“Role of Technology: Banking the Unbanked”

Rupa Mardi
Sikha Jain
Binita Sunadhar
(MFC Part- II), Utkal University

“If we continue producing billionaires, it is not going to take us too far. What we need is a focus on the
ground reality”
- Sam Pitroda, in his address at the Financial Inclusion Summit

The Indian economy is growing at a steady rate of 7% to 8.5% in the last five years or so. Most of the
growth is from industry and services sector. Agriculture is growing at a little over 2 %. The potential
for growth in the primary and SME sector is enormous. Limited access to affordable financial services
such as savings, loan, remittance and insurance services by the vast majority of the population in the
rural areas and unorganized sector is believed to be acting as a constraint to the growth impetus in
these sectors. Access to affordable financial services – especially credit and insurance – enlarges
livelihood opportunities and empowers the poor to take charge of their lives. Such empowerment
aids social and political stability. Hence financial inclusion is considered to be critical for achieving
inclusive growth; which itself is required for ensuring overall sustainable overall growth in the
country.

Financial inclusion means connecting all individuals, including those living in the remotest of rural
areas, to a well-functioning financial system. This would include: 

*Easy access to bank accounts for safe parking of savings 

*Availability of cheap credit through appropriately designed loans for poor & low income households
and small entrepreneurs 
*Availability of basic financial products like insurance. 

Disheartening statistics

The proportion of people having any kind of life insurance cover is as low as 10 per cent, and the
proportion having non-life insurance is an abysmally low 0.6 per cent. People having debit cards
comprise only 13 per cent and those having credit cards a marginal 2 per cent. These statistics,
staggering as they are, do not convey the true extent of financial exclusion. Even where bank
accounts are claimed to have been opened, verification has shown that a significant portion of these
accounts are dormant. Yet the statistics on financial ‘exclusion' in India are disheartening. Out of the
600,000 habitations in the country, only about 30,000, or just 5 per cent, have a commercial bank
branch. Just about 40 per cent of the population across the country has bank accounts, and this ratio
is much lower in the north-east of the country. Very few conduct any banking transactions and even
fewer receive any credit. Millions of people across the country are thereby denied the opportunity to
harness their earning capacity and entrepreneurial talent, and are condemned to marginalization and
poverty.

In the 1960s, no one predicted that the Internet would take the world by storm; that
laptops, palm-tops, Blackberrys, i-pods, i-phones, tablets and Kindles would be in the hands of
millions. Similarly, in 2010, perhaps we are just as unable to look ahead to 2030. In short, how
technology is going to shape our world and our world views is quite unpredictable. What is
predictable, though, is that as newer technologies are ushered in, banking services will become more
affordable and accessible to all. Harnessing this power of technology for financial inclusion is going
to be a big opportunity and a bigger challenge for us. Financial inclusion is a necessary condition for
generating and sustaining equitable growth. There are few, if any, instances of an economy
transiting from an agrarian system to a post-industrial modern society without broad-based financial
inclusion.

Technology solutions such as the UID project could make a difference.

The Unique Identification Number (UID) Project of Government of India will be a powerful
instrument for helping the poor establish their identity to meet the banks' KYC norms. This will
reduce cash and non-cash transaction costs, both to the banks and to the potential customers. India
has about 600,000 villages and it is not possible for a bank to put up an ATM in every village. But this
number can be used in a micro ATM, where there is a biometric reader.

The rolling out of UID numbers is a mammoth logistical challenge. It has not been done yet anywhere
in the world. The largest biometric system has 1.2 million users and the target is to have 10 times of
that. Today we have the vision, resources and the connectivity. This will have far reaching
consequences for India. It is in the light of millions of connected people, the right technology and a
willing government needed to understand financial inclusion.

Mobile banking is the next big challenge for the government as it will change the nature of banking in
India. “Concept of money would change drastically. Nature of Federal Reserve would change as a
person sitting in India would be able to buy a product in Brazil and pay in Euro or dollars. It would
take the banking facility directly into the hands of people.” But a bank would remain a bank and
mobile operators should not think that they will be able to take over a bank’s functionality. In future
a mobile will have to be integrated with multiple securities. Today a lot of work is being done in the
field of Near Field Communication (NFC). “With all these developments happening, the big question
is how we can use it for poor people”. The answer is example of postmen disbursing money through
mobile in rural areas.

Plan has been done to connect 250,000 panchayats through broadband. Achieving financial inclusion
is not unrealistic, but financial inclusion cannot be achieved without inclusive growth. “If merchants,
bank and operator can come together, they can develop a platform for mobile banking”. Financial
inclusion would facilitate drastic cut in the transactional cost.

Every domestic commercial bank — public and private sector — have been asked to prepare its own
Financial Inclusion Plan (FIP) and have it approved by its Board. Aim in this respect is two-fold. First,
each bank should have ownership of its FIP. Second, each bank to build on its comparative
advantage. So that banks can be innovative and entrepreneurial and try out models and experiments
consistent with their business models. The FIPs are meant to be rolled out over the next three years
and are required to include indicators for performance evaluation.

The banks agreed that, for the FIPs to succeed, scalable technology solutions should be in place; the
RRBs should also be core-banking enabled; and the business correspondent model, coupled with
biometric technology, needs to be deployed.

Viable Business Model

But there is a brighter side to the story. Contrary to common perception, financial inclusion is a
potentially viable business proposition. The success story of Dharavi, a bustling industrial-slum in
Mumbai. Wikipedia reports that Dharavi exports goods worth $500-650 million every year. Ironically,
even though Dharavi is situated right in the heart of Mumbai, the most banked city in the country,
and adjoins the Bandra-Kurla Complex, Mumbai's financial district, it did not have a commercial bank
branch for a long time. The first commercial bank branch was opened in February 2007. In just three
years, the bank registered business in excess of Rs 44 crore. Enthused by this success, one more
bank has opened a branch in Dharavi and many more are eager to do so. There are now nine ATMs in
Dharavi, all of them being actively used. The reality is that money management is a well-understood
part of everyday life of the poor, and therefore a key factor in determining their coping strategies.
The Dharavi is an illustration of how banking the unbanked can be a win-win opportunity.

Finally we can conclude saying that “All the pieces are in place, all we need to do is to develop a will to
come together and work for financial inclusion”.