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    ABSTRACT

    The Project Financial Inclusive Banking Leveraging Technology as a value proposition

    takes a close look into the operational aspects and business model of Financial Inclusive

    Banking in India. It describes in detail the various technological innovations that help in

    furthering financial inclusion in India. The Report also presents alternative solutions to

    overcome the barriers faced in the implementation of currently used technologies. It highlights

    how Financial Inclusion is being used in India by concerned players and stakeholders as a tool

    of poverty eradication.

    The Project begins with a discussion about the scenario of Indian and Global banking

    penetration. The Project then describes the main concept Financial Inclusion. It presents a

    background and vision of Financial Inclusion and also highlights the initiatives taken by the

    Reserve Bank of India in furthering Financial Inclusion in the country. The various Financial

    Institutions involved in Financial Inclusive Banking have been enumerated in the Report.

    The focus of the Report then shifts to Micro Finance and its various operational models. A

    discussion about the SBLP model and MFI models have been given in the Report. The

    discussion on micro finance would be incomplete without the mention of Grameen Bank ofBangladesh. Hence, the Report includes a brief introduction to Grameen Bank and its objectives.

    Using a comparative analysis between Grameen model and SHG model, they research tries to

    locate the client base of the two models on the poverty scale and suggest methods to improve the

    models. The Report discusses how technology helps in addressing the issue of high interest rates

    charged by Micro Finance Institutions. It makes use of a cost break up for the analysis. The key

    discussion of this project is on the use of technology in extending financial Inclusion in India. In

    the end the Report gives recommendations that could help in improving the use of technologyfor Financial Inclusion

    The work done in the other two phases of the internship has also been explained in this Report.

    All the reviewed chapters on Payment Systems have been discussed in the Report. Also the

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    chapters on Retail Banking that were developed during the Asset Development phase have been

    briefly discussed in the Report.

    Table of ContentsABSTRACT.................................................................................................................. 1

    Table of Contents.......................................................................................................2

    1. INTRODUCTION...................................................................................................... 4

    1.1 Purpose of the Project......................................................................................4

    1.2 Scope of the Project..........................................................................................5

    1.3 Methodology and Data Collection.....................................................................5

    1.4 Limitations........................................................................................................ 6

    1.5 Utility of the Project.......................................................................................... 61.6 Work Outline..................................................................................................... 6

    2 PHASE I: ASSET REVIEW & CERTIFICATION.............................................................8

    2.1 Chapters in the Course..................................................................................... 8

    3. PHASE II: ASSET DEVELOPMENT..........................................................................13

    3.1 Chapters Developed....................................................................................... 13

    4. THE INDIAN AND GLOBAL BANKING SCENARIO....................................................18

    5. FINANCIAL INCLUSION.........................................................................................21

    5.1 Goal of Inclusive Finance................................................................................21

    5.2 Background.................................................................................................... 23

    5.3 RBI & Financial Inclusion.................................................................................24

    5.4 Financial Inclusive Banking Services............................................................26

    5.5 Financial Inclusive Banking Access Barriers.................................................28

    5.6 Agents of Financial Inclusion..........................................................................28

    5.7 Microfinance................................................................................................... 34

    5.8 Evolution of Microfinance in India...................................................................34

    5.9 Micro Finance Models..................................................................................... 34

    5.10 The Grameen Bank Success Story................................................................38

    5.11 Why not SHG in Bangladesh and Grameen in India?....................................39

    5.12 Comparative Analysis Grameen Model and SHG Model.............................41

    5.12.1 On the Basis of Groups...........................................................................41

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    5.12.2 On the Basis of Loans............................................................................. 43

    5.12.3 On the Basis of Sustainability.................................................................44

    5.12.4 On the Basis of Outreach........................................................................45

    5.12.5 On the Basis of Empowerment...............................................................46

    5.12.6 Comparison Operating Cost Ratio.........................................................47

    5.12.7 Comparison of Interest Rates.................................................................48

    5.12.8 Zone Wise Coverage of SHGs in India...................................................49

    6. Levers of Financial Inclusion................................................................................52

    6.1 Technology - Addressing the Issue of High Interest Rates..............................53

    7. LEVERAGING TECHNOLOGY.................................................................................57

    7.1 Management Information System...................................................................57

    7.2 Automated Teller Machines............................................................................62

    7.3 Hand Held Devices.........................................................................................67

    7.4 Personal Digital Assistants..............................................................................73

    7.5 Simputers.......................................................................................................74

    7.6 Smart Cards....................................................................................................75

    7.7 Biometrics.......................................................................................................77

    7.8 Mobile Banking............................................................................................... 79

    7.8.1 CAM Technology....................................................................................... 86

    7.9 Information Dissemination Technologies........................................................868. RECOMMENDATIONS............................................................................................90

    9. REFERENCES........................................................................................................ 93

    10. ABBREVIATIONS................................................................................................. 94

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    List of figures & tables

    Figure 1: Average population per bank branch 22Figure 2: Deposits (Region Wise) 23Figure 3: Credits (Region Wise) 24Figure 4: Alternate Financial Institution Activities Developing Countries 34Figure 5: Comparison of OCR of MFIs 47Figure 6: Interest Rate Comparison of MFIs 48Figure 7: Zone wise Coverage of SHGs in India 49Figure 8: Population distribution in India 50Figure 9: BPL Population distribution in India 50Figure 10: Poverty Scale 50Figure 11: Financial Inclusion Levers. 52Figure 12: Cost of funds as a % of gross loan portfolio 53Figure 13: Loan losses as a % of gross loan portfolio 54Figure 14: After Tax Profit as a % of gross loan portfolio 54Figure 15: Interest Income Break up 55Figure 16: Biometric ATMs 64Figure 17: Scrip Terminal 66Figure 18: A Mobile ATM 67Figure 19: Hand Held Device 67Figure 20: Near Field Communication used in SBI Tiny project 71

    Table 1: Average Population per Branch 22Table 2: Percentage Population with a bank account 24Table 3: Model Comparison Group Basis 42Table 4: Model Comparison Loan Basis 43Table 5: Model Comparison Sustainability Basis 44Table 6: Model Comparison Outreach Basis 45Table 7: Model Comparison Group Basis 46Table 8: Comparison of various types of MIS 59

    1. INTRODUCTION

    1.1 Purpose of the Project

    The primary objective of this Project is to determine how technology can play a role in

    furthering Financial Inclusion in India by addressing various issues associated with financial

    Inclusion. The Project aims at:

    Developing a thorough understanding of Financial Inclusion

    Study the penetration of banking in India and abroad.

    Study Micro Finance and its models

    Perform a comparative analysis of various micro finance models

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    1.2 Scope of the Project

    The study mainly focuses on the Indian scenario of Financial Inclusion. Although there are

    several Financial Institutions which are involved in promoting Financial Inclusion but this

    Project scope is limited to Micro Finance Institutions only. The Project also discussescommonly deployed micro finance models in India. Of the various factors that promote

    Financial Inclusion, the study in this Project focuses mainly on leveraging technology. It tries to

    resolve various issues associated with micro finance by means of extensive use of technology.

    The entire research Project is based on secondary data.

    1.3 Methodology and Data Collection

    Phase I: Asset Review and Certification

    Methodology: In this phase learning was done by reviewing an existing FTC Asset on Payment

    Systems. The phase had three tasks:

    Study the Asset

    Add questions to existing Question Bank

    Take an online Course Certification and successfully complete the same.

    Phase II: Asset Development

    Methodology: In this phase learning was done by developing a new asset and the topic assigned

    was Retail Banking. The asset comprised of following chapter-wise artifacts:

    Documentation

    Presentation

    Question Bank

    Answer Key

    GIF format file of the Question Bank.

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    Data Collection: The data for development was obtained from books and online source like

    Reports, articles, databases etc.

    Phase III: Research Project

    Methodology: This phase required the preparation of a Research Report on the topics selected.

    The work for the Report was done concurrently along with the other phases. The Report is

    basically study-based and involves statistical analysis of interest income, cost and banking

    penetration. The method used for analysis would be the interpretation of data, graphs etc.

    Data Collection: The data for development is secondary and has been obtained from sources

    such as:

    Online Reports, Articles, Reviews, Databases etc.

