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Financial Inclusion  -  Drive to Diverse Business Models




NSN Reddy, Chief Manager, Andhra Bank, HO Hyderabad (


India is one of the large workforce countries of the world with around 540 million people participating in economic activities. Approximately 6% workforce serves in organized sectors, including Public and Private sectors, while rest of the workforce is in the unorganized sectors.

Though, organized workforce is well addressed by regular banking channels, vast majority of unorganized sector, comprising farmers, landless labourers, micro, small and medium enterprises etc., have limited access to affordable banking services such as savings, loan, remittance and insurance services, which is believed to be acting as one of the major constraints to the growth impetus of the country. Availability of banking services enlarges livelihood opportunities and empowers the poor to take charge of their lives that is required for social and political stability. Hence, financial inclusion is considered to be critical for accomplishment of inclusive growth.


Spread of Banking - Government Initiatives

Reserve Bank of India and the Government of India has been making concerted efforts to expand banking facilities across the country and the important initiatives undertaken since independence are as under:





Creation of State Bank of India

1969 &


Nationalization of Commercial Banks


Introduction of Lead Bank Scheme


Establishment of Regional Rural Banks (RRBs)


Self-Help Group (SHG)-Bank Linkage Programme


Kisan Credit Card Scheme


Introduction of “No-Frill” accounts


For common man, opening of bank account is a Herculean task since it warrants adherence of KYC norms viz., submission of address proof and identity proof, where as majority of rural/urban poor do not possess them. With a view to achieve greater financial inclusion, RBI exhorted the banks to make available a basic banking 'no frills' account either with 'NIL' or very minimum balances with simplified norms without any service charges.


Financial Exclusion – Fact sheet

Despite augmented thrust by the government and RBI on Branch expansion since 1969 i.e. Banks Nationalization, still the fruits of the banking not reached to substantial population, especially the underprivileged sections of the society, which is evident from the below:

Ø  Out of six lakh villages, 30000 villages only have the presence of Bank Branch.


Ø  As against total population of 1.20 billion, only 320 million have accounts with banks.


Ø  51% of the country's adults do not have access to bank accounts.


Ø  There are 400 million unbanked people (60% of households) in rural India of which 280 million are under Below Poverty Line (BPL).


Ø  Poor pay usurious interest at 40% to 50% to Money Lenders.


Ø  More than 40% of the government’s subsidy and social spending (NREGS, JSY, Student Scholarships, PDS etc.,) is being siphoned off by undeserving recipients.

Even after 6½ decades of political independence, still majority of residents are under the clutches of Money Lenders and deprived of financial independence.


Financial Exclusion - Triggers

The barriers for financial inclusion on demand side are low literacy rate coupled with scant financial literacy, low income levels, absence of collateral / assets and social exclusion. The supply side factors are distance, costs, timings, complicated procedures, sub-optimal attitude of staff and offering of inappropriate products etc.


Impact of Financial Exclusion


Financial exclusion is driving the people to approach informal financial markets like Money Lenders, Unregistered Finance Companies, Chit funds etc., which suffer from several imperfections such as high cost of credit at exploitative terms, loss of precious savings on account of fly-by-night operators, inordinate delays in effecting transfer of funds and settlement of accounts. Further, the informal players unable to offer insurance and pension products, which are very much needed to low income group segment. Absence of such products is causing opportunity loss as the target group is deprived of protecting their lives, assets and health against uncertainties. Thus, the financial exclusion not only widens the ‘Rich-Poor divide’ but also leads to ‘Social Exclusion’.



Financial Inclusion – Current initiatives


Financial Inclusion is delivery of banking services at an affordable cost to the vast sections of disadvantaged and low income group without discrimination. These services include acceptance of deposits (savings/fixed), lending (micro loans), online transfer of funds and providing micro insurance products to cover life, assets and health. Absence of any of the above services is considered as incomplete financial inclusion. Financial Inclusion means not only to extend banking facilities to unbanked people but also to provide these services at their convenient time, location and affordable costs.


