Calling on Mobile Banking: Financial Inclusion in Rural India

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Number 143
July 01, 2010

Calling on Mobile Banking: Financial Inclusion in Rural India
Riddhima Gandhi

The mobile phone revolution is sweeping across India and has the potential to dramatically transform the
lives of the nation’s rural poor. An estimated 8 million rural Indians who own mobile phones do not have
access to banks. This gap is only widening. Intense competition and innovation within the
telecommunications sector in the last decade has catapulted India into the largest and fastest-growing
mobile phone market in the world. Today India is uniquely poised to make use of mobile banking
technologies as a conduit for not only bridging the “digital divide,” but also fostering financial inclusion. In
India’s highly unequal society, where 40 percent of the population has no access to financial services,
“inclusive growth” has been recognized as a key priority for securing the future success of the country.
This newsletter analyzes the role that regulators, financial institutions, technology, and service providers
are playing in improving access and deliverability of mobile banking services to India’s rural poor.

India’s Mega Mobile Phone Market:
With an estimated 555 million subscribers and at least 17 million
being added each month, India’s booming mobile phone market represents a facet of India’s rapidly
modernizing economy. While demand for mobiles has permeated all socioeconomic strata, a striking
feature is that growth in mobile use in recent years has been powered by rural India. According to the
Indian Council for Research on International Economic Relations (ICRIER), rural tele-density has soared to
12.72 percent from 0.4 percent and urban tele-density to 72.47 percent from 5.8 percent in the past

Unlike most sectors of the Indian economy, where reforms have been sluggish, the Telecom Regulation
Authority of India (TRAI) began in the early 1990s to pursue liberalization policies that have promoted
healthy competition in the telecom industry. This, in conjunction with a surge in Indian affluence, has
resulted in expansion of mobile networks and a steady decrease in the price of domestic
telecommunications services. Today, call tariffs stand at 1 cent per minute and are among the lowest in
the world.

Despite these developments, network coverage is still heavily skewed in favor of urban areas. Speaking at
CSIS, Minister of State Sachin Pilot remarked that India’s remote northeastern region has scarcely been
integrated into the “telecom loop.” The Indian market is also characterized by its reliance on simple voice
calls and SMS (short text messaging), rather than sophisticated, and arguably more beneficial, mobile
technologies. Yet these simple features have led to cumulative benefits, especially for rural customers.
According to the World Bank, these include improvements in productivity, employment rates, and profits,
as well as better access to health and social services. The scope in India for future expansion and
technology upgrades in mobile-related products and services is massive, unleashing even greater rural
development potential.

Rural India, a Slowly Changing Paradigm? Rural India’s 626,000 villages make up 70 percent of the
workforce and generate 20 percent of India’s GDP. Although rural India historically has been considered a
burden on the economy, today there is growing recognition that robust increases in rural demand
cushioned India against the impact of the 2008–2009 financial crisis. Increased rural purchasing power is
now evident across a number of sectors. For instance, in 2010 rural consumption overtook urban areas in
fast-moving consumer goods over a five-year period.

However, rural India is still predominantly impoverished. To sustain this recent positive momentum, issues
of access need to be addressed urgently. Specifically, rural India has been perceived as a mere observer
and passive user of the technology and knowledge revolution that is driving India’s growth. Although
benefits are trickling down, products are rarely designed with rural communities in mind. Rural India is
also inadequately serviced financially. These two key factors are significantly undermining rural India’s
ability to fully integrate into the formal economy and to experience value-added growth.

Aligning Financial and Digital Inclusion Objectives:
India’s Rangarajan Committee on Financial
Inclusion (2008) defines financial inclusion as “ensuring access to financial services, including timely and
adequate credit where needed to vulnerable and low-income groups, at affordable costs.” This policy is
widely regarded as an effective pathway out of poverty, as it reduces dependency on exploitative loan
sharks, creates incentives for saving, and ensures against unpredictability. Five years after the Planning
Commission and the Reserve Bank of India (RBI) declared “a bank account for every household” as a
primary policy goal, a staggering 40 percent of India, or 135 million households, remain unbanked. A
report by the ICRIER finds that while banking in urban India has achieved more than 100 percent
penetration (many urban Indians have more than one bank account), rural India lags far behind with only
19 percent penetration.

