Financial Inclusion & Financial Literacy
Principles & Practices of Banking | Unit 16 Chapter Notes
Financial Inclusion brings banking to the excluded; Financial Literacy empowers them to use it. This chapter covers the delivery mechanisms — BF/BC models, Payment Banks, USSD banking, SHG linkage, mobile banking — and the literacy framework through NCFE, CFLs, and RSETIs.
📌 Why This Chapter Matters in JAIIB
Expect 5–7 questions from this chapter every attempt. The single highest-yield distinction is BF vs BC — who qualifies, what activities each can perform, and what extra activities BCs can do that BFs cannot. Payment Banks thresholds (₹2 lakh deposit cap), USSD code ★99#, USSD 2.0 launch date, and RSETI details are also regularly tested.
Financial Inclusion — Definition and Twin Pillars
Definition
“Financial Inclusion means the delivery of financial services at affordable costs to disadvantaged and low-income segments of society — in contrast to financial exclusion where these services are not available or affordable to such segments.”
The bouquet of micro finance services now covers: credit, thrift/savings, micro insurance, micro pension, micro remittances, digital payments. The focus is on reaching those at the “bottom of the pyramid.”
🧠 Twin Pillars — The Key Distinction
Financial Literacy
Stimulates the demand side — makes people aware of what financial services they can demand and how to use them effectively.
“Literacy = Learn = Demand Side”
Financial Inclusion
Stimulates the supply side — provides financial market services to meet the demand created by financial literacy.
“Inclusion = Implement = Supply Side”
Mnemonic: “Literacy Lights up Demand; Inclusion Implements Supply”
Who benefits from Financial Literacy? (Everyone, not just the poor)
Users (financially excluded)
Resource-poor, lower and middle income groups, HNIs — all need financial literacy.
Providers
Banks, financial institutions, other market players need to understand their own risks and returns framework.
Policy makers
Financial sector regulators (RBI, SEBI, IRDAI, PFRDA) and government must have in-depth knowledge to drive the agenda.
BF vs BC — The Core Distinction
| Dimension | Business Facilitator (BF) | Business Correspondent (BC) |
|---|---|---|
| Nature of work | Facilitation only — no banking business conducted | Actual banking business conducted on behalf of the bank |
| RBI approval | NOT required — no formal banking activities | Needs Board-approved policy; due diligence required |
| Who can be | NGOs, SHGs, Farmer Clubs, Panchayats, KVIC/KVIB, etc. | Individuals, NGOs/MFIs, Cooperatives, Companies, NBFC-NDs (for commercial banks) |
| Can charge customers? | No — prohibited from charging customers directly | No — prohibited from charging customers directly |
| Disburse credit? | No | Yes — small value credit |
| Collect deposits? | No | Yes — small value deposits |
| Sell third-party products? | No | Yes — micro insurance, MFs, pension products |
| Open accounts? | No | Yes — preliminary account opening work |
📌 The one-line distinction
BF = Facilitate (no money changes hands through the BF). BC = Conduct banking (money, deposits, credit, and products pass through the BC). All BF activities are included within BC activities — but BCs can do much more. And unlike BFs, BCs need a Board policy and due diligence before appointment.
Eligible Entities — Who Qualifies as BF / BC?
Business Facilitators (BF) — Eligible Entities
RBI approval NOT required
- →NGOs / Self-Help Groups (SHGs)
- →Farmers' Clubs
- →Cooperatives
- →Community-Based Organisations (CBOs)
- →IT-enabled rural outlets of corporate entities
- →Post Offices
- →Insurance Agents
- →Well-functioning Panchayats
- →Village Knowledge Centres
- →Agri Clinics / Agri Business Centres
- →Krishi Vigyan Kendras
- →KVIC / KVIB units
Business Correspondents (BC) — Eligible Entities
Board-approved policy required; due diligence mandatory
- →Individuals: retired bank/Govt employees, retired teachers, ex-servicemen
- →Individual owners of kirana/medical/Fair Price Shops
- →Individual PCO (Public Call Office) operators
- →Agents of Small Savings schemes / Insurance Companies
- →Individuals who own Petrol Pumps
- →Authorised functionaries of well-run SHGs linked to banks
- →Any individual including those operating Common Service Centres (CSCs)
- →NGOs / MFIs set up under Societies/Trust Acts and Section 25 Companies
- →Cooperative Societies (Mutually Aided / State Cooperative Societies Acts)
- →Post Offices
- →Companies under the Companies Act, 1956 with large retail outlets (excluding NBFCs)
- →NBFC-NDs (non-deposit taking) — only by commercial banks, not RRBs
🧠 BC Due Diligence — 5 Criteria: RFMCA
“Really Fine Managers Can Act” — R·F·M·C·A
⚠️ NBFC as BC — Special Rules
- → Only NBFC-NDs (non-deposit taking NBFCs) can be BCs — not deposit-taking NBFCs.
- → Only commercial banks (not RRBs) can appoint NBFC-NDs as BCs.
- → No mixing of bank funds with NBFC-ND funds.
