Innovations in Modern Banking and Innova PDF

CLEAR IJRCM- Vol-01: Issue: 02-Jul-Dec-2011 ISSN: Print: 2249-6009 - Online: 2249-4561
Innovations in Modern Banking and Innovative Financial

Inclusion – Issues and Challenges
K.S.Venkateswara Kumar
Assistant Professor
K L University Business School (KLUBS), K L University,
Vaddeswaram, Guntur (Dist) – 522 502
E-mail : kumar.venkateswara@gmail.com - kosuri_kumar@yahoo.co.in
Abstract- Innovation fosters an organization to grow, prosper & transform in synchronization
with the changes in the environment, both internal & external. Banking is no exception to this. In
fact, this sector has witnessed radical transformation of late, based on many innovations in
products, processes, services, systems, business models, technology, governance & regulation.
The pervasive influence of information technology has revolutionaries in banking. Banking has
become boundary less & virtual with a 24*7 model. Banks who strongly rely on the merits of
‘relationship was banking’ as a time tested way of targeting & servicing clients have readily
embraced Customer Relationship Management (CRM), with sharp focus on customer centricity,
facilitated by the availability of superior technology. Banking has become a part of financial
services. We now see the evolution of many novel deferral products like credit risk management
tools that enhance liquidity & market efficiency. Securitization is yet another example in this
regard, whose strategic use has been rapidly rising globally. Various types of credit & debit
cards & indeed e-cash itself are some more illustrious examples. It is very true that radical
developments have taken place in banking industry. But whether the innovations in banking
industry have percolated down to all segments of the people is a million dollar question. The
innovations in modern banking, financial inclusion through banking and innovative financial
inclusion are required for the growth of an economy especially developing economies. Innovative
financial inclusion refers to the delivery of the financial services outside financial institutions
(banks or micro finance institutions) by using information and communication technologies and
non-bank retail agents (including post offices) and other institutional arrangements to reach
those who are financially excluded. It is not limited to banking activity; it can include alternatives
to informal payment services, insurance products, savings, etc. Emerging technologies such as
mobile phones and innovations that enable banking services to be provided in post offices,
neighborhood shops, and other convenient locations will create a historic opportunity to deliver
affordable, quality financial services to the doorsteps of the world’s poor. This research paper
attempts a look at some such issues and challenges & provides insight into the impact of the
driving forces, behind innovation, in Indian banks as well as innovative financial inclusion.
Key words: Innovation, Financial inclusion, Customer Relationship Management.
INTRODUCTION
Innovation derives organization to grow, fact, this sector has witnessed radical
prosper & transform in sync with the transformation of late, based on many
changes in the environment, both internal & innovations in products, processes, services,
external. Banking is no exception to this. In systems, business models, technology,
Innovations in Modern Banking and Innovative Financial Inclusion – Issues and Challenges
governance & regulation. A liberalized & WHY INDIA IS EMERGING AS AN

