Financial inclusion

COVER STORY MICROFINANCE SHG RURAL CREDIT KYC NO-FRILLS

Rural
Financial Inclusion
Financial inclusion today is a buzz word for this relatively higher risk segment of the population.
One interesting aspect that has been brought out by studies on
policy makers. How has banks fared in this micro–lending in India is that microfinance is not the sole area
realm? Executive editor N. Mohan features of operations of development institutions. While development
two public sector banks, which have taken up is the ultimate aim, banks are in the field and with an eye on
several programs to offer banking facilities to profit. This has been mainly because of RBI’s policy stipulations
the unbanked population: – that banks are required to lend 40% to priority areas, which
in banking lingo is priority sector lending and which includes
agriculture, SMEs and government securities and microfinance is
ccess to banking for the unbanked populace - largely not that risky as perceived as lending is often made to groups or
rural and to some extent semi-urban - has been a through referrals and the experience has been that repayments are
dominating issue for policy planners and the Reserve Bank of forthcoming in as much as 95% of the cases. While investments
India. The central bank, in line with the importance given to in government securities earn interest rates of 6 to 7%, lending to
financial inclusion, especially in the context of enhancing SHGs or MFIs can fetch interest in the range of 9% to 14%.
agricultural output, has brought in several policy changes, the Banking Frontiers sought details of microfinance endeavors of
major among them being the directive to banks to open as two leading public sector banks – Chennai-based Indian Bank
many no-frills accounts as possible, simplication of the KYC and Mumbai-based Bank of India – which have major exposures
procedures for the BPL (below poverty line) segment, providing in the segment.
the full range of banking services through business facilitators or Rural development and agriculture have been the niche areas
business correspondents in inaccessible rural areas and setting for Indian Bank, declares M.S. Sundara Rajan, chairman and
up of CIBIL to make available credit histories of individuals and managing director of the bank. “Our total branch network of 1,584
small businesses with a view to lower the risk for banks. These includes 470 rural, 394 semi-urban, 393 urban and 327 metro
measures actually increased the access to formal banking services branches across India. Of these, rural and semi-urban branches,
through the use of intermediaries like self-help groups (SHGs) which mostly serve the rural masses, constitute 55% of the total
and microfinance institutions (MFIs). Today, apart from NABARD number of branches. We have the lead bank responsibility in 14
and public sector banks, several private sector and foreign banks districts of south India. We have also sponsored three regional
have accessed the microfinance market either directly or through rural banks (RRBs), having a network of 205 branches to serve
SHGs or MFIs providing a spectrum of financial services ranging the rural masses in Andhra Pradesh, Tamil Nadu and the union
from small value loans to several complex financial services to territory of Puducherry,” says Sundara Rajan.

12 BANKING FRONTIERS FEBRUARY 2009

Cover Story.indd 1 2/12/2009 6:49:57 PM


He informs that the bank’s an insurance scheme for the
strategic plan for agriculture beneficiaries, the premium of
lending focuses on direct which is Rs 200 per year. Of this
lending to individual farmers, premium, Rs 100 is borne by
SHGs and joint liability groups. the bank and Rs 100 by way of
Agriculture credit portfolio of subsidy from the government.
the bank has enlarged to Rs In the event of death of the
7,326 crore as of December 2008. insured person, the dependent
The bank’s approach has been to will receive Rs 30,000 and
finance small farmers, marginal in the case of accident, Rs
farmers, tenant farmers, 75,000. In addition to these
oral lessees, share croppers, benefits, the bank is offering
agricultural laborers. The bank, free education for two children
he says, offers timely and of a person, the cost of which
adequate credit for short term has been pegged at Rs 2,400
A.P. Ghugal Sundara Rajan
crop production purposes and per year.”
extends loans at concessional The bank also extends credit
rate of 7% interest under the interest subvention scheme of to micfo-finance institutions (MFIs). As of December 2008, it
the government. The bank also extends financial assistance for has funded some 21 MFIs, which includes the leading MFIs of
agri investment activities such as medium/long term loans for India like SKS Microfinance and Bandhan, accounting for a credit
plantation and horticulture, land development, minor irrigation of Rs 192 crore. “We make a major distinction between SHGs
and agri allied activities, loans for farm mechanization activities, and MFIs,” says Ghugal, adding “as in our experience, most of
two-wheeler loans, home loans and loans for land purchase, a the funding advanced to SHGs is productive credit whereas in
debt swap scheme called ‘Ryots Punarudharan Yojana’ to relieve the case of MFIs, the funds can be either productive credit or
the farmers from the clutches of local money lenders. consumption credit. MFIs again charge higher rates of interest

