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Rethinking Branchless Banking in India

Doug Johnson

Centre for Microfinance

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Branchless banking in Brazil

* Source: Planet Finance

Results

19 million new accountsopened in only four years(Brazilial pop = 200 mn)

Total flows in 2006 > $100 bn

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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 twoyears 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 twoyears on

Yet the business correspondent model has been used very

successfully to deliver government benefits.

Sub-districtgovernment

OfficePartner bank

FINO districtoffice

FINO agentNREGA workers

Worksitedetails

Cash and info onindividual

disbursementamounts

Cash and info onindividual

disbursementamounts

Disbursement infodownloaded to mobile

transaction device

Cash handdelivered to

agents

Wages

Example of the BC model used for delivery of government benefits: the FINO smartcard payment system

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Benefits of using branchless banking fordelivery of government benefits

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.

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.

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Need for an effective mechanism to delivergovernment benefits in India

Direct government benefits in India

Programme

Estimated outlay under 2008-09

Union Budget (crore rupees)

NREGA 29000*

Indira Awas Yojana 5400

National Old Age Pension

Scheme 3772

SGSY 2150

Conditional Cash Transfer

to the Girl Child 13.5

*Updated budget estimate as of October, 2008. Original budget estimate was16000.

Total = 40335.5 crore rs!

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Limitations of the BC model for delivery ofgovernment benefits

Yet the restrictions in the business correspondent model severely

limit the scaling up of branchless banking for delivery of

government benefits.

Bank

Semi-independent

section 25 co

FINO forprofit co

Beneficiaries

Payments + servicefee

Payments

Technology

transfer fee

FINO

Legal model adopted by FINO forsmartcard payment system

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

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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 paymentprocessor 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 processorapproach

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 aspayment processors

Lower risk of misallocation of funds

Any problems apparent immediately

With some government programmes, social audits could provide

additional information on functioning of agents

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.

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Why this would lead to much greater use of branchlessbanking 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 toincrease 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