globalized financial infrastructure had INNOVATION CENTRE
provided an additional impetus to this
gigantic effort. ■ INNOVATIVE APPROACH
The pervasive influence of information TOWARDS BUSINESS
technology has revolutionaries banking.
Transaction costs have crumbled & handling Indians by nature are very innovative in
of astronomical brick & mortar structure has their approach to whatever they do. In fact,
been rapidly yielding ground to click & that‘s also reflected in some unusual
order electronic banking with a plethora of demands from corporate clients. Banks are
new products. Banking has become now more receptive to innovation in order to
boundary less & virtual with a 24*7 model. get ahead of the competition. That‘s one
Banks who strongly rely on the merits of reason why banks in India are testing and
‗relationship was banking‘ as a time tested trying out newer ways of servicing both
way of targeting & servicing clients have retail as well as corporate customers.
readily embraced Customer Relationship
Management (CRM), with sharp focus on ■ SIZE
customer centricity, facilitated by the
availability of superior technology. CRM India is a large market for any bank. There
has, therefore, has become a new mantra in are many people who don‘t even hold bank
service management, which in both accounts, making the potential even greater.
relationship based & information intensive. These two factors encourage banks to try out
innovative strategies to increase their
Thanks to the regulatory changes & footprint in this market.
financial innovation, large banks have now
become complex organizations engaged in ■ COMPLEXITY
wide range of activities. Banking is now a
one-stop provider with a high degree of India is one of the most complex markets in
competition & competence. Banking has the world. For instance, Citibank‘s biometric
become a part of financial services. Risk initiative offers over half a dozen languages
Management is no longer a mere regulatory on the same platform. If Bangalore is the
issue. Basel-2 has accorded a primacy of place to test a modern product, the interiors
place to this fascinating exercise by of Maharashtra or Karnataka are the best
repositioning it as the core banking. We now ―laboratories‖ to test a biometric ATM.
see the evolution of many novel deferral
products like credit risk management tool ■ IT SAVVY
that enhances liquidity & market efficiency.
The retail revolution with accent on retail India has a large pool of IT-savvy customers.
loans in the form of housing loans & So, it is cheaper and easier to test out new
Consumer loans literally dominating the products here.
banking globally is yet another example of
product & service innovation. Various types ■ COMPETITION
of credit & debit cards & indeed e-cash itself,
which has the potential to redefine the role There is cut-throat competition in the
of monetary authorities, are some more banking space in India. Foreign banks,
illustrious examples. which are highly (over) regulated, need
newer, innovative products to wean away
customers from Indian private and public technology can be the key to differentiation,
sector rivals. And, since every successful competitive edge, and institutional survival.
new product gets copied, there is pressure to
launch new, innovative products. FINANCIAL INCLUSION
When Citibank launched a pilot version of The case for financial inclusion is not based
its ―Suvidha‖ account in Bangalore way on the principle of equity alone - access to
back in 1997-98, it had no idea that it was affordable banking services is required for
scripting history of sorts. This scheme, inclusive growth with stability. Achieving
which translates to ―convenience‖, and financial inclusion in a country like India
designed specially for salaried individuals, requires a high level of penetration by the
offered some unique benefits like utility bill formal financial system. Even in areas that
payments, automatic creation of fixed are well covered by banks, there are sections
deposits, direct credit of salary of society excluded from the banking system.
reimbursements, etc. Over the next three Political and social stability also drive
years, the success of Suvidha prompted the financial inclusion. In the recent period, the
bank to think of taking this scheme global— government has been encouraging opening
a first for a banking product developed in of bank accounts by providing government
India for the Indian market. benefits through such accounts. ICT
solutions have made such initiatives possible
INFORMATION AND TECHNOLOGY at relatively low cost.
IN BANKING
Financial inclusion is not merely providing
The advances in information and reliable access to an efficient payments
telecommunication technologies (IT) in the system. Many discussions, especially in the
past 25 years have had a profound impact on context of mobile phone-led retail payments
the nature of banking and in the way in that system, seem to focus on this aspect of
banks and financial institutions are financial inclusion. Financial inclusion is
organized. A study of the technological also not just micro-finance. Financial
progress in the banking sector is important inclusion represents reliable access to
because banks play an important role in affordable savings, loans, remittances and
providing financing and mobilizing savings, insurance services. We in India believe that
especially in emerging markets as compared financial inclusion primarily implies access
to mature markets, where such functions are to a bank account backed by deposit
performed by the well developed capital insurance, access to affordable credit and the
markets. Technological efficiency can result payments system.
in lower transaction costs and increased The key question is - What is the kind of
revenues for banks. For instance, technology regulatory and supervisory mechanism that
can allow banks to cross-market new and will ensure that the formal financial system
existing products to customers. delivers affordable financial services to the
The use of technology can improve/enhance excluded population with greater efficiency
systems for administrative control such as without compromising on acceptable levels
enabling better management of risk, which if of safety and reliability? The issues that
disclosed in regulatory reports to supervisors merit attention are:
and in annual reports to investors, can
improve bank transparency and enable the . Is there a tradeoff between financial
banks to reduce their cost of capital. Hence, inclusion and financial regulation - are
they at cross purposes or do they work Regulatory Interventions