DEVELOPING THE SHG MOVEMENT
Outlining the bank’s efforts in micro-lending, Sundara Rajan
says the bank has been pioneer in developing SHG movement in
the country by forming and credit linking SHGs in Dharmapuri
district of Tamil Nadu way back in 1989. “Our micro finance
portfolio has developed over years. More than 1.44 lakh women
SHGs have been benefited, having a loan outstanding of Rs.
1,230.02 crore,” he added.
Bank of India too, which has a substantially high microfinance
rural banking portfolio, extends credit to SHGs. While there
is no upward limit in funding SHGs, the bank extends funds
above Rs 50,000 only to SHGs. “In funding others,” says A.P.
Ghugal, general manager, priority sector department of the
bank, “we apply the BPL criteria prescribed by the government.
While individuals are technically eligible for financial assistance
under micro-finance schemes, we would prefer to channel credit
through SHGs in order to have a better impact.”
The funding is available to mainly all productive activities,
including farming and other priority sector and cottage industry.
Ghugal says the bank’s interest rate for priority sector lending
is the lowest among all the banks active in this sector - 9% per
annum. “Even NABARD sanctions credit at the rate of 10.25%,”
he says.
As part of corporate policy, the bank is actively involved in
financing SHGs working in tribal and backward areas. “As of now,
we have funded some 1,79,000 SHGs in the country, accounting
for credit worth Rs 464 crore,” said Ghugal. “Of these, as many
as 1,12,000 are women SHGs, with loans worth of Rs 394 crore.
An information Kiosk
As part of the micro-credit program, we have also introduced

BANKING FRONTIERS FEBRUARY 2009 13



- sometimes as much as 13.5%
- as these organizations have a
commercial interest and they Low-cost ATM
work on a for-profit basis.”
Vortex Engineering is a pioneer the total cost of ownership
in the country in developing a of an ATM, especially in
NO-FRILLS ACCOUNTS
low-cost all-purpose ATM, for rural areas. The problem
What has been the two
rural areas. Vijay Babu, CEO was that not only were ATMs
banks’ role in opening no-frills
of the Chennai-based firm, in expensive but also consuming
accounts?
discussion with N. Mohan: a lot of power which was a
Ghugal says in the last two
problem especially in rural
years Bank of India has opened
What are the major products areas. They also require an AC
some 16 lakh no-frills accounts,
and services are offered by to operate. Existing ATMs can
of which 7.5 lakh such accounts
Vortex Engineering? only dispense fresh, crisp notes.
were opened in the last nine
Vortex has developed a So, we, along with IIT-Madras,
months. “As a lead bank, we
completely indigenous low- set out to develop an ATM for
have responsibility for 48
cost ATM - Vortex Gramateller rural India with none of the
districts in the country. Of these,
- in collaboration with IIT-Madras. It has been above constraints.
we have achieved total financial
done keeping in mind the unique requirements
inclusion in two districts - Raigad
of the rural and semi-urban markets in India. Research reports suggest that mobiles are
in Maharashtra and Keonjhar in
It has many features that are not found in the most desired medium for accomplishing
Orissa. In these two districts,
other ATMs - like low power consumption of financial inclusion. How do you see the role of
all the residents have a bank
less than 50W, no need for air-conditioning, mobile telephony in micro-finance efforts?
account. We are nearing 100%
built-in battery backup for up to four hours of Mobiles will further enable low-cost banking
financial inclusion in two other
operation even under power failure, capability access to customers. With rapid growth of
districts and our roadmap is to
to run on solar power, ability to accept even mobile users, even among the BOP customers,
have 100% financial inclusion
soiled notes for dispensing and solutions using mobiles will enable
in all the 48 districts where we
finger print authentication as a easier banking access to them.
are lead bank.”
standard feature. I consider the Mobiles can offer various services
Sundara Rajan says Indian
low-cost POS devices, mobile phone like balance enquiry, bill payment
Bank has been instrumental in
banking and the low-cost ATMs as and cash less transactions but will
the introduction of financial
the most important technology still require an ATM for reliable cash
inclusion concept in the
innovations to offer affordable and dispensing. Cash withdrawal, either
country. “Way back in 2005,
reliable banking services to the from ones savings account or as loan
we launched National Pilot
BOP customers. or credit, is the most important
Project on Financial Inclusion
banking transaction required. We
Project (NPPFI) in the union
How could you bring in cost saving? have demonstrated a card-less cash
territory of Puducherry. It is
The idea for the product withdrawal using mobile phone and
now implemented by various
originated from IIT-Madras, when our ATM in partnership with mChek.
banks all over the country. With
the noted technology expert, In this model, the bank need not issue
the cooperation of all bankers,
Dr Ashok Jhunjhunwala, was ATM cards to customers and instead
100% financial inclusion has
approached by various leading let them use their mobile phones to
been achieved in the union
banks in India to find a way to reduce withdraw money from ATM.
territory. Subsequently, we
repeated this in Cuddalore
district of Tamil Nadu and
Kollam district of Kerala. We have completed 100% coverage in MANAGING KYC
12 of our lead districts,” says Sundara Rajan. How do the banks overcome the complex KYC issue?
The bank has opened nearly 15 lakh no frills accounts so far, Sundara Rajan says KYC norms have been relaxed by the Reserve
of which 4 lakh accounts were opened in the last financial year Bank of India for low income group members. The customer
alone. For these account holders, ATM cards are issued at the identification and proof of their location are the key components
discretion of the branch managers. No-frills account holders are of the simplified KYC norms. “For establishing a person’s identity
also entitled to SB-overdraft of up to Rs 50,000 for consumption and proof of his location, we can accept ration card, voter’s ID
needs and general credit cards of up to Rs 25,000 to self-employed card, driving license, PAN card and other specified documents. In
persons. More than 50,000 persons have been benefited under Dharavi slums in Mumbai, which is concentrated with migrant
these schemes. population, which has no documentary evidences, certification




