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FintechOctober 4 2009

India's mobile lifeline

Technology, in the guise of mobile and smart-card banking, is bringing the remote sectors of India's population within reach of the country's banks. Writer Rekha Mehon
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India's mobile lifeline

The dramatic growth experienced by India over the past couple of decades might have transformed the country into an economic powerhouse, and in the process improved the economic status of millions of Indians, but the benefits of economic growth have yet to be equitably shared. If anything, social, financial and economic inequalities have become further exacerbated.

While on the one hand India has experienced among the highest growth rates worldwide in the number of high-net-worth individuals with investable assets of more than $1m, on the other hand a vast majority of Indians remain financially excluded. Various studies estimate that about 60% of India's 1.1 billion population has little or no access to formal finance and less than 6% of India's 600,000 villages have a bank branch. A 2008 study by the National Sample Survey Organisation, a body that conducts large-scale, country-wide sample surveys on various socio-economic issues, revealed that out of a total of 89.3 million farmer households in India, 45.9 million do not have access to credit, either from institutional or non-institutional sources.

India's banking industry regulator, the Reserve Bank of India (RBI), has long pushed the banking sector towards greater penetration through initiatives such as commercial bank nationalisation in the 1960s and the establishment of regional rural and co-operative banks. As a result, today India boasts an expansive bank network of 61,000 commercial bank branches, 100,000 credit co-operatives and 12,000 non-bank financial institutions. The level of banking penetration has improved from one bank branch per 63,000 people in 1969 to one branch per 16,000 people in 2007. But the country is still a long way from achieving total financial inclusion.

"Though banking has made rapid strides in the country in many areas, a large portion of the population is still deprived of basic banking and financial services. In rural India, where the bulk of India resides, this is as high as 50%. Making flexible, timely, hassle free, and affordable financial services, not just loans, available to this section of society is the biggest challenge. Though the potential is high, the task is not easy. There are impediments, such as lack of proper infrastructure, viable technical solutions and financial literacy," says Manohara Raj, business head of microfinance at HDFC Bank.

Notably, the financially excluded unbanked population in India is not restricted to the rural areas. At a broad level it comprises marginal farmers, landless labourers, self-employed and unorganised sector enterprises, urban slum dwellers, migrant labourers and women.

Commenting on the challenges India faces in ensuring financial inclusion, Dr Will Derban, head of community relations - emerging markets at Barclays Global Retail & Commercial Bank, says: "The sheer size of the population of India and the levels of poverty that people suffer from poses a major challenge to any financial institution. The number of poor people that needs to be reached, 360 million was the estimate in the last census, and the quantum and complexity of services that they require, is unparalleled anywhere else."

Momentum shift

There has, however, been a noticeable shift in the momentum towards financial inclusion over the past two years, in large measure due to efforts by the banking regulator, as well as technological developments. The RBI has promoted several measures since 2006 to attract the financially excluded into the structured financial system, such as the introduction of a basic 'no-frills' account with low or zero minimum stipulated balances as well as charges; and relaxation of know-your-customer norms for low-income group members. Several banks have introduced no-frills accounts and according to the RBI the total number of such accounts has grown from less than half a million in March 2006 to 33.03 million by the end of March this year.

In 2006, the RBI introduced another critical initiative, allowing intermediation of banking services through entities called 'business correspondents' (BC). These intermediaries can be institutions such as non-governmental organisations, microfinance institutions and post offices. Moreover, BCs can appoint sub-agents to render services on their behalf.

The BC model has bought in the concept of the "barefoot banker", says Dr KC Chakrabarty, deputy governor of RBI. "No longer do we have to aim to have a physical bank branch in the more than 600,000 villages in the country to extend the reach of the banking sector. A mobile banking agent with a handheld device and biometric card can be equally or more effective in reaching customers and helping them open and transact on their bank account," he adds.

"Financial inclusion in India has received a huge boost after the business correspondent model came into play. It has acted like a catalyst allowing banks to have outreach in locations that were previously not accessible," says Sonjoy Mohanty, CEO of A Little World (ALW), a technology firm that operates as a BC through its partner firm, Zero Microfinance.