in tandem?
i. What have been the various regulatory The key message here is that the regulatory
interventions in India to facilitate approach has not compromised with
financial inclusion? prudential norms for deposit taking entities.
ii. What has been the approach to Only sound and strong institutions can
regulating non-bank intermediaries deliver financial inclusion. Within the
and entities providing innovative and overall traditional prudential framework,
low cost solutions for financial what the Reserve Bank of India has tried to
inclusion? do is to have a system of incentives and
iii. What are the important consumer disincentives that further the financial
protection issues in the area of inclusion objective and while doing so
financial inclusion and what has been balance the degree of the risk with the
the regulatory approach? and ability to achieve greater penetration.
iv. Financial regulation and financial
inclusion - is there a trade off? Looking at the success of credit unions and
community banks world-wide in providing
Sound and reliable deposit taking entities, financial services to local communities, it
backed by deposit insurance for small can be argued that smaller regional banks
deposits, accessible to all are, therefore, can be the answer for financial inclusion.
essential for financial inclusion. It is not However, our experience with local entities,
possible to have sound and reliable deposit such as cooperative banks, deposit taking
taking entities and a deposit insurance non-banking financial companies and
system without financial regulation. Hence, regional rural banks highlighted the risks of
there is no doubt that financial regulation poor governance, connected lending,
and financial inclusion work together - the geographic concentration leading to
former is a must for the latter. vulnerability to natural calamities and
downturns. Small entities also tend to absorb
Another reason why there is convergence disproportionate share of supervisory
between financial regulation and financial resources. Besides, the adoption of ICT
inclusion is that if financial intermediaries solutions that are essential for accessing
have to deliver affordable services, they mainstream payments system requires larger
need to take advantage of technology and investments and these often prove to be too
economies of scale. Such growth is not onerous for small entities and render them
possible without capital. Investors and uncompetitive.
lenders are comfortable with providing more
funds only if such entities are regulated. Under the current laws in India, every bank
More recently, in the context of the global requires a license from RBI for opening a
crisis, it is observed that undue reliance on branch. This legal requirement has been
borrowed funds can be a source of risk and a used as a regulatory tool for furthering
more stable retail base of deposits is good financial inclusion. Statutory approvals for
for both the bottom line and resilience. branch licenses in more lucrative centers are
Similarly, a diversified asset portfolio lends linked to the number of branches opened in
to less volatility in earnings. Thus, financial under-banked districts and States, as also
inclusion which can promote such a retail other factors such as fulfilling priority sector
and diversified portfolio - in assets and obligations, offering no frills accounts and
liabilities - also promotes financial stability. other parameters to gauge achievements in
financial inclusion and in customer service.
Taking the view that access to a bank 600 million UIDs in a phased manner by
account can be considered a public good, in 2014. UID enrolment will be done with the
2005, the RBI directed all banks to offer at help of State Government machinery and
all branches the facility of ‗no frills‘ account other Registrars. Banks can benefit by
to any person desirous of opening such an synchronizing opening of bank accounts for
account. These accounts have nil or low those who will be enrolled through this
minimum balances and charges, and have exercise. This project is a unique
limited facilities. Since 2005, over 39 opportunity to leverage UID, bank accounts
million no frills accounts have been opened. and mobile telephony services. Using UID
However, there are certain barriers that for fulfilling KYC for small value accounts
inhibit the active operation of such accounts will facilitate financial inclusion. In a
like the time and cost involved in reaching country with deep penetration of mobile
the nearest branch where the accounts have phones, this is expected to give a boost to
been opened. Hence, the RBI allowed the financial inclusion while ensuring the
branchless banking to ensure that these integrity of financial transactions.
accounts are more accessible to their holders.
One significant area, could be a challenge in APPROACH TOWARDS NON-

achieving greater financial inclusion is in BANKING ENTITIES
regard to Know Your Customer (KYC)
norms. In a country where most of the low Non-banking entities can be either non-
income and poor people do not have any banking non-financial entities or non-
document of identity or proof of address it is banking financial entities. In case of non-
very difficult to have KYC norms that insist banking financial entities, we have had to
on such documents. At the same time, to deal with two issues. The first is the
ensure integrity of financial transactions, it question of allowing non-deposit taking
is necessary that each customer is properly financial companies registered with the RBI,
identified before accounts are opened. In especially micro-finance companies, to
rural areas, this is addressed by asking for provide savings facilities and deposit
identification by local officials and requiring products for their clients. The argument put
a photograph of the account holder. Drives forth is that these entities are innovative and
for financial inclusion locally have been nimble footed and have shown their ability
achieved through active involvement of to provide loan products to the poor.
government in the identification process. In Considering the difficulties is ensuring
big towns and cities where there are a large effective supervision of large number of
number of migrants who do not have any small deposit taking entities and the
documents, fulfilling KYC norms and constraints in extending deposit insurance to
opening a bank account continue to be a such entities, the regulatory approach in
challenge. India has been to restrict deposit taking
activity to banks while promoting the
Recently, the Government of India branchless banking model for areas not
constituted the Unique Identification served by bank branches. Hence fresh
Authority of India (UIDAI) to issue a approvals to NBFCs for accepting deposits
Unique Identification Number (UID) with are not considered, while capital, liquidity
biometric recognition to every resident. It is and leverage requirements have been
expected that by latter part of this year, the tightened for those already permitted to do
UIDAI will begin issuing UIDs and roll out so.
The second issue is that of allowing non- penetration of mobile telephony in the
banking financial companies especially country, they have been permitted to enable
micro-finance companies to act as business ‗m-wallet‘ facilities up to Rs.5000 in the
correspondents of banks for branchless interest of small retail payments.
banking. The argument put forward is that
this would enable their clients to access Financial inclusion primarily represents
insured deposits, national payments system access to a bank account backed by deposit
and remittance services. There have also insurance, access to affordable credit and the
been demands that large ‗for profit‘ payments system. The Indian experience
companies having a wide network of outlets demonstrates that financial inclusion can
especially in rural areas could be allowed to work within the framework of mainstream
act as business correspondents of banks as banking within a sound regulatory
there could be significant synergies if such framework. Fair and transparent code of
networks are leveraged upon. This issue is conduct enforced through an effective
currently under examination and in doing so grievance redressal system and facilitated by
the possible risks such as conflicts of financial literacy and education are the
interest, co-mingling of funds, cornerstones for ensuring consumer
misrepresentation and other agency related protection which is an overarching objective
risks would need to be weighed against of financial regulation in the context of
possible safeguards for consumer protection. financial inclusion.
Non-bank non-financial entities have e-FINANCIAL INCLUSION

