ssrn-id1477765

8/13/2019 SSRN-id1477765

http://slidepdf.com/reader/full/ssrn-id1477765 1/7Electronic copy available at: http://ssrn.com/abstract=1477765

M A N A G E M E N T O F D E V E L O P M E N T

76 T H E I I P M T H I N K T A N K

Economist,

India Development Foundation, Gurgaon


Financial Inclusion by Channelizing

Existing Resources in India

Purti Sharma Financial inclusion proceeds towards integration of

people who are economically and socially excluded from

access to easy, safe and affordable credit and other

financial services. Due to lack of financial inclusion among the

lower income households, their protection from external

8/13/2019 SSRN-id1477765

http://slidepdf.com/reader/full/ssrn-id1477765 2/7Electronic copy available at: http://ssrn.com/abstract=1477765

I N N O V A T I V E I N C L U S I O N

77T H E I N D I A E C O N O M Y R E V I E W

economic shock becomes miniscule. As a result, income

disparity leads to vicious circle of poverty which continues to

persist in the lower income groups. According to IISS (Invest

India Incomes and Savings Survey, 2007), 55 percent of all

the households do not have bank accounts, 97 percent do

not have any health insurance and 61 percent do not have

life insurance1.

These missing financial markets among the lower income

groups could be because of demand and supply side constraints.

From the supply side, operating cost is considered as one of the

major obstacle in promoting financial inclusion. Salaries to staff,

travelling expenses, commissions, expenses on promotion of

groups, staff welfare expenses, amortisation and depreciation,

rent on hired buildings and other overheads - all constitutes the

operating cost. For instance, operating cost in the case of Canara

Bank for opening a new (no-frills2

) account was Rs. 48 and costof each transaction (deposit/remittance) was Rs. 1012. To reach

break even, the average amount of deposit required depends on

the number of transactions. The break even average deposit

level required was Rs. 1911 (for 12 transactions a year) and Rs.

11,465 (for 72 transactions a year)3. These costs are critical for

operating the formal banking system.

By looking at the general profiles of

various banks, it can be examined that the

number of employees has decreased, on the

other hand, business and profit per employ-

ee has increased in the SBI and various

national banks (Table 1). Thus, we can at

least analyse that bank has efficiently

employed their resources. The total factor

productivity (TFP) enables disaggregation

of output change into two major compo-

nents, namely, output change due to change in efficiency and

output change attributable to change in technology. And the

combination of both of these components (resource allocation

and technology adoption) should reduce operational cost.

The combination which minimises the cost component is

necessary for the lower level of income bracket because majority

of the population works in un-organised sector and are less

educated.

From the demand side, the higher cost of financial services

(including the transportation cost) discourages inclusion. It is

argued that the operating cost is higher for maintaining large

number of account with lower average deposits. As a result, we

found the lopsided distribution of banks and lack of availability

of formal institutional credit has occurred. And thus, it is

unviable for the banks to extend banking services to lower

income groups. For example, for the no frills savings account of

the HDFC bank, service charges for collecting an outstation

cheque is roughly around Rs. 50 (varies by banks) for a cheque

value of more than Rs. 500 (Table 2). On the other hand, the

service charges for transferring money using electronic medium

like mobile and net banking is free of cost from the service

provider’s side. But there is lower penetration of cellular phones

and internet in rural India. Along with that, the fixed and the

variable costs for cell phones makes it costlier for owning

cellular phones and thereby availing phone banking facility

would be still a distant dream for most of rural India. While

competitive market forces are increasingly expanding cellular

network to cover rural India, internet penetration will still takesome time. For example, to avail mobile banking services

minimum one time fixed cost would be approx. Rs. 1,000 for

buying a mobile hand set plus telecom operator’s monthly

service charges. The other electronic payment transfer facilities

like electronic bill payment cost around Rs. 25 per quarter per

customer ID, phone banking- non Interac-

tive voice response (IVR) cost around Rs.

50 per call (agent assisted calls), debit card

cost to Rs. 100 per year as annual fee, visa

money transfer cost to Rs. 20 (plus taxes)

per transaction etc4 are too costly compared

to small deposit denominations and lack of

critical network of users.