    Statistical data by RBI, United Nations, CGAP etc.

    Books on the subject.

    1.4 Limitations

    The study is based on secondary data obtained from various sources. No primary research could

    be done due to time and resource constraints. A research based on primary data would have

    definitely given a better insight and findings on the topic.

    1.5 Utility of the Project

    The Project serves as comprehensive study material to understand the concept of Financial

    Inclusion and Microfinance. It helps in understanding how Financial Inclusion can help in

    poverty eradication. The reader of the Report can develop a thorough understanding of

    microfinance models and other related concepts. For TCS, this Report could serve as study

    material for associates. For associates engaged in Projects related to Micro Finance it could

    serve as a good reference and learning material.

    1.6 Work Outline

    SIP activity comprised of 3 tasks:

    Asset Study & Review (Learning phase)

    Asset Development (Work phase)

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    Research Report submission. (Project phase)

    The SIP Schedule was:

    Initial Familiarization, Assignment to Mentors, Topic selection (1 week)

    Asset Study & Review ( 2 weeks)

    Asset Development (4 weeks)

    Research Report submission ( 4 weeks)

    Project Report finalization, Dry Run and Submission (1 week)

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    2 PHASE I: ASSET REVIEW & CERTIFICATION

    The first phase of SIP was a Review phase. The time allocated for the completion of this phase

    was 2 weeks. In this phase the task assigned was: To review an FTC module on Payment Systems

    Appear for FTC Certification Test for the same module

    The certification test was completed successfully with 78% marks. The Review results along

    with an additional set of questions for each of the 23 chapters in the module were submitted to

    the company guide within the time frame. This certificate program helped in:

    Understanding the basics of Payment systems, both domestic and global payment

    systems and applicable standards Understanding the role of Banks and Non-banking institutions in Payments

    Infrastructure

    Gaining in-depth knowledge of Payment systems and related infrastructure and activities

    Learning about modern and future trends in the Payments arena.

    2.1 Chapters in the Course

    Chapter 1: Basics of Payment SystemsThis chapter gives an idea about the evolution of the present day payment systems. It covers

    details about the importance of payment system and also the role played by the Central banks in

    implementing them. A brief discussion about evolution of payment systems in India is also

    given in the chapter.

    Chapter 2: Core Principles on Systematically Important Payment Systems

    This chapter covers the core principles of a payment system as established by the International

    Committee on Payment and Settlement Systems. It talks about the various legal enforcements

    that have to be kept in mind before implementing a payment system. The document also

    discusses the risks associated with the implementation of a Payment System in a country.

    Chapter 3: Payment instruments

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    This chapter is about the various payment instruments used in daily banking transactions. From

    the most conventional payment instruments like cheques to the most modern ones like

    Electronic Transfers, this chapter covers it all.

    Chapter 4: Clearing and Settlement Systems

    This chapter helps in learning how payments are settled and cleared within banks with separate

    details net and gross settlements. It also gives an introduction to Real Time Gross Settlement

    Mechanism (RTGS). The role of settlement agents and correspondent banks has also been

    described in the chapter.

    Chapter 5: Process of Check-clearing and MICR

    The chapter talks about the process of clearance of a cheque. It gives details about the

    conventional and most modern methods used for cheque clearance. It covers topic such as

    MICR clearing, local clearing and outstation clearing of cheques.

    Chapter 6: Standards for global payment system

    This chapter gives idea about the various technological standards used for Payment Systems

    throughout the world. It covers the use of standards such as XML, EDIFACT, TWIST, Rosetta

    Net and an introduction to SWIFT.

    Chapter 7: Introduction to SWIFT

    This chapter covers in details about Financial messaging Network of a non-profit organization

    called SWIFT which has been constantly improving the standards for payment services through

    new technologies and making the payments convenient. All aspects of its network such as the

    topologies, services etc. have been covered in this chapter.

    Chapter 8: SWIFT Messaging system

    This chapter looks into the messaging system used in a SWIFT financial messaging network. It

    covers the all the blocks and structures of a SWIFT message. The character set used for

    composing a SWIFT message and the standards used in SWIFT messages have been covered in

    this chapter.

    Chapter 9: CHIPS and ACH

    This chapter talks about two very important Payment systems used in US i.e. CHIPS and ACH.

    CHIPS(Clearing House Inter-bank Payments System) is the clearing house for large value

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    transactions while ACH is an electronic network used for financial transactions. This chapter

    covers both these topics in detail.

    Chapter 10: EFT and ECS

    This chapter deals with the Electronic Fund Transfer and Electronic Clearing Services. Adetailed procedural description and the Indian perspective of both these topics have been

    covered in this chapter.

    Chapter 11: Check truncation

    This Chapter gives understanding about the process of Check Truncation and the reasons behind

    emergence of this technology. In this chapter, Check-21 Act has been discussed briefly. It also

    tells how checks are processed after their truncation. The difference between check conversion

    and check truncation has also been given.

    Chapter 12: E-Check

    This chapter is a discussion about Electronic check which is a technological innovation in the

    financial space. It gives understand of the technology behind it, its structure and different

    operational models of e-check.

    Chapter 13: Continuous Linked Settlement

    This chapter discusses about the rise of foreign transaction or cross border transaction. Its tells

    how these settlements take place to avoid any risk and also talks about CLS the intermediary

    of all across border transactions and the workings and functions of the CLS.

    Chapter 14: PayPal

    This chapter offers clear view of the most popular peer-to-peer (P2P) money transfer system

    PayPal, which not only gives benefits to customers but provides safe and secure service through

    different modes charging very minimal transaction fees. It talks about the use of PayPal, types of

    PayPal account, fee structure of PayPal and legal Implications of PayPal

    Chapter 15: Payment gateways

    This chapter provides an understanding of payment gateways, its structure, and functions. It tells

    about the use of Payment Gateway, process flow of Payment Gateway and B2B /B2C

    Transactions via Payment Gateways.

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    Chapter 16: Cross border payments

    This chapter gives an understanding about the working of the cross-border transaction, various

    entities involved, associated risks and challenges. It also discusses about the standards that needto be complied with by banks to make cross border payments.

    Chapter 17: Mobile Payments

    This chapter talks about the nuances of the Mobile or M-payments. It also discusses various

    types of mobile payments, process involved in payment cycle, various players in the M-payment

    cycle and various technology vendors and their role.

    Chapter 18: Single European Payments Area

    This chapter gives an idea about Single European Payments system (SEPA) which is a new

    concept as applicable for 25 European countries. SEPA intends to implement common standards

    for retail payments across the group of countries participating in this initiative. SEPA is being

    rolled out in a phased manner and is expected to go completely Live by 2010.

    Chapter 19: Trans-European Automated Real Time Gross Settlement

    This chapter is a peek into upcoming European Union-wide Real Time Gross Payment systems,

    which is expected to change the payment scenario for all the participating European nations.

    This payment system is named TARGET. This chapter also deals with the core functioning of

    TARGET, its components, its accounts and various modules.

    Chapter 20: E-Money

    This chapter tells how Electronic currency has become a reality in some parts of the world and

    has replaced hard currency. This chapter helps in learning about electronic Money, process to

    make payments through E money, key features of E Money and various kinds of E Money.

    Chapter 21: Risk and Liquidity issues in payment systems

    This chapter gives an insight into various risks faced by the parties during settling down the

    payments, and what measures should be taken to avoid them by fixing a limit to the different

    risks. This chapter also discusses the risks involved while settling down the payments through

    net settlement process and deferred settlement process.

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    Chapter 22: Role of Regulatory Bodies

    This chapter gives a complete understanding about the regulatory bodies in the context of the

    payments scenario and the various Regulations associated with it.

    Chapter 23: Role of Non-bank institutions in Payment SystemThis Chapter talks about Non-bank Institutions in payment systems and their activities. It

    discusses the diverse roles played by these institutions in the Payment System. It also gives

    detailed insight into the Automated Clearing House.

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    3. PHASE II: ASSET DEVELOPMENT

    The Second phase of SIP was work phase. The time allocated for the completion of this phase

    was 4 weeks. In this phase the task assigned was: To develop a new course on Retail Banking comprising of 15 chapters

    Prepare documentation, presentation, Question Bank and Answer key for each chapter.

