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Indias Financial Inclusion

A case for Comprehensive Revenue Model
Dr Achintan Bhattacharya Joint Secretary, Department of Financial Services, Government of India

Despite considerable progress over the past twenty years with buoyant growth, rising inequality and declining poverty, Indias extensive banking network and outreach have virtually bypassed the poor despite the declared objective of Inclusive Growth. All the standard indicators reveal financial exclusion of almost three fifths of Indias citizens. The present article argues in favour of revenue generating bank led model of FI simply because once the basic business issues are addressed, it is expected that banks will themselves discover the golden path that tend to converge with the Governments objectives of Inclusive Growth while conforming to the prudential guidelines of RBI. It is also suggested to evolve not only a delivery model with a long term perspective, but also an economically viable revenue model for FI married holistically to the overall business plans of banks, priced in the same way as infrastructure pricing is done for the products which are custom made for the poor with in-built risk mitigating, livelihood enhancing measures, and, as the case may be, particularly for micro-loans, based on joint liability instead of collateralised legal procedures. Introduction Despite considerable progress over the past twenty years after liberalisations, with buoyant growth, rising inequality and declining poverty, Indias extensive banking network and outreach have virtually bypassed the poor despite the declared objective of Inclusive Growth. All the standard indicators reveal financial exclusion of almost three fifths of Indias citizens1. The initial indicative results of FI over the Past five years are encouraging but from macroeconomic perspectives it is now felt that for FI to succeed, it needs a big push for transforming not only the lives of the poor but also for financing and sustaining the present momentum of high GDP growth for the Indian economy2. It seems, therefore, Financial Inclusion is going to be a major growth agenda of the banks at least for the coming decade. If one takes into account the costs and benefits of FI, viewing it more as a quasi-public good3, thaen as available studies indicates, the macroeconomic benefits far outweighs the direct and indirect costs of Financial Inclusion4. Moreover, in another couple of years the Unique Identification Authoritys (UIDAI) Aadhar based epayment system is going to be a game-changer once it becomes a reality as banks would be expected to position themselves and undergo necessary improvisation and integration to operate from a common platform with a single account but multiple payment facility. Already it has raised the expectations of the policy planners and the common people.

What is argued in the present article is that at this juncture it would not be proper to sacrifice the issue of commercial considerations either by high ideals of social corporate responsibility or achievement of targets driven from above5 unless these are well synchronised with the market forces that drive the core commercial existence and profitability of banks. Addressing the commercial issues of FI architecture for the last mile, product and processes included, and converging and aligning the same with the business strategy of commercial banks - is not only vital but has become a necessity now. The paper therefore, argues that: the present mode of target-driven, bank-led financial inclusion design has to be weaved with a comprehensive, well-designed, holistic financial inclusion architecture by linking it with appropriate delivery mode, product design and market discovery of individual banks based on their own experiences of last mile realities. Within its limited scope6, therefore, the present article argues in favour of revenue generating bank led model of FI simply because once the basic business issues are addressed, it is expected that banks will themselves discover the golden path that tend to converge with the Governments objectives of Inclusive Growth while conforming to the prudential guidelines of RBI. Economic viability of financial inclusion One of the major constraints in bank-led Financial Inclusion model seem to be that the operating cost of financial inclusion is perceived to be high as compared with returns from the services extended to low income groups. Banks, therefore, are generally averse to voluntarily extending financial services to such segments. There is very little urgency or incentives for them to move to rural space and reach out the poor spread over huge geographical areas7. For this purpose, therefore, it is argued that three issues need to be addressed simultaneously and immediately. The first is to address directly the poor rural customers stationed at the last mile and developing acceptable, customised products focussed on their requirement. Second is the issue of developing appropriate delivery channels to push these products. Thirdly, banks are also required to address revenue related to four major issues; (i) the issue of costs and income; (ii) the issue of viability8; (iii) deciding the issue of sustainability and price determination of products; and (iv) integrating them with

