Date post: | 02-Apr-2018 |
Category: |
Documents |
Upload: | mehak-narula |
View: | 228 times |
Download: | 0 times |
of 94
7/27/2019 Sip Report 6sip report
1/94
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
7/27/2019 Sip Report 6sip report
2/94
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
2
7/27/2019 Sip Report 6sip report
3/94
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
3
7/27/2019 Sip Report 6sip report
4/94
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
4
7/27/2019 Sip Report 6sip report
5/94
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.
5
7/27/2019 Sip Report 6sip report
6/94
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)
6
7/27/2019 Sip Report 6sip report
7/94
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)
7
7/27/2019 Sip Report 6sip report
8/94
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
8
7/27/2019 Sip Report 6sip report
9/94
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
9
7/27/2019 Sip Report 6sip report
10/94
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.
10
7/27/2019 Sip Report 6sip report
11/94
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.
11
7/27/2019 Sip Report 6sip report
12/94
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.
12
7/27/2019 Sip Report 6sip report
13/94
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
13
7/27/2019 Sip Report 6sip report
14/94
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
14
7/27/2019 Sip Report 6sip report
15/94
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
15
7/27/2019 Sip Report 6sip report
16/94
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.
16
7/27/2019 Sip Report 6sip report
17/94
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.
17
7/27/2019 Sip Report 6sip report
18/94
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.
18
7/27/2019 Sip Report 6sip report
19/94
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)
19
7/27/2019 Sip Report 6sip report
20/94
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
7/27/2019 Sip Report 6sip report
21/94
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
21
7/27/2019 Sip Report 6sip report
22/94
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
22
7/27/2019 Sip Report 6sip report
23/94
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.
23
7/27/2019 Sip Report 6sip report
24/94
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)
24
7/27/2019 Sip Report 6sip report
25/94
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
25
7/27/2019 Sip Report 6sip report
26/94
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.
26
7/27/2019 Sip Report 6sip report
27/94
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.
27
7/27/2019 Sip Report 6sip report
28/94
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.
28
7/27/2019 Sip Report 6sip report
29/94
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
29
7/27/2019 Sip Report 6sip report
30/94
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
30
7/27/2019 Sip Report 6sip report
31/94
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
31
7/27/2019 Sip Report 6sip report
32/94
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.
32
7/27/2019 Sip Report 6sip report
33/94
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.
33
7/27/2019 Sip Report 6sip report
34/94
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
approach or model that can fit in all conditions. The concept of micro finance is all informal and34
7/27/2019 Sip Report 6sip report
35/94
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.
35
7/27/2019 Sip Report 6sip report
36/94
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.
36
7/27/2019 Sip Report 6sip report
37/94
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.
37
7/27/2019 Sip Report 6sip report
38/94
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
38
7/27/2019 Sip Report 6sip report
39/94
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
39
7/27/2019 Sip Report 6sip report
40/94
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.
40
7/27/2019 Sip Report 6sip report
41/94
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
41
7/27/2019 Sip Report 6sip report
42/94
The SHG model appear to be a better group structure based on the comparison of the
group parameters
42
7/27/2019 Sip Report 6sip report
43/94
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
43
7/27/2019 Sip Report 6sip report
44/94
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
44
7/27/2019 Sip Report 6sip report
45/94
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.
45
7/27/2019 Sip Report 6sip report
46/94
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
46
7/27/2019 Sip Report 6sip report
47/94
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.
47
7/27/2019 Sip Report 6sip report
48/94
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.
48
7/27/2019 Sip Report 6sip report
49/94
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
49
7/27/2019 Sip Report 6sip report
50/94
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.
50
7/27/2019 Sip Report 6sip report
51/94
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)
51
7/27/2019 Sip Report 6sip report
52/94
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.
52
7/27/2019 Sip Report 6sip report
53/94
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.
53
7/27/2019 Sip Report 6sip report
54/94
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
54
7/27/2019 Sip Report 6sip report
55/94
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.
55
7/27/2019 Sip Report 6sip report
56/94
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.
56
7/27/2019 Sip Report 6sip report
57/94
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.
57
7/27/2019 Sip Report 6sip report
58/94
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.
58
7/27/2019 Sip Report 6sip report
59/94
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