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ROLE OF FINANCIAL INSTITUTIONS

Financial institutions as the agency conducting activities in the financial sector has a role as follows:

1) Transfer of assets

2) Liquidity

3) Allocation of income

4) Transaction (Ycager & Seitz, 1) 89: 5)

1. Transfer of Assets

Financial institutions have assets in the form of “promises to pay” or be interpreted as a loan to the other party for a period that is set according to the needs of borrowers. Asset finance funds obtained from private savings. Thus, the financial institution is actually just shift or move liability borrower into an asset with a maturity as desired savers. The process of transferring liability into an asset called transmutation asset.

2. Liquidity

Liquidity relates to the ability to obtain cash in times of need. Some secondary securities purchased business sector and households primarily intended for liquidity purposes. Secondary securities such as savings deposits, time deposits, certificates of deposit issued by commercial banks provide the level of security and high liquidity, in addition to the extra income.

3. Revenue Reallocation

In fact, many individuals in the community have adequate income and realize that in the future they will be retired so income will obviously be reduced. To face the future is set aside or allocate their income in preparation for the future. To do so, in principle, they can just buy or store items such as: land, houses and so on, but the ownership of secondary securities issued by financial institutions, such as savings programs, deposit, retirement plans, insurance policies or the Shares-stocks is much better if compared with the first alternative.

4. Transaction

Secondary securities issued by a financial intermediary such as checking accounts, savings (deposits, etc., are part and payment system. Giro or certain savings accounts offered by banks in principle can function as a bank. Savings products are purchased by households and business units to facilitate them to exchange goods and services. In particular, secondary economic unit purchase securities (eg demand deposits) to facilitate the settlement of financial transactions daily.

Thus, financial institutions act as financial intermediaries that provide services to facilitate monetary transactions.

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Financial Inclusion and Digital Payments

A Good Digital Payment Ecosystem: Characteristics and Recommendations

A good digital payment ecosystem is one that enables financial inclusion, an ecosystem that allows all citizens to participate in the growth and development trajectory of the economy.

The key stakeholders in the digital payment scenario are numerous – internet service providers, payment system operators, technology providers, mobile network operators, banks and retailers form the actual players in the market. The digital transaction system allows banks to increase their customer base with lower costs and risks. According to Booz Allen estimates, banks can reduce cash logistics by 10% through use of cashless payment transactions. Telecom and internet service providers gain by increasing customer retention, higher revenues through value added services etc. Retailers and service providers benefit through fast access to a larger base of customers, better payment collections etc. There is a synergy between the digital world and the financial world that needs to be exploited successfully to give the final benefit to the consumer. However, at the same time the government and regulators of banking, telecommunications, payment systems, competition issues, anti-money laundering, all form the environment in which the digital payments business model functions.

Given that the business of digital transactions is new and unfamiliar, governments and regulators tend to be cautious about allowing innovations that may disrupt financial stability of the economy. As has been emphasized in the previous sections of this paper, while on one hand financial inclusion is the stated objective of governments, and new technology has been widely accepted as a tool for financial inclusion, regulatory and supervisory concerns have inhibited the development of digital payments in many countries, including India. For a new product market to develop, it is important that the enabling environment be one which blends legal and regulatory openness and certainty – openness will allow innovation to flourish while certainty will give confidence to entrepreneurs to make investments. Thus the markets which develop fastest are those which are in environments that are moving towards greater openness and greater certainty. The most crucial issue here is to ensure that the market remains open and competitive for entrepreneurs to take up new business models. The key characteristics have been mentioned and discussed at various points in the preceding sections. These are:

1. Ensure entry by ensuring a high degree of inclusiveness in types of service providers, ensuring a level playing field, and also ensure that both large and small players can enter the industry.

 

Inclusiveness: Both banking and non-banking entities should be encouraged to enter the industry.

The basic concerns of regulators in the financial sphere revolve around (i) maintaining financial stability, (ii) raising economic efficiency, (iii) increasing access to financial services, (iv) ensuring financial integrity, and (v) ensuring consumer protection, and (vi) ensure rapid accessibility of such services for the masses with heterogeneous requirements.

Given the focus of financial regulators to ensure financial stability, it is but natural for them to have a bank focus. But, disruption to financial stability deals with systemically important payment systems, and not retail payment systems, especially of micro-magnitude. This distinctiveness of retail and micro-amounts should be well understood to avoid stifling innovation that has the potential to help the masses of the country. Consequently there is no need to limit this industry only to the banks.