The Government has advised all the banks to provide appropriate banking facilities to 73000 villages having population in excess of 2000 by March 2012 and the remaining villages (around 5 lakh) by 2015 using various business models and technologies.

Government of India has set up two funds viz., Financial Inclusion Technology Fund (FITF) and Financial Inclusion Fund (FIF) under the supervision of NABARD to provide financial support to the eligible institutions to encourage cost effective user friendly technology solutions for smooth implementation of financial inclusion initiatives.


The objective of FITF is to enhance investment in Information Communication Technology (ICT) to stimulate the transfer of research and technology in financial inclusion, increase the technological absorption capacity of financial service providers/users and encourage an environment of innovation and cooperation among stakeholders. Similarly, the objective of FIF is to support “developmental and promotional activities” to achieve greater financial inclusion through spreading financial education and literacy, particularly among weaker sections and low income groups in unbanked areas.



Financial Inclusion – Diverse Business Models


I. Unbanked Areas - Branch Expansion


i) Physical Branches: The penetration of banking in India is low compared to developed nations, which is evident from the presence of 5.70 lakh unbanked villages across the country. Branch banking continues to play significant role in business development despite increased adoption of Alternate Delivery Channels in the recent years.


The road map of Indian Banks clearly indicates that BC model is going to be used in a big way to achieve the financial inclusion objective. However, banks need to open more number of brick and mortar branches especially in unbanked centers to cover the large population on one hand and branch network acts as service branch to route the transactions undertaken by BCs.


The recent RBI guidelines on Branch Licensing Policy clearly states that banks to open minimum 25% of proposed branches in unbanked rural tier 5 & 6 centers. Hence, branch network continued to grow in the ensuing years also.


ii) Satellite Branches (Mobile Branches): As part of liberalized Branch Authorization policy, RBI has granted general permission to domestic scheduled commercial banks to open satellite branches in unbanked rural / semi-urban centers where the population is below 50,000. It envisages the extension of banking facilities through a well protected van with arrangements for 2 or 3 staff members who visit the identified village / location for a reasonable time on specified days and specified hours. It is a cost effective model to provide banking services to the unbanked areas compared to physical branch model.


iii) License to New Banks: It is observed from press reports that RBI is keen to consider to issue banking licenses to Business Houses and NBFCs to enlarge the reach of banking services across the country through branch expansion mode as well other modes. The grant of new licenses likely to be linked to financial inclusion as the government is looking at nationwide roll-out of Unique Identification project with the help of banks.


II. Alternate Delivery Channels

Opening “No frills accounts” with simplified KYC norms is only the first step in building the relationship which would require sustained efforts on the part of Banks and Customers to achieve Financial Inclusion. However, residents of far-flung areas are unable to visit branches located at distant places on account of opportunity and time constraints. Hence, it has become imperative for banks to reach out customers through a variety of technology driven delivery channels such as Micro ATMs, Bio-metric ATMs, Mobile ATMs, and Smart Cards etc.

i) Micro ATMs: The presence of ATMs mostly found in Metro/Urban centers. Banks are not keen to install ATMs at Rural/Semi Urban centers on account of high investment and low transaction volume. In order to make the ATMs viable at these centers, there is a need to deploy low cost ATMs with basic features such as cash withdrawal and balance enquiry and should be located at places where rural folk pays frequent visits like petrol pumps, mandis etc. It is convenient and cost effective to the customers compared to pay visit to the bank branch located at nearby center.

ii) Biometric ATMs: The penetration of ATMs into Rural / Semi-urban areas may not serve the envisaged purpose unless it is put to use by illiterates/semi-literates whose presence is predominant in unbanked areas. The existing ATMs are not put to use optimally by rural folk on account of PIN and Password related issues. Introduction of Biometric ATMs enable them to avail ATM services on par with urban literate customers.

iii) Mobile ATMs are designed to extend ATM services to all the eligible customers including in unbanked centers. In this model, ATM is installed in a vehicle, which would move to the pre-determined places at regular intervals to provide Door-step banking. Illiterates may also avail ATM facility using Biometric cards. During their visits, Mobile ATMs can undertake opening of accounts, which has immense benefit to the residents of unbanked centers.


iv) Smart Cards: State Governments are actively looking at making pension payments and disbursals under Rural Employment Generation Program using smart cards linked bank accounts. Smart card provides biometric authentication, which would help in reducing frauds and ensure identity of customers. In order to popularize smart cards, all agriculture short term loans and payment of social security schemes are to be dispensed through Smart Cards.