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the overall business model9 of the bank. All these issues are inter-related and are to be addressed simultaneously and in a comprehensive manner. ISSUE#1 - Focussing on what the rural poor need Reorienting product delivery focus for the poor people It must be conceded that faced with low incomes and little or no wealth, poor people have a more complex challenge and need to manage it themselves without much contractual or legal protection or resorting to more complex financial transactions than many people who are comfortably off10. The building blocks of financial inclusion, the banking business for the poor, therefore, must not only include functions like exchange, storage, transfer and investment of money - all based on a relation of trust - but also that they are customised to suit their generic needs keeping in view their poor financial standing, lack of collaterals and poor financial literacy as well as their alienation from banks due to their urban, pro-rich and education bias and resultant elitism of bankers as well as field-level complexities in land record, ownership, poverty, uncertainty of income and other socio-political issues11. What the poor want, even for banking and related services, products that are: simple, can be operated speedily, small in terms of product size and are flexible and are affordable, convenient and safe12. Besides, there are complicated procedural wrangles in opening and operating bank accounts as bankers follow legally backed security based collateral oriented approach13 for loan products as a whole. There is no change in attitude even when they try to advance micro-loans. This is also the reason why, perhaps, loans under INR 2 lac category have recorded such a poor show. Banks would therefore, be required to innovate products following the leads of successful microfinance companies and explore possibilities under Joint Liability instead of Collaterals. There is no reason why banks would not take a direct proactive role in SHG formation, hand-holding and then pushing loans and services specially customised for the target groups. Addressing risks In one sense Financial Inclusion is more than putting across a mere financial architecture. Any measure to truly financially include the poor would require creating a variety of risk/vulnerability management mechanisms and ensuring that they are consistently and simultaneously available14. Unless major risks are simultaneously covered, the likelihood of one risk wiping out an entire livelihood is a very high possibility, and people who have been temporarily included could be excluded again15. Thus, financially including low income groups without addressing structural causes that result in the failure of livelihoods simply cannot help.

Selling products custom made for the poor Under the FI agenda of the RBI and the Govt., banks are essentially offering deposit products, almost a plain vanilla account often with small overdraft facilities. But banks cannot make money and ensure a profitable business from deposit products alone, unless they sell some composite products -credit, insurance, remittance and other related products including micro-pension almost as a combo offer- to poor clients. Then again, such products are to be custom made and not a copycat editions of their urban products sold to more solvent and more informed customers in metropolis. This is the emerging challenge that banks have to face and resolve through a process of reverse innovation. Thus the development of new business model and the use of technology that drives down costs of transactions to a new low (as in the case of telecom sector) would hold the key to profitability of banks in the FI space, beyond mere regulatory compliance. Addressing livelihood issues From a holistic or a macroeconomic point of view, it can be said, Financial inclusion needs to be seen not merely as an outreach programme but as a livelihood programme as a business philosophy of financial inclusion16. Therefore, banks are required to simultaneously chalk out an inbuilt model for addressing livelihood and viability issues of the people they are going to serve. Delivery model is not enough - Ensuring quality of delivery mechanism Enlistment of BCs hardly means that they are successfully adopted and integrated in a bank led growth model in the absence of appropriate delivery model and product designs integrated with the commercial business strategies adequately incentivised to take care of the business at each layer. Besides, the BCs carry the brand images of banks they represent and can encash the faith of the people. Adequate supervision and control on BCs does not appear to be a great problem that cannot be overcome. Some banks have also burnt their fingers in preventing loss of reputation17. The problems become all the more difficult if such BCs (like traditional Kirana Shop Owners who are traditionally engaged in informal money lending at a very high rate without obtaining necessary licence) divert the customer base of the bank as its authorised representative and use this opportunity for personal gains. ISSUE#2 - Delivery through branchless banking The business correspondent (BC) model The BC model network is being presently managed by banks through tie-ups with section 25 companies acting as corporate BC. At the field level, or individual touch