Members of an SHG participating in a discussion sense. First is cost of transportation for an
account holder to come to the branch and
carry out transactions. Second is loss of a
day’s wages in case he or she has to travel to
the bank branch. Third is possible incidental
but avoidable expenses. In our efforts to make
our financial inclusion program a success, we
decided to eliminate these and make banking
available at the doorsteps of the customers in
the far-fetched rural areas. We are leveraging
technology for this purpose.”
The bank adopted a smartcard-based
system developed by Integra Microsystems
for the purpose. These smartcards are
biometrics-enabled, have 16–digit numbers
and are capable of 10 functions. The bank
has already issued nearly 41,000 smartcards
in Raigad district alone, where it has
accomplished 100% financial inclusion.
The bank’s business correspondents go to
from local administration is accepted.” the villages with handheld devices and carry out transactions.
Ghugal says KYC is a major process in opening no-frills accounts, Through this, an account holder can withdraw cash, deposit cash
especially in rural areas of the country. “We largely rely on business or cheque, receive pension or other remittances under the various
facilitators or business correspondents for this. But, we ensure that government schemes, buy insurance or mutual fund – in short
proper KYC is carried out as per norms prescribed by the RBI and practically all the banking transactions that hitherto required
we take full responsibility in verifying the credentials and proof of his or her visiting a bank branch. What is more, he or she gets
residence of the customers,” says he. a confirmation through an SMS about the transaction he had
Do the two bankers think the concept of no-frills accounts completed, gets latest statement, etc. The device is also voice-
performed as per expectations In terms of attracting customers enabled as the account holder can opt to get a voice message
and them doing the transaction? immediately after completion of a transaction.
Sundara Rajan says it has, at least partly. He admits: “However, Indian Bank too has adopted information technology in a
the number of accounts in which the transactions taking place big way in its financial inclusion programs. Sundara Rajan says
is low. People need to be educated and encouraged to operate the bank is planning several information and communication
their accounts and save whatever little is possible. Similarly, SB- technology initiatives as alternative delivery channels for
overdraft and general credit card facilities need to be extended to inclusive banking and for increasing outreach under financial
more number of no-frills account holders. To increase the outreach inclusion and microfinance. There are 20 banking service centers
with our financial products and services, various alternative functioning across India to extend financial / non-financial
delivery channels are deployed by leveraging technology like services under financial inclusion, utilizing the internet facility,
banking service centers, business facilitators, smart card banking, 12 rural internet kiosks serving sugarcane farmers for their credit
biometric ATMs, etc.” and non-credit requirements and biometric smartcard banking
(offline) in Cuddalore (Tamil Nadu), Dharavi (Mumbai) and
IT AS ENABLER Kaligram (Kolkata).
Bankers in general believe financial inclusion can be achieved
by leveraging IT. The government is responsive as the 2007-2008 BRANCH BANKING
budget had provided for the setting up of two funds for financial Indian Bank has also been into urban financial inclusion in
inclusion – the Financial Inclusion Fund for Developmental a big way. Sundara Rajan says the bank’s exclusive Microsate
and Promotional Interventions and the Financial Inclusion branch in Chetput, Chennai, which was opened in 2005, has
Technology Fund to meet cost of technology adoption of about been able to cover poor families in 1,400-odd slums in the city,
$125 million each. touching the lives of more than one lakh poor households. “The
Ghugal narrated constraints that the bank confronted while phenomenal outreach through the branch paved the way for
extending banking facilities in rural and semi-urban areas: the bank to establish 13 more Microsate branches during 2007-
“During our efforts to provide banking facilities in rural and 08 in major cities in India. So far, Rs 136.14 crores has been
semi-urban areas, we have come to realize that there are three disbursed to more than 13,459 women SHGs / JLGs through
major impediments that inhibit financial inclusion in the true these branches,” added Sundara Rajan.