All the above initiatives warrant the banks to invest substantial amounts in infrastructure besides recurring expenditure which adds cost to the customer where as the distribution of financial products and services at the lowest rung of the pyramid requires a low-cost model that allows accepting and making of a large number of micro payments from small value customers.

The high intermediary cost of the banks is a stumbling block to reach the poor, which need to be addressed. Hence, it is warranted the banks to search for the following alternate models to extend Branchless Banking across unbanked areas in the country.

High Operating Costs and Low Business Volume are the major constraints of the banks in extending banking services especially in remote rural and inaccessible areas through Branch Banking Model. To address this issue, RBI permitted the banks to make use the services of Business Correspondents to take banking to un-banked areas in a most cost effective manner.


III. Business Correspondent (BC) Model

Banks are able to extend the following basic banking services to the people residing in unbanked areas across the country through BCs using Information Communication Technologies. This model enables greater rural outreach to improve the business volumes. RBI permitted the BCs to undertake the following services:

Ø  Collection/payment of small value deposits

Ø  Disbursal of small value loan amounts

Ø  Collection of loan installments

Ø  Receipt and delivery of small value remittances and

Ø  Sale of micro insurance/mutual fund products/pension products/other third party products


The BC model allows the bank to use third parties (Individuals/associations/ institutions/corporates) to extend the said services. Under this, the user is required to open account with a Bank and franchised to BC for the purpose of extending approved services. BCs use biometric smart cards, in which customer data including finger prints are stored and works on PoS machines with key management. Technology plays an important role to establish link between the Customer, BC and Bank for seamless operations.


BC Model – Strategic Partnerships:


Though, individuals/associations are allowed to act as BCs, banks are keen to use the services of corporates on account of their capacity to make huge investments and their ability to scale-up operations. Further, they are expected to handle business continuity issues more effectively besides providing single point of contact for banks. Engaging corporates dealing with FMCG products, Farm inputs, Telcom retail outlets, Pharma products are likely to be more suitable to act as BCs on account of their extensive presence and bondage with rural hinterland. Banks may also examine the feasibility of the following entities for the said purpose.


i) Tie-up with Post Offices: Modernization of Post Offices is in full swing and the connectivity is expected to be completed by 2013 (Sri. Kapil Sibal, Minister of Communications statement in Loksabha on 11th August 2011) Banks may make use of the existing post office network of 1.50 lakh offices across the country for the purpose of providing banking services especially in unbanked areas either through online connectivity or using Smart Cards. It is a fact that rural folk feel comfortable to undertake banking transactions through Post Offices as the trust level is relatively high compared to other entities.


ii) E-Seva Centers: Banks may enter agreement with state governments for sharing e-seva resources, thereby banking services (receipts and payments) can be extended to the customers, which will be beneficial to all the concerned.


iii) Common Service Centre Scheme (CSC): As part of National e-Governance Plan, CSC was introduced in the year 2006 under Public Private Partnership model to offer web-enabled utility services (electricity, telephone and water bills) in rural areas. Around one lakh CSCs are in operation and banks may examine to use their services as BCs which will be beneficial to all the concerned.


iv) T-Banking: Today, we rarely come across a house without Television. It has become one of the cost effective modes to disseminate information and to provide entertainment to the public. Banks may make use of the existing cable network to extend banking services to vast segment using this mode as non-branch service delivery channel. However, this model yet to take a shape for pilot implementation.