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points, BCs are given a small allowance of INR 1500 to INR 3000 per month and/or some commissions are provided with necessary accessories like handheld devices and other enabling biometric instruments etc either through outright direct purchase by the banks or through renting. It is estimated that for the financial inclusion to take place, there will be an estimated requirement of more than 1.2 lac BCs all over the country, as against 25000 presently engaged, to extend banking services in all the habitations in every corner of the country. Problems in scaling There are many islands of success stories - from PSBs to new private sector banks. But when it comes to replicating them on a grand, national scale, with wide horizon of services and adhering to quality with appropriate backups, scaling from pilot stage to national scale18 has not yet been found feasible. Besides, it is also not the question of providing services; the question is of quality financial services. The FI movement will get a jolt if banks start Financial Inclusion either half-heartedly or with products that are unsuitable to the poor. This is because, once the customer goes back frustrated, the cause is half lost. Appointing a common BC for all banks in the initial stage At present RBI guidelines stipulate that while at the apex level a BC agent can represent more than one bank, there could be problem of jurisdiction if a BC at field level represents more than one bank. But this is more to ensure uniformity of command and control and is a management issue. Banks in charge of a particular revenue district/villages can explore engaging a common BC, at least in the initial phase, when the customer base is low, with some parameters of minimum business (with an incentive system built in it) on the basis of an exclusive service area approach. There are obvious duplication of work and multiplication of BCs when more than one bank operates in a common service area and having separate BCs each. Perhaps, this issue could be sorted out as a management issue. Besides, a common model BC protocol needs to be worked out by all the banks together, both public and private, so that the business models could also be linked to it. Ensuring viability of BCs In order to involve banking correspondent to serve the mini branches of banks, the Ministry of Finance has issued instructions to ensure that the BCs have online connectivity, are interoperable and are not confined to unbanked; BCs should be attached to the bank branches in the service area and should cover the area of one or more than one Gram Panchayat. According to the Ministry of Finance, the challenge is to make a Point of

Sell (POS) viable and it is working out how each bank need to work out a strategy for each of the district in which they are lead banks. It has been felt that viability of BCs would come when the banks are able to create demand for credit in the area of operation. Evolving a holistic management system for the BC Till date, banks are yet to include in the BC model issues like settlement of claims, reconciliation of transactions, credit related issues etc. Apart from addressing issues of technology related interoperability; banks are required to evolve a holistic management system for the Banking Correspondents which are nothing but the human face of cash-in-cash-out system just as the ATM is the technology enabled face for the same. Then there are also issues of training BCs at a massive scale for skill formation and training, which, perhaps, could be done through workshops on a uniform curriculum by holding camps and utilising the existing training infrastructure plus those built under RUDSETI and other schemes. Business plan Savings mobilisation Garnering savings from hitherto unbanked rural sectors and particularly from the poor benefits the economy as greater financial resources hitherto untapped become available at cheaper rate for broad-basing financial services, improving margins and financing growth process not only as a corporate social responsibility but as a economically rewarding option. Addressing issues of economic viability of business models When the banking industry is geared to earn profit through market mechanism, it would be too unrealistic to ignore this vital aspect of economic viability of FI. The success19 of a viable business model must include basic payment services, which are, perhaps, the most important financial service for poor people. However, these schemes can only be sustainable if they are built on a commercially viable business model like M-Pesa in Kenya20, not only in rural India but also in urban centres to address the financial needs of the poor. This would automatically take care of the demands of banks for reimbursement of additional costs incurred towards FI drive21 . Increasing revenue Imposing token transaction fee to inculcate market-driven credit culture RBI has permitted the banks to levy transaction charges to the beneficiaries. However, it is apprehended that at this nascent stage of BC delivery model, imposing

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transaction charges for financial services could be counterproductive. But what poor people want is not cheaper credit but timely credit, that too in right quantity. They would stand to gain if transaction fees are imposed. Perhaps, the market-driven credit culture would be vitiated if transaction fee is fully waived. Therefore, from the very beginning, it is felt, transaction fee should be made a part of credit under all schemes of Financial Inclusion. Supplementing savings oriented delivery model with fee based income model The present rural bias of the present Financial Inclusion stems from the fact that majority of Indias poor live in rural areas. The mainstream thinking about economic viability of Financial Inclusion model, particularly in rural areas, is centred on the idea that it can be achieved by increasing access to domestic savings in rural areas alone. But unless the existing high transaction costs are reduced drastically through technology interface, which in turn would reduce the cost of credit in the banking system as a whole, the NIMs of banks can hardly improve22. Therefore, in order to increase margin banks would have to supplement their income with fee based income from micro-insurance23, remittances, pension services etc apart from enhanced income from increased business through host of activities and through KCC/GCCs and direct transfer of subsidies under central schemes. Thus, the present Brick-and-Mortar branch banking model of India has to be redesigned with the help of BC/BF agency model linkages for financial viability24 over a reasonable or and moderate period of time25. Addressing costs Addressing the core economics of delivery channels In order to integrate the FI model with the business strategy, therefore, the core banking platform the bank could be designed and synchronised in two ways: (i) to cater to the more complex needs of the higher value customers in the urban and metro urban areas like corporate etc. and, (ii)a simpler scalable, cost effective platform for the rural customers. The delivery model requires constructing a banking infrastructure that is commercially viable, safe, trusted and accessible to all and requires that each player in the value chair must have a clear financial incentive to participate in and actively promote the services. This has three key elements. The retail network

