1 Rethinking Branchless Banking in India Doug Johnson Centre for Microfinance

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

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

4 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 bank’s 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.

5 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

6 The business correspondent model two years on Yet the business correspondent model has been used very successfully to deliver government benefits. Sub-district government Office Partner bank FINO district office FINO agent NREGA workers Worksite details Cash and info on individual disbursement amounts Disbursement info downloaded to mobile transaction device Cash hand delivered to agents Wages Example of the BC model used for delivery of government benefits: the FINO smartcard payment system

7 Benefits of using branchless banking for delivery 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.

8 Need for an effective mechanism to deliver government benefits in India Direct government benefits in India Programme Estimated outlay under Union Budget (crore rupees) NREGA29000* Indira Awas Yojana5400 National Old Age Pension Scheme3772 SGSY2150 Conditional Cash Transfer to the Girl Child13.5 *Updated budget estimate as of October, Original budget estimate was Total = crore rs!

9 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. Bank Semi- independent section 25 co FINO for profit co Beneficiaries Payments + service fee Payments “Technology transfer fee” FINO Legal model adopted by FINO for smartcard 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

10 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

11 Why NBFCs could be allowed to serve as payment 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.

12 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.

13 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