- → No restrictive practices (e.g., offering savings/remittance only to NBFC’s own customers).
- → Specific contractual arrangement for all conflicts of interest.
BF / BC Activities, Terms, Ultra Small Branches & Grievance Redressal
Activities common to BOTH BF and BC
- →Identification of borrowers and fitment of activities
- →Collection and preliminary processing of loan applications (verification of primary info/data)
- →Creating awareness about savings and other products
- →Education and advice on managing money; debt counselling
- →Processing and submission of applications to banks
- →Promotion and nurturing of SHGs / Joint Liability Groups
- →Post-sanction monitoring
- →Monitoring and hand-holding of SHGs / JLGs / Credit Groups
- →Follow-up for recovery
Additional activities — BC only (not BF)
- ✓Disbursal of small value credit
- ✓Recovery of principal / collection of interest
- ✓Collection of small value deposits
- ✓Sale of micro insurance / mutual fund products / pension products / other third-party products
- ✓Receipt and delivery of small value remittances / other payment instruments
- ✓Distribution of banknotes and coins
- ✓Preliminary work relating to account opening formalities
Key Terms and Conditions for BF/BC Engagement
Commission / Fee: Banks pay reasonable fee to BF/BC. BF/BC is specifically prohibited from charging customers directly.
Technology requirement: Transactions should normally be put through ICT devices (handheld/mobile phone) seamlessly integrated with the bank's CBS.
Cash limits: Suitable limits on cash holding, individual customer payments and receipts.
Receipts: All cash collected by BC must be acknowledged by a receipt on behalf of the bank.
Bank's responsibility: All agreements with customers must clearly specify that the bank is responsible to the customer — not the BC/BF.
Data security: Preservation and protection of security/confidentiality of customer information with BC.
Multiple bank BCs: A company acting as BC for more than one bank must keep the customer database of each bank strictly separate.
Business Continuity: BCP required to ensure uninterrupted service if the arrangement with BCs/sub-agents is terminated.
Ultra Small Branches (USBs)
What they are: Low cost, simple brick-and-mortar structures — fixed outlets from which BCs may operate.
Location logic: Set up between the base branch and BC locations to support approximately 8–10 BC units within 3–4 km.
Infrastructure: Must have CBS terminal linked to a passbook printer and a safe for cash retention.
Staffing: Must be managed by full-time bank officers/employees.
Oversight: Every BC outlet is under the oversight of a base branch.
Classification: Treated as independent 'Banking Outlets' or 'Part-Time Banking Outlets'.
Grievance Redressal for BC/BF Services
- →Banks must have a dedicated grievance redressal machinery for BC/BF services. Name and contact of designated officer must be widely publicised.
- →Procedure and timeline for responding to complaints must be placed on the bank’s website.
- →60-day rule: If a complainant does not get a satisfactory response within 60 days from lodging the complaint, the complainant may approach the Banking Ombudsman.
Payment Banks · SHG-Bank Linkage · Co-Lending
Payment Banks (PBs) — Scope and Limits
Payment Banks were created to further financial inclusion by providing (i) small savings accounts and (ii) payments/remittance services to migrant labour, low-income households, small businesses, and unorganised sector entities.
What PBs CAN do
- ✓Accept demand deposits — max ₹2 lakh per customer
- ✓Issue ATM/debit cards and PPIs
- ✓Offer internet banking
- ✓Payments and remittance services
- ✓Act as BC of another bank
- ✓Distribute simple financial products (MFs, Insurance)
- ✓Utility bill payments
- ✓At least 25% physical access points must be in rural centres
What PBs CANNOT do
- ✗Grant loans or advances (no lending allowed)
- ✗Accept time deposits (fixed deposits)
- ✗Issue credit cards
★ Exam trap: The ₹2 lakh deposit cap is the most tested PB fact. A PB CANNOT lend — that’s the fundamental difference from a regular bank.
SHG-Bank Linkage Programme
SHGs (Self-Help Groups) bridge the formal banking structure with the rural poor. All scheduled commercial banks have been advised to meet the entire credit requirements of SHG members. SHG movement has been instrumental in the social and economic inclusion of women.
Co-Lending by Banks and NBFCs to Priority Sector (Nov 2020)
RBI issued Co-Lending Model (CLM) guidelines in November 2020. Primary focus: exploit the lower cost of funds from banks and the greater reach of NBFCs together — for priority sector lending. Improves synergy between regulated entities.
Mobile Banking, USSD, Digital Onboarding & Digital Lending
Mobile Banking for Financial Inclusion
- →Banks use mobiles/tablets to open Small Accounts / BSBD Accounts in unbanked villages.
- →Banking services offered through POS instruments handled by BC agents.
- →Wage earners can send money instantly through mobile banking at low cost.
- →ICT-based BC model allows accounts to be operated by even illiterate customers using biometrics.
- →Covid-19 significantly accelerated mobile usage among weaker sections for payments.
Constraints to Adoption of Mobile Banking
- →Security concerns about mobile banking.
- →Diversity of mobile operating systems and devices adds complexity.
- →Banks and telcos must launch apps/WAP sites that run on all handsets and OS.