According to the Bank of International Settlements, one of the main objectives of payment regulation is to address those legal and regulatory barriers to market development and innovation. It is for the RBI and other regulators to work towards this end, so that the potential of technology can be exploited to the full in meeting the goal of financial inclusion.

Level playing field: The close links between the network service providers and the consumer should not provide inordinate advantages to those companies at the cost of other players. For instance, currently the mobile phone is considered the most potent tool of financial inclusion. However the mobile industry is characterized by only a handful of operators both in India and abroad. Given the close links between the consumer and the mobile service provider and the tie-in of the consumer to the service provider, a monopolistic digital transaction industry would be a likely outcome if a level playing field is not created.

A digital-payment platform set up by the service provider should be open to other account holders within a specific agreed time period, and new entrants should be allowed to use existing payment infrastructures. Just as landline users can choose between different long distance providers, so too must regulation ensure that various financial service providers can access the user.

Large and small: The digital transaction eco system should involve, and not keep out, small firms.

Large firms should not derive undue advantage from regulatory prescriptions. This is important for many reasons. Take for example Micro-finance initiatives and how they can leverage the intra-communities ties for lowering cost of credit. Whether we have MFIs or bank correspondents, or private money-lenders, or NGOs, or other entities operating in small distinct communities, such entities need not be debarred from providing their services to their users through digital means.

Though certain prudential norms would be essential, they should not follow a one size fits all approach and, depending upon scale and scope of their operations, their regulatory requirements also need to be appropriately structured.

2. Ensure low cost access for the masses that is integrated with the economy.

Know Your Customer Norms: If digital transactions are to be truly transformational, it is important to bring unbanked customers into the fold of payment systems. KYC regulations put in to ensure financial integrity can hamper the growth of this market and hence affect the aim of financial inclusion.

According to RBI guidelines, mobile payment services to be offered by banks are not only restricted only to their customers, but also to those customers who are KYC/AML compliant. Since subscription to a mobile phone also involves identity checks, this is a duplication of effort and can given rise to inconsistencies in norms. Standardizing the system of compliance across digital and financial worlds will also help sharing of data and information. These may seem as small glitches now, but can appear as roadblocks later on retarding the goal of integrating the latest digital technology with financial services. Discussion on evolving systems is important to keep abreast of technological and market developments.

Integration: Facilitate a variety of services that are easy to integrate with all sectors of the economy.

In the digital transaction market, there is a significant coordination problem that arises due to the overlapping role of multiple regulators of banking, telecom and payment system supervisors, competition and agencies involved in monitoring activities of money laundering and fraud. The problem is compounded because of the dynamic nature of the industry and continuously evolving technology. This means that the regulators have to be flexible, be quick on the uptake to change when needed and deliver appropriate regulatory orders in a coordinated and consistent fashion.

3. Ensure that the system can serve heterogeneous requirements

Inherent flexibility: A one size fit all approach that is currently the practice in banking regulation needs to change to become more flexible and adapt to the different needs of the consumers at the bottom of the pyramid, who are a highly heterogeneous group. The terms ‘masses’ and ‘under-privileged’ are a highly heterogeneous segment. They include self-employed and unemployed, cultivators and land-less laborers, literate and illiterate, nuclear households and joint families, indeed the range is large. And so are the requirements.

Conclusion: Financial inclusion is recognized as a goal by all policy makers as the economic growth and development story will remain incomplete without participation by the poorest of the poor. Evolving technology has changed the landscape of the financial world as digital payments bring with them significant efficiencies. Further, with the fast adoption of mobile phones and spread of the networks, costs of making transactions have been significantly reduced. Experiences in other countries and modern technology shows that the future lies in involving non-bank institutions as intermediaries. While vigilance is justified when confronted with new, unfamiliar systems, stifling innovations and market developments through extreme caution will only retard the growth trajectory of the economy. The policy makers should therefore work towards providing an environment where all stakeholders can perform the functions they do best. An added problem in the digital payment space is that the overlapping roles of multiple regulators leads to coordination failure and this should be well understood by all policy makers. The need of the hour therefore is to work with clarity and consistency and speed up the process of moving towards greater openness and greater certainty in the digital payment sphere.

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Alternative Investments and Pension Funds

If recent stock market activity does nothing more, it shows us that volatility continues to be the name of the game when it comes to investing, as £120 billion is wiped off the value of UK shares alone in the course of four days.

Investors have traditionally employed a number of strategies such as asset allocation and diversification in an effort to reduce risk. But more recently than ever before, the big investment players such as Pension Funds, Hedge Funds and Sovereign Wealth Funds are turning to alternative investments to generate returns that are not dependent on the performance of traditional assets such as equities and bonds.

