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The challenges of branchless banking

December 05, 2016 11:03 IST
  • Some believe the shift to mobile-based transactions will be seamless considering that the urban tele-density is 148%.
  • In rural areas, it is touching 51%.
  • But smartphone penetration in India is a mere 12%.
  • Growth of mobile money has been extremely slow: It is currently 1%.

Ishan Bakshi/Business Standard reports.

IMAGE: Where the traditional brick and motor model has failed to rapidly scale up, the branchless model has stepped up. Photograph: Reuters

The National Democratic Alliance government's decision to scrap high denomination notes has once again brought to the fore questions about the adequacy of the banking infrastructure, especially in rural areas.

At this juncture, when many are worried about how the poor are going to manage, a new report, Inclusive Finance India Report by Access Development Services looks at the extent of financial inclusion in the country. Business Standard takes a look at the key elements of the report.

By all accounts, there has been a sharp increase in the population that is now 'directly banked.'

As the Finscope Consumer survey cited in the report shows, even in 4 of the poorest states in the country -- Uttar Pradesh, Odisha, Madhya Pradesh and Bihar -- a staggering 86% of the population is directly banked.

In large measure, this increase reflects the success of the Jan Dhan Yojana.

But there has also been a steady increase in financial touchpoints in rural areas through various channels, though its depth to effectively serve the population is debatable.

For instance, the number of bank branches in rural areas has risen from 48,033 in 2015 to 50,421 in 2016, accounting for roughly 38% of the total branches of all scheduled commercial banks.

While this may seem impressive, adjusting for population, rural areas account for roughly 70% of the country's population, reveals the inadequacy of the formal banking system.

The report also suggests that the absolute branch numbers might not be the right indicator to look at when determining the actual reach of the banking system simply because there might be multiple branches in a particular location.

The report thus looks at unique banked locations in rural and semi-urban areas to gauge the growth in unbanked areas.

This data point shows that the growth of unique rural locations has actually lagged behind the rate of growth of rural branches, which suggests that banks are opening branches in areas where the formal system already exists.

But, where the traditional brick and motor model has failed to rapidly scale up, the branchless model has stepped up.

Data presented in the report show that over the past 6 years, there has been a sharp increase in branchless mode outlets, with the same rising from 34,316 in 2010 to 534,477 in 2016.

But questions have also been raised about the effectiveness of this channel in its capacity to deliver financial services effectively.

The growth of mobile phone users has made it an important platform to extend banking services, especially to the unbanked sections of the society.
 
 

Regional rural banks are another major financial touchpoint as they continue to have a major presence in rural and semi-urban areas.

But the RRBs' share in the banking network has declined from 35% in 2011 to 31% in 2016, which suggests that they have grown at a slower pace than the branch network of the banking system.

Primary agricultural societies (PACs) are also an important channel in rural areas.

While there are 92,000 PACs in India, the report suggests that only 67,000 of them are 'effective and are in the viable range and may be actually providing some services to the members.'

One must point out that even this reduced number of 67,000 is greater than the 45,359 unique rural and semi-urban locations that have bank branches.

On Self Help Groups (SHGs), the data presented in the report suggest that there hasn't been much increase in the number of SHGs over the past four years, although the average savings per group has increased dramatically.

As the report shows, in the last four years it has almost grown by 2.5 times in the eastern sector and the savings amounts have doubled if we look at the average statistics for the country as a whole.

The only region where the growth in absolute savings is low is the northeastern region.

Microfinance institutions have also witnessed a sharp growth in their loan portfolio, but the report points out that this is 'growing disproportionately to the base -- branches, employees, and clients.'

This, it adds, is a sign of 'deepening of engagement with the same client, either through higher loan amounts or through multiple loan accounts, or both.'

While these data do suggest a significant increase in financial touch points in rural areas, does this increase reflect greater inclusion?

Does an increase in bank branches imply greater financial inclusion?

Consider, for instance, a rather telling statistic that of all the Jan Dhan account holders, only 2.8% have been offered the overdraft facility extended under the scheme.

Further, even among those for whom it has been sanctioned, nearly half have not availed the facility.

This, in a sense, goes to the heart of the problem of financial inclusion -- that of greater engagement with the formal system.

Changing that has always been the problem.

The question now is whether the demonetisation drive will push for greater engagement with the formal banking system through mobiles.

Data show that transactions through mobiles have gone up from roughly a million in 2011 to almost 50 million by 2016, with the estimated value of Rs 57,200 crore (Rs 572 billion).

Some believe that the shift to mobile-based transactions will be seamless considering that the urban tele-density is 148%.

In rural areas, it is touching 51%.

Further, the smartphone penetration in India is a mere 12% according to data in the report.

Growth of mobile money has been extremely slow (it is currently 1%), with only 8% of rural males below the poverty line actively using mobile accounts beyond basic wallets.

As the report points out, the exponential growth of mobile phone users has made it an important platform to extend banking services, especially to the unbanked sections of the society.

A seamless transition to cash-less society is unlikely to materialise in the short term.

Image only published for representational purposes.

Ishan Bakshi
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