Monday, June 28, 2010

Broadening electronic payments coverage in India

Electronic payments industry requires the government to motivate laying the rails (aka necessary infrastructure).  It is heartening to note that government in India is using RBI's bully pulpit to get there.  Public Sector banks in India have signed up to bank the unbanked over the next 5 years.  I am sure the skeptical readers have been hearing about such good intentions for many years without any perceptible change in ground realities.  I think that this time it is going to be [marginally] different
  • Back to back governments of the same party is providing adequate time to focus on and deploy infrastructure
  • Political parties in India have figured out how to benefit from government sops being distributed electronically.
 Having said that, it will take time (5+ years) and effort to see electronic disbursements and financial inclusion (FI) make a difference in the lives of the poor, and change behavior (reduce use of physical cash).

Reserve Bank of India (RBI is the Indian Banking/Payments regulator) Deputy Governor Dr KC Chakrabarthy, among other RBI officials and Bank management shared their Financial Inclusion plans at the 23rd SKOCH Summit on Financial Deepening in Mumbai:

  • As part of Phase-1 (by 2012-13) of the current initiative, all villages with population greater than 2K are being covered (400K villages).  Subsequently, the rest (200K villages) will be covered.
  • Banks will each spend Rs 30-50Cr ($7-$11M) annually towards meeting their FI plan
  • Banks are hiring their own Business Correspondents (BCs) this year, and addressing about 10-15% of their 3-year goal
  • Banks will sign up third party BCs to scale up their efforts to reach their target over the next couple of years.
  • NABARD suggested Self Help Groups (SHGs) to be BCs as they currently have a financial relationship with the target audience. [Editor: There are over 6M SHGs in India]
  • It appears that the telcos will be on the sidelines during the current FI initiative.  Please understand that FI targets the 400M individuals who are unbanked / underbanked.  Telcos could still have a role while addressing the folks who already have both bank accounts and cell phones
  • Banks' FI initiative will loose money over the first 3 years.  However, RBI felt that, considering the profits being posted by banks in an economy growing nearly 10%, these looses can be absorbed.
  • Government disbursements, to essentially the same audience targeted by FI, are expected to reduce losses for banks.
  • Four products are part of the initial deployment: Banking, Remittances, Debit Card, Credit Card
  • Use of payment cards (as debit/credit card for FI) was discussed, while its feasability and sustainability were questioned. [In the near future, not many transactions will be made using credit/debit cards, therefore the concern over ROI).
  • Financial Education will be a significant heavy lifting that will need to be undertaken.  Training BCs and education rural India are necessary for change in behavior and increase in transaction volumes.  ABHAY (Bank of India), PAC (Primary Agricultural Cooperative) and Vikas Kendras are some of the associated initiatives.
  • Role of UID in meeting FI: Banks are expected to perform their own independent KYC and cannot rely on a third-party KYC effort (i.e., banks cannot rely on UID's KYC).
To make this a balanced post, telcos presence needs to be mentioned.  Airtel also presented at the summit.  Airtel felt that telcos were better positioned to address FI for the following reasons:
  • Banks have 30M accounts and 2500 BCs.  Telcos have 600M accounts and 2M agents
  • Telcos handle nearly $20B of cash via recharge of minutes.  Therefore, they have both the front-end expertise and the back-end sophistication to adequately serve the market and meet the regulators requirements
Please note that the current RBI regulations restrict bank wallets to offer Cash Out services (i.e., get cash from funds in their wallet).


  1. Yes, lots of action is taking place in ePayments in India, led by Reserve Bank of India.
    RBI is not rushing into the matter, it is slowly spreading the ePayments wings.

  2. When the Government of India announced the NREGS, it allocated a whopping 7% of the funds for ensuring that the remaining 93% is utilized properly. From all accounts I have seen there have been numerous corrupt practices around the distribution of money. Its quite clear that whatever schemes the GoI might come out with, its polician-bureaucrat-business nexus is going to ensure that a large portion of the largesse is diverted and misused. The redeeming fact is that if earlier 5% used to reach the intended beneficiary, today it seems 20% does.

    Electronic payments combined with strong deterrents to corrupt practices can result in increasing this percentage to 50 and more in double quick time. But, is anyone interested?