What is Financial Inclusion? – Banking Scenario | Business Correspondent | Business Facilitator Model

Financial Inclusion refers to the efforts made to make financial products and services accessible and affordable to all individuals and businesses, regardless of their personal wealth or business size. The goal is to provide a diverse range of financial services, such as bank accounts, loans, insurance, and investment products, to everyone, especially those who are underserved or excluded from the financial system.

Table of Contents

1. Introduction
2. What is Financial Inclusion?
3. Need for Financial Inclusion
4. Present Banking Scenario
5. Initiatives of the Reserve Bank of India
6. Business Correspondent and Business Facilitator Model
7. Role of Technology in Financial Inclusion
8. Let Us Sum Up
9. Keywords

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1. Introduction

There are a large number of people in the country, who have not accessed the formal financial system, as yet. Everyone needs access to financial services. The situation wherein people are not able to access financial products from formal financial institutions is termed as “Financial Exclusion”. Such a situation could result in certain economically and socially undesirable consequences. Banks themselves will not be able to achieve the financial inclusion goal more particularly, in the last mile and they might need the assistance of intermediaries. With an appropriate business model, the formal financial system can realize the huge potential coming from the unmet demand for financial services, from such ‘excluded’ population. Microfinance institutions have proved that they can reach the bottom of the pyramid, and make profit out of that activity. The SHG-bank linkage is another channel through which, the excluded population of the economy could be reached. Other innovative channels also need to be developed, to reach out to the excluded. Finally, the ‘financially excluded’ section needs to be educated about the benefits of being a part of the organized financial system. Financial literacy and product innovation are the need of the hour if microfinance has to expand and attain total financial inclusion.

2. What is Financial Inclusion?

The definition of financial inclusion currently in use is the delivery of financial services by the formal financial system, at an affordable cost, to vast sections of disadvantaged and low-income groups. Financial services include the provision of savings, loans, insurance, payments and remittance facilities by the formal financial system to those, who tend to be excluded.

The word ‘disadvantaged’ may be referred to in a broader context and may include not only the rural poor comprising marginal and sub-marginal farmers, landless labourers and share croppers, but also women, workers in the unorganized sector, pensioners, etc.

3. Need for Financial Inclusion

Since basic financial services (savings and remittances) are generally provided by the banking system, any discussion on financial inclusion should start from a question as to whether the banking system by itself or indirectly through the SHG-bank linkage model has facilitated reaching the poor. There can be no two opinions on this issue; there has been a remarkable improvement in the banks’ outreach to the poor, especially in the decades that followed their nationalization. Yet, the financial exclusion is a large issue. The real question therefore is whether the banking system is reaching the excluded or putting it differently, whether can it ever reach? And if the answer to the latter is negative and unfortunately it is so, the further question is what can then be done? Even after 75 years of independence, a large section of Indian population still remained unbanked. This malaise has led to generation of financial instability among the lower income group, who do not have access to the financial products and services.

4. Present Banking Scenario

The objective of Financial Inclusion is to extend financial services to the large hitherto unserved population of the country, to unlock its growth potential. In addition, it strives towards a more inclusive growth by making financing available to the poor in particular. There are more than 1,40,000 branches of commercial banks and Regional Rural Banks in the country as on 31 March, 2022. The customer reach of banks is still far from satisfactory. While analyzing the root causes for the above state of affairs, one must recognize the following:

• A major issue in expanding the outreach of the formal banking system, is the transaction cost for the banks. The credit requirements of small and marginal farmers, agricultural labourers, artisans and petty traders in rural areas are often small, urgent and frequent. The cost structure, systems and procedures in the formal banking system, make the transaction costs for small banking operations, quite high.
• Poor credit discipline in rural loans is another important issue. Rural credit is generally considered as developmental lending, which has a negative connotation in the minds of the borrower, in many states.
• Adequacy of manpower in the rural branches is another issue. Banks do not find willing takers for rural postings and motivating the staff to take up rural assignment, is a big HR issue for banks.
• Not only do the banks find it difficult to reach the poor in the rural areas, the poor also do not find it easy to relate to the urban-oriented staff, at the rural branches. They, therefore, are in look-out for someone, with whom, they can easily relate to and speak in their own dialect.
• Often, the distance at which, the bank’s branches are located necessitated customers to incur out-of-pocket expenses and also to forego their earnings, during the days they visited the banks.
• As per statistics published by RBI and Co-operative Union, there are more than one lakh primary agricultural societies in the country. Yet, it is a fact that more than two thirds of them are defunct. The co-operatives are not efficient and financially strong to undertake larger credit disbursement.