    This phase helped in:

    Understanding the basics of Retail Banking

    Understanding Core Banking, Branch Banking and Unit Banking

    Gaining in-depth knowledge of Retail Banking products and services

    Developing an understanding of various Retail Banking channels

    Learning about present and future trends in the Retail Banking.

    3.1 Chapters Developed

    Chapter 1: Evolution and History of Banking

    Topics covered in chapter are:

    The history of banking

    Evolution of banking since inception

    Major events in the banking history

    Chapter 2: Retail Banking Features & Characteristics

    Topics covered in chapter are:

    Key features of retail banking

    Services offered by retail bankers

    Prospects of retail banking

    Chapter 3: Retail Banking Financial Accounting

    Topics covered in chapter are:

    The basic concepts of financial accounting

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    Various accounting tools

    Interpretation of financial Reports

    Chapter 4: Retail Banking Products and Services Acceptance of MoneyTopics covered in chapter are:

    Money acceptance services offered by retail banks.

    Latest innovations in bank deposits

    Importance of deposits for a bank.

    Chapter 5: Retail Banking Products and Services Lending of Money

    Topics covered in chapter are: Money lending services offered by retail banks.

    Latest innovations in bank loans

    Importance of loans for a bank.

    Chapter 6: Retail Banking Products and Services Subsidiary Services

    Topics covered in chapter are:

    The various subsidiary services provided by banks

    The need for these subsidiary services

    The channels that support these services

    Chapter 7: Retail Banking Operations

    Topics covered in chapter are:

    The operations of a bank

    Core Banking Solutions

    Chapter 8: Channel Services - Physical

    Topics covered in chapter are:

    The conventional banking channel

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    Branch Banking Services

    Front Office Banking Tasks

    Bank Tellers

    Chapter 9: Channel Services - Electronic

    Topics covered in chapter are:

    Various electronic delivery channels

    Services available through e-channels

    Future delivery channels

    Chapter 10: Payment System India

    Topics covered in chapter are:

    The payment systems used in India

    RBI EFT and RTGS systems

    Chapter 11: Payment Systems - General

    Topics covered in chapter are:

    The uses of payment systems

    The payment system mechanisms

    Need and importance of payment systems

    Chapter 12: Payment System US

    Topics covered in chapter are:

    The payment systems used in US

    The technological aspects of the US payment systems

    Fedwire

    SWIFT and ACH

    Chapter 13: Payment System Europe

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    Topics covered in chapter are:

    The payment systems used in Europe

    The technological aspects of the European payment systems

    SEPA

    Chapter 14: Payment Cards

    Topics covered in chapter are:

    The various types of Payment Cards

    The Evolution of payment Cards

    The technology behind Payment Cards

    Chapter 15: Clearing & Settlement Systems

    Topics covered in chapter are:

    How are payments settled and cleared within banks?

    Net and Gross settlements.

    Real Time Gross Settlement Mechanism (RTGS).

    The role of settlement agents and correspondent banks.

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    The stark reality is that most poor people in the world still lackaccess to sustainable financial services, whether it is savings,

    credit or insurance. The great challenge before us is to address

    the constraints that exclude people from full participation in the

    financial sector. Together, we can and must build inclusive

    financial sectors that help people improve their lives.

    -UN Secretary-General Kofi Annan, 29 December 2003.

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    4. THE INDIAN AND GLOBAL BANKING SCENARIO

    It would be ideal to have an overview of the penetration of Banking in India and at the global

    level before moving further into the discussions on Financial Inclusion. There are several

    indicators which depict the penetration of banking in a country. Some of these indicators and the

    performance of India on these indicators have been given below:

    Average Population per Branch Office (APPBO)

    The average population served per branch office is a good indicator of banking

    penetration. The trend under this indicator in the last decade is as under:

    Figure 1: Average population per bank branchSource: Business Statistical Returns, Reserve Bank of India

    The population served per branch as decreased in the urban areas while the same has

    increased for rural areas. Considering the fact that the rural population has decreased

    over the years due to socio-economic reasons such as migration to urban areas, it can be

    said that there is a lack of focused banking growth in rural areas. At the national level,

    the population per branch office has increased, indicating that branch expansion has not

    kept pace with the population increase.

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    Number of Accounts per thousand population

    Deposit (C+S) Accounts

    per 1000 population

    Credit Accounts

    per 1000 Population

    Region/State Rural Urban Rural Urban

    Northern Region 338 652 55 71

    North Eastern Region 186 281 35 41

    Eastern Region 185 413 45 47

    Central Region 242 375 45 49

    Western Region 263 526 46 121

    Southern Region 393 486 136 185

    All India 270 483 64 104Table 1: Average Population per Branch Office

    Source: Business Statistical Returns, Reserve Bank of India

    The number of deposit (current and savings) and credit accounts per 1000 population is

    given above in table 1(Above). It is seen that the deposits (current plus savings) accounts

    per 1000 population in the rural areas, is about sixty per cent of the urban areas. Similar

    situation is also evident even in case of credit accounts per 1000 population.

    Deposits and Credit accounts (Region Wise)

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    Figure 2: Deposits (Region Wise)

    Source: Business Statistical Returns, Reserve Bank of India

    Figure 3: Credits (Region Wise)

    Source: Business Statistical Returns, Reserve Bank of India

    About 2/3rd of the Indian population resides in rural and semi urban areas, yet they

    account only for about 22.7% of the deposits and 17.3% of the credits accounts. This

    shows the huge gap that exists in the penetration of banking in India

    Percentage Population with a bank account

    Table 2 shows a list of countries where the percentage of population with a bank account

    is low. Except for certain European countries, most of the remaining countries have20

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    below 50% penetration of banking. A lot of efforts need to be diverted towards

    achievement of higher banking penetration in these countries.

    Country/Location Percentage Population with bank account

    Botswana 47.0Brazil 43.0

    Columbia 39.0

    Djibouti 24.8

    Lesotho 17.0

    Mexico City 21.3

    Namibia 28.4

    South Africa 31.7

    Swaziland 35.3

    Tanzania 6.4Table 2: Percentage Population with a bank account

    Source: Business CGAP, 2007

    5. FINANCIAL INCLUSION

    Financial Inclusion is the delivery of banking services at affordable costs to vast sections of

    disadvantaged and low income groups. Definition Source:

    www.iibf.org.in

    The term Financial Inclusion was coined at the start of the New Millennium. Within a decade

    Financial Inclusion has become the common goal for most of the national banks of various

    developing nations. Financial Inclusion is seen as an important tool of eradicating poverty from

    the face of the earth. The idea behind Financial Inclusion is to make Banking affordable and

    accessible to all. Banking is a service meant for public good. It is essential that banking facilities

    must be made available to each and every individual without any discrimination.

    5.1 Goal of Inclusive Finance

    According to the United Nations the main goals of Inclusive Finance are as follows:

    Access at a reasonable cost of all households and enterprises to the range of financial

    services for which they are bankable, including savings, short and long-term credit,

    leasing and factoring, mortgages, insurance, pensions, payments, local money transfers

    and international remittances

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    Sound institutions, guided by appropriate internal management systems, industry

    performance standards, and performance monitoring by the market, as well as by sound

    prudential regulation where required

    Financial and institutional sustainability as a means of providing access to financial

    services over time

    Multiple providers of financial services, wherever feasible, so as to bring cost-effective

    and a wide variety of alternatives to customers (which could include any number of

    combinations of sound private, non-profit and public providers).

    - Source: United Nations, 2006

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    5.2 Background

    In most developing countries, financial services are accessible only to a minority of the

    population. Although the financial sectors of these countries are expanding, the financial assets

    mainly remain concentrated in the hands of a few. Vast majority of the people in these

    developing countries do not have a savings account. They have no access to credit from a formal

    financial institution, and neither their lives, livestock, crops and livelihood are insured. They

    rarely transact through financial institutions. In fact, a large majority of the people in the

    developing countries rarely enter the bank premises. The use of financial services in developed

    countries is also not much different. The limited use of financial services by people in

    developing countries has become an international concern. The Heads of State and Governmentofficials meeting at the September 2005 World Summit at the United Nations stated that: We

    recognize the need for access to financial services, in particular for the poor, including through

    microfinance and microcredit.