A recent report by Morningstar and Barron’s; the 2010 Alternative Investment Survey of U.S. Institutions and Financial Advisers, has revealed that institutional investors have allocated more than 25% of their assets under management to alternative investments.

Barclay Capital also recently stated that pension funds have added substantially to their farmland and commodity holdings, with institutional investors expected to hold up to $1 trillion in agricultural assets by 2015, way up from a mere $6 billion held in this asset class ten years ago.

 

Both institutional and private investors are hoping to generate superior returns in order to boost the performance of their portfolios without dramatically altering the over risk profile, and many see farmland and timber as ideal assets in the current economic climate.

Forestry investments generate profits from the production and sale of timber, so investment returns rely on the biological growth of trees, rather than the performance of financial assets. And with farmland, growth in demand for food, feed and fuel is pushing up the price of food, which bolsters farmland incomes and in turn makes productive land a more valuable asset, capturing capital growth.

There is most certainly an appetite for simple, transparent and tangible assets that are unlikely to depreciate as they are supported by solid long term fundamentals nod remain in high demand, and where investment performance is not dependent upon the decisions and choices of Fund Managers or economic or political news. Many investors consider that owning assets within the food, energy, water and commodity markets are likely to prove more profitable than investing in companies as demand for these essential commodities will continue to grow as the population expands at the fastest pace in history.

China recently invested $1.5 billion dollars into a farmland development project in Argentina, bringing investment capital for infrastructure, and technical expertise in large-scale irrigation, in exchange for long-term leases of farmland from the Argentine Government virtually rent free.

Swedish and American Pension Funds have recently committed hundreds of millions of dollar in investment capital to farmland purchases in order to capture inflation in the capital value of the asset, whilst also generating income streams, useful for meeting commitments in the short term to member of their schemes.

So alternative investments may be the order of the day, but barriers to entry do exist for smaller investors, and those considering such investments should seek advice form experienced Consultants.

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Finance Services

Choosing the Correct Financing Services For You

A person’s financial status can often be one of the most important facets of their lives, being an influential factor on their lifestyles, as well as the environment in which they live in. Thus, planning your financial position and also taking steps to ensure that your financial future is secure forever, is something that every individual should keep in mind. However, planning our finances ourselves can be quite a headache, a reason that can account for the fact that there has been in today’s world, an emergence of a group of advisors who can help you to plan out your financial position smoothly and help you to secure the futures of yourself, as well as your family.

Whether you are planning to buy a house in the immediate future or looking for ways in which you can invest your money to reap rich dividends after a few years, a friendly financial agent or service provider can help you chart out the perfect road to your dreams. So exactly what do you expect some of the efficient financing services to provide you with? Well, for starters, your financial advisor can help you to set the goal that you would wish to reach a few years down the line.

They also ensure that these goals are realistic enough by calculating the state of your finances at present, as well as visualise the dividends that your investments will fetch for you in the future. These financial services then also ensure that you stay in line with the financial goals that you have set for yourself and make sure that you reach them in due course.

So, what exactly should you look for while choosing a financial advisor for yourself? Well, the first criterion in this regard would definitely be their credentials, as well as their references. Check on your other friends and relatives in case they know or have experienced the services of an efficient financial advisor or organisation, whom you can approach in order to be guided towards a situation of financial stability.

The other aspect of choosing a financial planner for yourself needs to be seen from the point of view of the fact that the relationship that you will need to establish with your financial advisor, is in every way, as personal as you would create with your doctor or lawyer. Thus, the relationship and understanding that you need to find with your financial advisor is an extremely important facet of the endeavor.

Make sure that you go through a round of face to face discussions with your financial advisor. This interaction will help you to analyse exactly how much time he or she can devote to you and also help you to clear away your doubts, in case you have any about the process. You could also ask for a written account of every aspect of the role that your financial advisor will play for you, as in most cases, these documents are readily available at their offices in order to help their clients out with their queries.

With the help of able and efficient financing services you can plan out your future and break apart any financial barrier that could ever come in your path.

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Finance Services

Financial Accounting and Management Accounting – An Overview

This article deals with a brief overview of some of the differences between financial accounting and management accounting systems. But at first let us understand what accounting is.

What is accounting? Accounting may be defined as a system of collecting, summerising, analysing, and reporting in financial terms, information about a business organisation. The business accounting as understood today, comprises of, financial accounting, and management accounting. These two parts of the business system have something in common and there are differences as well.

As a part of the accounting system of business enterprises, these two differ from each other in many respects.