BANKING FRONTIERS FEBRUARY 2009 15



The bank is planning to establish 13 more
Microsate branches in tier II cities / towns
in South India. SBI for a Cardless System
Sundara Rajan cites the instance of
Dharavi, the so-called largest slum in Asia. State Bank of India has been very swiped at the POS machine before
“There was no banking facility in these innovative in the use of technology any transaction. All the accounts
sprawling slums till February 2007. This for financial inclusion. The bank the bank opened across the
slum is inhabited by thousands of migrant has now decided country following
labourers from southern districts of Tamil to do away with the decision to
Nadu who did not have bank accounts as smart cards and introduce the
many of them could not produce proof instead rely on cardless system did
of identity to banks. They were finding POS machines, not involve issue
it difficult to send remittances from their which will have of smart cards.
savings to their families residing in Tamil biometric details This has brought in
Nadu. We came to their rescue by opening of account tremendous cost
a branch with CBS facility and online ATM holders stored in savings for the
in Dharavi in February 2007 to facilitate them, and which bank. According
urban financial inclusion. So far, 14,726 will travel to to the bank, only
persons have opened bank accounts at our villages where a miniscule of its
Dharavi branch.” the customers no-frills account
As a complementary link, Indian Bank can carry out holders left their
has also opened a branch at Valliyur in transactions, villages at any
Tirunelveli district of Tamil Nadu, from including receipt given point of
where a large chunk of migrant labourers of payment of cash under social time. Most of the account holders
has moved to Dharavi, to render necessary security schemes of the government accessed the bank to receive the
financial services especially remittance by just recording their fingerprint. pension or the NREGS payment and
facilities. In view of the good response, The bank feels this will drastically as such they do not require inter-
one more offsite ATM centre has also been reduce cost of transactions and operability. In such a scenario, a
opened in Dharavi. it is implementing the project business correspondent of the bank
Dharavi also has some 114 across the country. The prevailing could go with the POS machine at
SHGs formed in association system involved smart cards with periodic intervals to help them
with reputed NGOs. Microfinance to the a magnetic strip that need to be draw the money.
tune of Rs 10 lakhs has been granted during
the current year. The SHGs, majority of
them formed by women have taken up the
business activities such as garment making, leather products, to distress sales.
eatables, etc. In addition to Dharavi, the bank has implemented Adds he: “In addition, we also offer credit for such novel
financial inclusion projects in Chennai and in Guntur district causes as improving health and sanitation in rural areas. Under
of Andhra Pradesh. The bank has won the Skoch Challenger our Nirmal Gram Yojana scheme, rural inhabitants are offered
award for its outstanding initiatives under financial inclusion loans for the construction of toilets. We undertake educational
in Dharavi and Puducherry. programs in the villages highlighting how clean environment and
Ghugal says Bank of India has not been into urban financial sanitation helps cut down suffering and expenses on account of
inclusion. “We are not into this area as our focus is on rural and diseases. Some 35,000 toilet units have already been constructed
semi-urban areas. Personally, I feel that urban financial inclusion under the scheme. Each family gets a loan of Rs 6,000, which
has not taken off in the manner it is publicised about by can be repaid in easy installments over five years.”
some banks.” Indian Bank’s agriculture credit portfolio has grown to
Rs 7,326 crore as of December 2008. It is one of the few banks in
RURAL FINANCE the country, which has consistently overreached the 40% and
about agri-finance, Ghugal says Bank of India offers agri- 18% norm prescribed by RBI for priority sector and agriculture
finance for various agriculture-related activities - farming, farm sector respectively. As of December 2008, the percentage
products, purchase of cattle, purchase of tractors, horticulture, of priority sector and agriculture credit stood at 46.33% and
poultry, plantation, dairying, etc. The finance is available for 19.18% respectively.
traditional farming as well as high-tech. Some of the finance
schemes have been helpful to farmers as they need not resort mohan@bankingfrontiers.com



Financial inclusion

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