INTRODUCTION
Access to financial services (in the form of savings, credit, insurance, remittance or welfare payments) is a fundamental tool for managing a family’s well being and productive capacity, to smooth expenditure when inflows are erratic, to build surplus when the demand for expenditures is heavy (school fees, marriages, buying farm equipment) or to protect against emergencies. However only one-quarter of financial households have any form of savings with formal banking institutions (Adams, et al., 2008). The following Figure 1 depicts how finances help a person at every stage of his life. It not only improves person’s social, educational and financial status, also provides capacity to manage shocks and vulnerabilities at any point of time in life(Singha and Gayithri, 2012; Borghoff, 2011; Ravi et. al. 201; Zhang, 2011). According to the World Bank (2009), getting financial services to rural people is the biggest challenge in the quest for broad –based financial inclusion.
Figure 1. Financial needs (Microsave)
According to the “Transact” the national forum for financial inclusion “Financial Inclusion is a state in which all people have access to appropriate, desired financial products and services in order to manage their money effectively”. It is achieved by financial literacy and financial capability on the part of the consumer and financial access on the part of product, services and active suppliers.” The following Figure 2 depicts the Components (Savings, Micro credit, Insurance and Remittance) of Financial inclusion.
Figure 2. Components of financial inclusion (Karmakar, 2010)
Several studies have demonstrated that there is considerable demand for financial inclusion by the under-banked and unbanked provided these services address specific consumer needs such as ease and proximity of access, security, low-value high-volume transactions, and financial services that offer value better than existing informal alternatives and integrate into the livelihoods, such as entrapping income during harvesting and enabling access during festive seasons or emergency needs (World Bank, 2008; Balmer et al., 2005). They also have a willingness to pay reasonable charges to avail these services (Cheney, 2008). Given the few and expensive alternatives for financial services that poor have, they are willing to pay a price based on perceived value and cost of existing alternatives likes loan sharks, money lenders or informal savings with high risk.
Key influencers of demand and willingness to pay are demographics, literacy levels, social-dynamics, local enablers and inhibitors, availability of informal and alternate channels (together with their cost and convenience), adaptability to change, comfort with technology, and other exogenous and endogenous factors (Affleck, & Mellor, 2006).
Out of the 428 million deposit accounts in India only 30% are in rural areas. With a rural population of 741.6 million, the rural penetration of bank is as low as 18%. Even where access to banking is available the transaction cost of savings in India is as high as 10% for the rural people (Group Savings and Loans Associations: Impact Study, 2010).
Banks usually target customers with regular and stable incomes, like salaried employees and well established businesses. This is efficient and profitable as most of these clients conduct high value and less frequent transactions, resulting in lower operating costs (Chakrabarty, 2006). Banks service most customers from branches, while facilitating few transactions outside the branch premises, through ATMs (cash withdrawal and deposit), internet and mobile banking (cheque book request, bill payments, funds transfers, and balance enquiries).Banking is currently costly and labour intensive for all concerned.
Due to high cost of delivery and small average size of the transactions, it is not profitable business for banks to set up shop to cater for the poor people (Chakrabarty, 2006). As a consequence a large segment has remained financially excluded.
But, the situation is gradually changing and increasingly several organisations includingBanks, Mobile Network Operators (MNOs), Technology Service Providers, Business Correspondents (BC’s) and large agent networks are recognizing that there is considerable potential at the bottom of the pyramid (Wilcox, 2011-2015). They understand that getting low income segments into the regular financial sector is beneficial both for the people belonging to this segment and the financial institutions.
Widespread penetration of mobile technologies and their integration with banking infrastructure has enabled banking services outreach in a low cost and more efficient manner through mobiles phones (Suoranta & Mattila, 2004). Advances in biometrics and its integration with Point of Transaction (POT) terminals has enabled substitution of bank personnel by technology, supported by less qualified agents and business correspondents, enhancing security and lowering costs (Davis, & Owens, 2009; World Bank, 2008).
The policy environment too has evolved considerably. Using a mix of loose and tight regulations and taking a controlling, direction setting or mentoring approach, it has provided suitable incentives and disincentives to promote financial inclusion. Policy enablers such as extending outreach through third party agents and agent network managers or business correspondents have been promoted by the Reserve Bank of India (RBI, 2009-2010).
Today a wide range of technologies are available that can address requirements for financial inclusion in parts.