emerged as active players in financial
inclusion in that they have helped banks in To define e-Financial Inclusion, one could
offering customized payments and state as innovative applications of ICT for
remittance services to their customers based delivery of financial & payment services and
on innovative ICT solutions. Any role adequate credit where needed, at an
enhancement of non-banks to become affordable cost to the vast section of
principals in provision of financial services disadvantaged and low-income groups, who
implies that these non-bank entities would currently are unbanked.‖
have to be brought under financial UPA Govt. has given highest priority to the
regulation and this could inhibit their other goal of achieving inclusive society as could
activities. Combining financial and non- be seen from President‘s address to
financial business is also something the Parliament on 4th June 2009, and also to the
regulator may not be comfortable with as nation on the eve of Independence Day and
there could be conflicts of interest. so also emphasis in Union budget 2009-10
to deepen and broaden the agenda for
Subsequent to the notification of Payment inclusive development. Govt. has already set
and Settlement Systems Act, 2007, the up the Unique Identification Authority of
payment services have been opened up in India (UIDAI) for improving the delivery of
India for non-bank service providers also. public services. Also, in the agenda for first
The broad regulatory approach of RBI hundred days ―revamping banks and post
towards non-banks has been to permit these offices to become outreach units for
entities to provide payment services which financial inclusion complemented by
are fee-based without access to funds of the business correspondents aided by
customers. Indian regulations clearly spell technology‖.
out the role of telecom operators as service
providers. However, keeping in view the
For any ‗e-‗ to proliferate to rural areas, be it Instant Money Order (iMO) service is a
be e-learning, e-governance, e-health, e- good example. The smart card enabled
agriculture and the like, the first thing is facilitating mechanism now available in post
connectivity and any low-cost would mean offices in every State capital enables money
― to get more deliverables (including transfer between two resident individuals of
financial services) out of the e-infrastructure India besides saving time with regard to
already in existence or have been planned to clearing of outstation cheques. Further,
be in place in very near future‖. Creation of another initiative e-post meant for those do
new infrastructure cost money and the cost not have internet and e-mail could get
would need to be amortized over a period of benefits of this (sent online but delivered by
time. Moreover, e-Financial Inclusion prima mail). Innovative way of lying-up with those
facie should be viewed as ―money at the having rural PO saving bank account but not
bottom of the pyramid‖ and business models having a bank account, iMO and e-post
may be so designed to be profit-making in could help facilitate e-Financial Inclusion.
the long run or at least self-supporting. e- Further under NeGP, there is a scheme for
infrastructure of the Indian banks is rapidly establishing 100000 + Common Service
expanding and the visible benefits of ICT in Centers (CSCs), primary in rural areas of
day-to-day banking are well known. the country. There Centers would be
Common man is becoming quite used to broadband internet enabled and would
ATMs; internet banking etc, are gradually provide all government and private services
finding its acceptance. RBI has been placing at the doorstep of the citizen. The Scheme is
a lot of emphasis on financial inclusion being implemented in public private
covering, inter alia, no-frill accounts, rural partnership. CSCs have significant potential
bank branches, etc. Further, many pilot to accelerate e-Financial Inclusion.
projects have been initiated in various States In recent times, since growth of mobile
by different banks using smart cards for phone has been phenomenal and it has
opening & operating bank accounts with emerged as an ubiquitous convergent device
biometric identification at people‘s (anybody, anytime, anywhere appliances),
doorsteps. Here, the link to hand-held mobile banking & m-payment has attracted
connecting device ensures that the a lot of attention globally. Realizing its
transactions are recorded at the bank‘s books potential for e-Financial inclusion,
on real time basis. Nevertheless, how much Department of Information Technology
these are facilitating financial inclusion for (DIT), Govt. of India, in April 2007,
unbanked or rural poor need to be analyzed. prepared a state-of-the-art study on
international best practices on mobile
e-infrastructure of Mobile Network payments thereafter organized a
Operators (MNOs), has seen phenomenal brainstorming session of stake-holders to
growth in recent times. Total number of chalk-out future course of action and then
mobile phones as on April 30, 2009 was 403 joined hands with another emerging
million out of which 187 million (46%) do initiative in the form of Mobile Payment
not have a bank account. Already grown to a Forum of India (http://www.mpf.org.in).
total number of 479 million by July, 2009, The MPFI website contains a lot of useful
growth rate of acquisition of mobile phones materials on mobile payment.
in rural area far exceeds the growth rate of
opening of new bank accounts. Insofar as SELECT CONCEPTUAL ISSUES &
Indian post offices (which has very large CHALLENGES IN FINANCIAL
rural reach) network are concerned, the INCLUSION
the retirement stage. The client would like to