The underlying reason for this situation is that rural India is deemed unprofitable for traditional banking
operations. Since 2005 the RBI has made efforts to encourage rural banking through such measures as
no-frills-accounts, greater government involvement in enrollment, and cheaper agricultural loans, but with
only marginal success. Technological innovations built on access to telecommunications networks can
quickly fill this vacuum. Recent innovations can improve rural outreach by modifying and securing existing
banking channels and introducing new channels that leapfrog traditional infrastructure constraints and
minimize transaction costs. According to Anurag Gupta, the CEO of A Little World (ALW), mobile banking
(m-banking) is the cheapest way to reach rural customers. While it costs $523 to $837 to set up a micro-
banking outlet, it costs only $209 if they are supplanted by mobile banking technologies. In the same
vein, the RBI reports that while the government typically incurs a transaction cost of 12–13 percent,
mobile banking brings the cost down to a mere 2 percent.

As part of its broader aim to tackle infrastructure shortages, the government is also deeply committed to
bridging the “digital divide,” or ensuring universal access to information and communications technology
(ICT) networks. In this regard, the strongest feature of mobile banking is that it marries the government’s
aims of financial and digital inclusion. An example is the $4 billion Universal Services Obligations fund,
under the Ministry of Communications and Technology, that is being deployed to meet the needs of rural
connectivity. This will automatically enable access to mobile banking in these undeveloped areas.
Furthermore, the recent auctioning of the wireless 3G broadband network will drastically improve Internet
coverage, which stands at 7 percent today, and trigger the development of Internet-based rural mobile
banking technologies.

The M-banking Ecosystem, Enabling Design and Delivery:
Full-scale commercial implementation of
rural m-banking is complex. It requires a multitude of players, such as telecom operators, m-banking
product developers, regulators, and financial institutions to envisage and coordinate delivery. In 2008, the
RBI laid out skeletal operating guidelines for mobile banking transactions. Given the growing importance
of this area, as of June 20, 2010, the RBI and TRAI have announced that they will collaborate with one
another to avoid any form of regulatory cross fire. The RBI is gradually consolidating and revising
regulations based on the Mobile Banking Working Group’s 2008 recommendations. Some of these include
methods for banks to partner with telecom providers, strengthening the security framework, laying down
common standards for completing transactions, and so on. TRAI is focusing on dispute settlements and
fixing tariff rates for mobile banking access.

Today, creative pilot projects are being undertaken sporadically across rural India. These projects vary
significantly in their design, scope, and outreach. MCHECK, with 500,000 customers, requires beneficiaries
to own their mobile phone and have an HDFC bank account. It uses encrypted SMS technology to transfer
small amounts of funds via designated agents. EkGaon Technologies, assisting 10,000 rural Self-Help
Group members, uses a camera phone with special voice recognition software to authorize transactions. A
Little World, catering to 250 villages, uses Near Field Communications (NFC), which is an instant and

secure transmission technology. ALW has effectively pioneered a “mobile-phone bank” equipped with a
biometric fingerprint authenticator, a contactless smart card reader, and a printer.

Another path-breaking feature of mobile-based technologies is that they can be used as catalysts to
strengthen the nascent e-governance or “digital governance” regime in India. In particular, government
benefits to the rural poor can be disbursed via mobile phones. Plagued with leakages and lack of
accountability in the past, pension and employment benefits in 12 states are now reaching beneficiaries
more successfully through NFC mobile technology developed by FINO-MITRA. ID cards are swiped through
a wireless mobile phone reader to complete and record transactions.

Challenges Facing M-banking:
There is a legitimate concern that mobile banking is not popular even
within urban areas. Today, fewer than 14 percent of urban dwellers use mobile banking. Challenges
include little awareness about mobile banking, lack of support in vernacular languages, and, perhaps most
crucially, security issues for both customers and regulators. The World Bank paper “Integrity in Mobile
Financial Services” finds that security concerns center around customer identification, data protection, the
ability to disguise mobile transaction totals, the speed with which illicit transactions can be carried out,
and the level of regulation of the service providers. The RBI is aware of this and currently approves very
few wireless transfer techniques; it also insists on bank-led models and has limited mobile transactions to
Rs. 10,000. These limitations can be expected to be relaxed as new technologies evolve and existing ones
establish their credibility.

