IFSI access to bank accounts. However, Aadhaar


                                FINANCIAL INSTRUMENTS AND

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There have
been some recent reports of malpractices with respect to Jan Dhan accounts. In
this context, it may be interesting to know the grass-root level challenges
that are impacting financial inclusion.

In India,
where nearly one-fourth of population is illiterate and below the poverty line,
ensuring financial inclusion is a challenge. The two indicators, poverty and
illiteracy, vary widely between different States in India. Rural poverty is
above 30 per cent of population in places such as Assam, Bihar, Madhya Pradesh,
Uttar Pradesh, Orissa, Jharkhand, Chhattisgarh, and Manipur. Rural poverty can
be attributed to lower farm income, lack of sustainable livelihood, lack of
skills, under employment and unemployment. Thus, ensuring deposit operations in
these accounts is a challenge.



India has
a literacy rate of 73 per cent with some States such as Bihar, Uttar Pradesh,
Jharkhand, Madhya Pradesh and Rajasthan where the literacy rate ranges between
62 per cent and 70 per cent. The banks have devised ways to address limitations
arising out of illiteracy by ensuring biometric access to bank accounts.
However, Aadhaar seeding implies that some numericals have still to be punched
in the machine to operate an account. As all the numerals are in English, only
the banker or the business correspondent (BC) can punch in the Aadhaar number.
Similarly, the messages that are received on mobile phones from banks are also
in English and therefore the illiterate person has to seek someone’s assistance
to understand and interpret the message.

In each of
the above cases, the privacy of an individual’s bank balance is breached. This
makes the illiterates, and population confined at home – females and elderly –
vulnerable to malpractices. There are also anecdotes that enterprising BCs, to
ensure ease of business, give the same Personal Identification Number (PIN) to
all the residents in a single village. This can further compromise privacy and
cause embarrassment to the authorities when direct benefit transfers through
bank accounts are implemented on a larger scale. Therefore, a financial
inclusion strategy sensitive to regional, demographic and gender related
factors, needs to be carefully crafted.

Further, it
needs to be considered that why despite extensive efforts from authorities, the
Prime Minister’s Jan Dhan Accounts (PMJDA) have underperformed. This could be,
in addition to poverty and illiteracy, due to the type of products being
offered to the unbanked population. Illustratively, recurring deposits are
products which are more suitable to the salaried income group rather than
people in informal sector whose incomes are uncertain, seasonal and unplanned.



In the
opening of PMJDA, mainly public sector banks (PSBs) rose to the occasion in
ensuring that every unbanked household had a bank account. Now that 25 crore
PMJDAs have been opened in the last two years, a feat unparalleled in history
of financial inclusion, it needs to be considered whether is it also the
responsibility of the PSBs to ensure that these are operational.

opening of PMJDA was a mammoth task, as in March 2014 just before PMJDA, total
accounts on books of commercial banks were around 1 lakh crore. As can be imagined,
given the limited resources in banking sector, opening of such large number of
PMJDA within 24 months in far flung areas diverted the attention of bankers
from their principal activity of mobilizing resources and lending to reliable

The next
challenge is monitoring existing borrower accounts. Therefore, to ensure that
the banking industry is robust and existing banking assets safe, given that
heavy lifting has been done by PSBs, should the newly opened PMJDA in rural
areas and some in urban too, in a sequentially planned manner be moved to rural
and urban cooperatives?

at present, there are a number of regulatory authorities that have a role to
play in financial inclusion – Reserve Bank, National Bank for Agriculture and
Rural Development (NABARD), Securities and Exchange Board of India, Small
Industries and Development Bank of India, and MUDRA bank. There is a need to
fix responsibility on a single regulatory authority to ensure that JDAs are
operational. In this context, given that NABARD has an extensive presence
across the country and was formed for the purpose of development of agriculture
and rural areas, it should be made the nodal and accountable agency for
financial inclusion. NABARD may not have the existing capacity, as of now, to
accept the challenge but can certainly be prepared in a phased manner in next
few years. It has been investing in modernizing, and infusing technology in
cooperative institutions.



There is
also need for further research on why the moneylender despite persistent
efforts by institutions in formal sector has continued to flourish in the
financial market. Money lenders continue to account for nearly 30 per cent of
total banking business. This then gives rise to an interesting related
question: do interest rates matter?

In modern
times, if interest rate matters, why do people prefer to go to moneylenders,
despite a network of banks, cooperatives, MFIs and SHGs? Is it simply due to
ease of doing business or some other factors? This is one area which requires
grass-root level research.