Designing Products: Simplicity and fulfill the function by entering into
Complexity mechanisms that help him save money
In the wake of the ―subprime crisis,‖ there during times of income and invest it in a
has been a lot of discussion about the combination of assets so that an adequate
complexity and simplicity of products, and amount is available during the retirement
how this affects usage and outcomes. The stage. He also would want to manage
school of thought that places the onus of longevity risk and heath risk after the
financial literacy on the customer is in a retirement, because both these risks may
―race to simplify.‖ However, from a render the savings inadequate. There is
financial inclusion perspective, we worry expected selection bias priced into
that this significantly undermines the true mechanisms to manage either of these risks.
potential of finance. Consider the following An annuity would be priced to take into
examples. account the fact that a person who is not
Two of the ways for a farmer to finance her well would not want to purchase it, while
sowing operation could be through a crop the health insurance is priced with the
loan payable in equal monthly installments opposite logic, that is, a person who is likely
or through a crop loan where principal and to fall ill is more likely to purchase it. Both
interest payments are linked to the amount are selection biases that offset each other to
of rainfall obtained in her region. Clearly, some extent and bundling an annuity with
for the provider, the first product is simpler health insurance (or long-term care
to design, provide, and communicate. The insurance) should bring the price down for
latter is complex because it combines a loan the household. So, even though it is simple
with insurance-like features and will require for the provider to sell stand-alone health
the lender to hedge the rainfall risk at its insurance (or long-term care insurance)
level. At the time of disbursing the loan, the products, most clients would not be able to
provider in the second instance would not be understand the underlying logic of product
able to give the farmer a ―simple‖ fixed design and actuarial calculation, and
repayment schedule. However, from the therefore would not be able to enter into the
perspective of the functionality required for appropriate financial contract.
a farmer to manage volatile income streams,
the latter appears to be a much superior Fixing Responsibilities: Provider’s and
alternative because the financial products Client’s Responsibilities for Outcomes
absorb the volatility. In the first case, the
volatility for the farmer is perhaps There is a need for a detailed assessment of
exacerbated by adding a fixed outflow to a the extent to which the different
very volatile cash flow, making the farmer stakeholders could be held accountable for
worse off. In the second case, the provider the client outcomes. In addition to the clients,
uses its expertise to integrate a solution for there are four categories of stakeholders that
the farmer, which she or he otherwise might could be held accountable:
not be able to create without such expert v. Advisors and/ providers of financial
support. services, who interface between
Often there are underlying assumptions clients and the financial system;
about product pricing and design that the vi. Risk aggregators and fund managers,
client may not be aware of, and the client‘s who manage client portfolios;
decision may become impossibly complex
to make. One example would be financing
vii. Third party agencies like rating Understanding the process of