    This is a reflection of a growing concern about development and poverty eradication policies at

    the national and local levels. The basic question that needs to be answered is: Why are there so

    many bankable people who still remain unbanked? Who are the people and firms who are

    excluded from full participation in the financial sector those who should be but are not usingformal financial services? The Unbanked persons are creditworthy people and firms who have

    the capacity to generate income and repay whatever they borrow, but they do not have access to

    any source of formal credit. These people are also insurable and they have the earnings to pay

    for their insurance premium regularly. But again they do not have access to insurance. A large

    section of unbanked people are those people who desire for a safe place to save and assemble

    assets and also seek a reliable way to transit money, but the story again is that they do not have

    any access to savings or payments services. A sector of the economy that provides access to

    every individual to the basic financial services is called an Inclusive financial sector. It

    provides access to credit, insurance, savings and payments services for everyone. Inclusive

    finance does not mean that everyone who is eligible to use these services necessarily makes use

    of them, but they must be able to choose to use them according to their needs.

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    5.3 RBI & Financial Inclusion

    RBI laid emphasis on Financial Inclusion for the first time by the RBI in its annual policy

    2004-05.

    In the Annual Policy of the Reserve Bank for 2004-05, the Governor, Dr. Reddy said -There has been expansion, greater competition and diversification of ownership of banks

    leading to both enhanced efficiency and systemic resilience in the banking sector. However,

    there are legitimate concerns in regard to the banking practices that tend to exclude rather than

    attract vast sections of population, in particular pensioners, self-employed and those employed

    in unorganized sector. While commercial considerations are no doubt important, the banks

    have been bestowed with several privileges, especially of seeking public deposits on a highly

    leveraged basis, and consequently they should be obliged to provide banking services to all

    segments of the population, on equitable basis. Quotation Source:

    www.rbi.org.in

    Recent RBI Initiatives

    N o-Frills Bank Accounts

    The RBI in its Annual policy for the year 2004-05 advised banks to make available no-

    frills account. No-frills bank accounts are bank accounts which require low or nil

    minimum balance. Accordingly, this implies that a No-frill Bank account would not be

    issued frills like ATM Card, Debit Card, Internet Banking facility, etc.

    The initiative resulted in the opening of 6 million new no frills bank accounts between

    March 2006 and 2007.

    Relaxed KYC Norms

    In order to free customers from the procedural hassles of opening a new bank account,

    RBI simplified the Know Your Customers (KYC) procedures. This ensured that both

    rural and urban customers do not face any difficulty in opening a new bank account.

    KYC Norms are details which a customer has to furnish in order to open a bank account.

    General Purpose Credit Cards (GCC)

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    Banks have been asked to introduce General purpose Credit Card (GCC) facility up to

    Rs.25000 at their rural and semi urban braches. This facility is a type of revolving credit,

    which allows the holder to withdraw up to the specified limit.

    One Time Settlement Schemes (OTS)

    The Reserve Bank has instructed banks to offer one time settlement offers to customers

    who are unable to pay loans with principal amount is less than Rs 25000. There are a

    large number small Non Performing Assets (NPAs) with banks. An offer of such an

    OTS would help in restoring a customers borrowing relationship with the formal

    system. This would eliminate the need to go back to any informal agents like

    moneylenders.

    Use of Intermediaries

    In January 2006, the Reserve Bank permitted commercial banks to make use of the

    services of non-governmental organizations (NGOs/SHGs), micro-finance institutions

    and other civil society organizations as intermediaries for providing financial and

    banking services. These intermediaries could be used as business facilitators (BF) or

    business correspondents (BC) by commercial banks.

    Expansion of bank branches

    Over the years, the high concentration of bank branches in metropolitan areas and low in

    rural/semi urban became a concern for the RBI. To ease this problem, since 2006, the

    Reserve Bank allows opening of new branches by any bank only on the criteria that at

    least half of their new branches should be opened in under-banked areas which are

    notified by the RBI from time to time

    Encourage use of IT

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    The Reserve Bank of India has been encouraging the use of Information Communication

    Technology (ICT) solutions by banks for enhancing its outreach with the help of their

    Business Correspondents and other intermediaries.

    Restore customer confidence

    In recent years, realizing the important role that Rural and Co-operative banks could play

    in Financial Inclusion, a regulatory and supervisory framework has been implemented to

    weed out the non viable banks in an orderly manner through consultations with the

    Registrar of cooperative societies and sector representatives. This step has helped restore

    customer confidence in these banks.

    Vision 2020

    RBIs vision for 2020 is to open nearly 600 million new customers' accounts and service

    them through a variety of channels by leveraging on IT.

    5.4 Financial Inclusive Banking Services

    Financial Inclusive banking is not limited to the extension of credit to the poor and weaker

    section of the society. There exists a broader portfolio of services that needs to be directed to

    the clients in order to achieve sustained inclusion. Some of the services in the portfolio ofFinancial Inclusive Banking are:

    A No-frills banking account for making and receiving payments

    A savings product suited to the pattern of cash flows of a poor household

    Low cost money transfer facilities

    Small loans and overdrafts for productive, personal and other purposes

    Micro-insurance (life and non-life)

    Other services tailored to the needs of the clients.

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    There are a large number of reasons why poor and low-income customers do not want or are not

    offered more access to formal financial services. Sometimes, the demand for these services is

    latent and such demands can be met by innovative financial services. In some cases the demand

    cannot be satisfied by the financial products or delivery methodology currently being offered. In

    all cases, the poor and low-income people want the type of financial services that can fulfill their

    needs and help them to better manage their households and businesses. The need is for

    convenient, affordable, flexible, permanently available, reliable and safe financial services.

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    5.5 Financial Inclusive Banking Access Barriers

    There are certain factors which play a decisive role in shaping the market for financial services

    used by poor and low-income people. Some of these factors act as constraints that limit

    customer demand for financial services.

    The factors are:

    Cultural Norms

    Gender Factor

    Age Factor

    Legal Identity

    Level of Literacy

    Geographical Location

    Level of Income

    Type of Occupation

    Government Regulations

    Service/Product Provided.

    5.6 Agents of Financial Inclusion

    In the last 25 years, various types of Financial Institutions have stepped forward and taken

    initiatives for serving poor and lower income clients. There exists mix of public, private and not-

    for-profit organizations who work for the cause. Some of these organizations have both social as

    well as financial goals. They are also referred as organizations with a double bottom line or

    alternative financial institutions. Micro Finance Institutions are considered to be one such

    financial service providers and they comprise of NGOs, microfinance banks, and non-bank

    financial intermediaries. Governments and voluntary donors have played a decisive role in

    supporting the innovative service approaches of the alternative financial institutions. These

    institutions encounter the social, economic and political challenges in their economies and also

    continue to serve those who have always been denied access to financial services. Most of the

    countries have a large number of such institutions.

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    The main agents of Financial Inclusion are:

    Commercial banks

    These are banks which offer simplified savings accounts, fee-for-service activities,

    money transfer, micro-credit services etc. to the clients. The role of these institutions in

    extending financial inclusion is very vital. Due to the vast coverage that financial

    inclusion requires, these banks usually tie up with other NGOs and MFIs to act as

    intermediaries for them. Providing financial services to low and middle income

    households is often a profitable business for a commercial bank.

    State development and agricultural banks

    These are Government established and owned banks which help in fostering the

    development of the priority sectors such as agriculture, handicraft industry etc. Their

    main aim is to promote government policy initiatives to reach clients who are considered

    non-bankable by conventional commercial banks. State Development and Agricultural

    banks also serve as a channel for all government transfers, payments, or receivables to

    the farmers and other priority sectors.

    Postal savings banks

    The strength of these institutions is the large distribution networks they cover. They

    capitalize on their networks to provide financial services. In quite a lot of the countries,

    Postal Savings Banks are the leading financial service provider. There services are

    particularly useful in rural areas as they can efficiently manage small account balances.

    They mainly offer savings and payment/transfer services.