Financial inclusion by introducing

electronic payment system is one of the

solutions to reach the masses. But in India

this solution is not feasible because poor households are out of

the domain of formal banking system and the large number of

lower deposits reduces the bank’s profitability. Secondly, the

concept of virtual money banking, technology usage and trust on

technology is difficult to promote among people who are

financially excluded as well as are financially illiterate. Thirdly,

majority of the population that belongs to poor class are working

in un-organised sector with irregular incomes. And finally, lack

of infrastructure availability (i.e disruptive electricity, low

cellular phones and internet penetration etc) makes it challeng-

ing to initiate electronic payment system.

To mitigate the financial inclusion problem for the poor class

Financial inclusionby introducing

electronicpayment system

is one of thesolutions to reach

the masses

8/13/2019 SSRN-id1477765

http://slidepdf.com/reader/full/ssrn-id1477765 3/7



households, solutions need to be devised for redundancy of all

these issues. The electronic payment system for the poor

household is not a perfect solution for promoting banking

activities. The electronic payment system is outstanding pro-

posal if it follows top to bottom approach. The access to formal

banking system among the rich class is higher in comparison to

the middle and the poor income groups; however usage of

electronic payment system is very low in all the classes at present

in India. The adoption cost as well as the benefit of using

electronic payment system is higher. So, the initial adoption cost

can be incurred by rich income groups. It is also important to do

so because it has been found that the job security increases the

chances of owning the electronic cards. And higher volume of

transactions reduces the transaction cost and the fixed income

reduces the default risk. Over the period of time, the growing

competitive markets are expected to reduce the adoption cost

and the spillover effect which would lead to the mass adoption.

Solutions for Poor Class Households

• Aim is to create smaller networks of people having access to

formal banking system (by offering lower rate of interest

using no frill accounts)

• Integrate smaller networks to themselves and in turn form a

bigger network of households having access to formal

banking system

• Induction of electronic banking payment system should

Table 1: Profile of the Banks

SBI & its Associates (Amount in rupees crore)

2003-04 2004-05 2005-06 2006-07 2007-08

No. of Offices 13782 13921 14190 14611 15512

No. of Employees 280676 277508 270608 255699 248425

Business per Employee (in Rs. lakh) 1810 2270.99 2826.53 3509.87 4314.37

Profit per Employee (in Rs. lakh) 23.68 15.16 16.58 21.78 25.66

Operating Expenses 12117 13410 15759 15988 16994

Nationalised Banks

No. of Offices 34460 34988 35590 37227 38726

No. of Employees 471951 471297 473725 473179 466368

Business per Employee (in Rs. lakh) 4864 7202 8761 10401 13233

Profit per Employee (in Rs. lakh) 47 49 55 65 84


Foreign Banks

No. of Offices 209 234 254 264 278

No. of Employees 12654 15750 20344 26444 33114

Business per Employee (in Rs. lakh) 25108.56 25597.32 28632.73 29871.67 36963.72

Profit per Employee (in Rs. lakh) 641.77 330.04 765.29 753.89 1314.63


Other Scheduled Commercial Banks

No. of Offices 4988 5539 6129 6984 8265

No. of Employees 72119 82959 103339 136121 166334

Business per Employee (in Rs. lakh) 9324 10402 11226 12018 13327

Profit per Employee (in Rs. lakh) 113 39 71 82 105


Sources: RBI

8/13/2019 SSRN-id1477765




the habit of thrift and savings among

citizens of the country. The emphasis,

as the words “small savings” suggest, is

to bring the small depositor into the

fold of the savings movement. Post

Office Savings Banks were opened in

1882. Some of the small savings

schemes i.e. Public Provident Fund

and Senior Citizen's Savings Scheme

are also operated through designated

branches of nationalised banks and

four private banks i.e. ICICI, IDBI,

HDFC and UTI Bank. The post

offices are not meant to replace banks

because it can not execute the

function of money multiplier. Butnationalised and commercial banks

can use post office’s infrastructure to facilitate various banking

services.