agencies, which minimize the communication between the provider and
market information asymmetry; and the client is important. There are essentially
viii. Regulators and the central bank, four ways in which the provider can
which are responsible for the overall communicate with the customer:
stewardship of the system ix. information: explaining the product
Several debates on financial literacy have features;
placed the onus on the customer to x. computation: helping the customer
understand the intricacies of financial understand implications of a certain
mechanisms, but there is insufficient product or set of products in the
emphasis on the capability of the provider specific context of the household;
and its preparedness for counseling xi. advice: offering an integrated
customers on financial choices. How well financial proposition to the client as
trained is the customer representative of the an advice; and
provider in helping customers navigate xii. decision: deciding on behalf of the
complex life cycle finance choices? There is client.
a case for placing much greater importance In the first instance, the provider may just
on provider and distributor financial literacy share appropriate product details with the
to ensure good customer outcomes. clients in a transparent, easy to understand
Instead of passing the responsibility entirely format. However, even if these details are
onto the clients, frontline finance workers provided, the household still faces the task
could take the responsibility of analyzing of estimating the impact of certain product
household typologies based on risk profiles decisions on its life. This is primarily a
(high dependence on wage income, high challenge of estimation (of optimal liquidity
volatility of cash flows due to rainfall risk), requirements at different stages of life) and
and use automated expert systems that computation (the math about implications).
match these profiles with financial portfolios In the second way of communicating with a
(combinations of savings, investments, loans, customer, the provider may help the
and insurance mechanisms). The providers customer understand the implications of
could use their expertise to build systems to specific product decisions by doing the
implement a comprehensive process and computation and simulation based on inputs
support the financial decisions of their received from the household. In the
clients. preceding section‘s discussion on the
responsibility of providers, a detailed
Communication about Product Features example of such a computation and
simulation tool is presented. Both of these
Most clients are not trained in finance, and kinds of communication exist in the product
the increasing complexity underlying the menu–driven approach to product design.
product contracts is difficult even for trained The third kind of communication entails the
people to understand. Moreover, the product provider developing an integrated financial
contracts have not done much to help the proposition on behalf of the client, offering
clients make the right choices. For example, it as advice, and letting the client decide. In
credit card contracts have become so this alternative, the onus will be on the
incomprehensible that the cost of provider to explain the rationale for the
understanding them may be quite high. advice. This kind of communication
These challenges will be faced by those who necessarily builds on ―computation‖ that
are going to be financially included.
supports the development of advice to be Behavioral Issues in Product Design and