    MFI banks

    Micro Finance Institutions generally operate as independent entities or as the subsidiaries

    of larger banks. They operate under structured frameworks adapted and serve a client

    base which is perceived as risky and unprofitable by commercial banks. MFI banks

    usually include a social dimension in their operations. Unlike commercial banks, they

    treat microfinance as their core business activity. They provide services tailored

    specifically to reach people with low to medium income and other small and medium

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    enterprises. The shareholders of such institutions value the social responsibility of the

    bank. They usually expect lower returns from their operations.

    Licensed Non-bank financial intermediaries

    They are former microcredit NGOs that have been converted under special legislation

    and also finance companies. Their offerings include non-collateralized credit products

    and services. These institutions may have the authority to take deposits under specified

    conditions. They fund their operations from funding by public or private sources. They

    serve small and medium enterprises.

    Financial cooperatives and credit unions

    They comprise of:

    o Municipally-owned savings and loan institutions

    o Member-owned financial cooperatives like credit unions.

    These institutions work on a not-for-profit basis. They are controlled and operated by

    their members. Any earning which these institutions make is redistributed to the

    members in the form of dividends on share capital, additional interest on savings, or

    decreased rates on loans or spent for improvement of services such as remittances and

    insurance.

    Rural banks and community banks

    They are small financial intermediaries which are owned by local individuals, or

    local/regional governments. These banks may also be organized in form of a

    cooperative. Some of these banks are started for sufficing government mandates of

    providing financial services to people who do not have access to savings, and loans.

    Some of these banks are also privately owned banks for community service. Such banks

    need smaller paid-in capital for start up.

    Non-governmental organizations

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    These are organizations that cater financial services (mainly credit) along with other

    services like health and education. They are governed by a number of civil and

    commercial laws. Donors are the main source of funds for NGOs. Their main goal is the

    welfare of the poorest poor. They are not subjected to bank regulation and supervision

    and hence they have the authority to mobilize funds from public.

    Insurance companies

    They are insurance providers which provide insurance to poor and low-income

    customers. They may either be for-profit or not-for-profit institutions, government

    providers, and mutual and cooperative insurers. These institutions either work directly or

    act reinsurance providers to larger organizations.

    Transfer payment companies

    They are specialized money transfer companies that provide fast and safe transfer of

    funds for low and middle-income clients.

    Their services may be of three types:

    Remittances

    Credit

    Account-to-account deposit transfers.

    They are fee-based and profitable and have the capacity to attract new customers to

    saving and loan services. Its main categories are:

    o Non-bank private retailers

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    They are private commercial retailers who engage exclusively in financial

    services such as moneylenders, deposit services, pawns. They may be private

    retailers such as small grocery stores, agricultural service providers and agro-

    businesses, and large retailers.

    o Informal mutual assistance groups

    This group consists of Rotating savings and credit associations (ROSCAs), self-

    help groups and mutual assistance groups. They can be quite small, organized

    between group of friends, NGOs, or local community members. They may also

    be large in size like entire community, employees of larger businesses and

    government departments.

    Figure 4: Alternate Financial Institution Activities Developing Countries

    Source: CGAP 2007

    The figure above shows the alternate financial institution activities in developing countries.

    Alternate financial institutions here imply institutions other than commercial banks. Some of the

    important observations that may be made from the figure above are:

    Contribution of Micro Finance Institutions is significantly high in both savings accounts

    and loan holdings.

    Contribution of State Banks is also comparable to that of MFIs.

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    The contribution of MFIs is more significant as they are institutions solely dedicated to the poor

    and low income customers.

    MFIs have a dimension of social well being in their daily operations. Banks like Grameen Bank

    have shown the potential that MFIs hold. There are several MFIs worldwide which have

    helped in shifting Financial Inclusion to a higher level. By far MFIs are the most important

    agent of Financial Inclusion.

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    5.7 Microfinance

    Micro finance is the provision of thrift, credit and other financial services and products of very

    small amounts to the poor for enabling them to raise their income levels and improve their

    living standards. - Definition Source:

    www.rbi.org.in

    It has been recognized that micro finance helps the poor people in meeting their needs for small

    loans and other financial services. The various informal and flexible services offered to low-

    income borrowers for meeting their daily consumption and livelihood need has made micro

    finance movement grow at a rapid pace across the world. This has in turn has also influenced the

    lives of millions of poor positively.

    5.8 Evolution of Microfinance in India

    After the nationalization of banks in 1969, the banking sector has witnessed large scale branch

    expansion. This has shifted the focus of bankers from class banking to mass banking. Over a

    period of time, it was, however realized that, despite of the large number of formal financial

    institutions, these institutions were unable to cater completely to the small and frequent credit

    needs of most of the poor. This necessitated the search for alternative policies and reforms that

    could help in reaching out to the poor.

    The emergence of the micro finance movement in India could be traced back to the self-help

    group (SHG) - bank linkage programme (SBLP) started in 1992 by National Bank for

    Agricultural and Rural Development (NABARD). This programme was remarkably successful.

    Soon other approaches like micro finance institutions (MFIs) also emerged. Realizing the

    potential of micro finance, the Reserve Bank, NABARD and Small Industries Development

    Bank of India (SIDBI) have taken numerous initiatives over the years to give push to the micro

    finance movement in India.

    5.9 Micro Finance Models

    At the international level a lot of work and efforts had been put in for development of micro

    Finance since the 1980s. Micro finance is an evolving and diverse field. There is no particular

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    flexible. As a result, each model has to be tailored according to the circumstances and the local

    needs. The micro finance movement has gained huge momentum in India in recent years.

    Currently, there are two main models being used in India. These are:

    The SHG-bank linkage programme (SBLP) model

    The micro finance institution (MFI) model.

    SBLP

    The SHG Bank Linkage Programme model was initiated as a pilot project by NABARD in

    1992. It has evolved as a dominant model in terms of number of borrowers and loans

    outstanding. In terms of coverage also this model is regarded as the largest micro finance

    programme in the world. The SBLP has made remarkable progress since its inception.On March 31, 2007, 2.9 million SHGs under SBLP had an outstanding bank loans of Rs.12,366

    Crore. The number of SHGs having saving bank accounts with the banking sector was 4.2

    million and the outstanding savings was that of Rs. 3,513 Crore.

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    Most of the self-help groups use NABARD's SHG-bank-linkage program. This model has been

    successful in attracting the attention of the poor populations that or otherwise difficult to reach

    directly through banks. SHGs aggregate their individual savings into a single deposit and thus

    minimize their bank transaction. With the help of self-help groups, banks can serve small rural

    depositors and also pay them the market rate of interest.

    The different models that have emerged under the SBLP are:

    Model I: SHGs promoted, guided and financed by banks.

    Model II: SHGs promoted by NGOs/ Government agencies and financed by banks.

    Model III: SHGs promoted by NGOs and financed by banks using NGOs/formal

    agencies as financial intermediaries.

    Model II has been the most successful.

    MFI Model

    While the SBLP model leads the list of model of micro finance used in India, the MFI model has

    also gained great momentum in the recent past. The MFI model in India exists in diverse

    institutional and legal forms. MFIs in India exist in forms like:

    Trusts registered under the Indian Trust Act

    Societies registered under the Societies Registration Act, 1860

    Co-operatives registered under the Mutually Aided Cooperative Societies Acts of the

    States

    Non-banking financial companies (NBFC)-MFIs, which are registered under Section 25

    of the Companies Act, 1956

    NBFCs registered with the Reserve Bank.

    These MFIs are scattered across the country and due to the multiplicity of registering authorities,

    there is no reliable estimate of the number of MFIs. The most frequently used estimate is that

    their number is likely to be around 800. Attempts have been made by some of the associations

    of MFIs like Sa-Dhan to capture the business volume of the MFI sector. As per the Bharat

    Micro Finance Report of Sa-Dhan, in March 2008, the 223 member MFIs of Sa-Dhan had an

    outreach of 14.1 million clients with an outstanding micro finance portfolio of Rs.5,954 crore.

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    Bank Partnership Model

    Banks can use MFIs as their agent for handling credit, monitoring, supervision and recovery. In

    this model, the bank is the lender and the MFI acts as an agent for handling items of work

    relating to credit monitoring, supervision and recovery, while the borrower is the individual. The

    MFI acts as an agent it takes care of all relationships with the client, from first contact through

    final repayment. Another variation of this model is where the MFI, an NBFC, holds the

    individual loans on its books for a while, before securitizing them and selling them to the bank.

