Let me begin this post on a positive note. India is currently witnessing one of the most exciting and challenging phases in its history. We are looking at a growth story which is exciting because it is
• forward looking,
• stable and
• equipped with technical & human capabilities and
But this growth story is also CHALLENGING. Can it PROPERLY REACH TO THE POOR PEOPLE?

Financial Information Network and Operations (FINO) is an organization committed to the cause of Financial Inclusion. It has already a customer base of 15 millions, which is targeted to grow to 25 millions by 2011. The customer base of FINO is primarily from bottom of pyramid and under banked segment, which it provides financial services on behalf of various financial institutions.

We at FINO riding on the philosophy of Financial Inclusion, are taking this service of Insurance to the bottom of pyramid people, These people at the bottom of the pyramid have high vulnerability. The reasons of this vulnerability being untimely death, critical accident of their earning member, illness etc
Since all of above perpetuate poverty. It is vital that access to insurance becomes an important strategy for reducing poverty among this highly vulnerable section.

The good news is that India is amongst few of the developing countries, which has clearly stated regulation and definition for “microinsurance” (i.e., insurance services geared to low-income people).It includes

1. A clear guideline for microinsurance which was formulated in the year 2005, where sum assured from Rs. 5,000 to Rs. 50,000 is considered under the microinsurance ambit, apart from other guidelines.

2. Insurance Regulatory Development Authority (IRDA) has came out with compulsory mandate for all Life and General insurance companies to cover the rural and the social sectors (which varies according to the number of years of operation of that company).

But the challenges are enormous for microinsurance. And the reasons are outlined below.
a) Many microinsurance schemes are quite small in coverage, leaving the vast majority of poor people without adequate protection.

b) Microinsurance in India is for the most part driven by compulsory credit life insurance and the growth of the microinsurance industry is therefore largely driven by the growth of microfinance.

c ) Poor risk mitigation: Only 10% of microinsurance policies are estimated to be sold on a voluntary basis – of these, up to 90% is endowment products rather than pure risk products, which is the real need of the poor for risk mitigation.

d ) Lack of awareness about microinsurance

e) The development of the microinsurance market has thus far also been inhibited by a lack of formal financial services infrastructure in rural areas, which undermines cost-effective microinsurance distribution, as well as a lack of actuarial data.

All in all only about 2% of the low-income market is estimated to be reached by microinsurance*, despite rural and social sector obligations on insurers and the creation of microinsurance agents within regulation.

The uptake of microinsurance has seen some increase but is mainly linked to the growth of the microfinance sector rather than micro-insurance per se

In my next post will talk about what we are planning to do at FINO to tackle this issue. Keep watching!!

Let me address following fundamental question. “Have the Innovations within Co-operative Banking and Micro credit Institutions actually reached the unreached?” I clearly feel that now it’s time to think out of the box. Here’s a brief perspective.
Reaching the un-reached
The world over, research has been ongoing to reach the un-reached. Challenges in reaching the unreached which have emerged according to the studies are
• Full proof identity
• Information gap
• Illiterate populace
• Immature deeply penetrated networks
• Infrastructure (roads, power etc.) issues etc.
To mitigate the above issues, it is pertinent to study in depth the challenges and innovate innovations to reach the deprived.

It’s a Competitive World
Not long back, access to formal finance was not even a dream for un-served or the underserved. Now there is shift
Paradigm Shift: Co-operative banks and the micro credit institutions pan continents have made a paradigm shift in the way they provide access to finance for the underserved. A trend towards the formal financial institutions and accepting microfinance as a profitable and sustainable business enterprise is palpable. As cooperative finance is in itself an innovation from traditional commercial banking, cooperatives are naturally at the heart of the micro credit and the current financial inclusion movement.

Despite of the paradigm shift and significant progress, particularly in the last decade, a majority of poor and low income households still remain without any access to formal finance. In this light, the emergence of innovations in microfinance markets has created the possibility of reaching poorer households that have not yet been benefited from the microfinance programs.

What innovation means
I clearly feel that innovation within this domain can be understood as a production technology developed by the co-operative bank or the micro credit institution that produces a sustainable product or service for the poor at the least possible cost.
According to me, there can be various types of innovations in microfinance:
• Technological innovations
• Product innovations
• Strategic innovations
• Process innovations
• Institutional arrangement innovations.
The innovation in the recent past has been mainly focused on product diversification, including savings and remittances and extending outreach, particularly to rural areas. There has been also a different type of technical innovation like smart card solution, remote transaction system etc.

Research Paper
We are going to come up with a paper titled “Time to Think Out of the Box” The paper shall be researched within the boundaries of India and shall explore the possibilities of “Think Out of the Box” aspects related to innovations. The attempt shall be to highlight as to why innovations happened in small packets in the past, be it business packet or energy packet or technology or usage of technology packet. The paper shall be an attempt to suggest how future technological offerings/package to the un-served be priced, matching the price of an ‘Ice Candy’ (‘Lolly’ costing Rs. 2/- in India). Thus, drawing conclusions as to how the exploratory innovations shall be able to address issues like; services at the door steps in a secured manner, at reduced costs, improving the quality, providing emerging market returns, expanding the outreach and alleviating poverty.