the payment network and the account platform Each of these elements has very different economics. The retail network economics has two components of transaction costs: (i) Cost of the bank of originating and processing the transaction and (ii) Cost to the consumer accessing the service. When the banks reach the last mile, banks are required to expand their small customer base by using the agent channel and through the existing SHG-MFI network. Besides, it needs to conduct as many transactions per customer as possible for all financial services. The payment network again is a communication function and requires large fixed costs for the bank and connectivity for the consumer. The economies of account platform, there are significant fixed cost which if amortised over a large number of customers, results in lower incremental cost per customer. But mere adoption of new channels and technology to expand profitably into un-served consumer market will not do. A very different value chain will have to be created through a process of specialisation and scale. For the purpose of economies, banks have to explore both the existing and new options such as: amortising costs of BCs with a fixed cost component towards salary plus in-built incentives linked to increases in transaction/ network; the costs of hardware and software could also be amortised; for the FI mission, the ATMs and micro ATMs could also be powered with green energy like solar power supply; for reducing costs on fixed assets, instead of outright purchase, ATMs and other hand-held devices could be taken on rent with appropriate security arrangement agreement with the vendor. But these issues are best to be left to the bankers to discover their own least-cost combination. Working out a revenue model View from Income-Expenditure flow These revenue related issues could also be looked from a simple income-expense accounting method for factors that in economics are known as current costs/income on an accrual basis. In cases of Financial Inclusion, it is actually difficult to segregate overhead costs26; however, such income-expense model must also take into account the overall expenses on common services like NCPI, NDSL, MSP and expenses on other charges on pro-rata basis spread over relevant period of time.

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A simple illustration will make the concept clear. Let us presume that Bank X incurs an expenditure of INR 100 crore towards its Financial Inclusion project in the first year for 100 branches in 100 villages. These costs also include fixed costs towards NDSL, MSP and NCPI Charges spread over a number of years. Presuming the hypothetical situation that Bank X incurs a cost of INR 1.50 for every INR 100 savings collected paying interest @ 4.5 percent and deploying them @ 12 percent. Then the bank retains a interest margin of INR 5 per INR 100 (differential between cost of savings 4.50+1.50=6.00 per 100 Rupees and cost of advances @ 12 percent). There are also income earned on money advanced in no-frill accounts (say @ 4.5 percent), interest earned on KCCs (say @ 7 percent),on GCCs (say @ 13+ percent), or on in-built overdraft (say @ 14+ percent) etc. Let us further presume that in the first year itself, it mobilises INR 100 crore towards additional savings collection through FI project (which is generally quite difficult). By such effort, then, the bank has compensated its costs towards FI by INR 60 crore only (out of INR 100 crore) by increased income. The rest of the costs27, therefore, need to be covered, either by increasing the collection of additional savings in subsequent years and/or by putting efforts to mop up other fee based incomes like, say insurance, pension fund commissions, charges for fund transfers and towards transaction costs from Govt. welfare schemes. This apart, there could be increased business through enhanced credit offtake at higher rates if market conditions so allow. Thus unless there is a comprehensive cost-income projections made on the basis of pragmatic field-level realities, it would not be possible to either arrive at an ideal product/services pricing or an income-expense model. But this does not happen over time as financial services infrastructure needs sufficient time, at least a medium term, earning the trust of the people and to garner the required savings through spread of financial literacy, inculcating a habit of savings culture among people living in remoter/rural areas. This drives home the point that in a bank led model of financial inclusion, from the very beginning a comprehensive delivery model has to be evolved that would rely, apart from income earned from savings, income from other fee based products like microinsurance, pension fund commission and other transaction charges of other govt. income-generation schemes. Working out a revenue model - An illustration If hypothetically, it is presumed that Bank X achieves break-even after 5th year, then it has a medium term viable revenue model under the financial inclusion architecture - similar to the way a road infrastructure