given to the clients. Delivery
In the fourth approach to communication,
the provider decides on behalf of the clients. There is some evidence indicating that
This alternative is actually not rare. It is individuals may not be perfect consumption
crucial to highlight that defaults in products smoothers. People may not be smoothing
and bundling of products have advice built consumption over individual lifetimes but
into them, in a manner that decisions are rather letting it track income through the life
made on behalf of the clients. This is cycle, spending more when earning more
conceptually different from offering and spending less when earning less, even
customized financial propositions wherein over the short term. Various reasons have
the proposition is provided as an expert‘s been cited for this observed suboptimal
―advice‖ and the decision is made by the pattern. An increasing body of literature
clients. The rationale for last approach is argues that clients‘ behavioral biases lead to
often put in terms of the household‘s suboptimal outcomes for them, challenging
limitation in making the right decisions. For the assumption that individuals make
example, self-control bias is given as a perfectly rational decisions given their
rationale for putting defaults in saving plans. observable constraints. One of the most
Similarly, the microfinance institutions that prominent of these is the self- control bias
bundle the life insurance product with the that leads to suboptimal saving and
loan presume that the client would not borrowing decisions for the client. Such
purchase it and thus leaver the lender and behavioral biases also may lead to
family exposed to mortality risk. suboptimal outcomes from financial access,
Since the household‘s decisions may be even when the providers have ostensibly
shaped significantly by the method of done their job.
communication, this issue is an important Presuming for the time being that certain
one when considering financial inclusion.18 behavioral biases do exist, what then can be
Though the product menu–driven approach the response of the financial system? It
based simply on information may be easier could be argued that even when individuals
for the provider, the client perspective needs do not behave in their own best interests,
to be carefully considered. Just providing institutions may evolve to offset this
information on products leaves the entire behavior and produce a net result that is
process of computation and (self) advice equivalent to the individuals behaving
with the clients, who often lack the expertise optimally. This could be done by designing
or time to fulfill these functions products and processes that respond to the
comprehensively. In the integrated behavioral biases in a manner that induces
proposition approach, the providers would individuals to select the right products that
need to modify their client communication suit their behavioral profile. For example,
strategy by expanding the scope of commitment savings products and welfare-
communication from just offering product enhancing defaults in products may work for
information to providing computational individuals facing self-control problems.
support and advice to clients. The decision Notwithstanding the potential merits of
itself may left with the clients, but the these possibilities, there are challenges
support from the providers would enable inherent in this approach. It often entails
more optimal decisions. making certain decisions on behalf of clients,
and every such decision would require
taking a normative stand on what will
improve outcomes for individuals. For human capital will be very different from
example, it is not obvious that reduction of that of a school teacher, both in terms of
consumption to increase savings is economic value and risk profiles. The
necessarily a good thing, and it is difficult to human capital of many workers in rural
estimate when that would be the case areas may be fairly uncorrelated with the
without having a clear understanding of stock market trends, and this provides
discount factors specific to individuals. diversification opportunity for the household.
Since there is diversity in the client group, At the same time, the worker‘s return on
clients should always be given a choice to human capital is usually quite volatile, with
self-select the right option. equity-like features (but with low average
Between the two alternative approaches to returns as well), thus making it better for the
financial services delivery discussed earlier worker to invest in debt instruments.
on, the integrated proposition approach These human capital characteristics should
seems more capable of customizing be incorporated in any portfolio allocation
solutions that would fit the characteristics of decision. The design challenge is how to
the household. Just like the provider would ensure that this happens. If the menu-driven
assess the risk preference of the household, approach is taken, the household is expected
it could also find ways to interact with to factor in the human capital characteristics
clients who are sophisticated about their while making the portfolio allocation
biases and offer solutions that help these decisions, whereas in the customized
clients manage their portfolios in an optimal proposition approach, the characteristics
way. An individual who is sophisticated would be understood by the provider and
about his or her biases could benefit from incorporated into the proposition. Even
such arrangements, but those who are naive though the household is in the best position
about their biases may end up using these to understand its own human capital, it may
mechanisms sub optimally, and may even not have the expertise to understand how
give the provider opportunity to exploit that this capital rates with financial capital and
naiveté, with adverse effects on the client‘s how it can optimize the overall portfolio.
welfare. This is a much debated issue in the The household may not have access to the
realm of financial services delivery and data and tools that could help establish the
requires some kind of resolution for defining relationship between various components of
the role of the provider in ensuring effective its portfolio, including human capital. Here
financial inclusion. again, expertise may be required to
understand the characteristics of the
Defining the Household’s Portfolio: household‘s human capital and advise the
Human Capital and Financial Capital household on the basis of the overall
portfolio it is managing, thus offering a
The current frameworks of financial customized financial proposition.
planning and portfolio allocation are almost
always limited to financial assets. However, Features of the Delivery Channel
the financially excluded are often also the
financially poor, for many of whom the most Though the functions of finance may be
important asset for much of their lifetime is stable, the products, channels, and
their human capital. It would be important to institutions required to fulfill these functions
formally recognize the value and risk keep changing. The exact features of the
characteristics of human capital in portfolio ideal channel may change based on the
allocation decisions. A landless laborer‘s combination of functions and product to be
provided, but there are certain features of the world and upload your trade-related data
delivery channel that may be synonymous from the bank.
with high-quality financial inclusion. It is
almost axiomatic that the financial services ■ Citibank
channel should be able to provide the
services in a convenient, flexible, reliable, WEBCAM BANKING
and continuous manner. Convenience and
flexibility are required to make sure the You no longer have to go to meet a banker
delivery channel ―fits‖ the needs of the face to face to sort out your queries as
clients. For example, low-income Webcam Banking allows you to talk to your
households have significant short-term banker anytime anywhere. This technology,
consumption-smoothing needs, which could undergoing pilot testing, is very costly; so,
be fulfilled if they had convenient access to the bank is working on making it
credit or saving facilities. Low-income economical. This product is ideally suited
clients also seem highly time sensitive and for Citi‘s most mature markets in the West.
often prefer to pay relatively high interest
rates for convenient and ―doorstep‖ services. BIOMETRIC ATM
Reliability and continuity help the clients
actively use the channel for implementing It‘s the simplest and most innovative way to
long-term financial decisions, especially reach out to people in the rural heartland.
when the clients are taking a risk on the The biometric ATM allows rural folks to
institution (investment, insurance). undertake self-service banking by using
their fingerprints for identification purposes.
IN THE PIPELINE This product can find application in
countries like China where Citi is
These are a few innovative products aggressively spreading its wings.
developed in India that may hit the global
markets soon: ■ Deutsche Bank
■ Standard Chartered Bank CREDIT CARD BASKET
BUYER FINANCE You don‘t have to buy different cards to get