The existing Indian Post Offices are strategically perfect

source available to promote inclusive financial growth especially

for poor population. Its connectivity enables us to reach the

remotest corners of the country. By utilising

existing Post Office’s infrastructure,

developing technology and connecting

existing user with technology and expanding

user base would be one of the solutions for

financial inclusion. Since Post offices can

not provide credit to its customers, banks

and post offices can collaborate together in

offering various financial services by

managing channels/technological strengths.

The net collections in the small savings

schemes (gross collections minus withdrawals by subscribers)

have increased from Rs. 100 crores in 1948-49 to Rs. 96,788

crore (Net) in 2004-2005. 100 percent of net collections mobi-

lized in small savings schemes in a State/UT are transferred to

the concerned State/UT Govt. as investment in special securities

issued by that Government. All deposits under small savings

schemes are credited to the 'National Small Savings Fund'

(NSSF). All withdrawals by the depositors are made out of the

accumulations in this fund. The balance in the fund is invested in

special Government securities as per norms decided from time

to time by the Central Government. In nutshell, post offices can

happen as result of spill over effect from the top of the

pyramid, especially after the cost of service charge for using

electronic payment is reduced

• It is important not to introduce electronic payment system for

poor class because majority of the

population in this category are illiterate

and the cost of deploying electronic

payment services for the large number of

account having lower deposit would not

be profitable

• Introduction of formal banking system

should be encouraged by known faces

and trusted institutions like post offices.

• All the Government welfare programmes

targeted for the poor should be linked

with banks. All the monetary benefits should be routed

through banks only.

Thus, the solutions for financial inclusion lies in channelizing

existing resources and building up a platform for public –private

partnerships using technology. There are three important

constituents for inclusive growth i.e. infrastructure, advanced

technology and user’s network which are mandatory for provid-

ing easy, safe and affordable financial services.

Encouraging small saving scheme among the poor was

considered a priority concern of the Government. The primary

objectives of the small savings programme have been to promote

The existing IndianPost Offices are

strategically theperfect sourceavailable to

promote inclusivefinancial growth

Table 2: Service Charges for No Frills Savings Account

*Figures are for HDFC BankSource: HDFC website

Phone Banking - IVR Free

Phone Banking - Non IVR Rs. 50 per call (Agent assisted calls).

ATM Card Free

ATM Card - Transaction charge forPartner banks- SBI & Andhra Bank

Balance enquiry: Free & Rs.17.80 (plus taxes)per cash withdrawal

BillPay Rs. 25 (plus taxes) per qtr per Customer ID

Mobile Banking Free

Net Banking Free

Visa Money Transfer Rs. 20 (plus taxes) per transaction

Debit Card - Annual Fee - Regular Rs. 100 per year (plus taxes)

Collection of outstation cheques atHDFC bank's location

1) Cheque value Rs. 0 to Rs. 500 -No charges2) Cheque value Rs. 501 & above Re. 1 per1000 (Min Rs. 50) * Credit on receipt of clear funds

8/13/2019 SSRN-id1477765




act as an important enabler through which various financial

services can be extended while the technological spill-over effectis taking place in the banking sector.

Infrastructure and Facilities of Post Offices

Indian post office’s network forms the largest postal system in

the world with an array of about 1.55 lakh post offices in India

(Table 3). Out of the total number of the Indian post offices, 90

percent are in the rural areas and 10 percent are in the urban

areas. On an average, a post office covers an area of 21 sq. km

and serves 5,687 and 19,891 people in rural and urban respec-

tively. The connectivity of the post offices are not only reflected

in sheer size and numbers, but also in the average distance

travelled for availing postal facilities which is around three km

for all India.

In the last 150 years, the Post offices have redefined ‘connec-

tivity’ by expanding its wide range of services from mere

transmitting messages. There are various services offered by

Indian Post Offices that are:

Technology

The adoption of technology in payment and settlement systems

reduces the cost of providing services with wider adoption of

these technological products. It would play a pivotal role in

reducing operating cost and would enable transfer of payments

in real time. The technology needs to be inducted in a big to

make transactions with the Post offices hassle free. At present,

there are only five percent of the total post offices which are

computerised. Computerisation of the Post offices can bring

transparency and accountability. All payments to the public

could be uploaded on the network and the public can have

option of availing these services through various technological

processes, thereby, minimising the physical visits (includes

transportation cost of the consumer). The increasing penetra-

tion of technology in the Post Offices can also encourage

partnership deals with financial institutions, insurance compa-

nies, banks and logistics in the remotest corner of

the country. The entire organisational structure can

be linked with the central government and Panchay-

ats to run various developmental schemes especially

in the rural area.