- →Most financial inclusion customers are first-time banking users — awareness gap.
USSD-Based Mobile Banking — *99# and USSD 2.0
Common USSD Platform (USSD 1.0)
Launched by NPCI in November 2012. A common USSD code ★99# for all telcos and all banks. Enabled basic mobile banking without internet.
USSD 2.0
Launched in December 2016 along with BHIM, based on UPI. Made UPI available on non-internet mobile devices — both smartphones and basic phones. Accessible by simply dialling ★99#.
📌 3 USSD facts to memorise
Digital Onboarding
Two broad areas: (i) improving accessibility using FinTech; (ii) managing risks from FinTech adoption. Aadhaar ecosystem is a key avenue. RBI/Government have framed V-CIP (Video Customer Identification Process) and Digital KYC processes for remote onboarding.
Digital Lending
RBI Working Group on Digital Lending (including Online Platforms and Mobile Apps) report issued in November 2021. Made several recommendations for regulating digital lending — covering Lending Service Providers (LSPs), data privacy, fair practices, and customer protection.
Financial Literacy — FLCs, NCFE, NFLAT, and CFLs
Financial Literacy Centres (FLCs)
RBI has directed banks to establish Financial Literacy Centres (FLCs). These centres disseminate information on general banking concepts to diverse target groups:
National Centre for Financial Education (NCFE)
Set up by
All four financial sector regulators jointly: RBI, SEBI, IRDAI, and PFRDA. Purpose: implement the National Strategy for Financial Education (NSFE) in a collaborative manner.
Programmes offered
E-Learning Management System with different programmes for youth, adults, school children, and school teachers.
📌 NCFE-NFLAT
National Financial Literacy Assessment Test — conducted at national level for school students of Classes VIII to X. Aim: motivate school students to learn finance concepts and measure their financial awareness.
Centres for Financial Literacy (CFLs)
RBI pilot project
RBI launched a pilot project in 2017 involving select banks and NGOs to set up CFLs. Now being set up at every block in the country in a phased manner.
Purpose
Promote inclusive growth, deepen financial inclusion, and protect customers by promoting financial literacy at the grassroots block level.
📌 Quick distinction
FLC
Financial Literacy Centres — set up by banks per RBI direction.
CFL
Centres for Financial Literacy — RBI pilot (2017), set up at block level.
NCFE
National Centre for Financial Education — set up jointly by RBI, SEBI, IRDAI, PFRDA.
Rural Self Employment Training Institutes (RSETIs)
Launched by
Ministry of Rural Development (MoRD)
Managed by
Banks (with cooperation from GoI and State Govts)
Based on model of
Rural Development and Self Employment Training Institute — 1962
Coverage
One RSETI per district (lead bank sets it up)
Programs per year
30 to 40 skill development programmes
Duration per prog.
1 to 6 weeks
Program Categories
🧠 5 RSETI Objectives — DHAEI
Demand-driven training — Trainings offered must be demand-driven — based on what the market and trainees need.
Hand-holding for credit linkage — Hand-holding support to be provided for assured credit linkage with banks.
Aptitude-based area selection — Area in which training is given is decided after assessing the candidate's aptitude.
Escort services for 2 years — Escort services to be provided for at least 2 years to ensure sustainability of micro enterprise trainees.
Intensive residential programmes — Trainees receive intensive short-term residential self-employment training programmes with free food and accommodation.
“Demand-driven Helpers Assess Each Individual” — D·H·A·E·I
Chapter at a Glance
✅ Exam Strategy for Chapter 16
- ✓BF vs BC is the most frequently tested distinction — always ask yourself: does money change hands? If yes, it's BC territory. If it's just facilitation/paperwork, it's BF.
- ✓BF entities: organisations only (NGOs, SHGs, Panchayats, KVIC, etc.). BC entities: much broader — individuals, companies, MFIs, NBFC-NDs.
- ✓BC due diligence = RFMCA (5 criteria). No due diligence required for BF appointment.
- ✓Payment Banks: ₹2 lakh cap on deposits. Cannot lend. 25% rural access. Can be BC of another bank.
- ✓USSD: ★99# (NPCI, Nov 2012). USSD 2.0 (Dec 2016, BHIM, UPI-based, works on basic phones without internet).
- ✓Grievance: 60 days → Banking Ombudsman.
- ✓Financial Literacy = demand side. Financial Inclusion = supply side. These two words are exam traps.
- ✓NCFE is set up by all 4 regulators (RBI + SEBI + IRDAI + PFRDA) — not just RBI alone.
- ✓NFLAT = Classes VIII to X. CFLs = block level. FLCs = bank-run. These are three separate things.
- ✓RSETIs: 30–40 programs/year, 1–6 weeks, managed by banks, set up by MoRD, one per district.
- ✓Co-Lending Model (CLM) = banks + NBFCs for priority sector. RBI guidelines = November 2020.
- ✓Ultra Small Branches: between base branch and BC (3–4 km range, supports 8–10 BC units), staffed by full-time bank employees, linked to CBS + passbook printer.
Discussion
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