The first difference is in its structure or formats of its presentation of information. Financial accounting has a single unified structure of presentation, which means, that the information relating to enterprise business system is presented more or less on a uniform basis. The end products of financial accounting are its three basic financial statements, and these are:

 

– The balance sheet.

– The profit and loss account/income statement.

– The statement of changes in financial position.

The balance sheet presents the financial position of an organisation at any point of time. The profit and loss statement would contain the organisation’s financial performance over a specified period of time, which is usually one year. The inflow and outflow of financial resources of an organisation during a period of time is reported in the statement of changes.

The financial statements prepared are based upon an equation or model, which implies, that all organisations present their financial statements on basis of a uniform structure. This would mean that financial accounting has a unified structure.

Primarily, financial statements are usually meant for people outside the organisation, such as, shareholders, creditors, government, the general public, and like others. These people also get such reports from other organisations, and to maintain uniformity in these statements, financial accounting system uses a unified structure system.

On the other hand, management accounting is mainly concerned with the in-house management. Since the accounting statements are used internally, it varies in structure from organisation to organisation, depending upon the circumstances and requirements of individual use. Therefore, management accounting is tailored to meet the needs of the management of the particular organisation.

The next difference is in the generally accepted accounting principles. Financial accounting is prepared in accordance with the Generally Accepted Accounting Principles, which in short is known as GAAP. Preparation of financial statements following GAAP ensures that the account presentations have been prepared on basis of a norm, as per the general guidelines issued by law.

On the other hand, management accounting is an in-house requirement, and is for the exclusive use of the management of the organisation. These management accounting statements are never made available to the outsiders, and hence could be formulated in the manner as wanted by the in-house management.

The third difference between financial accounting and management accounting is the statutory requirement of preparation of accounts. As discussed above, financial statements are prepared solely for the people outside the organisation, who have interests in the business operation of the organisation. There are shareholders, who would use the information contained in the financial statements, to decide whether or not to invest in the organisation. By law it is mandatory to prepare such statements, and it is a statutory obligation. In fact, the company law not only makes it mandatory to prepare such accounts, it also has laid down the structures, based on which such financial statements need to be prepared.

The fourth difference is the reflection of historical accounts. As mentioned above, there are three types of financial accounting statements that are prepared. Within these three, while the balance sheet and the profit and loss account, report the financial position on a particular date, and the results of operation of the organisation during a specific period of time respectively, the statement of changes of the financial position reports the inflow and outflow of resources during a particular period of time. Therefore, financial statements record historical data. On the other hand, management accounting does not record any financial history of the organisation.

The fourth difference relates to segment reporting. Financial accounting pertains to the business as a whole, though some organisations segment such accounting for its different operating centres. But, as and when the financial statements are presented, it shows the business as a whole. Contrary to this, the management accounting system may present statements in segmented fashion.

Finally, the financial accounting and management accounting differs in respect of their ultimate objectives. Financial accounting is prepared specifically for external reporting, where-as, management accounts are solely for in-house use.

In this brief presentation, it has become quite clear how financial accounting differs with management account preparation. Both of the accounting systems are vital to any business scenario, and are mandatory requirements in a corporate environment.

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Workplace Financial Education and the Positive Impact on Organisations

Personal finance can be a scary issue for many people. It can be confusing and overwhelming. To make matters worse, most Australians are so busy juggling work and life that they lack the time to give their personal finances the attention it deserves – which is the reason why most employees are requesting workplace financial education, tools and resources to help them make the right financial decisions, so they can achieve real LIFE outcomes outside of work.

Workplace financial education and advice is now the most sought after employee benefit employees want and leading employers are lining up to align themselves with organisations that can provide a trusted source of education and unbiased advice.

And don’t be fooled. Financial education isn’t designed for employees struggling to pay the bills. It’s designed for employees that have the financial capabilities to get more out of their income and investments. So we’re talking about employees ranging from the CEO down to middle management.

 

Investing in employee’s financial well-being makes good business sense. Why? Because personal finances impact basically every aspect of your life – from your lifestyle, relationships, attitude to your physical and mental wellbeing. So when employees lack the time or expertise to make the most of their personal finances, it affects their life inside and outside of work.

Employees who are distracted with their finances often find it difficult to focus on their work and spend valuable work time searching for solutions which directly affects their productivity and their employer’s bottom line.

What is Workplace Financial Education?

Financial education isn’t just about providing employees with information about money, taxes, investments, superannuation and so on, because information alone does not produce financial outcomes.