project achieves financial viability (although in such infra project the period is much longer). In algebraic terms, there are two basic equations viz, an income function and a cost function leading to a third equation of derivative function ie Revenue function. The purpose would be to minimise costs and maximise revenue. Income (Yi) /Cost functions Income of banks and of FI project spread over a period of time would generally consist of: (1) Income from savings(si) over a period of time(i) (2) Income from credit deployment (cdi) over time(i). (3) Income from all fee based products like fund transfers, pension, remittances, all government schemes including direct subsidy transfers (zi) over a period of time. (4) Fixed income, if any, to begin within the initial year ie 0 year(K0). But each of these variables determining income and costs will have a coefficient (say ani) like rate of interest, rate of transaction fees, rate of commission charges spread over a period of time (i) and each rate would be different for specific variable [(represented by another coefficient, say, a2i where n varies from from 1 to 10 in time period i (ie,110 years etc)] Similarly, costs spread overtime generally consist of: 1. Costs towards KCC/GCC cards and costs towards credit deployment (c). 2. Transaction/collection costs of deposits/other deposits/overdraft( s ) 3. Costs towards salaries/commission BCs/BF/supervisors(e) 4. Maintenance charges for software/hardware (m). 5. Transaction costs towards transfer of money under various government schemes (including future direct subsidy transfer) and costs towards remittances, pension, insurance etc. (g) 6. Costs towards purchase/rending of hand-held biometric devices, tool kits, micro-ATMs etc. (h). 7. These are over and above the fixed costs (overheads) like stationary costs, costs towards technology service providers (NDSL/MSP/NSPI etc), costs for savings for

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additional field personnel and other apportioned costs for Human Resources (Ko). Algebraically represented, these would be: Income Function ( Yi):

scenario, a part of incremental GDP must continue to percolate down to the bottom level, raising the income of the poor. From this simplistic analysis the point that is driven home is that for bank-led FI model to succeed both the conditions of break-even and sustainability has to be met. And it needs proper coordination, pragmatic regulatory flexibility and comprehensive planning, keeping into account the ground-level realities of Indias vast, geographically diversified unbanked rural areas and its deprived poor population. In order to arrive at any revenue model-thus the major task involves estimating technology, HR and overhead fixed costs as capital costs and after year to year running costs (variable costs). Next comes the issue of pricing28 and thereafter, projection of business- both interest income and fee based income clubbed together. Under normal circumstances, opening a branch in a remote village having a population below 1000, does not make good business sense. But in case of BC based models, such a proposition could be pragmatically dovetailed and efforts cross subsidised, at least initially till the time all the people, poor and not so poor alike, are included for delivery of financial services. The success of financial inclusion will depend very much on how these costs and income elements are integrated into the mainstream business model of the banking business. Conclusion For the purpose of FI and particularly the present model of bank led financial inclusion agenda needs the convergence of interest of policy planner, the regulators as well as various stakeholders including the main participant banks. For the Govt., financial inclusion seeks to empower the poor, enhancing their access to financial products and increasing their incomes and synchronising it with the objective of regulator in ensuring due prudence of the banking system while ensuring its stability and buoyancy. It has to be remembered that any contradiction in this entire gamut of policy, implementation and vision of financial inclusion would result in non achievement of target and hamper the very growth process that India wants to pursue. Therefore, financial inclusion package has to be complete in terms of its design, and process, quality and marketing to address directly the customer base that it proposes to caterneither a patch up model nor half hearted efforts for attaining paper targets. The present bank-led model of financial inclusion demands a holistic approach, a firm conviction, appropriate policy evolution, proper regulatory design and commercial substance with skilled marketing efforts.