Is Rural India ready? Although mobile banking is especially valuable for rural regions because of the
lack of alternatives, delivery depends on overcoming several impediments. The most pressing of these is
meeting the prerequisite of mobile network and electricity coverage. Also, physical security concerns are
more acute in rural areas, especially with branchless banking models that use agents. Oversight
mechanisms need to be installed at the kiosks where physical transactions take place, due to problems
associated with crime and bribery. Although many transactions can be cashless, hard cash still needs to be
available for customers. As a result, the security and logistics of the transportation channels used by
providers need to take priority. This will be particularly difficult in more remote areas. The textual and
technical illiteracy problem in rural India elicits a need for multilingual support and perhaps voice-based
services to carry out transactions. Of the mobile banking technologies discussed above, none has been
tested for scalability and reliability. The government thus needs to play a more active role in building
support and encouraging research, perhaps by making use of the Financial Inclusion Technology fund to
subsidize these projects. In sum, it appears that while there is a huge unmet need for mobile banking in
rural India, the region is definitely not yet equipped for large-scale deployment of this technology.

Major Market Players: Nokia and Motorola are the leading mobile handset providers, due in major part
to their ability to develop simple, low-cost models that are well suited to the Indian context. Telecom
services are operated by a wide spectrum of firms, ranging from state-owned companies (BSNL and
MTNL), to private enterprises (Reliance and Bharti-Airtel), and even foreign partnerships. The most
notable of these are UK-based Vodafone’s partnership with Essar, as well as the recent partnership
between Japan’s Docomo and Tata. In June 2010, the United States’ AT&T ventured into the Indian
telecom market and is hoping to partner with Reliance Telecom in the near future.

Foreign Role in Rural Mobile Banking:
Information systems and telecommunications have been widely
regarded as central to the development of mobile banking. The international investor community has
taken a major interest in this sector, with $550 million worth of foreign direct investment pouring in over
the last five years. A safe, secure transparent market along with investment policies and other lucrative
incentives have made foreign collaborations in India possible. The same trend is expected with respect to
the various dimensions of mobile banking technology and represents yet another fruitful area for U.S.-
India cooperation. Multinational companies, NGOs, and multilaterals have already indicated a strong desire
to not only fund but also develop mobile banking models, both in India and elsewhere. In fact, the most
renowned mobile banking system in the world today, M-PESA in Kenya, was modeled by the UK’s
Vodafone. The world-renowned Grameen Bank and U.S.-owned transaction platform developer Obobay
have embarked on the “Bank a Billion” initiative currently under way in Mumbai. They plan to use their
Indian m-banking experience as a template for future worldwide delivery. In February 2010, the Bill &
Melinda Gates foundation and the Consultative Group to Assist the Poor announced the “Mobile Money for

the Unbanked Initiative,” with a $12.5 million grant to provide research funding for such initiatives, some
of which are expected to occur in India. Finally, homebred firms are also being pursued by foreign
investors. ALW’s promising model has won it funding from the prominent New Zealand-based foreign
venture capitalist Legatum Capital.

Looking Ahead, a Win-Win Situation: According to Vikram Akula, CEO of SKS Microfinance, India’s
largest microfinance institution, micro-banks that run on mobile phones represent “the future of
microfinance delivery.” A step-by-step concerted effort by the Ministry of Communications and
Technology, RBI, and TRAI, who all appear to be on the right track, will help network providers and
financial institutions to scale their operations and realize profits. Parallel developments in India will also
positively enhance the mobile banking process. In particular, the availability and expansion of the 3G
Internet network will allow for more advanced smart-phone–based mobile banking options. Furthermore,
the biometric Multipurpose National Identity Card, under the Unique Identification Authority of India, will
provide a unique number to all Indians. This will alleviate security concerns over identification and
improve the efficiency of delivery. Overall, mobile banking has presented itself as a boon for rural India.
Rural connectivity and financial inclusion will permanently change the way economic activity is conducted
in India, offering tremendous opportunities to be harnessed.

Riddhima Gandhi is a research intern with the South Asia Program at the Center for Strategic and
International Studies in Washington, D.C.
South Asia Monitor is published by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on
international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions; accordingly,
all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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