How to make mobile banking viable in India

This is the game-changer as far as social sector payments are concerned, says Sunil Jain.

If State Bank of India (SBI) announcing its grand plans of nearly quadrupling its existing branch network in the next decade at a fantastic laser show in the Brabourne cricket stadium in Mumbai had the banking world abuzz, its ability to bring another 50,000 un-banked villages under its fold by the end of last month (it did 50,000 in 2008-09) set pulses racing in the mobile banking community.

For there's no way SBI, or any other bank for that matter, can hope to achieve this audacious growth (India has over 6 lakh villages) in the conventional branch network manner - if maintaining a village branch costs Rs 5 lakh per annum in just salaries, covering this requires an annual business of Rs 2 crore (rs 20 million) per village at current levels of net interest margins!

The only way this can be achieved is through the Banking Correspondent (BC) network that, in turn, will largely operate through a mobile phone network.
The way this works is that the bank appoints a BC in a village, say the kirana shop-owner, and villagers come and give their deposits to the BC. The BC services them in one of two ways.

She has a phone on which the amount is entered and is wirelessly synced to the bank's server - if the customer has a mobile phone, she gets as SMS receipt and, if not, the BC then prints out a receipt (such a printer-phone set-up, which includes a scanner for fingerprints, costs around Rs 30,000).

The BC keeps the money and the bank, which has a deposit from the BC, debits this from that. When the money is withdrawn, another wireless sync gets done, another SMS/receipt gets generated and, this time around, the BC's deposit account with the bank gets credited.

This is a cheaper way to provide financial inclusion, but running even this requires considerable thought and effort since the rural market isn't that lucrative for financial services as yet.

In the case of SBI, which is in 100,000 such villages, the deposits and loans from here form a tiny fraction of its all-India total, primarily because rural incomes and savings are lower.

A study by NCAER and Future Capital Research (of retailer Pantaloon fame) points out that while the Top 20 cities account for 10 per cent of India's population, 20 per cent of expenditure, 30 per cent of income and 60 per cent of savings, the comparable numbers for rural India are 70, 64, 56 and 33 per cent.

In other words, using a complicated calculation that I hope is correct, an average rural citizen earns about a fourth and saves less than a tenth of his counterpart in the Top 20 cities - so, even the vastly cheaper village BC-bank isn't going to do much for the bank's bottom line.

Let's do the math to see how the government needs to contribute to making it viable. On average, SBI and various service providers who are rolling out BC networks tell you, a BC needs around Rs 3,000 per month for this activity to be worth it.

Given that there are 6 lakh villages, at even one BC a village, this means Rs 2,160 crore (Rs 21.60 billion) per year. If, on average, a bank needs one manager and one clerk to handle 100 BCs, that's another Rs 300 crore (Rs 3 billion) which needs to be funded - and we're not even talking of profits or the cost of the printer-phone (Rs 2,000 crore) or stuff like that.

So, how does Rs 2,500 crore (Rs 25 billion) get funded if we're not looking at the usual Budget-funding? One way out is internal remittances by the 10 crore or so migrant labour population - if you assume a remittance of Rs 500 per month, that's Rs 60,000 crore (Rs 600 billion) a year.

Since the post office charges around 3-15 per cent commission, depending on the size of the transfer, most banks talk of a 2 per cent BC commission as being appropriate - a 2 per cent commission means internal remittances will only generate Rs 1,666 per month for each of 6 lakh BCs.

Theoretically, some more could come from transactions villagers will have with the BC, depositing and withdrawing money, but SBI's experience as well as the incomes (mostly on a daily basis) don't offer too much hope.

Things could be quite different if, however, the government decides to pass on the NREGS payments (Rs 60,000 crore in 2010-11?), using the Unique ID number project -link the Unique ID to the BC network and it means the government can, with pinpoint precision, ensure the money goes only to the person concerned with zero leakage.

At the same 2 per cent commission, that's another Rs 1,666 for each BC and the BC-bank is that much closer to becoming self-sustaining. Once you add in the profits that banks or aggregators will require to set up and run the BC network, the amounts required will rise to more than Rs 3,000 per BC, but the essential principle is that the government needs to channelise more of its social sector payments through the BC network for it to be viable.

The advantages, politicians should understand, will be huge. Imagine an NREGS worker getting to know he has got his money while in the village instead of wasting a day or two to go to the nearest urban bank branch to check if the payment is in; ditto for health care payments, money got for the birth of a girl-child and so on.

This is the game-changer as far as social sector payments are concerned. Let's hope this year's Budget gives some signals on this front.