One of the
main reason behind this activity is the illiteracy prevailing in India. People
in remote parts of India are incapable in analyzing the harmful effects of
taking money from the moneylenders. Ideally it is a matter of concern the
entire economic development of the country and it also promotes illegal
activities on a large scale.



Risk- The problem related to the security has become one
of the major concerns for banks. A large group of customers refuses to opt for
e-banking facilities due to uncertainty and security concerns.

Trust Factor- Trust is the biggest hurdle to online
banking for most of the customers. Conventional banking is preferred by the
customers because of lack of trust on the online security. They have a
perception that online transaction is risky due to which frauds can take place.

Awareness- Awareness among consumers about the
e-banking facilities and procedures is still at lower side in Indian scenario.
Banks are not able to disseminate proper information about the use, benefits
and facility of internet banking

risk- The risk of disclosing private information &
fear of identity theft is one of the major factors that inhibit the consumers
while opting for internet banking services. Most of the consumers believe that
using online banking services make them vulnerable to identity theft.

the public support- In developing countries, in the
past, most e-finance initiatives have been the result of joint efforts between
the private and public sectors. If the public sector does not have the
necessary resources to implement the projects it is important that joint
efforts between public and private sectors along with the multilateral agencies
like the World Bank, be developed to enable public support for e-finance
related initiatives.

of Personnel services- In present times, banks are to
provide several services like social banking with financial possibilities,
selective up gradation, computerization and innovative mechanization, better
customer services, effective managerial culture, internal supervision and
control, adequate profitability, strong organization culture etc. Therefore,
banks must be able to provide complete personnel service to the customers who
come with expectations.

of global technology- There is a need to have an
adequate level of infrastructure and human capacity building before the
developing countries can adopt global technology for their local requirements.
In developing countries, many consumers either do not trust or do not access to
the necessary infrastructure to be able to process e-payments.

Performing Assets (NPA)- Nonperforming assets are another
challenge to the banking sector. Vehicle loans and unsecured loans increases
N.P.A. which terms 50% of banks retail portfolio was also hit due to upward
movement in interest rates, restrictions on collection practices and soaring
real estate prices. So that every bank have to take care about regular
repayment of loans.

The nationalized banks and commercial banks have the competition from foreign
and new private sector banks. Competition in banking sector brings various
challenges before the banks such as product positioning, innovative ideas and
channels, new market trends, cross selling ad at managerial and organizational
part this system needs to be manage, assets and contain risk.

Technology- Developing or acquiring the right
technology, deploying it optimally and then leveraging it to the maximum extent
is essential to achieve and maintain high service and efficiency standards
while remaining cost effective and delivering sustainable return to
shareholders. Early adopters of technology acquire significant competitive
advances Managing technology is therefore, a key challenge for the Indian
banking sector.

Faced with regard to convergence with IFRS-

There are number of challenges
that India is likely to face with regard to convergence with IFRS. Convergence
with IFRS is not only just technical exercise but also involves overall changes
in not only the perspective, but also the very objective of accounting in the
country. Despite of the various benefits of adopting IFRS, implementation of
IFRS is a herculean task in India. Following are a few challenges faced during
adoption and implementation of IFRS-

between Legislation and Accounting- There are concerns
about the compatibility of Indian laws with IFRS in certain matters pertaining
to accounting, such as formats and presentation requirements. Similarly, there
is uncertainty over tax treatments of items arising from convergence such as
unrealized gains and losses and the move from a tax basis for depreciation
(IGAAP) to one of useful economic life (IFRS).

of GAAP Reconciliation- Securities Exchange Commission
(SEC) laid out with two options in its proposal, firstly calling for the
traditional IFRS first time adoption process, secondly requiring that step plus
an on-going unaudited reconciliation of the financial statements from IFRS to
US GAAP. Clearly the second one is a more costly approach for firms and its

Financial Reporting Processes- Although many Indian
companies have still not thought about the impact on their information systems.
These will require a fundamental review and initial costs could be significant.
At the same time, it is important to have in place sound systems in order to
ensure that subsequent generation of reporting information is efficient.

The convergence of IFRS in India will not only affect the Financial Statements
but also the tax liabilities would also get changed. Present scenario, Indian
Tax laws do not recognize the Accounting Standards. To entertain immediate
change in the Indian Tax Law is the major challenge faced by the Indian Law

of Contract- The contracts would have to be
re-negotiated which is also a big challenge. This is because the financial
results under IFRS are likely to be very different from those under the Indian