Employees still have to take financial information away and then apply it to their own personal circumstances which can also be very challenging. So workplace financial education won’t mean much to your busy executive if they don’t have the tools and support to help them take action, so financial coaching is also a big part of a financial education program – having quick access to a team of experts at their finger tips.

The upside will far exceed your organisations expectations

Many employers now include financial education as part of their employee benefits program. There’s a growing awareness that such programs give organisations a competitive edge whilst increasing their reputation as an employer of choice.

Workplace financial education gives employees the tools, information and confidence to make better financial decisions that can help them achieve positive financial outcomes which directly impact their personal and professional lives. It can be a roadmap to a better future.

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Getting the Most Out of Equipment Financing

There are many equipment financing companies in the business world anxious to gain a new client who is looking to buy or lease machinery for construction, transportation or the office. Consumers need to be cautious and be sure they are getting the best deal for their needs and that they are working with a proven company.

One of the first things to consider is the reliability of the equipment financing organization. There will be several in the client’s location who have been in business for many years and who are well established. They should be happy to supply names of customers who will give a testimonial of their satisfaction. The company should have a comprehensive website where rates can be computed and full disclosure of the merits of leasing versus buying is discussed. And sales associates, when contacted, should be patient and helpful, answering questions fully without pressuring the client to make a decision.

Potential clients should also ask the equipment financing company if it will consider used equipment, as huge savings can be realized if pre-owned machinery is purchased. And it is also important to find out what the timeframe for approval is. Many financers can offer a one-day turnaround, making for a quick and efficient process, since if the price is good, the unit may not be available for long.

In addition to the company from which the equipment is being purchased, there are many institutions which offer equipment financing. Conventional banks usually offer the lowest available interest rates, and clients who have a good relationship with their bank and who use it regularly for doing their business as well as investments, may get a very good deal. Banks tend to be territorial, however, and may not be open to financing equipment that is going to be used to expand a business to another city. Other options for equipment financing include independent borrowers, where the interest rate may be higher, but they are often more flexible.

Whether to purchase or lease is another factor which should be contemplated before signing any agreement for equipment financing. Often a lease is very reasonable on a monthly basis, but once its term is up, the ownership does not belong to the lessee; there is a residual buyout which must be purchased. This most often applies to vehicles, but may also be in effect for other equipment. The worst case would be paying for equipment long after the need for it has passed, so buyers would be wise to examine any agreement carefully and be sure they are aware of all the terms. Leasing does allow the consumer to trade up to the latest technology easily and this is a positive reason to consider it.

Most large machinery and equipment, including construction, automobiles, semi-tractor units or airplanes, is purchased by using the services of an equipment financing service. There is a considerable capital outlay when purchasing semi-trailer units or aircraft as well as road construction pieces, and few companies can or want to pay cash. Leasing it rather than owning it is a very common practice that often makes good business sense.

Whatever option is chosen for equipment financing, it is good to have two or three agreements to consider and compare before making a final decision.

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Finance Services

widespread positive sentiment, the rupiah remains weak

Rupiah fell back against the United States dollar (U.S.). U.S. unemployment data release that exceeds expectations, it appears that the U.S. dollar has not escalate.

Middle rate of the rupiah weakened Bloomberg notes are at Rp9.595 per USD, down 11 points, with daily movements in the Rp9.564-Rp9.615 per USD. Meanwhile, Bank Indonesia (BI), noted rupiah weakened to Rp9.590 per USD, with the trading range Rp9.542-Rp9.638 per USD.

“SUN auction results yesterday pretty well, won Rp 7, 5 trillion from the initial target of Rp 5 trillion has not yet been able to withstand the pressure of dollars of U.S. dollars,”

In fact, September foreign exchange reserves recorded an increase to USD110, 172 billion, from its previous position of USD108, 990 billion, up $ 1, 182 billion. Among the additional income derived from the influx of foreign funds into rupiah assets such as government securities and stocks.

Securities analyst Samuel Lana Soelistianingsih reveal more positive sentiment comes from the European Central Bank step (ECB) have expressed readiness to buy government bonds. The mechanism of these purchases remain within the framework of the European bailout fund (European Stability Mechanism-ESM).

Countries requiring OMT must submit a formal request to the ESM to buy government bonds in the primary market are next, before the ECB to buy bonds in the secondary market. But to obtain these funds, the country needs to meet certain requirements.

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Finance Services

Student Finance Services – Serve The Cost Of Your Education

Over the past 10 years, just as with everything else, the cost of education has risen dramatically. In order to cushioning the existing condition of the distress students, more types of student finance services have made available in today’s financial market. With the help of these finance services, money is granted to the students that they and their parents get from scholarships and private lenders and a few other sources. The aid assists you in paying the education cost.

