Branchless Banking in India: Ready for Take-off?

Written by Sachin Bansal

Customers in India using branchless banking

Financial inclusion seems a top priority for the newly elected Government of India (GoI). The Reserve Bank of India (RBI) recently announced the establishment of Payments Banks to provide payment services and deposit products to small businesses and low-income households, and it allowed non-banking financial companies (NBFCs) to function as Business Correspondents (BC) – a move that was long awaited. The Prime Minister, on the other hand, has announced the ambitious ‘Jan Dhan Yojana’ (PMJDY, or ‘Prime Minister’s People Money Scheme’), which aims to bring financially-excluded people into the banking system by providing them with bank accounts that have integrated insurance cards and debit cards.

Mobile companies have also been persuaded by the government to share their infrastructure to facilitate basic banking services through cell phones. Fund transfer, balance inquiry, change of PIN, mini statement, cheque book request, and other account services can now be initiated with simple text messages from ordinary handsets and without accessing the internet. Most of the telecom companies have signed an agreement with National Payments Corporation of India (NPCI) to facilitate the service. It will operate on Unstructured Supplementary Service Data (USSD) channel of telcos — a simple interactive messaging system. As such, the National Unified USSD Platform (NUUP) was successfully launched by NPCI recently.

Nonetheless, the journey towards full financial inclusion in India will not be easy. There is a big push by the government and the banking regulator to expand the traditional boundaries of banking in India to make financial services available to un(der)banked people. With a view to achieving greater financial inclusion, the RBI has been taking various initiatives to provide access to financial services for as many people as possible. In November 2005, banks were advised to make available a basic banking ‘no-frills’ account, either with ‘nil’ (0) or very low minimum balance, as well as very low or no service charges.

As per the Mor committee report (from the Committee on Comprehensive Financial Services for Small Businesses and Low Income Households, set up by the RBI in September 2013), only 36% of the adult population in India holds a bank account (the figure for urban India is 45% and while in rural India it is 32%).

It is alarming that this is the state of financial inclusion in India, the country that hosts 17.5 % of the world’s total population. Highlighting the problem, studies show that close to 50% of the existing bank accounts in India remain dormant. A major chunk of these dormant accounts include the No Frills Accounts (NFA), where dormancy is as high as 80%, suggesting that many low-income customers aren’t making use of their accounts.

There has been considerable growth in developing alternative delivery channels for financial services in past eight years. The framework for the BC model was created in 2006, helping to accelerate a gradual shift from traditional branch banking models to branchless banking options, such as BC outlets, Ultra Small Branches, ATMs and Kiosks operated by private players. The latest in these efforts is the RBI’s decision to allow two special classes of banks: “payments banks” and “small finance banks”. Released guidelines allow telcos, payments service providers and pre-paid card issuers to apply for payments bank status while existing NBFCs or MFIs can apply for Small Finance Bank license. Both of these initiatives are keeping financial inclusion as the core objective and it is believed that this new class of banks may provide the needed boost to financial inclusion in India.

There are some encouraging signs of progress. According to RBI statistics up to March 31, 2014, the number of banking outlets in villages has increased to nearly 384,000 (at least one outlet for every two villages); the total number of BC outlets in urban locations has increased to 60,730; the total Number of Basic Savings Bank Deposit Accounts (BSBDAs) stand at 243 million, and; nearly 328 million transactions were carried out through BSBDAs during the last year.

In the current regulatory scenario, it is not difficult to open a basic bank account with the relaxed Know Your Customer (KYC ) guidelines for low-income customers. India’s system for providing a unique government ID, called Aadhar, has also played a key role in overcoming KYC challenges. Customers can now open a bank account through a BC at any agent outlet in their neighbourhood. Such accounts are not only serviced by banks but also by BC companies like Sub-K, FINO, Eko, and others.

The biggest challenge now is to encourage people to use this huge network created over past 8 or 9 years. There are a lot of challenges but there are signs that India is on the road to financial inclusion. What we now need now is to leverage the existing infrastructure, along with financial education, to make this network realise its full potential.

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