Today, life is unimaginable without a mobile phone. For most it would come to a standstill without it. Given its functionality, growth has been extraordinary recently in both rural and urban areas: rural tele-density has increased to 12.72 from 0.4 and urban tele-density 72.47 from 5.8 in past 10 years. India is the fastest growing mobile market in the world and almost 15 million subscribers are being added per month, mostly in rural areas. Such massive growth in numbers is commendable by itself, and if accompanied by the predictable positive economic impact, the results could be unprecedented. Several studies have quantified the role of mobile phones in improving productivity, employment, profits and also enabling social change. The reasons mobiles have such major impacts are mainly due to reduction in transaction cost, widening markets and alleviating infrastructure constraints. Each of these positive characteristics of increased connectivity has potential in the financial services sector as well.
India has a relatively deep financial system and a wide network of banks. The average population served per branch office (an important indicator of banking penetration) is 15 per 1000 persons and has not changed much in past 10 years. The rate of increase in the number of bank branches in India during 1991-2006 in urban and rural areas was 3.5 and 0.6 respectively; that is, the population coverage of banks in rural areas is declining. While urban India seems to be over-banked with more than 100% penetration (many urban Indians have more than one bank account), rural India lags far behind with 19% penetration. Banking infrastructure in rural India is poor and although there are 32,000 commercial bank branches in India, only 7% of villages boast of a branch. Among the reasons for low presence are lack of infrastructure, regulatory constraints, illiteracy, incomplete service offerings by banks, and high transaction costs in the formal banking system, information asymmetry, and high proportion of non-performing loans (NPLs).
Opening more branches is perhaps not justified on economic grounds in rural areas. Therefore, to improve access in rural areas, banks needs to modify existing channels, introduce new channels and identify innovative ways to integrate the two. The indirect costs (transaction costs, commissions, etc.) and expenses associated with banking transactions are very high. Moreover high levels of illiteracy deter rural customers from actively engaging in formal financial transactions. Given its rapid spread, mobile banking seems to be an obvious method to reach out to the unbanked population. This is not a totally new concept since several successful structures have already been established across countries to tap the unbanked population using mobile technology. M-pesa (Kenya), Obopay (USA), Mcheck, RBAP-MABS (Philippines) are compelling examples.
In India, where it is expensive and cost ineffective to extend the coverage of the banking channel, branchless payment systems can dramatically reduce the cost of delivering financial services to poor people. Branchless banking can offer basic banking services to customers at a much lower cost than what it would cost to serve people through traditional channels. For the spread of any technology used to increase financial access, it is imperative that the technology is user friendly and in tune with mass customer needs. The early adopters of technology in India (such as followed by various other promising technology providers in India ´┐ŻEKO, FINO, TCS, A Little World (ALW), CMFIL, ATOM Technologies have proven at pilot levels that microfinance channels can also improve inclusion. While the potential of branchless banking is enormous, policy and regulation could still prove to be obstacles in this regard. The regulatory hurdles imposed by government, financial institutions, and the department of telecom are inimical to the success of mobile payments; so they need to addressed.
To sum up, the knowledge, capital and technology to address the challenges of rural-urban gap however now exist in India, although they are not yet fully aligned due to regulatory constraints. A multi-pronged approach is required to make the Indian banking system more inclusive, which requires a concerted effort by several stakeholders, including the Government of India, the Reserve Bank of India, and Telecom regulatory authority. Thus with a more enabling environment the next few years promise to be exciting for the delivery of financial services to poor people in India.