The rate of interest is average and there are certain restrictions and fees, but they often form part of the total package. Many loans are nominally for a specified amount disbursed in two payments. But it is not uncommon for up to 4% in fees to be deducted from that amount before any funds are distributed. Be sure to look for low or no-fee loans.

The average financial aid package today will be a complex mixture of grants, scholarships if possible, and probably private loans. With the recent large increase in defaults on sub-prime lending mostly for mortgages, lenders are going to be more stringent measures than before about credit history and income.

The best way to get started is to look at tables of the most student finance programs, what interest rates and fees they carry along with any eligibility requirements.

Quarters of lending agencies are working to this prospect. You can access to them online too. Online processing is simple and convenient. It saves a good amount of your time and energy. By processing online, you can make your loan approval a little faster.

Student finance services are made available for the student to get money grants for their studies. With the help of the finance package, you get a good amount of money to cover the cost of your education.

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Financial Inclusion and IT Contribution

Financial Inclusion and How Technology can Contribute to it?

“India is failing, its rural poor with 230 million people being undernourished, the highest for any country in the world. Malnutrition accounts for nearly 50% of child deaths in India as every third adult (aged 15-49 years) is reported to be thin (BMI less than 18.5).Brought out by the United Nations World Food Program (WFP), the report points to some staggering figures. More than 27% of the world’s undernourished population lives in India while 43% of children (under 5 years) in the country are underweight. The figure is among the highest in the world and is much higher than the global average of 25% and also higher than sub-Saharan Africa’s figure of 28%. These targeting errors arise due to imperfect information, inexact measurement of household characteristics, corruption and inefficiency in providing funds to impoverished sector”

This news in TOI (dated 15.10.2009) reflects the Financial Exclusion and its impact citizens are facing in India.
Let us first understand what Financial Inclusion means to us:
As stated by RBI, Financial Inclusion stands for “The process of ensuring access to appropriate financial products and services needed by vulnerable groups such as weaker sections and low income groups at an affordable cost in a fair and transparent manner by mainstream Institutional players”

The need of the hour to push Financial Inclusion generated in spite of the fact that the banking industry has shown tremendous growth in volume and complexity during the last few decades. Despite making significant improvements in all the areas relating to financial viability, profitability and competitiveness, there are concerns that banks have not been able to include vast segment of the population, especially the underprivileged sections of the society, into the fold of basic banking services. Almost 60% of our population resides in rural area in India.

 

The scope of Financial Inclusion involves providing

Bank accounts – check in account
Immediate Credit
Savings products
Remittances & Payment services
Insurance – Health care
Mortgage
Financial advisory services
Entrepreneurial credit

Following sectors broadly describe the Financial Exclusion region:

Agricultural and Industrial Laborers
People engaged in un-organized sectors
Unemployed
Women
Children
Old people
Physically challenged people.

The consequences of this vary depending on the nature and extent of services denied. It may lead to increased travel requirements, higher incidence of crime, general decline in investment, difficulties in gaining access to credit or getting credit from informal sources at exorbitant rates, and increased unemployment, etc. The small business may suffer due to loss of access to middle class and higher-income consumers, higher cash handling costs, delays in remittances of money. According to certain researches, financial exclusion can lead to social exclusion.

From the data provided by Financial Inclusion committee (set by RBI), a conclusion can be reached which says the efforts taken by govt. has been quite palpable. But in spite of that we failed in providing banking facilities to Underprivileged section in rural and urban areas.

Key challenges faced by government as well as private players in providing financial services to these regions can be understood as follows:

– Lack of standard process for identification of individuals and SMEs
– Non availability of credit history of individuals and SMEs
– Need to provide Financial Service at bare minimum Cost
– Need to reach out to very small pockets of population which may make any FI investment inviable
– Lack of a proper business model
– Lack of an appropriate legal model
– Illiteracy within large section of population, which would need innovative ways of delivering banking channels / interaction model with banks or quasi banking entities –

Technology in Rescue:

Technology can contribute in finding a solution to these challenges. In rural finance, technology plays two key roles: implementing effective internal control when direct supervision is difficult due to distance, and decreasing the cost of penetration into more remote areas.

To promote entrepreneurship, financial accessibility in villages, providing loan is imperative. The foremost step in providing Basic Banking services, is Verifying/Authenticating a person, which may include his/her address, credit history.
Expanding the coverage of CIBIL (Credit Information Bureau India Limited) or establishing a new organization in line with CIBIL, exclusively for rural areas will help banks in accessing detailed information of a citizen or SME.
Our innovative project Unique Identification (LID) once executed successfully will provide information of an individual which can further be used to fetch credit history from CIBIL.

