Notes on Regulating Branchless Banking in India

January 4, 2008    

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 large, sophisticated banking sector, a dynamic and competitive 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.