Costs function (Ci ) :

From equation (1) and (2) above, we derive the Revenue function (Ri) :
Ri = Yi Ci..(3)

In this multivariate analysis, the Revenue (Ri) is a function of net income (Yi) over costs (Ci) over a finite period of time(i= 1 to 10 years). Simplistically stated, if R =f(x) where x is net income (+) or Loss (-) ie (Yi-Ci), then First order condition stipulates that
dR = 0 .(4) dx

This means that net revenue becomes positive after i th year. For example if i=5, then, after 5th years, the project will become viable. This is nothing but the break-even point which is a necessary condition. Second order condition stipulates:
d2 R > or = 0 .(5) dx2

This means that after ith year (5th year in this case) the project would continue to earn profit as a sufficient condition. This is also the sustainability condition. For the purpose of profitability banks would generally strive to achieve maximisation of income (Y-function) ie equation (1) subject to minimisation of costs(C function) ie equation (2). Generally, this can be done mathematically by either linear or non-linear programming on the basis of observed matrices of income and costs. Mathematically, then, the project becomes economically viable, iff by nth year(n= 1 to, say, 10), net Revenue is greater than zero. Similarly, the project becomes sustainable, if the revenues go on increasing thereafter. There could be a third condition of long-term sustainability of FI model: in a rising growth

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Notes & References: 1. For a comprehensive view on poverty and inequality please see Basu Kaushik (2010):Beyond Invisible Hand, Groundwork for a New Economics;Penguin Books. Pal Parthapratim and Jayati Ghosh (July 2007): Inequality in India: A survey of recent trends; DESA Working Paper No. 45; ST/ESA/2007/DWP/45.and for inclusive growth agenda, see Planning Commission, Government of India( December, 2006):Towards Faster and More Inclusive Growth: An Approach to the 11 Five Year Plan. 2. This is more so because of the reason that only 1% of incremental saving for financing growth during 2008-09 came from the individual household sector whereas domestic corporate savings contributed more than 11%. Keeping in view the fact that during the current year, corporate savings will be hit by high input costs in a high interest rate scenario, it is necessary to push individual household savings further. 3. A good is considered as public good if it meets the conditions of nonrivalness in consumption and non-excludability. The degree of publicness in financial inclusion may be different from the stand point of a typical public good like say defense, but there is little doubt that financial inclusion meets the above two criteria to a large measure and to that extent is a quasi public good. Vijay Kelkar (13/1/08) : NP Sen Memorial Lecture; Hyderabad. 4. A NABARD study estimates that in monetary terms the total net benefit of a financial inclusion policy was around Rs. 54715 crore per annum. It identified financial costs as direct costs-- like for opening account, viz, processing fee, documentation fee, payment in obtaining documents (land records, search report, no-due certificate from other banks, identity certificate like ration card, driving license, etc), mortgaging and registration, etc. and Indirect costs like those spent on getting these formalities done for opening credit account. The NABARD study also identified two sets of benefits: (i) Reduction in the interest cost on loan on account of shift from noninstitutional sources of credit to institutional sources. (ii) Net income from the investments made by those who avail credit afresh. reduction in interest cost on account of shifting of borrowing from non-institutional sources( at Rs.18126 crore per annum) and total incremental income from the added investment on account of financial inclusion(at Rs.95,403 crore).see Mehrotra,N, V.Puhazhendhi, G.G.Nair, and B.B.Sahoo (2009), Financial Inclusion An Overview, NABARD Occasional Paper No. 48. 5. In todays macro-monetary environment, banks ought to be bending backwards to get low-cost deposits from the retail segment in the interest of better liability management. Yet, the availability of alternative, more attractive instruments in urban areas and higher transaction costs in rural areas impair their effort. Haseeb A Drabu(2009): Economics and Inclusion in Sameer Kochar,R.Chandrasekhar,K.C.Chakrabarty and Deepak Phatak(ed): Financial Inclusion;Academic Foundation;2009;New Delhi. 6. There are other related organisational issues which are also needed to be addressed like reengineering the business process from the present mode of front end delivery to technology driven back-end support system as well as developing cadres of rural human resources meant exclusively for financial inclusion. These issues would address the supply side economics of banks in consonance with the field level realities of consumer acceptance of such products and ensuring that there are no weak links in the entire chain of delivery process. 7. In todays macro-monetary environment, banks ought to be bending backwards to get low-cost deposits from the retail segment in the interest of better liability

