Rethinking Branchless Banking in India

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Rethinking Branchless Banking in India

• Doug Johnson
• Centre for Microfinance

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Introduction to Branchless Banking
branchless banking outsourcing the processing of
transactions by banks to third party agents
Branchless Bankings Risks Increased risk of
fraud as agents are smaller, less easily
monitored, and (potentially) less concerned about
their long term reputation than banks.
Branchless Bankings USP Reduces cost of
servicing clients for banks while increasing
convenience for clients leading to greatly
increased financial inclusion.
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Branchless banking in Brazil

• Results
• 19 million new accounts opened in only four years
  (Brazilial pop 200 mn)
• Total flows in 2006 gt 100 bn

Source Planet Finance
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Branchless Banking in India
In 2006 the RBI created a new model of branchless
banking for Indian banks the business
correspondent model.

• Details of the Business Correspondent model
• Banks permitted to outsource to outsource
  transaction processing to non-profits (section 25
  cos), co-ops, post offices, societies, trusts,
  and ex-service-people
• All transaction information must be updated in
  banks CBS by end of day
• Agents must be located within 15 kms of a partner
  bank branch
• It was hoped that the model would allow banks to
  offer financial products, especially savings
  accounts, to previously unreached populations.

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The business correspondent model two years on
Use of BC model to deliver savings accounts
remains relatively limited due to

• Restrictions on what types of organisations can
  serve as business correspondents.
• Lack of a clear business model for agents serving
  as business correspondents

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The business correspondent model two years on
Yet the business correspondent model has been
used very successfully to deliver government
benefits.
Example of the BC model used for delivery of
government benefits the FINO smartcard payment
system
Cash and info on individual disbursement amounts
Cash and info on individual disbursement amounts
Sub-district government Office
Partner bank
FINO district office
Disbursement info downloaded to mobile
transaction device
Cash hand delivered to agents
Worksite details
Wages
FINO agent
NREGA workers
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Benefits of using branchless banking for delivery
of government benefits
An independent CMF case study of one such payment
system revealed that the payment system resulted
in benefits for both the beneficiaries and the
government.

• Greater convenience for beneficiaries
• Increased empowerment for female beneficiaries
• Reduced leakage due to fewer duplicate /
  fictitious beneficiaries
• All while being profitable for the agent and
  only marginal extra cost for the government.

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Need for an effective mechanism to deliver
government benefits in India
Direct government benefits in India
Total 40335.5 crore rs!
Updated budget estimate as of October, 2008.
Original budget estimate was 16000.
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Limitations of the BC model for delivery of
government benefits
Yet the restrictions in the business
correspondent model severely limit the scaling up
of branchless banking for delivery of government
benefits.
Legal model adopted by FINO for smartcard payment
system
Bank

• ALW and FINO in regulatory limbo
• Only companies which can both develop the
  technology and disburse payments on the ground
  can deliver government benefits in this way

Payments service fee
FINO
Technology transfer fee
FINO for profit co
Semi-independent section 25 co
Payments
Beneficiaries
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A new approach to branchless banking
The RBI should create a new type of banking
agent, payment processors, authorized to
deliver government benefits but not to collect
savings.

• Details of the proposed payment processor
  model
• Payment processors allowed to deliver government
  benefits but not to conduct other banking
  transactions such as handling savings
• Payment processors required to implement
  biometric verification systems so that physical
  presence of beneficiaries at time of transactions
  can be confirmed
• NBFCs allowed to serve as payment processors

• Benefits of the payment processor approach
• Increase in proportion of government benefits
  routed through formal financial system would lead
  to reduced corruption and increased convenience
  for beneficiaries
• Allows the RBI to take a cautious wait and see
  approach to branchless banking

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Why NBFCs could be allowed to serve as payment
processors
The risks associated with allowing an
organisation to disburse government benefits are
much less than the risks associated with allowing
the organisation to handle savings.

• Lower risk of misallocation of funds
• Any problems apparent immediately
• With some government programmes, social audits
  could provide additional information on
  functioning of agents

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Why this would lead to much greater use of
branchless banking for delivery of government
benefits
Disbursing government benefits would be a natural
fit for many large MFIs and deposit taking NBFCs.

• Unlike technology companies, MFIs already have
  presence in rural areas and capacity to disburse
  cash in these areas
• In some cases, field staff visit villages
  according to exact same cycle as government
  benefits are disbursed

Still, incentive structure should be carefully
calibrated to ensure that agents can make profit.
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Leveraging payment processor model to increase
financial inclusion in the long term
RBI could take a wait and see approach to
payment processors, gradually lifting
restrictions on what type of transactions they
are permitted to conduct if and when it deems
prudent.

• RBI would gain better understanding of their own
  capacity to monitor these agents
• RBI would get a better idea of which types of
  organisations can be trusted