MICROCAPITAL STORY: CGAP Releases Notes on Regulation of Branchless Banking in India

CGAP has partnered with the UK Department for International Development (DFID) and the GSM Association, a global trade association representing over 700 mobile phone operators from 218 countries, to conduct diagnostic reviews of the regulatory environment for branchless banking approaches in Pakistan, Kenya, South Africa, the Philippines, India, Russia and Brazil. The report on India, summarized here, was released this month. MicroCapital covered the release of the Kenya report in a story dated November 26. 2007, and the Pakistan report can be downloaded from CGAP.

Branchless banking is defined as the delivery of financial services outside conventional bank branches using information and communications technologies and non-bank retail agents. Because of their potential to radically reduce the cost of delivery and increase convenience for customers, branchless banking approaches can expand coverage to new, previously unserved segments of the population. Technology can help a range of market actors to push the boundaries of access to finance, including not only banks but also microfinance institutions (MFIs), mobile phone operators and technology companies.

For decades, India’s government and its central bank, the Reserve Bank of India (RBI), have made the establishment of an inclusive financial sector a key policy priority. Yet in spite of numerous government initiatives and a burgeoning microfinance sector, lack of access to formal financial services remains a problem in India. Less than 59% of adults have access to a bank account and less than 14% have a loan with a bank. With more than 30,000 bank branches, 110,000 cooperatives (one in every five villages), and 150,000 post offices, financial sector policymakers do not believe the number of service points is a major problem.

Over the last few years, regulators have focused on the use of bank agents (or “business correspondents”) and, more recently, mobile payments as a means to reach the unbanked. Today, India has all the ingredients for making branchless banking work: a government committed to increasing access, a central bank cognizant of the potential and risks posed by branchless banking models, a sophisticated banking sector, a dynamic mobile phone industry and no lack of cutting edge technology providers.

However, restrictions applicable to the bank agent model have impeded its use. In addition, the potential for payment and m-banking services to be provided by mobile network operators and other non-banks has not yet been realized due largely to restrictions on non-banks accepting funds from the public and the prohibition on e-money issuance by non-banks.

There have been indications, however, that change is on the horizon. In 2007, RBI issued two reports that revealed keen awareness of the need to lower costs of delivering payment and banking services. The reports suggested willingness by RBI to consider use of mobile phones and prepaid cards for these purposes.

Going forward, a further relaxation on the range of permitted business correspondents and of pricing restrictions (including interest rate caps applicable to small loans) will likely unleash the potential of the bank-based model. Technology can also assist in ensuring transactions are reported on the books of the bank quickly. Such technology can also help the bank get all necessary information for know-your-customer and to underwrite loans.

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