management. Yet, the availability of alternative, more attractive instruments in urban areas and higher transaction costs in rural areas impair their effort. Haseeb A Drabu(2009): Economics and Inclusion in Sameer Kochar, R.Chandrasekhar, K.C.Chakrabarty and Deepak Phatak(ed): Financial Inclusion;Academic Foundation;2009;New Delhi. 8. The concept of economic viability was also accepted even by the HLC, albeit in an indirect way when it recommended for greater role of the DCC with greater involvement of state governments 9. ...financial inclusion plans must be integrated with the normal business plans of the banks. We believe that banking to the poor is a viable business opportunity but costs and benefit exercise needs to be attempted by the banks to make financial inclusion congruent with their business models. Banks must view financial inclusion as a huge business opportunity and perfect their delivery models.Dr K. C. Chakrabarty(17 June 2010 ) Financial Deepening by putting Financial Inclusion Campaign into Mission Mode; Address at the 23rd Skoch Summit; Mumbai. 10. For a detailed analysis of daily financial lives of poor people from the viewpoint of economists (see Portfolios of the Poor), a prominent investigation into the everyday problems they face (Collins, Kulkarni and Gavron (2009)). According to a Report prepared by The Confederation of Indian Industry (CII) and the Boston Consulting Group (BCG) - Financial Inclusion From Obligation to Opportunity (March,2011, New Delhi) daily wage earners, monthly wage earners, seasonal earners and a part of the selfemployed generally constitute the financially excluded lot, who, on account of their low income, face constraints in saving and look out for short term consumption loans and they opt for borrowing at higher costs from the local money lender, friend or relative. Traditional banking for the excluded comes at costs amounting to 10 to 12 times the revenues generated. Which is estimated to be as large as Rs. 20,000 crore annually. 11. Thus,...financial inclusion is not mere State Benefit Transfers. Loans must be extended and savings and borrowings habits need to be inculcated among the poor. Poor do not require cheap credit but prompt credit. It is an anomaly that while they are pressed to pay exorbitant rates of interest to the money lender, the mainstream financial institutions are still shy of lending to them. 12. See Boston Consulting Group (BCG) ( 2007): Understanding Next Billion Consumers. 13. In a bank based model, customers have a direct contractual relationship with a bank or similar prudentially regulated and supervised financial institution. In the nonbank based model the contractual relationship is with a non-bank service provider such as a mobile network operator or an issuer of stored-value payment instruments. Customers exchange cash at a retail agent in return for an electronic record of value. See K. C. Chakrabarty(17 June 2010): Financial Deepening by putting Financial Inclusion Campaign into Mission Mode; Address at the 23rd Skoch Summit on in Mumbai. 14. This was also the recommendations of the Committee on Financial Sector Reforms. Perhaps, the greatest challenge to financial inclusion is to design efficient risk management product for the poor. The poor are typically exposed to a level of risk that is too high for them to obtain insurance at affordable rate.--- A key policy implication, therefore, is to increase investments that lead to intrinsic risk reduction so that insurance can be afford at a premia that minimise the need for subsidies. See A HUNDRED SMALL STEPS Report of the Committee on Financial Sector Reforms (Raghuram Rajan Committee); Planning Commission (2009); Sage, pp 63.

