Approach Paper How to Leverage Technology for Broad-Basing Financial Inclusion Intiatives
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 3 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. 5 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 6 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 7 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 8 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: 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. 9 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 10 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. 11 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 12 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. 13 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 15 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
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