All these have considerably increased the transaction costs for banks and borrowers alike, thereby thwarting the genuine efforts of banks in realizing the objectives of “financial inclusion” in villages.

5. Initiatives of the Reserve Bank of India

The Reserve Bank of India in its annual policy statement of April, 2005 recognized the problem of financial exclusion and initiated several steps. Some of the major initiatives aimed at promotion of financial inclusion include:

• Introduction of Basic Savings Bank Deposit Account (BSBDA) either with nil or very low balances as well as charges that make such accounts accessible to vast sections of population.
• A simplified general purpose credit card (GCC) facility to be issued by banks without insistence on collateral or purpose.
• Launching Self-help Group scheme.
• Simplified “Know Your Customer (KYC)” norms.
• Relaxations in Branch Licensing Policy.

6. Business Correspondent and Business Facilitator Model

It is seen above that the existing design of the banking structure may not be able to achieve inclusion as there are certain cost and structural issues involved in the delivery of financial products. The branch banking and electronic banking may not be appropriate models to reach the excluded as financial inclusion involves financial education, counseling and building up of close relationship with people. Banks must, therefore, look to alternate delivery channels to reach the poor. This is of particular importance in areas, where the bank does not have a branch or where a branch is situated at a considerable distance for the clients to reach or access. Also, there could be areas where the branch may be located close by and yet the awareness of the bank products with the financially excluded could be limited, on account of procedural or other barriers. In this background and in order to take banking services to the people living in these unbanked and under-banked areas, the Business Correspondent/Business Facilitator model for rural development has been conceived essentially to fill up a gap that currently exists between the financial institutions and the excluded.

The person or institution appointed as Business Correspondent (BC)/Business Facilitator (BF) will function, as an extended arm of the bank’s branch, in the area. A BC or BF will be an intermediary or a bridge between the bank and the targeted people. As a bank’s face in the areas where there is no branch, BC/BF will have to directly assist the people, in various banking and finance related matters. It is expected that the Business Correspondent/Business Facilitator will perform the role of a friend, philosopher and guide to the people residing in the area, with reference to financial inclusion. This should enable the targeted population to have easy access to the banks and the services rendered by them. It is, therefore, necessary for a BC/BF to be familiar with basic banking knowledge and the role and responsibilities of Business Correspondents/Business Facilitators. With the objective of ensuring greater financial inclusion and increasing the outreach of the banking sector, banks have been allowed to use the services of the NGOs, Self-Help Groups (SHGs), Microfinance Institutions (MFIs) and other Civil Society Organizations (CSOs), as intermediaries in providing financial and banking services, through the use of Business Correspondent and Business Facilitator model. This provision for correspondent banking has opened up new vistas in financial inclusion.

7. Role of Technology in Financial Inclusion

Technology and financial inclusion are the popular coinage in banking parlance, in the country. Main hurdle in financial inclusion so far has been, large numbers and low volumes, emphasizing the need to improve reach to country’s farthest/remotest corner, by effectively leveraging the Technology. In order to make available the banking facilities across the length and breadth of the country, latest technological products like e-KYC, IMPS, AePS, mobile banking etc. have the potential to emerge as a game changer, in terms of costs, convenience, and speed of reach. Business models of banks, telecom operators and other stakeholders need to converge. Under the guidance of RBI, various organizations like National Payments Corporation of India (NPCI), Institute for Development & Research in Banking Technology (IDRBT) etc. are contributing significantly in bringing new technology- based products. Reserve Bank has been actively involved in harnessing technology for the development of the Indian banking sector over the years.