One of the recent initiatives in this direction was

launch of e-bill post/e-payment. e-Bill Post is a

facility for accepting payment of bills or payments

from many-to-one in post offices. The amount

collected is consolidated electronically in a web

based Central Server on line, and the information is

Table 3: Postal Network in India

Sources: Department of Post

Total number of post offices in the country 155204

Total number of post offices in rural areas 139046

Total number of post offices in urban areas 16158

Population served by a post office* 7166

Population served by a post office (in rural area) 5687

Population served by a post office (in urban area) 19891

Area served by a post office (sq. km.) 21

Average distance to be travelled for postal facilities (in km.) 3

Figure 1: Top to Bottom Approach for Introducing Electronic Banking

Large Network of

Electronic Banking

CRITICAL MASS

Small Network of

Formal Banking

Rich

Middle

Poor

Introduce e-payments system in banking

Spill Over Effect of e-payment system

with the critical mass adoption

Introduce Banking by creating local groups using

known faces & trusted institution and later link it

to the larger network of electronic banking system

8/13/2019 SSRN-id1477765




available to the e-Bill Post/e-payment user at any time. The

traffic for e- Bill Post service was 25 lakh users through which

the amount of revenue earned was about Rs. 128.13 lakh in the

year 2006-075.In the span of three years, this facility grew to

about 38 percent. For increasing network of technology users,

educating illiterate population especially in rural locations is

the biggest challenge. However, this can be over come by ‘out

of home’ (OOH) media service which can be placed at eachPost Office. This would not only help in educating people about

how to use technology (both pictorially and verbally), but

also advertise various financial options available to them and

their benefits.

The larger the technologically driven financial network,

greater are the benefits for adopting it. For widening the

technologically driven network of financial services, adoption

cost and its benefits would play a key role for the existing users.

So, building trust on money transactions through technology is a

key challenge to encourage people for adopting electronic

medium. Initially the adoption has to be ‘top to bottom’ down

approach to build the network effect and the competition for

reducing the higher service cost. The potential adopters would

be encouraged if technology will help them in reducing cost and

time spent on it. For example, having a large network of compat-

ible mobile phone users for instance makes new users more

likely to join.

The existence of alternatives between physical access and

electronic access of financial services can

affect decision to adopt if and only if cost and

benefits are higher. So the rate of change with

which new technology is adopted will decide

the operational cost and inclusion.

Network

The Post offices can be biggest facilitator in

bringing low income groups under the umbrella of saving and

investment opportunities by including workers from un-organ-

ised sector. The Post office banks are the largest saving banks in

the country in terms of having more than 17.39 crore accounts

and deposits amounting to Rs. 3,51,589.95 crore as on 31st

March, 2007. The total amount of savings with the post offices

has been accounted for about 8.20 percent of India’s GDP at

factor cost (current prices) during the year 2007-08. Theuntapped rural market has also shown faster growth in the

insurance sector. The rural postal life insurance has grown at the

rate of 34.2 percent in terms of value of business in the year

2005-06 and 2006-07 respectively. In the same year, it has

increased from Rs 25,229 crore to Rs. 33,865 crore (Table 5).

The active number of rural insurance policies till the 2006-07

was around 52 lakh which grew at 11.5 percent from the

previous year.

Similarly, one of the oldest and important financial services

offered by post offices is transfer of money by using money

orders without opening a bank account. This service is popular

among rural labourers who works in un-organised sector and

wants to remit amount for small denominations. There were 991

lakh money order issued in the year 2006-07 (Table 6). The

average value of money order in the same year was around Rs.

782.72.

The post offices are like ‘one stop shop’ for providing a range

of banking6 and insurance services like term deposits, mutual

Communication services – Letters, Post Cards, etc.

Transportation services – Parcel, Logistics, etc.

Financial services – Savings Bank, Money Order, Insurance, etc.Value added services – Speed Post, Service, Business Post, Direct Post, etc.