Technology is the cornerstone of the BC model, says Mr Chakrabarty. "Not only does technology enable banks to automate their operations and centrally network their branches, it is essential in empowering the BCs to provide banking services as well." Financial inclusion failed to take off earlier because of the absence of appropriate banking technology, says Mr Chakrabarty, but now technology is no longer a constraint. Smart cards and mobile are the two main technologies currently being deployed by the BCs.

Union Bank of India, one of the largest state-run banks in the country, is working with Financial Information Network and Operations (Fino), a multi-bank promoted technology firm that provides a smart card-based multi-application card and also acts as the BC for the bank. It provides customers with a biometric smart card carrying their fingerprint data, demographic data, banking information and photograph. This then acts as their passbook-cum-ATM card enabling customers to make deposits and withdrawals when interacting with the banking agents.

Union Bank has "taken banking to the doorstep of the financially excluded through biometric smart cards", said MV Nair, chairman and managing director of Union Bank, speaking at the bank's annual general meeting in Mumbai last year. "BCs assist the customers in the usage of biometric cards at the point of sale and facilitate collection of cash from account holder and payment of cash to them," he added. Mr Nair stated that Union Bank had issued 153,791 cards to the rural poor and 146,849 cards in impoverished urban areas.

Smart or Mobile?

Fino acts as a BC to more than 10 banks and has enrolled 5.5 million customers for its smart card solution. The Zero platform from ALW, on the other hand, is based on a mobile phone. With Zero, customers do not carry their banking records with them, it resides on Zero's customer service agents' near-field communication (NFC) mobile phones that can store up to 50,000 customer records, including fingerprints, photos, voice tags and a five-year transaction history for each customer.

"The Zero platform converts the mobile phone into a secure, self-sufficient bank branch, with biometrics-based customer ID. The local banking agent or customer service point operator acts as a teller for customer enrolments for no-frills accounts and all types of transactions," says Mr Mohanty. At the end of each day, the mobile phone connects to the bank's server for transaction uploads, downloads and application updates. Zero has thus far partnered with 22 banks and has signed up almost 4 million customers.

"There is hardly any difference between a smart card-based service and mobile-based service. The only thing is that more data can be stored on smart cards and for customers they are a prized possession. Smart cards are also more secure than mobile phones," says Rishi Gupta, director and chief financial officer at Fino.

However, Mr Mohanty disagrees. He says: "While there could be concerns regarding security of transactions on ordinary mobiles, the same was not applicable for NFC mobiles where the data security is ensured through high levels of encryption. The proof lies in the pudding. Banks would not have partnered with us if there would have been any concerns about the security of transactions." As such he points out that the cost benefits of a mobile platform are very high. The transaction costs of a mobile platform are nearly half that of a smart card, he says.

"Despite security concerns, mobiles have a huge potential in the financial inclusion space. Today there are many more mobile phone users than bank account holders in India," says Mr Chakabarty, quoting figures from the Cellular Operators Association of India, which state that as of the end of April this year there were 403 million mobile phone users in the country out of which 187 million (46%) do not have a bank account.

Another BC to base its service on the mobile phone is financial services provider Eko, which has tied up with the country's biggest bank, State Bank of India (SBI). Meanwhile, noting the immense potential of the mobile, Fino has also decided to enter the mobile space. Fino's new product will enable enrolment as well as banking transactions through the use of mobile technology, thus increasing scalability at reduced costs, according to a press release from the company, which adds that the customers will also be able to use their mobiles as an e-wallet and for mobile commerce as well. Manish Khera, CEO of Fino, says that the mobile-based solution will "ensure that Fino is able to reach out to a large segment of the 8 million rural subscribers of mobile phones who are currently deprived of basic banking facilities".