    Such refinancing through securitization enables the MFIs greater access to funds.

    Banking Correspondents

    In January 2006, the Reserve Bank allowed commercial banks to utilize NGOs, MFIs (other

    than NBFCs) and other civil society organizations as intermediaries in providing financial and

    banking services by using business facilitator and business correspondent (BC) models. The BC

    model allows banks to perform financial transactions at a location much closer to the rural

    population. The BC model uses the MFIs ability to get close to poor clients a necessity for

    savings mobilization from the poor while relying on the financial strength of the bank to

    safeguard the deposits. According to the announcement made by the Union Finance Minister in

    the Union Budget 2008-09, banks were permitted to engage retired bank employees, ex-

    servicemen and retired government employees as business correspondents (BCs) with effect

    from April 24, 2008, in addition to entities already permitted earlier, subject to appropriate due

    diligence.

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    5.10 The Grameen Bank Success Story

    The origin of Grameen Bank can be traced back to 1976 when Professor Muhammad Yunus,

    Head of the Rural Economics Program at the University of Chittagong, launched an action

    research project to examine the possibility of designing a credit delivery system to provide

    banking services targeted at the rural poor. The Grameen Bank Project (Grameen means "rural"

    or "village" in Bangla language) came into operation with the following objectives:

    Extend banking facilities to poor men and women

    Eliminate the exploitation of the poor by money lenders

    Create opportunities for self-employment for the vast multitude of unemployed people in

    rural Bangladesh

    Bring the disadvantaged, mostly the women from the poorest households, within the fold

    of an organizational format which they can understand and manage by themselves

    Reverse the age-old vicious circle of "low income, low saving & low investment", into

    virtuous circle of "low income, injection of credit, investment, more income, more

    savings, more investment, more income".

    The action research demonstrated its strength in Jobra (a village adjacent to Chittagong

    University) and some of the neighboring villages during 1976-1979. With the sponsorship of the

    central bank of the country and support of the nationalized commercial banks, the project was

    extended to Tangail district (a district north of Dhaka, the capital city of Bangladesh) in 1979.

    With the success in Tangail, the project was extended to several other districts in the country. In

    October 1983, the Grameen Bank Project was transformed into an independent bank by

    government legislation. Today Grameen Bank is owned by the rural poor whom it serves.

    Borrowers of the Bank own 90% of its shares, while the remaining 10% is owned by the

    government.

    - Content Source: www.grameen-info.org

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    5.11 Why not SHG in Bangladesh and Grameen in India?

    The poor population in India is not so different from its counterpart in Bangladesh. As a matter

    of fact, the differences between Northern and Southern India are actually more pronounced than

    those between poor communities in West Bengal, or UP, Bihar and Orissa, from their

    neighbours in Bangladesh. It therefore seems odd why such diverse system have evolved in the

    two countries over the years. Few reasons for these differences may be as follows:

    Reason 1 Form of Governance

    Bangladesh More used to disciplined, militarist Government

    India More mature as a democracy as compared to Bangladesh

    Bangladesh as a country has less experience of democracy than India. Its people are more used

    to military governments. They are used to a more disciplined and less individualist form of

    governance. Grameen as an Institution works with strict discipline and guidelines. They have

    often been criticized for being over-disciplined or even militarist, with its tradition of saluting,

    of meetings with imposed seating systems and the necessity for strict adherence to pre-set

    schedules, by staff and members alike. It may, for that reason, be that Grameen is more

    acceptable in Bangladesh and less in India.

    Reason 2 Dependence on Donor Funds

    Bangladesh Development Aid 1985 - $ 11.40 per person; 1997 - $ 9.00 per person

    India Development Aid 1985 - $ 1.90 per person; 1997 - $ 1.90 per person

    For the Initial two decades of its operation, Grameen was predominantly a donor based model. It

    was very well supported by donors in Bangladesh. India on the other hand has always scored

    low on Development aids. This is one the reason why the Grameen Model is more predominant

    in Bangladesh.

    Reason 3 Social Set Up

    Bangladesh More Homogenous

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    India Less Homogenous

    Bangladeshi village communities are generally more socially and economically homogeneous

    and less divided by caste, than their Hindu equivalents in India. It may therefore be easier in

    Bangladesh to persuade people to join together in groups and centers which follow a

    standardized system. The freer and more flexible SHG system may be more appropriate for the

    Indian situation.

    Reason 4 Population Density

    Bangladesh 850 per square Km

    India 300 per square Km

    Grameen Model requires more frequent meetings with its members as compared to the SHG

    model. This makes it costlier to operate a Grameen MFI. In order to make up for the higher cost,

    Grameen MFIs prefer operating in areas which can provide them a stronger customer base so

    that more number of clients could be served per visit. In short densely populated areas serve a

    suitable market for Grameen MFIs. Bangladesh is 3 times more densely populated than India.

    This could be one of the reasons for Grameen to be more successful in Bangladesh.

    Reason 5 Bank Network

    Bangladesh Relatively Under developedIndia Strong RRB network

    The Indian banks have over 70,000 branches in rural areas. The Indian banks are also compelled

    to direct a substantial proportion of their credit to the so-called priority sectors and weaker

    sections. The SHG linkage system is ideal for banks; any branch can do business with one or a

    number of SHGs, without making significant changes to its operating procedures. Bangladesh

    does not have such a well developed network of Rural Banks.

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    5.12 Comparative Analysis Grameen Model and SHG

    Model

    5.12.1 On the Basis of Groups

    Parameters Grameen SHG

    Client Type Groups (5 Members) Groups (15-20 Members)

    Group Autonomy Low High

    Group Role Consumer Retailer

    Role of Lending Institute Retailer Wholesaler

    Savings Rs. 5-25 per week Rs. 20-100 per month

    Credits Rs. 2000 5000 Rs. 5000 - 10000

    Service Focus Credit Savings & Credit

    Promotion Bank Staff Usually through NGOs

    Meetings Weekly Monthly

    Group Discipline High Low

    Table 3: Model Comparison Group Basis

    A Grameen group is of smaller size as compared to an SHG group. The Degree of autonomy

    enjoyed by a SHG Group is more than that by a Grameen Group. This is because in an SHG, the

    group performs the entire task of allocation of loans and repayment. While in a Grameen Group

    the entire task of allocation of loans and repayment is in the hands of the bank staff. The role

    played by the Lending Institution differs in both the models. In the SHG model, the bank

    performs the task of a wholesaler because the banks responsibility is just the allocation of loan

    to the SHG. The SHG in turn acts as the retailer to distribute the loan further to the members.

    Observations:

    In an SHG, the degree of responsibility of the members is higher

    Since autonomy in an SHG is higher, the degree of discipline is lower

    Less frequent meetings and the use of NGOs for promotion helps SHGs in lowering

    their operation cost

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    The SHG model appear to be a better group structure based on the comparison of the

    group parameters

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    5.12.2 On the Basis of Loans

    Parameters

    Microfinance Informal Formal

    SHG

    MFI

    SHG

    Group

    Grameen

    MFIMoneylender Relatives Bank

    Loan Amount Medium Variable Low-Medium

    Variable-High Low-Variable

    High

    Access Variable Medium Medium Medium Medium Low

    Speed Medium High Fixed High High Low

    Flexibility Medium High Low High High Low

    Cost Medium Medium Medium-High

    High Variable Low

    Table 4: Model Comparison Loan Basis

    Loan which is the most important Financial Service offered by any Micro Finance Institution is

    an ideal tool for comparison of the models being used in the Institutions.

    Observation:

    Formal Banks or the Commercial Banks provide loans which cater to the needs of high

    to medium income groups and hence are an infeasible options for MFI Clients

    The informal sector like moneylenders cater to medium to low income groups but again

    the cost of loans from such sources is generally on the higher side

    The best option for low to medium income clients is loan from Microfinance Institutions.