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15. In agriculture, for example, while small holder producers bear a major portion of the risk, they are also primarily takers of prices handed down by somewhat imperfect markets; financial products are required to be appropriately improvised to deliver and in the process overcome market imperfections and facilitate risk/vulnerability management by (and for) the poor. See Ramesh S. Arunachalam(2008): Scoping Paper on Financial Inclusion; UNDP. 16. B Sambamurthy(2009):Branchless Banking to Reach Government Interventions; in Sameer Kochar et al (ed): Financial Inclusion.pp 111. 17. for example, there are reports that BCs appointed by the largest State owned bank like SBI adopted not only fraudulent means but overcharged their customers beyond their approved rates, as a result of which SBI had to cancel their services and are taking a fresh look at the entire affair. 18. There is a misplaced optimism about specified individual category BCs and NGOs taking financial Inclusion to scale. What is often forgotten is the cost of enrolling, training, managing and keeping effective thousands of retired government servants and school teachers, etc. Banks who have done so successfully in pilots have, however, not managed to scale.Sameer Kochar(2010): Ground Zero for Financial Inclusion; INCLUSION, July-September; vol I, Issue 2. 19. In the case of basic financial services for the poor, the danger seems more that such services do not emerge in the first place, and financial inclusion simply does not happen. There is therefore a need for a stronger regulatory response if and when particular bundles of service emerge and grow towards a size and importance that could pose risks for financial stability. see Peter Dittus and Michael Klein(May 2011):On harnessing the potential of financial inclusion, , BIS working paper no. 34. 20. For India, however, the kind of transaction charges M-Pesa levies, does not seem to make much business sense as most of similar domestic services are much cheaper and India needs to improvise similar options for cheaper and better utilization. 21. Ministry of Finance was also prepared initially to the idea as, perhaps, a provision was made to reimburse banks additional costs @Rs 50 per account for covering No-Frills Accounts toward achieving Financial Inclusion goals. It is felt that this dichotomy between the aim of inclusive growth and Financial Inclusion goals irrespective of commercial core of banking (as if FI is an appendage) has resulted in paper inclusion only because FI is designed to operate at the fringe,remaining unintegrated to the overall business strategy.. 22. The cost of credit in the banking system as a whole increased over the years, for instance, from 5.4 in 2007-08 to 5.6 in 2008-09. See RBI:BSR of SCBs in IndiaRBI, March, 2009. 23. For example, if banks starts marketing micro-insurance products, they are not going to earn only fee based income; they first help insulate the poor beneficiaries from

certain risks, help them bring ultimately into the fold of financial intermediation and inculcate savings habit; in addition, most importantly, such beneficiaries become linked permanently to a long term customer relationship with the banks enabling them a solid customer base at grassroots. 24. ...financial inclusion plans must be integrated with the normal business plans of the banks. We believe that banking to the poor is a viable business opportunity but costs and benefit exercise needs to be attempted by the banks to make financial inclusion congruent with their business models. Banks must view financial inclusion as a huge business opportunity and perfect their delivery models. Dr K. C. Chakrabarty (17 June 2010 ) Financial Deepening by putting Financial Inclusion Campaign into Mission Mode; Address at the 23rd Skoch Summit; Mumbai. 25. While the major emphasis of the regulator and the govt. has been on bridging rural urban gap by financial widening, however, owing to several factors such as the sharp increase in urbanisation, rural to urban migration as also the increase in urban poverty, the share of poor and the low-income households not having any access to finance in the urban areas is also increasing.(see Usha Thorat : Inclusive Growth The Role of Banks in Emerging Economies; Independence Commemoration Lecture, 2008 Colombo ; February 28, 2008 ). 26. for example, there is a tendency among banks to apportion a part of the overall fixed expenses on technology for FI like investments on CBS network; but such investments are essential for overall financial services in banks; CBS being as essential as provision of mainstream banking services, the same should not be apportioned to FI except additional and incremental expenses on overheads. 27. Looking at the details of costs and expenditure some indicative costs could consist of Costs of: KCC/GCC ;overdraft costs; Interest costs; Interest Cost on other deposits; Account Hosting Charges; Costs of BCs/Supervisors Rental Hand-held device; Hardware Maintenance Costs; Software Maintenance costs; Other overhead costs; Costs towards stationary/miscellaneous items; Additional HR costs etc. Some of the items of income in FI are: Interest on KCC; Interest on GCC; Interest on O/D in No-Frill a/c; Spread on a/c on N-Frill a/c; Interest on other deposits; MicroInsurance Commission; Micro- pension commissions; Transaction fees; Fees from Remittances; Other fee income etc. 28. As regards pricing principle long-term infrastructure projects generally follow the principle of what economists call shadow price which is the price of the goods/services in the absence of market price and this is nothing but the opportunity cost of a project. Here costs are amortised over a period of time, medium term or long term, as the case may be, on the basis of projected revenue, as in case of pricing of most public goods. A case in point could be the Delhi metro rail project. For cost benefit analysis of Indian infrastructure like Delhi metro, see Murty.M.N,Dhavala.K.K, Ghosh.Meenakshi and Singh. Rashmi(2006):Social Cost-Benefit Analysis of Delhi Metro;Institute of Economic Growth;Delhi.

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