. Transactions
from proximity contactless smart card to transaction terminal to backend server and
back to the smart card should conform to global security standards and must employ
secure encryption standard like 3DES/DES or PKI.
15. Seek government sponsorship and support for making payments under National Rural
Employment Guarantee Scheme and Social Security Payments thru’ such technology
based solutions, so as to render further viability to the business case.
16. Facilitate seamless integration of Regional Rural Banks with the main payments system,
by providing computerization support to them.
17. Create a national data-base, sectoral, geographic and demographic reports, and also
a payment system benefiting the cardholders from the underprivileged/unbanked
population.
18. Service area approach should be adhered for extending financial inclusion with specific
villages to be allotted to specific Banks, but these should be only limited to areas that
are otherwise not lucrative enough for multiple Banks to be servicing.
19. Identify and appoint BCs /BFs, detailing all the terms and conditions.
20. Fidelity and insurance coverage for the field level agents to be taken.
21. Qualification and Training of Business Correspondents (e.g.; similar to insurance
agents).
22. Encourage BFs / BCs to play an active role in financial inclusion, by supporting them
with technology applications and capacity building.
23. The smart card (or any such financial inclusion intermediation) should be issued to all
underprivileged as a matter of routine after taking care of the KYC norms as applicable.
It is also recommended that if cards are issued free of cost (or on a subsidized basis),
only one card from any Bank should be provided and holding of more than one card
from different banks should be avoided. If consumer needs more cards from different
banks, it must be on chargeable basis.
27
IBA Sub-Committee on IT- enabled Financial Inclusion
Notes
IBA Sub-Committee on IT-enabled Financial Inclusion
28