Table 4: Main Services Offered by Indian Post

Items 2002-03 2003-04 2004-05 2005-06 2006-07

No. of Policies* upto the year 1795070 2666485 3738798 4702776 5246673

Value of Business upto the year (Rs. in Crore) 7464.53 12385.11 18520.93 25229.65 33865.66

Average sum Assured per Policy (in Rs.) 47654.8 54932.09 53958.05 61107 88002

Table 5: Rural Postal Life Insurance


8/13/2019 SSRN-id1477765




funds, pension, etc. Various initiatives have been taken by

Department of post to make growth inclusive for economically

exclusive population.

• In collaboration with State Bank of India, an extensive

network of Business Facilitators and Business Correspond-

ents covering one lakh villages in phase one under the Rural

and Agri Business Group (RABG) has been experimented.• In partnership with Oriental Company Insurance Limited,

the post offices in the year 2006 launched accidental death

insurance cover for one year of Rs. 1,00,000 at the low annual

premium of Rs. 15 for its account holders.

• The memorandum of understanding (MoU) has been signed

between Postal Department and Rural Development Depart-

ment for payment of the wages to the workers under National

Rural Employment Guarantee Scheme (NREGS).

• The 300 finance marts are planned to provide products like

Insurance, Postal Life Insurance, Rural Postal Life Insurance,

Credit, Saving etc.

• Instant Money Order (iMO) is an online Money transmission

service which was launched in 2006. Presently it is available in

812 centres (till 2008).

• The electronic transmission of money orders (eMO) system

was commissioned in the year 2008.

• ‘Grameen Sanchar Sewak’ project was conceptualised to

provide accessibility to public telephone to the rural popula-

tion at their doorsteps by using latest Wireless in Local Loop

(WLL) technology.

Conclusion and Recommendations

All the above initiatives should eventually lead us towards

financial inclusion if collaborative actions are taken together.

Lack of channelizing existing recourses, catastrophic policy

implementation and lower technological penetration and

adoption are the main causes of financial exclusion. So, we

recommend that the facility of opening current account should

be introduced in post offices so that day to day transactions can

be done. Secondly, all the post offices should be computerized,

connected with internet and should have PCO booths. Thirdly,

the telephonic transfer of payments should be encouraged by

developing a technology wherein receipts of transfers of

payments can be obtained. It would be significant achievement

because most of the rural population working in un-organisedsectors are illiterate but can understand number system based

technology. Fourthly, for opening new accounts ‘Know your

customer’ norms should be routed through post offices. Fifth,

the monetary benefits for the poor under various government

schemes should be routed through post office accounts. Finally,

the wage payments in the un-organised sector should also be

routed through formal banking system for encouraging faster

financial inclusion.

Endnotes and Additional Thinking

1 Dataworks ,Invest India Income and Saving Survey, 20072 No Frills Savings Account allows maintaining the account

without any minimum or average balance requirement.

Generally, no frills saving account is opened for people who

does not have a bank account & has an annual income of less

than or equal to Rs. 50,000/- or does not have a bank account

& is a beneficiary under a Government Welfare Scheme.3 Report on currency and finance 2006-08 Vol. II.4 HDFC bank website ‘Service charges & fees’ applicable to

customers as on July, 2008.5 India Post ‘Annual Report 2007-08’.6 Banking services available in Post offices are Saving Account,

Recurring Deposit, Time Deposit, Monthly income Scheme,

Public Provident Fund, Senior Citizens Saving Scheme, Kisan

Vikas Patras and National saving certificates.

(The views expressed in the article are personal and do not reflect

the official policy or position of the organisation).

Items 2002-03 2003-04 2004-05 2005-06 2006-07

Number issued(in Lakh) 1050.30 1101.47 1015.98 957.90 991.00

Value of M.O. Issued (Rs. in lakh) 865000.40 687502.40 705216.51 718342.93 775670.57

Commission (Rs. in Lakh) 29923.70 31137.50 32031.40 32792.43 34791.64

Average Value of Money Orders (In Rs.) 823.57 624.17 694.12 749.91 782.72

Table 6: Inland Money Orders During the Year 2002-2003 to 2006-07


ssrn-id1477765

Documents