    Their loan amounts are low and the cost of loans is lower than that charged by the formal

    and informal sources

    Findings:

    In case of Microfinance Institutions, those running on the Grameen model provide loan

    of smaller amounts but the interest they charge is slightly on the higher side

    While institutions which run on the SHG model provide loan of low to medium amount

    but the interest rate they charge is lower

    Grameen Model MFIs are able to cater to clients down the poverty scale

    SGH model MFIs can cater to clients little higher up on the poverty scale

    This shows that both the models focus on catering to different range of clients

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    5.12.3 On the Basis of Sustainability

    Parameters Grameen SHG

    Average Yield

    (As per M-CRIL)

    23.7%

    More money drawn out ofclients

    8.9%

    More Money Left withClients

    Interest Rate Charged 29-41% 14-36%

    Operational Overheads Higher Lower

    Cost of Institutional Development Less High

    Staff High in Number Low Salary Less Skilled

    Low in Number High Salary More Skilled

    Management More Management Less Management

    Groups Durable and Long Lasting More vulnerable toSwitching

    Table 5: Model Comparison Sustainability Basis

    Economic sustainability refers to the capacity of an MFI to be operational for a period of time,

    covering all its operational expenses.

    Observations:

    MFIs working on Grameen Model have a higher return on their investments as they a

    charge a higher rate of interest as compared to their SHG counterparts

    But, at the same time Grameen MFIs end up paying higher operational expenses

    SHG MFIs enjoy the existing infrastructure of Rural Banks and hence require lesser

    cost of institutional development

    In terms of staff, Grameen MFIs work with higher number of low skilled staff and SHG

    MFIs work with lower number of high skilled staff

    Findings:

    In India the SHG system is more economical, and thus more financially sustainable, in

    the short to medium term at any rate, in spite of the fact that SHG members usually pay a

    lower price for their loans than members of Grameen groups

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    5.12.4 On the Basis of Outreach

    Parameters Grameen SH

    Self Exclusion Group Pressure Group Pressure

    Regulations for Groupformation

    Strict Lenient

    Management by Clients Less More

    Chances of Exclusion by otherMembers

    Low High

    Institutional Supervision High Low

    Table 6: Model Comparison Outreach Basis

    Outreach here signifies the penetration of the services. It implies the number and type of clients

    an MFI can reach to. Here we try to find out which of the two group systems reaches and

    benefits the poorest people most effectively.

    Observations:

    Self exclusion of the clients due to group pressure is a problem common to both types of

    MFIs

    Group formation decisions are more guided by the banks in Grameen model while it is

    not so in SHG Model

    There are set upper income limits for group formation in case of a Grameen MFI while

    there are no such limits

    In a SHG MFI, chances are higher that a poor member is excluded from the group by

    other more affluent members

    Findings:

    The observations seem to suggest that SHGs are probably rather less likely to include

    poorer people than Grameen groups; neither system reaches the very poorest

    Given the very rapid growth of the SHG system in India, the biggest question which

    arises is that: Are these SHGs actually catering to the clients which lie down the poverty

    scale?

    So in terms of outreach, it is the Grameen Model which scores over the SHG Model.

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    5.12.5 On the Basis of Empowerment

    Parameters Grameen SHG

    Client Responsibility Less More

    Lenders Attitude Less Friendly More Friendly

    Decision Making More by MFI More by Client

    Group Composition Not totally Member Controlled

    Member Controlled

    Internal/External Threats More Protected Less Protected

    Table 7: Model Comparison Group Basis

    Empowerment here explains how micro-finance has enabled large numbers of poor people to

    improve their social and even their political status. It is non economic empowerment that we

    compare in the analysis.

    Observations:

    Higher degree of autonomy associated with SHG group give them a sense of social well

    being

    Decision making in case of a Grameen Group is totally in the hands of the banks

    Decision making in SHG Groups is in the hands of the SHG members, thereby they

    enjoy a higher sense of responsibility

    SHG groups are more vulnerable to threats such as being used as channels for

    Government Grants and Political propaganda

    Grameen group being strongly controlled by the banks are less prone to such threats

    Findings:

    SHG membership is thus more empowering, but at the same time more vulnerable.

    SHGs are a more empowering instrument than Grameen groups, but they also demand more of

    their members, and expose them to greater risks

    Grameen Groups are less empowering, thus may be more readily accepted by poorer clients

    SHG Groups are more empowering and hence are likely to be more acceptable to more affluent

    clients

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    The following analysis is based on data collected for 32 different microfinance institutions, 16

    working on the Grameen Model and 16 on the SHG Model. The entire data set consists of equal

    number of small, medium and large scale Microfinance Institutions both for the Grameen and

    SHG Models.

    5.12.6 Comparison Operating Cost Ratio

    Comparison of OCR of MFI's

    0

    10

    20

    30

    40

    50

    60

    70

    1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

    Micro Finance Institutes

    OperatingCostRatio

    Op Cost Ratio

    (Grameen)Op Cost Ratio (SHG)

    Figure 5: Comparison of OCR of MFIs

    Operating Cost Ratio for a Microfinance Institution is defined as the ratio of Operating Cost for

    a year divided by the total outstanding loans.

    From the above graph we can conclude that for a Grameen MFI the Operating Cost Ratio is

    usually higher than that of a SHG MFI.

    Reasoning:

    The higher OCR for Grameen MFIs can be attributed to the higher operational overheads theyincur.Since the entire task of promotion and management of a Grameen Group lies with the

    bank staff, the operational cost is bound to be higher. Moreover the loan portfolios that the

    Grameen MFIs provide are usually of smaller value as compared to SHG loan portfolios. The

    net effect is that the OCR of Grameen MFIs is higher.

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    5.12.7 Comparison of Interest Rates

    Figure 6: Interest Rate Comparison of MFIs

    The above plot is for the interest rates charged by various Microfinance Institutions. Again, it

    may be noted that the interest rates charged by Grameen Microfinance Institutions is

    comparatively higher that the Interest rates charged by the SHG MFIs.

    Reasoning:

    The higher interest rates charged by Grameen MFIs may be attributed to the higher operational

    cost they have to incur in order to sustain their operations. Grameen MFIs have to charge higher

    interest rates because their loan portfolios are of smaller value. The smaller the loan portfolio

    the higher is the interest rate it attracts. This is essential because disbursement of smaller loans

    attracts higher cost in terms of staff cost.

    Both the Operating Cost Ratio and Interest Rates Comparison suggest that SHG MFIs perform

    better than Grameen MFIs. But before drawing upon any final conclusion, we analyze the

    penetration of SHG region wise, throughout India.

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    5.12.8 Zone Wise Coverage of SHGs in India

    Microfinance Coverage

    0

    500,000

    1,000,000

    1,500,000

    2,000,000

    2,500,000

    3,000,000

    3,500,000

    Mar '04 Mar '05 Mar '06 Mar '07

    Years

    NumberofSHG'

    Northern

    North Eastern Region

    Eastern Region

    Central Region

    Western Region

    Southern Region

    All India

    Figure 7: Zone wise Coverage of SHGs in India

    The above graph explains the coverage of SHGs in India. It may be seen that the southern region

    is way ahead of the other regions in terms of number of SHGs. It may be noted that just 15% of

    the people below poverty line live in the Southern Region. The Eastern and Central Region

    together serve as the home for almost 60% of the BPL population. But these two regions have an

    SHG coverage way below the southern region.

    The probable reason for the southern regions to perform better than the other regions are:

    The higher level of literacy in the southern region is ideal for the growth of SHG

    coverage

    The SHG movement made a head start in the southern region

    The Lower level of poverty in Southern Region creates an ideal customer base for SHGs

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    Population Distribution

    Northern, 13%

    North Eastern

    Region, 4%

    Eastern

    Region, 22%

    Central Region,

    25%

    Western

    Region, 15%

    Southern

    Region, 21% Northern

    North Eastern Region

    Eastern Region

    Central Region

    Western Region

    Southern Region

    Figure 8: Population distribution in India

    Below Poverty Line Distribution

    Northern, 7%

    North Eastern

    Region, 3%

    Eastern Region,

    29%

    Central Region,

    32%

    Western Region,14%

    Southern Region,

    15%Northern

    North Eastern Region

    Eastern Region

    Central Region

    Western Region

    Southern Region

    Figure 9: BPL Population distribution in India

    Conclusion:

    Figure 10: Poverty Scale

    From the above analysis it is clear that if we map the two models on the poverty scale, we find

    that the SHG cater to clients located higher up on the Poverty Scale while the Grameen MFIs

    cater to clients poorer than the SHG clients. This makes it clear that the great success enjoyed by

    SHG model in India is more in Number and less in value. The actual poor or the poorest of the

    poor are left unserved by SHG MFIs.

