Rethinking Branchless Banking in India

Doug Johnson Centre for Microfinance

Introduction to Branchless Banking

branchless banking: outsourcing the processing of transactions by

banks to third party agents

Branchless Bankings USP: Reduces cost of servicing clients for banks while increasing convenience for clients leading to greatly increased financial

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.

inclusion.

Branchless banking in Brazil

Results 19 million new accounts opened in only four years (Brazilial pop = 200 mn) Total flows in 2006 > $100 bn
* Source: Planet Finance

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 nonprofits (section 25 cos), co-ops, post offices, societies, trusts, and exservice-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

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

Worksite details

Partner bank

FINO district office

Disbursement info downloaded to mobile transaction device

Cash hand delivered to agents

Wages

NREGA workers

FINO agent

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

Estimated outlay under 2008-09 Union Budget (crore rupees) 29000* 5400 3772 2150 13.5

Programme NREGA Indira Awas Yojana

National Old Age Pension Scheme

SGSY

Conditional Cash Transfer to the Girl Child

Total

40335.5 crore rs!

*Updated budget estimate as of October, 2008. Original budget estimate was 16000.

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 FINO
Technology transfer fee

ALW and FINO in regulatory limbo

Payments + service fee

FINO for profit co

Semiindependent section 25 co
Payments

Only companies which can both

develop the technology and disburse payments on the ground can deliver government benefits in this way
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Beneficiaries

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 10 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

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

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