Providing banking services at minimum cost is a vital factor in reaching to the masses. This can be achieved by providing no-frills account, and loans of small amount at low rates. Microfinance Institutions and banks can find substantial customer base in this field as Usurers still dominate this sector even when high rate of interest that they demands from those seeking credit.
Investing to reach small pockets of population may look financially inviable, but appropriate technology, business model can help in increasing the ROI. PPP can help increasing the coverage at minimal costs.

In India where we have above 50% of population residing in villages, the only way we can reach the majority is by POST. Post Office could play a vital role in providing access to financial services, including banking, saving, credit and insurance, to financially excluded people.
An Initiative by Uttarakhand Post, where it has entered into a business tie-up with Uttaranchal Gramin Bank with the following twin objectives:-

(a) Collection of high-end deposits on behalf of the bank.
(b) Disbursement of bank loans and collection of the re-payment installments (EMI) through Savings Bank Passbook Account and with the help of GDS (Gramin Dak Sevak) staff.

Both these services are rendered by Uttarakhand Post on reasonable charges. In short the endeavor is to expand the role of an agency functionary, that India Post has being playing on behalf of Ministry of Finance for long, to that of a Commercial Bank also for the reasons of better profitability and future prospects. Providing IT solution to Indian posts where they can create business tie-ups online with banks will help in accelerating this initiative.

The root cause for advancement in banking sector in rural areas is the cost factor. Technology can help in cutting down the cost factor. Use of IT reduces the costs of financial transactions, improves allocation of resources, and increases competitiveness and efficiency. Most importantly, it enables to take any product or service to the general masses. IT has also enabled efficient, accurate and timely management of the increased transaction volume that comes with a larger customer base. The ‘Anywhere Banking’ through Core Banking Systems, ‘Anytime Banking’ through new, 24/7/365 delivery channels like Automated Teller Machines (ATMs), and Net and Mobile Banking, etc., are also increasingly becoming an integral part of the banking services. Appropriate Technology and Efficient Delivery model can help in making banking feasible and profitable in rural areas too.

The need of the hour is leveraging technology in Indian banking for providing affordable and cost-effective banking services to the masses through multi-delivery channels. Before making a commitment, Banks analyze the region which will be covered by their investment and the ROI. What if Banks can reach the end customer without opening an exclusive branch in the distant area? Mobile phone banking is not new in this in generation. Mobile phone users now belong to all strata of society, spread across metropolitan, urban, semi-urban and rural centers. Banks and financial service providers can leverage the advantage by reaching out to people through this medium.

Few proposals and initiatives in strengthening financial growth in improvised sector:

