Opinion Banking without banks

Implausible as this seems,it is the most likely scenario. It will soon emerge from the go-ahead given by a group of bureaucrats to a plan to merge India’s fabulous telecom backbone to the fledgling business of taking banking (if not banks) to the villages.

By any calculation,the possibilities are immense. If the average age of the Indian is taken as 23 years,and you take out the top 20 per cent who already use some form of banking service,we still get about 800 million people. Children and the old are another 100 million; also assume that among the poor,each couple will use only one account. We still get 350 million potential customers. Remember: a young population is also one that’s quick to adapt to changes.

Those numbers also explain why so many entrepreneurs are itching to tap this market.

There are but two constraints. The first,as we have seen,is technology; the second is the framing of rules. As the sordid IPL drama shows it is best to insist on rules before the game starts. Sports or any economic enterprise run best when the principles are clear and well-explained.

But often when faced with this choice the Indian financial sector has overwritten rules that have practically killed the market. Hopefully that will not occur here: innovation has to be the key to drive this market and bring down the cost of delivery even further.

After several tries the government,the banks and the RBI are now agreed that banking services can reach the lower income group only if the establishment cost is low. This makes the banking correspondent model a clear leader.

In a nutshell the banking correspondent model means giving an individual — as a representative of a bank or a financial institution — the authority to operate as a branch for those employed as farmers,as labourers in shops and mandis and just about anywhere.

Obviously,despite the romantic picture of farmers immediately getting banking services at their doorsteps,the initial,maximum business will be in the big cities,as that is where the poor concentrate.

But irrespective of wherever the customer is located,the banking correspondent will need his technology to follow him. No bank,including SBI,HDFC or PNB,can set up a platform to develop such a complex set of data transfers that will also be cost-effective for them. Instead they need to access the technology platform already available with the telecom companies.

That technology will open up challenges. Banks will have to price in the cost to the service they will offer the customers. Then there’s the problem of connectivity between telecom companies and the secure IT network of the banks. Tagged to this data security issue is the question of liability. At present for any loss in transmission on internet or on mobiles,the banks put in a disclaimer. This will be scarcely possible in the new world of banking correspondents; obviously a bank will be in trouble if it tries to explain its new customers the money they deposited does not exist as the telecom network failed at that point.

These technological issues have got traction from the report of the inter-ministerial group constituted by the government “to enable finalisation of a framework for delivery of basic financial services using mobile phones”. The IMG,chaired by the secretary of the information technology department,also included,among others,representatives from the finance ministry,department of posts,rural development,the Planning Commission,the UID Authority of India,Trai,the RBI,and the home ministry.

The approach of the group is sound. Mobile subscribers in rural areas now far outstrip bank account holders. The government naturally also hopes it will be able to ride the technology platform to reach cash benefits to the poor under its various welfare schemes.

The framework envisages banks offering “mobile-linked no-frills accounts” to customers who can’t be expected to avail of regular services. The backbone of the service is the ubiquitous mobile phone. Transactions permissible over these accounts will include cash deposit,cash withdrawal,balance enquiry,transfer of money from one mobile-linked account to another,and transfer of money to a mobile-linked account from a regular bank account. The identification of the customers will draw upon the Unique ID system in the country,as and when it becomes operational.

One of the most exciting possibilities that will soon open up is the chance for the customers to send money to each other using only their mobiles as identification devices. Potentially,once this gets going it is a short step to the point where market transactions also get settled on mobiles. The beauty of the system is the money never leaves the banks,not even to the intermediary,except when the money is being deposited.

In the process India will have leapt over the credit card age to the digital money age. Since this section of the population has never used plastic money,they will carry very little baggage to make the switchover. The implications of that scale of transformation will become apparent only once we are there.

The writer is Executive Editor (News),‘The Financial Express’

subhomoy.bhattacharjee@expressindia.com