Poor people in isolated areas of the country are gaining access to banking services through local agents equipped with a cash float and a portable computer. The initiative directed by India's central bank is transforming lives. Anuj Chopra, foreign correspondent, reports
Whenever Pradeep Tambadkar, a 30-year-old sugar cane farmer, wants to withdraw money from his bank account, he needs only to call out to a man next door and the bank walks right up to him.
Mahesh Patil, his neighbour in the village of Sudkoli, perched on the Arabian Sea coast, is an agent with the Bank of India, one of the country's largest public-sector banks. He pulls out a handheld biometric device that looks like a cross between a gaming console and a credit card swipe machine.
Mr Tambadkar needs to place his left thumb on a sensor on the battery-powered machine, and enter in his unique identity code and the amount he wishes to withdraw. A congenial Marathi-speaking voice guides him through the process. Once the details have been entered into the device, Mr Patil hands over Mr Tambadkar's cash.
This model of branchless banking, which reduces the cost of serving clients while increasing convenience, is part of an ambitious effort by the Reserve Bank of India (RBI), the central bank, to promote financial inclusion among poor and remote populations that have no access to bank branches.
India's banking penetration is much lower than in most developed markets. There are only 10.11 bank branches per 1,000 adults and only 40 per cent of India's 1.2 billion people have bank accounts, according to the management consultancy McKinsey & Company. Of India's 600,000 villages, only 30,000 have access to bank branches.
The cost of a banking transaction falls from US$1 (Dh3.67) at a bank branch to 10 cents if done through an agent, or banking correspondent (BC), says a study by the University of Pennsylvania's Wharton School. Usha Thorat, who took over the financial inclusion portfolio at the RBI last year, says this model "is the only way to increase financial inclusion".
"A large population in India is unbanked," she says. "They have to travel long distances to the nearest bank branch to collect payment for social schemes. Technology has made doorstep service possible."
As rural incomes expand, there is a greater demand for banking services. According to the market research company India Brand Equity Foundation, the country's working population is expected to increase from 675.9 million last year to 795.5 million by 2026, expanding the market for banks.
The RBI aims to connect 350,000 villages across the country with banks in the next two financial years. It has asked banks to ensure that 223,473 villages have access to the basic financial services by next March.
"With this model, we can take banking further and further into the interiors of India," Ms Thorat says.
Besides ensuring financial inclusion, this landmark initiative also has the potential to reduce corruption and poverty significantly.
Over the next half decade, India will spend $250 billion on social schemes and subsidies such as old age pensions. The brokerage CLSA Asia-Pacific Markets estimates that 40 per cent of that spending - $100bn - will be siphoned off through corruption.
McKinsey says India can save as much as 1 trillion rupees (Dh80.64bn) a year - nearly 20 per cent of its current fiscal deficit - by depositing payments directly into bank accounts.
According to a World Bank study, a similar cash transfer scheme in Brazil, called the Bolsa Familia Programme, helped to lift 20 million people out of poverty between 2003 and 2009. Through the programme, 19 million bank accounts were opened in the first four years.
McKinsey expects India to nearly double its share of global banking revenue by 2015 - from 1.5 per cent to 2.8 per cent. Twenty Indian banks with a total brand value of $13bn were listed on last year's Global Banking 500, the annual international ranking of the world's most valuable brands by the UK consultancy Brand Finance.
The government-owned State Bank of India (SBI), the country's largest bank - whose brand value increased from $1.5bn in 2009 to $4.55bnlast year - was ranked 36 and became the first Indian lender to be ranked among the top 50 banks in the world.
ICICI, India's largest private-sector bank, was in the top 100 with a brand value of $2.16bn.
And with a large market that is underserved by banks, there is ample scope for growth, analysts say.
Employing agents such as Mr Patil where banks do not exist can enhance the penetration of other financial services such as mutual funds, pension products and insurance, analysts say.
In 2006, the RBI granted banks permission to appoint retired bank and government employees as BCs. They must be permanent residents of the areas in which they operate and must be able to read and write English. The BC, who is offered training to handle biometric devices, is meant to function under the strict supervision of a bank branch.
Financial Information Network and Operations, a business and banking services technology provider based in Mumbai, employs 8,000 BCs around India, at salaries of between 1,500 and 3,000 rupees monthly. These BCs have managed to tap a customer base of 17 million people for 14 banks, including the SBI.
The RBI says the number of bank accounts opened through the new model rose to 74 million this March from 50 million last year.
However, "you cannot cover all services only through banking correspondents. You need to have brick-and-mortar branches, and that is why we have now made it mandatory that 25 per cent of the new branches have to be in unbanked villages," says KC Chakrabarty, a deputy governor of the RBI.
The use of the model remains fairly limited because of restrictions on who can be hired as BCs, analysts say. In September last yearthe RBI permitted banks to employ post offices and companies registered under the Indian Companies Act 1956 as BCs. But non-banking institutions, even those with large and widespread retail networks, are prohibited from functioning in this capacity.
There is also a risk of fraud because agents are less easily monitored and are potentially less concerned about their long-term reputations than banks are. The SBI, which says it is unsure whether the model is financially viable in the long term, reports 3.83 million bank accounts opened through BCs in recent years versus 126 million accounts opened through its 12,583 branches across the country.
Ms Thorat dismisses those concerns. The model caters to a low-income population in rural India where banking transactions involve small amounts of cash. But this approach will be profitable in the long term, she says, if banks use BCs to "offer a wide range of financial products".