– Another route by which FI can reach the masses is by DTH. Direct to home technology is currently very widely spread in even remote places of the country. An indigenously developed technology lets user access GMAIL and other websites through DTH on TV. The same technology can be upgraded to help users interact with banks and other FIs where they can provide necessary information to the people residing in far flung areas.
– Grocery stores or Health centers in our villages can also be used in providing banking services like insurance, loan or savings.
– 3i Infotech, a leading IT company has developed Kiosk based banking, i.e. internet based, and Bio-metrically enabled exclusively for rural areas.
– The use of IT also enables banks to handle the enormous increase in the volume of transactions for millions of households for processing, credit scoring, credit record and follow-up. Other uses of technology include taking instant photographs of people opening bank accounts, and using electoral ID cards to simplify form-filling.
– Hello Money is a mobile banking service launched by Barclays in India. Barclays aims to make banking viable to all segments of the population through this service, regardless of economic status. The service is also available in India’s national language – Hindi – and will, in time, be available in other regional languages. Customers only need to be numerically literate to use the service, making it very simple and convenient. The Bank also offers “no frills” and zero balance savings accounts. As of December 2008 the Bank has opened 40,726 zero balance accounts (no balance commitments required of customers) and 3,935 no frills accounts. These offer a free cheque book, access to over 25,000 Visa ATMs, free statements, a passbook facility and SMS alerts. These services are particularly aimed at market traders, artisans and micro-entrepreneurs who might otherwise be excluded from financial services.
– eChoupal, an initiative of ITC Limited to link directly with rural farmers, with the help of technology, for procurement of agricultural / aquaculture products. eChoupal was conceived to tackle the challenges posed by the unique features of Indian agriculture, characterized by fragmented farms, weak infrastructure and the involvement of numerous intermediaries. ITC Limited has now established computers and Internet access in rural areas across several agricultural regions of the country, where the farmers can directly negotiate the sale of their produce with ITC Limited. The PCs and Internet access at these centers enable the farmers to obtain information on mandi prices, good farming practices and place orders for agricultural inputs like seeds and fertilizers. This helps farmers in improving the quality of produce, and also helps in realizing a better price.
– BASIX, an Indian institute that promotes sustainable livelihoods through microcredit, has been an early adopter of technology. It operates as the business correspondent (BC) (agents who work on behalf of banks) for Axis Bank, Citibank, and the State Bank of India (SBI), to reach areas where opening a bank branch is not viable. BASIX uses mobile phones to enroll customers and carry out transactions. It has set up fixed-location BC outlets, equipped with hand-held devices which are now being converted to mobile connections. BASIX is also trying out a card, similar to smart cards, and a remittance initiative to help workers in Delhi to send money home to their villages in central India.
– ACCION International as a Microfinance Organization promotes PortaCredit technology, which allows loan officers using handheld computers
to take loan applications.1 PortaCredit has helped a number of ACCION partners in Latin America improve their level of productivity, standardization and risk management.
– UMU in Uganda is currently launching a pilot for a Remote Transaction System (RTS), which is combination of technology and business processes that will enable cash deposits and withdrawals by microfinance clients through a network of accredited third party merchants (e.g. agricultural stockists, traders, gas station managers) in rural and non-urban areas. The RTS will also facilitate the electronic capture of transaction data at the client level and the creation of an electronic identification system.
– Customized ATMs with voice interactive features and other advances in technology as mentioned above can help in achieving Financial Inclusion target.

The advancement in technology and business model used will make it cost effective, so that every small transaction will be feasible through POS. Making the POS wireless or for that matter away from any kind of network will make it feasible to be used in remote areas too. The CashCard will contain the amount you hold in it and your security PIN. When you are out of cash in your CashCard, all you need to do is go to an ATM and recharge your card with the cash present in your saving/current account. The card can also be recharged online or by using your mobile banking feature. Hence this will save the investment bank needs to make in opening an exclusive branch in a financially less profitable area.

CashCard can be used by government/banks to provide loans to Farmers; they can use it for making their medical, insurance payments. Recharging of the cards can be done from ATM or authorized outlets. POS will help to make their day to day transactions easy and secured.

Designing innovative business models specifically for the market will encourage people to come forward and invest in their future.

A recently offered Mutual Fund scheme by SBI (SBI Chota SIP) lets individual to make benefit of low monthly investment amount of 100. Similarly on the lines FIIs have started offering Life Insurance cover which varies from Rs.5000 to Rs. 50000 where the annual premium varies from Rs.60 to Rs.600.

Remittances are another unexplored field in these regions where Banks and FIs are targeting now. Some banks have tried pilot projects allowing customers to use smart cards with biometric identification to open bank accounts. The cards have been linked to mobile or hand-held connectivity devices to ensure banks can record transactions in real time. Meanwhile, some State Governments are using smart cards to send social security payments under the National Rural Employment Guarantee Scheme. The same delivery channel can be used to provide other financial services such as low-cost remittances and insurance. The National Financial Switch offers nationwide networking of ATMs and can facilitate banking transactions including remittances.

Now Banks and other FIs see their role as playing an important part in fueling the growth of the Indian economy -not just servicing successful metropolitan companies but also reaching out to ordinary people. By following programs of branch expansion, improving financial literacy and leveraging IT solutions to extend reach, they are demonstrating their determination to make financial services available to all.

One such program is the HSBC Mann Deshi Business School for Rural Women, in the Satara district of the western Indian state of Maharashtra. It was set up in December 2006 to offer micro-loans to poor women to help them set up their own businesses. The school gives girls and women with limited or no formal education training in financial literacy, marketing, technical skills and negotiation skills. It has already benefited some 6,000 women, enabling them to start their own micro enterprises and become financially independent.

Concluding remarks:

The reason why we are concentrating on Financial Inclusion now is because, we now want to focus on Inclusive Growth, we have the Banking Technology which can help in reaching millions of deserving citizens, and the fact that Poor are bankable. Technology can be a very valuable tool in providing access to banking products in remote areas. To sum up, banks need to redesign their business strategies to incorporate specific plans to promote financial inclusion of low income group treating it both a business opportunity as well as a corporate social responsibility. They have to make use of all available resources including technology and expertise available with them as well as the MFIs and NGOs.