BC Model – Present Status

Though, the banks have started using BC model through around 22000 CSPs, encountering initial hiccups in providing seamless operations on account of technology and operational issues. So far, banks have opened over 75 million no-frill accounts using Branch Banking and BC model, but most of them are not operational and are in dormant status. Hence, it is imperative for the banks to ensure that full range of financial services are provided using low cost, reliable, user friendly and secure technology backbone to all the needy people spread across six lakh villages in the ensuing years. While BC model confronting the following challenges, banks are looking this area as an opportunity to penetrate across unbanked areas.


BC Model - Issues and Challenges

i) Operational issues: Cash management is the biggest challenge as the major operations of BCs pertains to cash transactions. It entails interest costs as well as operational risks. Further, the beneficiaries of BC services are mostly illiterate and are susceptible to misguidance. At times, customers tend to perceive the BCs as banks. The success of the model crucially depend on the trust levels among customers, banks and BCs, which is possible through spread of financial awareness by conducting financial literacy programs on an ongoing basis.   

ii) Viability: The viability of the BC model is the most critical issue which probably one of the main reasons for not taking-off the model as envisaged. The transaction volume is not encouraging since many of the accounts opened are in dormant stage. Absence of sufficient business is causing concern to both BCs as well as banks; and in turn it is becoming difficult for BCs to continue operations on account of mismatch of revenues earned and costs incurred. This aspect warrants the attention of the government, regulator and the bankers to ensure to have suitable compensation policy in place.

As per RBI guidelines, Banks are allowed to levy reasonable charges to the customers to meet the operational costs, which include service chares paid by the banks to Business Correspondents. At present, banks are incurring around `120/- to `200/- per account as fixed expenditure and 2% to 3% on transaction volume as recurring expenditure.

Large number of beneficiaries of BC model belongs to low income group and not inclined to bear service charges. At the same time it is a huge burden for the banks in the initial years on account of low business volume. Hence, there is an imperative need to support the banks to meet the operational costs associated with Financial Inclusion initiatives till the banks attain break-even.  Alternatively, the regulator may examine to reimburse the transaction costs as is being done in respect of handling Government transactions. Further, to make the BC model viable, the funds pertaining to various government schemes are to be routed directly through the beneficiaries’ bank accounts only.


IV. Mobile Banking Model

As per TRAI May 2011 report, the number of Mobile subscribers in India stood at 840 million, of which the active subscribers estimated around 560 million, which speaks that every alternate person is having a mobile. Around 1/3rd mobile users are residing in villages/small towns. About 91% of villages are covered by at least one operator and 51% of villages are covered by the three operators and 31% of villages are covered by four operators. The reach of mobile to the remote areas and its usage by the common man has become order of the day.

The mobile-phone revolution that is transforming the world could also turn into a banking revolution. It is an ideal vehicle to extend banking services to rural / unbanked India in a unique way. It enables the subscribers to manage their banking transactions independent of place and time.

Model-1: It is a pure vanilla product runs on Interbank Mobile Payment Service (IMPS) mode which enables the bank customers to have access to their bank accounts and carryout banking transactions. It allows funds transfer across the banks to the credit of beneficiary accounts within India using mobile phones independent of Branch/Business Correspondents. RBI is keen in implementation of this model by all banks and allows transfer of funds up to `50000/- free of cost. South Africa and Philippines countries have implemented this model successfully and providing banking services to the remote rural areas.

Model-2: It leverage the widespread network of retail agents involves both banks and telecom operators where the retailer has an account in the bank and the transactions are carried out in a manner similar to the way customers recharge their phones. The subscriber can approach to a retailer of mobile network for withdrawal/deposit of money and the transaction takes place using SMS messages. The role of telecom players is significant in taking the banking services to the unbanked through banks. List of bank tie-ups with major telecom service providers are furnished here under:



Service Provider

State Bank of India

Bharathi Airtel


Vodafone Essar

Union Bank of India

Nokia & Obopay

Axis Bank

Idea Cellular

Yes Bank


Bank of India

mCheck India Payment Systems & PayMate

Syndicate Bank


Source: Press reports

Service provider levy charges for maintenance of the systems and undertaking the transactions, which are to be either recovered from the customers or borne by the bank.   