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    Recommendations:

    In order to achieve a more valuable Financial Inclusion in India it is essential that the SHG

    model also covers the clients located further down the poverty scale. In doing so, the OCR of the

    MFIs is likely to go up. So, it is essential that this rise in OCR be compensated by either:

    Making fundamental changes in the SHG model

    o The high degree of autonomy given to groups in SHG model should be restricted

    o There should be stricter norms for entry in SHG like Annual Income Cap

    o Guidelines for SHGs must be made stricter to ensure prompt repayment

    Leveraging Technology to bring down the operational cost (To be explained in the

    preceding sections of the report)

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    6. Levers of Financial Inclusion

    Figure 11 (below) depicts the four levers that can help in raising the levels of financial inclusion

    in any country. Each lever has its own important role to play. But considering the future goals of

    Financial Inclusion, Technology appears to be the most important lever. Extensive use of

    technology has the ability to address prominent Inclusive Finance issues. Technological

    solutions are required to:

    Capture customer details

    Facilitate unique identification

    Ensure reliable and uninterrupted connectivity to remote areas

    Ensure connectivity across multiple channels of delivery

    Offer multiple financial products through same delivery channel

    Ensuring consumer protection

    Develop comprehensive and reliable credit information system

    Develop appropriate products tailored to local needs and segments

    Provide customer education and counseling

    Enable use of multi-media and multi-language for dissemination of information and

    advice.

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    Figure 11: Financial Inclusion Levers

    6.1 Technology - Addressing the Issue of High Interest

    Rates

    Micro Finance Institutions have always been criticized for charging interest rates which are

    normally much higher than those charged by commercial banks. Micro Finance institutions on

    the other hand claim that high interest rates enable them to:

    Make their business Sustainable and Permanent

    Allow expansion of services

    Eliminate the need of subsidies.

    Cost AnalysisThis analysis aims at finding the most important component of the interest income on loans

    issued by Micro Finance Institutions, which can be reduced through extensive use of

    Technology.

    There are four components of the interest income generated by any microfinance company.

    They are:

    Cost of funds:

    Figure 12: Cost of funds as a % of gross loan portfolioSource: CGAP Report 2007

    o Funds are available to MFIs at a repayment rate of around 8%

    o This rate is higher than that for commercial banks.

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    o MFIs tend to price takers when it comes to borrowing or funding. So there is not

    much that they can do to reduce the cost of funds.

    Loan Losses:

    Figure 13: Loan losses as a % of gross loan portfolioSource: CGAP Report 2007

    o Average default rates are low around 2%

    o Loan losses due default have very little effect on MFI interest rates

    o Loan losses are quite low in most MFIs

    o Strong monitoring in MF loan also helps in keeping the default rates down.

    Profits:

    o Profit is the most controversial component of the interest income since is subject

    to the control of the management

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    Figure 14: After Tax Profit as a % of gross loan portfolioSource: CGAP Report 2007

    o Median Return for Micro Finance Institutions was 12.5% in 2006 (Lower than

    that of banks)

    o Elimination of profit component would reduce interest rates by only 1/7 th, which

    is not very significant.

    Administrative Expenses:

    o Tiny loans require higher administrative expenses

    o Comprises of 11% of interest income in 2006

    o Administrative cost decreases with the age of the MF institution.

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    Figure 15: Interest Income Break upSource: CGAP Report 2007

    o As seen from figure 9, Administrative income constitutes the biggest share of the

    interest income. So, it is the operating/administrative expenses which are to be

    targeted for reduction

    o The components of operational expenses are:

    Staffing

    Resources - Human, Technological

    Training

    Management Information Systems

    Monitoring

    Publicity.

    o Apparently, each of these components can be significantly reduced using

    technology.

    Conclusion of cost analysis

    It is not Loan losses, Profit Income or Cost of Funds that causes the interest rates to be

    high

    The greatest single component that contributes to the high interest rates is the operational

    or administrative expenses

    Most of the components of Administrative expenses can be reduced using better

    technology

    Hence, technology can address the issue of High Interest rates, if used extensively.

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    7. LEVERAGING TECHNOLOGY

    A lot of effort has been invested on the development of cost effective products and solutions for

    Financial Inclusive Banking. Various Pilot projects on the latest technological innovations have

    be launched over the years, with a very few of them finding real success. Cost effectiveness,

    scalability and ease of use are the most important factors which decide the fate of any new

    innovation. In order to find wide range acceptability, any banking innovation needs to have the

    right combination of all the three above mentioned factors.

    Although there are numerous solutions and products available in the market, our discussion in

    the report shall be limited to the products which have evolved as the most successful innovations

    in inclusive banking. We will also discuss about some other promising technologies and their

    application in microfinance.

    7.1 Management Information System

    Any Microfinance institution, whether big or small, needs to have a bank-office MIS in place

    before attempting to make use of any front-end application or delivery channel. The back-office

    MIS is the backbone of any Information System solution. While a few MFIs are making good

    use of this technology, the majority are facing difficulties in getting the right solution. The main

    reasons for this include: Insufficient organizational and human capacity

    Unavailability of suitable MIS applications for microfinance

    Diversity in business processes and frequent changes in procedures

    Risk of failure of the MIS

    Diversity of geography and language

    Unavailability of vendors and their capacity to implement and support IT solutions

    High cost of IT solutions for MFIs

    Lack of commitment of management and key decision-makers within an MFI

    Lack of awareness about the importance of IT.

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    Despite the advances in MIS, practical experience shows that the acquisition of a suitable MIS is

    not simple. Many MFIs are struggling with their MIS. Some of the reasons for these difficulties

    are:

    Microfinance operations are unique and complex, compared to commercial retail

    banking

    The Microfinance sector is still evolving and lacks standardization in its procedures,

    methodologies, customer characteristics, type of transactions and reporting

    There is no of-the-shelf software available that can address the requirements of every

    MFI

    Those MIS that are available are complex and costly for adoption by MFIs

    MFIs lack human and organizational capacity to develop or select an appropriate

    MIS

    MFIs operate in remote and difficult areas where communication and power

    infrastructure do not exist, and are therefore constrained from using IT equipment

    required to run MIS applications.

    Information Systems currently used by MFIs

    Manual System:

    Some MFIs still rely on manual systems, which involve maintenance of records in forms and

    ledgers. Organizations having manual systems are either small micro-credit programs or NGOs.

    E.g. Paper based MIS

    Semi-automated System:

    More than 50% of MFIs are operating in a semi-automated mode. Within this category, the

    spreadsheet is the common tool being used either in conjunction with a manual system or with

    an MIS application that does not fulfill the information requirements of the MFI. The majority

    of non-regulated MFIs have semi-automated systems. E.g. Excel Based MIS

    Fully Automated System:

    Only Few MFIs are fortunate enough to have a fully automated and integrated MIS, fulfilling

    the whole information requirements of the organization. Such systems are existent with banks or

    regulated MFIs. E.g. Open Source MIS, Specialized Vendor Package etc.

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    CostData

    ReliabilityScalability

    Data

    Exchange

    Capability

    Design

    Flexibility

    Excel Spreadsheet Low Low Poor Poor Low

    Specialized Vendor Package High High High Medium Medium

    Custom Made High High High Medium High

    Open Source Application Low High High High HighTable 8: Comparison of various types of MIS

    Disadvantage of manual systems:

    Some of the disadvantages of manual Information Systems are:

    Too laborious and time consuming

    Prone to Errors Data manipulation and analysis is very difficult

    Maintenance of large amount of data is almost impossible

    Data and information is not secured

    Loosely controlled

    Highly inflexible (addition of new products and change in business processes cannot be

    made)

    Business continuity is at risk in case of damage to information due to fire, water or any

    other disaster

    Reporting is very cumbersome, time consuming and difficult.

    Benefi