doug johnson branchless banking

13
1 Rethinking Branchless Banking in India Doug Johnson Centre for Microfinance

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Page 1: Doug Johnson Branchless Banking

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Rethinking Branchless Banking in India

Doug Johnson

Centre for Microfinance

Page 2: Doug Johnson Branchless Banking

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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.

Page 3: Doug Johnson Branchless Banking

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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

Page 4: Doug Johnson Branchless Banking

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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 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.

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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

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The business correspondent model two years on

Yet the business correspondent model has been used very

successfully to deliver government benefits.

Sub-district government

OfficePartner bank

FINO district office

FINO agentNREGA workers

Worksite details

Cash and info on individual disbursement amounts

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

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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.

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Need for an effective mechanism to deliver government benefits in India

Direct government benefits in India

ProgrammeEstimated 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 was 16000.

Total = 40335.5 crore rs!

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Limitations of the BC model for delivery of government benefitsYet 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

Page 10: Doug Johnson Branchless Banking

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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 “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

Page 11: Doug Johnson Branchless Banking

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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.

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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.

Page 13: Doug Johnson Branchless Banking

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Leveraging payment processor model to increase financial inclusion in the long termRBI 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