Model-3: M/s. Eko, a software company started by technocrats in association with SBI is extending low cost mobile banking  services called “Simpli Bank” to low income people residing in Delhi, Bihar and Jharkand states. It is a low cost leaner version, which works on core banking platform on real time basis. The service is available to customers on all basic mobile phones without any process application download as is required in other models. This model is using the services of small kirana shops extensively as Common Service Provider (CSP). On successful transaction, both the customer and CSP receive SMS confirmation. The business model is very simple and sustainable as the transaction cost works out to `4.50, which includes service charge payable to CSP.


Delivery Channels & Transaction Costs


In the absence of published data on transaction costs of banks, the channel-wise estimated cost per transaction is furnished below based on Bancon conference papers (2006), RBI report on reasonableness of ATM charges and other reports of banks on Branchless Banking Models.



Delivery Channel

Cost per transaction (`)


Branch Banking






Business Correspondents



Mobile Banking with CSP



Mobile Banking without CSP






From the above, it is obvious that mobile banking is the best suited model for branchless banking as the associated costs are low compared to Branch banking, ATM and BC Model, and definitely it is going to be the future banking. However, business models of banks, telecom operators and other stakeholders need to converge duly addressing the network and security related issues on priority.


Financial Inclusion – Way forward


Though, Branchless Banking models are gaining momentum on account of cost effective solutions, banks may have to continue to adopt multi-pronged approach focusing attention on all delivery channels viz., Physical Branch Network, ATMs including Micro and Mobile ATMs, Branchless Banking through Business Correspondents and Mobile Banking, to accomplish financial inclusion. It is to be noted that banks can not afford to depend on a single delivery channel as they are dealing with clientele having diverse literacy, economic, social, geographic backgrounds. Use of multiple delivery channels is only the way out to reach the large number of clientele. In the present scenario, no single channel is to be treated as substitute to other channel; rather they are to be viewed as supplementary to each other.


Banks need to revisit their approach towards low value accounts of vast neglected population and adopt “High Volume and Low Margin” business model. In this context, Prof. C K Prahalad view on small customers is worth noting “The future lies with those companies who see the poor as their customers.” The need of the hour is to forge Public Private Partnership powered by ubiquitous technologies to reach the unbanked in a most cost effective way.


Banks, Central/State Governments, Technology providers, Regulators, other developmental agencies and the community at large need to work together in tandem to accomplish the task of total financial inclusion.


Financial inclusion initiatives will definitely strengthen financial deepening and provide resources to the banks to expand credit delivery, which lead to accelerate economic growth. Let us hope that the dream of the nation “financial independence” comes true shortly with the active participation of the Banks and all the associated entities using Information Technology as powerful tool.




  1. Article of Dr. C Rangarajan, Chairman, Prime Minister’s Economic Advisory Council titled “Financial Inclusion – Not an Option but a Compulsion” published in September 2010 issue of “The Banking & Financial World”
  1. Paper presented by Dr. K G Karmakar, Managing Director, NABARD on “Financial Inclusion – Branchless Banking and Beyond”
  1. Article of Sri B B Barik, Principal, B V Rural Institute, Bichpuri, Agra on “Financial Inclusion and Empowerment of Indian Rural Households
  1. Conference Papers of Bancon 2006 on “Inclusive Growth – A New Challenge”
  1. Dr. C Rangarajan Committee Report on Financial Inclusion 2008.
  1. Report on “Low Cost Banking on Mobile” published in Business Standard dated 20th June 2011



Important Notice :  [The articles written by author contains only the academic view of the writer and purely for discussions and updation of the knowledge of the bankers.   The views expressed in the articles may not at all be subscribed by the organisation where the author is working and / or]