Toes dipped

Over the past two years, 26 out of the 50 private and state-backed public sector banks in India have adopted the banking intermediation business correspondent model, through which nearly 9 million no-frills accounts have been opened. The top few banks in the country, such as SBI, ICICI Bank, Axis Bank, Union Bank and Punjab National Bank, have taken the lead in trying out the business model. "Banks are divided in their attitude towards the BC model," says Fino's Mr Gupta. Those who are keen to gain market share among the hitherto financially excluded population are the ones that have taken the lead, he says, while most of the others are merely making suitable noises only because of the RBI's push.

State-owned SBI, which is the largest bank in the country both in terms of assets and branch network, is by far the most active bank in the financial inclusion arena. Not only does it have the largest presence in rural India, it is also the most aggressive player, says Anurag Gupta of ALW, which has partnered with 22 banks along with SBI. Abhishek Sinha, CEO of Eko, adds: "SBI is an extremely proactive and innovative partner. It is open to trying out new things, does not have a bias and is experimenting with several BC service providers."

The ongoing deployments of mobile technology and smart cards have shown that effective usage of appropriate technologies can not only easily enable financial outreach, but also reduce the overall operational costs. Nonetheless, industry experts contend that the BC-based banking intermediation scheme has not yet taken off. Mr Chakrabarty says that most of the implementations of the BC model around the country are small-scale in nature. "The BC model needs to be further fine-tuned to make it robust and scalable, fit to be rolled out across the country," he says.

"The business correspondent model has enormous potential to bring about financial inclusion in the country, but the scheme is not being implemented effectively," says Sameer Kochhar, CEO of Skoch Consultancy, a boutique strategy and consulting firm which recently came out with a report on how to speed financial inclusion in India.

One of the most critical issues that is as yet unresolved is who bears the cost of intermediation: the state, banks or business correspondents themselves? RBI regulations do not allow the BCs to charge customers for account opening and basic deposits and withdrawals. In most cases, banks pay the BCs a certain fee for acquiring customers and managing banking transactions, but this is not enough to meet the operational expenses of the BCs. In the southern state of Andhra Pradesh, where all government-related payments to the low-income populace are now mandatorily being routed through the banking system, the state government has stepped in to pay a transaction fee. But even here, the funding gap remains.

"The biggest challenge that the BC model faces is the financial sustainability of the BC firm," says Eko's Mr Sinha. "There are regulatory restrictions on customer monetisation. However, the remuneration that BCs currently receive from banks is not enough to cover their transaction costs. We can only charge customers for remittance transactions or for selling additional asset and liability products, but plans to offer these services is further down the pipeline."

"The business of being a BC seems viable in the long term but not in the short and medium term," says Mr Kochhar. "Like most businesses, the BC too requires an initial financing support, but unfortunately, they are not being provided this financial support, neither from banks nor the state, and are instead expected to become investors to set up the basic infrastructure for financial inclusion in villages," he says.

According to estimates by Skoch, over a two-year period, the funding gap for a BC while operating a smart card service would amount to anywhere between Rs2.93bn ($60.4m) and Rs8.19bn.

Poor still suffer

Mr Kochhar criticises leading banks in India for lack of will regarding financial inclusion. If the largest of the state-backed public sector banks decided to take on the cost of financial inclusion, he says, "the overall figure of Rs2.66bn per year, over a five-year period, is so insignificant compared to their balance sheets that financial inclusion would have happened many times over. Instead, the entire burden has been passed on to the littlest and the poorest link in the chain: the BC."

Having observed the current limitations of the banking intermediation business model, the RBI is now devising ways to overcome these issues. Mr Chakrabarty is confident that over the next year the BC model will be refined and become robust and fit to be rolled out across the country. "India should be able to achieve financial inclusion in the next five years," he says.

HDFC's Mr Raj echoes his views. "We can go a long way in ensuring that we achieve our target of 100% financial inclusion by 2015 if we could get a few things right," he says. Some of the measures that banks need to undertake to ensure higher financial inclusion, he adds, are increasing use of branchless banking based on the BC model and greater adoption of communication technology, especially mobile. Importantly, he says that to ensure higher financial inclusion, formal banking institutions need to look at financial inclusion as a business opportunity, and not just a social responsibility.

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