The scope shall also cover to uncover the degree of mismatch between the credit products offered by the suppliers and those demanded, especially when the price of credit seems too high and the tenor too short for many poor households, particularly those relying primarily on agricultural sources of income to repay their loans.

FINO organized a learning Fiesta at their Sanpada, Navi Mumbai office on April 14, 2010. The fiesta was attended by actress Sushmita Mukherjee of Karamchand Fame who was among the speakers. Speaking on financial inclusion she said that “ As a nation we need to continuously challenge ourselves in areas of inclusion and acceptance . Financial literacy is the key to financial inclusion It is up to the leaders to set the goals.”

She was as a part of the FINO organized 2 week learning Fiesta. This fiesta is being joined by industry experts and academicians to share their views on various areas related to management.

FINO recently covered 13 million customers and has become the largest entity among technology service providers in Financial Inclusion.

Poverty reduction funds:

The Government has set up two funds
• Financial Inclusion Fund (FIF)
• Financial Inclusion Technology Fund (FITF)

Both funds are mainly for poverty reduction and investment in Information technologies to facilitate availability of services to micro-customers. The new approach of marrying a low cost BC with a larger entity is being considered to be self-sustainable and therefore has not been considered to be eligible for support under these funds.

Setbacks:

This thought process is unfortunately depriving the new BC model of much needed financial support merely because they dove-tail into mainstream organizations. Denying the BC model access to such policy incentives in my view is hampering the growth of this model, particularly since the mainstream players continue to regard this customer base as not immediately profitable and are also unwilling to financially invest in growing it to an adequate degree.

Looking at the enormity of the task it is imperative that we all put our collective might behind the task. The current model is being rolled out aggressively by a few banks in the country but urgently needs many other banks to step in and to overcome their hesitation.

Any new model is always prone risks.

Let’s take the words of the Deputy Governor of RBI Dr. K. C. Chakravorty,

“It is for the first time in the history of the world that 2 billion people will rise out of the poverty. It is our privilege that we are not only living in such times and are also associated with it by contributing to this phenomenon”.

India has over 400 million unbanked individuals residing in both urban and rural areas of the Country. FINO caters to the set of customers by acting as a formal channel linking them to large and well regulated financial entities in India and beyond her borders.

The four tenets anchored are:

• Customer needs the full bouquet of financial services:
o The belief is that while the entire policy focus has been on loans, there is a need to pay attention to other products as well. If a person is given an avenue to save, he / she would be able to save enough for the foreseeable events in life and would not necessarily have to borrow to meet those requirements.
o On the other hand, for catastrophic events in a person’s life, the right product is perhaps insurance and not loans or savings.
o Since many people in this segment migrate from their place of birth to where employment opportunities are better, they have a need to remit money home to their families.

• Reduce cost to serve:
o The delivery of these products are at an affordable cost, primarily taking out physical infrastructure in the entire delivery chain to reduce costs and substituting it with a combination of technology and very thin physical front ends.

• Complete end-to-end technology and services: The complete cycle of acquiring and servicing a customer, particularly under the Business Correspondent (BC) framework:
o Field level mechanisms to contact the customer and complete his / her KYC and other formalities as per underlying product.
o Back-end facilities to process the product solicitations.
o Technology frame-work to handle the large volumes.
o Issuance of the tokens needed to do transactions.
o Identifying and training a large field force (BCs) to carry out customer transactions; a very key element from a bank’s risk perspective.
o Robust front-end and back-end technology infrastructure to manage and host a large number of transactions and accounts.

• Technology that is scalable and robust:
o The biggest beneficiaries of the model have been the large government schemes – National Rural Employment Guarantee (NREG) and Social Security Pension (SSP) schemes which were struggling to pay to the rightful beneficiaries their dues.
o The technology can be leveraged to deliver wages to the workers covered under the pay-for-work program of NREGS in a timely manner, also reducing duplicate and fraudulent registrations.
o The scheme has also benefitted the pensioners who are now assured of their benefits right at their door-step through simplified processes at the front-end keeping the complexity of the technology at the back-end.

FINO has architected a system which leverages technology to not only capture all the details but also approve / reject claims as per WHO approved packages which could be used to deliver cash-less benefit to customers from hospitals. Bima Yojna (RSBY) is also facilitated in the country. The scheme envisages insuring nearly 60 million Below Poverty Line (BPL) households in the country. The scheme has opened up a health insurance market of Rs.40 billion annually through various insurance companies and service providers. 1.8 million Families are under the scheme.

Insurance
Two key products in micro insurance are
• Life
• Health.

New technology architecture is developed for life insurance which is offered through channel finger-prints of both the insured person and the beneficiary are captured on the card thus ensuring smooth service beneficiary in the eventuality of insured person.

Banking
RBI propounded the BC in 2006 to make financial services accessible to the large number of people who are unbanked, generally poor and rely on informal financial setups in rural and urban short span of three years this model has demonstrated its relevance and utility on the ground.
While there are many approaches underlying proponents of the model namely servicing the customer in his / her village have it finally offers only the ones that clears the reach of the BC model inclusion in general, in the remotest nook and corners of the country.