Progress of Technology in the banking sector

A major technological development in banking sector is the adoption of the Core Banking Solutions (CBS). CBS is a step towards enhancing, customer convenience through ‘Anywhere – Anytime Banking’. It is important to leverage this technological advancement to look at areas beyond CBS that can help in not just delivering quality and efficient services to customers but also generating and managing information effectively. The adoption of CBS led to adoption of various technological products like ECS, NEFT, RTGS, ATMs, internet banking, mobile banking, etc. The progress in usage of technology in banking and the evolution of digital financial services have accelerated the financial inclusion program in the country. The major intervention programs of GOI, PM Jan-Dhan Yojana and the Direct Benefit Transfer (DBT) have also facilitated the excluded to participate in the financial inclusion program substantially. Further, the uberization of financial services in India was triggered by JAM trinity, which comprised of:

• Jan Dhan Yojana account linked with zero balance, insurance, and overdraft facilities, which would be main channel for DBT of government’s subsidies;
• Aadhaar data base which provides unique biometric identification for instant authentication of identity and online KYC; and
• Mobile phones which provide a platform for two-factor authentication for both sides of a transaction – vendor and customer.

8. Let Us Sum Up

Access to a well-functioning financial system can economically and socially empower individuals, particularly farmers, small entrepreneurs and women, by allowing them to better integrate into the formal economy, make use of economic opportunities, and protect themselves from the economic uncertainties. Efficient, cost-effective, safe and inclusive finance approaches for savings, credit and other financial services for the poor and vulnerable sections can help in increasing their incomes, building productive assets, managing risks and breaking the vicious cycle of poverty.

In the Indian context, Financial Inclusion is defined as a process of ensuring access to financial services and timely and adequate credit, where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost. The policy makers have highlighted the role of financial institutions and other service providers in enabling adequate and easy access of financial services to all, especially excluded groups and communities. Measures pursued such as nationalization of banks, expansion of branch network, introduction of innovative credit delivery system such as group financing (SHG Bank Linkage Program) etc. expanded the institutional disbursal.

The technological progress and the evolution of digital financial services have played the role of catalyst in reducing the cost of gathering information and transaction and thereby facilitated larger financial inclusion. The adoption of Core Banking Solution by the banks has led to various technological products like NEFT, RTGS, Mobile Banking, Internet Banking, ATMs, etc. Some of the technology-based products have made significant changes in the banking outreach to the masses.

9. Keywords

Financial Inclusion: The availability and equality of opportunities to access financial services. It refers to the process by which individuals and businesses can access appropriate, affordable, and timely financial products and services.

Micro Finance: A type of banking service provided to unemployed or low-income individuals or groups, who otherwise would have no other access to financial services.
SHG Bank Linkage Program: Mechanism for providing financial services to the unreached and underserved poor households.

General Purpose Card: A card provided by an issuer that allows the cardholders to pay for goods and services, at a large number of diverse merchants, by accessing a line of credit extended to the cardholder by the issuer.

Branch Licensing: The process of getting license/approval to open a new place of business in India or abroad and shift or change the place of business to another place except within the same city, towns or village.

NGOs: Non-profit organizations which operate independently of any government, typically one whose purpose is to address social issue/s.

Civil Society Organizations (CSO): Non-State, not-for-profit, voluntary entities formed by people in the social sphere that are separate from the State and the market. They represent a wide range of interests.

Micro Finance Institutions: Financial companies that provide small loans to people who do not have any access to banking facilities.
Core Banking Solution (CBS): Software solution which optimizes complex, enable platform and application freedom, deliver ambient user experiences, and synchronize across the front, middle and back offices with technology built for innovation.

IMPS: Is an instant payment inter-bank electronic funds transfer system.

AePS: AePS is a bank-led model which allows online interoperable financial transaction at PoS (Point of Sale/Micro ATM) through the Business Correspondent (BC)/Bank Mitra of any bank, using the Aadhaar authentication.

IDRBT: An Apex-level Institute, which would be the brain trust for Banking Technology and spearhead technology absorption in the Indian Banking and Financial Sector.