The bank offers credit to channel partners the best value as the bank studies your
(dealers and distributors) on very attractive spending pattern (travel, dining, etc) and
terms as a reward for their long standing provides a switching facility to half a dozen
association with the company or take an other schemes on a single card. This not
insurance wrap to cover the risk. only saves customers money by getting them
the best deal but also saves them the trouble
INFO MANAGER of carrying separate co-branded cards for
travel, petrol or dining.
For trade services (exports or imports), you
no longer have to call your banker or wait PAYERID SOLUTION
for the data (to be transmitted to your
computer) as ‗Info Manager‘, which is an
internet-based trade reporting and enquiry If you have thousands of dealers and
tool, takes care of the reporting. You just multiple operations across distant locations
need to log on to the net from any part of the (like an HUL or an ITC), it becomes a
Herculean task to dispatch goods. PayerID
enables companies to identify the paying 5. Garbade, K.D., and Silber, W.L. (1978)
parties without the need to maintain multiple ‗Technology, communications and the
bank accounts (of dealers or suppliers), thus performance of financial markets: 1840–
the easy dispatch goods. 1975‘, Journal of Finance, 33(3): 819–32.
6. Healy, P.M. and Palepu, K.G. (2001)
Conclusion ‗Information asymmetry, corporate
disclosure, and the capital markets: a review
Despite the current difficulties and of the empirical disclosure literature‘,
challenges, financial innovation will Journal of Accounting & Economics, 31(1–
continue to play an important role in 3): 405–40.
promoting global growth, especially in 7. Kaminsky, G. and Reinhart, C. (1999)
emerging markets and developing countries. ‗The twin crises: the causes of banking and
For growth to be truly inclusive, banking balance of payments problems‘, American
must reach out to many more people than it Economic Review, 89(3): 473–500.
reaches now. Technological changes in the 8. Mishkin, F. and Strahan, P. (1999) ‗What
form of Information Technology and will technology do to financial structure?‘
mobile banking greatly expand the potential Brookings-Wharton Papers on Financial
reach of the banking system. Developing Services, pp. 249–277.
and under-developed economies all over the 9. Narasimham Committee (1991) Report on
globe are looking for new modes and means Banking Sector Reforms (Chairman M.
to cub poverty and include their citizens in Narasimham) (http://www.rbi.org.in,
the financial system. One of the important accessed on 17 May 2004).
factors that would help achieve this vision 10. Reserve Bank of India (2004)
is to ensure total financial inclusion. ‗Computerisation in banking industry –
statistics‘
(http://www.rbi.org.in, accessed on 17 May
References 2004).
11. Rangarajan Committee (1989) Report on
1. Ba´tiz-Lazo, B. and Wood, D. (1999)
the Modernisation of the Banking Sector
‗Management of core capabilities in
(Chairman C. Rangarajan)
Mexican and European banks‘, International
(http://www.rbi.org.in, accessed on 17 May
Service Industry Management Journal
2004).
(Special Issue, Service Management in Latin
12. Sarkar, J. (1999) ‗India‘s banking sector:
America), 10(5): 430–48.
current status, emerging challenges, and
2. Basel Committee (1998) ‗Report on
policy imperatives in a globalised
enhancing bank transparency‘, Paper No. 41,
environment‘, in Hanson, J. and Kathuria,
http://www.bis.org/publ/bcbs41.pdf,
S.(eds) India: A Financial Sector for the
accessed on 11 May 2004.
Twenty-first Century, New Delhi: Oxford
3. Business Standard (2003) ‗Business
13. Merton, R.C. 1995. ―Financial
Standard Banking Annual‘, 2003 (http://
Innovation and the Management and
www.business-
Regulation of Financial Institutions.‖
standard.com/special/bankannual/2003/tech.
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Indian Economy, New Delhi: S. Chand and
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95.
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Consumer Choice in Products Liability.‖
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11/4/2007, Vol. 16 Issue 22, p126-131,
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retail banking: Inclusion and segmentation
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work,‖ Working Paper, Wharton Financial
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(Philadelphia, PA).
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Banking Scope and Financial Innovation,
Review of
Financial Studies, Vol. 10, p. 1099-1131.
19. Deidda, L., and B. Fattouh (2008),

Banks, Financial Markets and Growth,
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Technological Change, Financial
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Author’s Profile
K.S.Venkateswara Kumar doing PhD, under the guidance of Prof. V. Rama Devi. I have 11
years of teaching & 3 years of industrial experience. I have presented nine papers, four national
and five international.

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CLEAR IJRCM- Vol-01: Issue: 02-Jul-Dec-2011 ISSN: Print: 2249-6009 - Online: 2249-4561

Innovations in Modern Banking and Innovative Financial

governance & regulation. A liberalized & WHY INDIA IS EMERGING AS AN

they at cross purposes or do they work Regulatory Interventions

One significant area, could be a challenge in APPROACH TOWARDS NON-

Non-bank non-financial entities have e-FINANCIAL INCLUSION

the retirement stage. The client would like to

vii. Third party agencies like rating Understanding the process of

supports the development of advice to be Behavioral Issues in Product Design and

■ Standard Chartered Bank CREDIT CARD BASKET

BUYER FINANCE You don‘t have to buy different cards to get

American Economic Review 95, no. 3: 780–

18. Boot, A.W.A., and A.V. Thakor (1997),

19. Deidda, L., and B. Fattouh (2008),

20. Frame, W.S., and L.J. White (2009),

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