Ongoing debates:
• On the insurance side while there has been a rapid roll-out of the product anchored by the government’s RSBY scheme, there is need for a greater focus on the quality of the service providers.
• Varying levels of quality at the service provider end has led to a slower roll-out in some of the states as also fewer transactions post roll-out which effectively amounts to a virtual denial of service to the end customer even though the insurer has received payment from the Government.
• The scheme itself also suffers from a lack of clarity on the guidelines regarding continuity after the first year, thus making it difficult for the service provider to build a long term business model.

Satisfied model or what?

Acceptability of the BC model by prominent financial institutions in India particularly traditional banking companies is a clear cut pointer towards ushering in a new banking paradigm in India through this model.
However, the model of using a highly capitalized and regulated mainstream financial entity with customer ownership and delivering basic savings and insurance services through a low cost BC model using technology as a risk mitigant is unfortunately being confused with choosing the “right” technology to access these customers by poorly capitalized entities for mobilizing deposits on their own balance sheets.

Protection for rich and the poor now same:
The savings of the poor deserve as much risk protection as that of the rich, if not more, and that this principal has nothing to do with the choice of technology being deployed.
It may instead worthwhile to explore whether these entities could act as BCs of large banks themselves, using a similar technological architecture instead of accepting deposits on their own balance sheets.

It is estimated that there are about 500-600 million unbanked or under-banked people in India, bulk of which reside in rural areas. Some of the factors to be blamed for this low penetration include

• Lack of geographical access
• Inefficient infrastructure
• No suitable technology
• No political will etc.

Traditional branch based banking failed to serve these markets, primary reason being the non-viability of these markets to justify the huge costs involved in setting up a branch network.

With the objective of enabling financial inclusion, a number of measures have been initiated by the RBI and various state and central governments in the past decade; the measures undertaken were in line with the sleuth of innovations being done around the world in the Microfinance space.

How BC Started:

Business Correspondent (BC) model was developed by RBI in January 2006 to overcome traditional challenges and increase banking penetration keeping in line with its goal of total financial inclusion.

What is BC:

The business correspondent (BC) is an intermediary between the customer and the bank; it provides all the basic banking facilities (saving accounts, deposits, loans, remittances and insurance) but does not boast of a portfolio offering as expansive as the modern banking channel. The BC model is a type of branchless banking wherein the agents appointed by the BCs themselves reach out to the customers on behalf of the bank. These agents provide ‘Banking at the Doorstep’ facility to customer using myriad of technologies depending upon the BC involved.

BC Advantages:

• BCs have successfully eliminated hardship for millions of poor Indians. Our research has shown that rural labors spend upwards of a day’s salary and at least 4 hours to do a basic 1 minute transaction like money deposit. Since BC services are provided at the customer’s doorstep, it saves the customer a great deal of time and money by making travel to the nearest banking facility redundant.

• BC’s provide the best suitable products to the poor rather than push the services of a single organization, the terms of which at times may not be beneficial to the end customer. (As BCs do not represent any single company)

• Business Correspondents have developed various innovative solutions doing away with the cost intensive traditional branch based banking system.

• The cost of operations by a BC model is meager: 3-4% of transaction value as compared to 10-15% for the MFI model. Many MFIs have themselves turned to BCs to handle operations for them.

• Hiring local agents has enabled BCs build necessary local acceptance and trust among the illiterate target population.

Dealing with poor is proving to be a viable proposition; financial organizations no longer loathe the BPL customer. With an activist government, booming economy, easy funds and path breaking innovation, Indian Microfinance is becoming a hotly contested space.

Business Correspondent Model is very interesting. Let me start from the basics of BC. Business Correspondent (BC) is an intermediary between the customer and the bank and is a full-service outlet that does not provide as expansive a financial offering as mainstream banks do, but sell all their products (saving accounts, deposits, loans, remittances and insurance products).

FINO has proudly led the approach of making BC services available in India. When FINO began its journey in 2006, its envisaged role was to provide financial inclusion technology to regional entities like MFIs/LFIs. We had thought that these entities would provide a new dimension to the Indian banking system by acting as BCs for regulated financial entities. Surprisingly this did not happen due to myriad reasons, consequent of which FINO transformed its role from a technology provider to a BC - a type of branchless banking wherein the agents appointed by the BCs themselves reach out to the customers. We provide “Banking at the Doorstep”. When we talk about innovation, the BC model seems to be an innovation in itself.

Today FINO is the largest BC in India with over 5,000 physical points Bandhus all across the country. We have a presence at a lot of places.

FINO realizes that Bandhus are a very critical part of the delivery chain and customer experience. Hence FINO invests aggressively in their training, insurance benefits and having a code of conduct for them to ensure lower risk and better customer experience.

An innovative technology highway has been laid out by FINO in this very short span of time which has improved the efficacy, coverage and reach of the BC model and financial inclusion in general, in the remotest nook and corners of India.