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Time to go cashless
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Recently, one of our loan officers at SKS Microfinance was murdered and robbed of cash collections when he was returning from the field. Any death under these brutal circumstances is tragic, of course. But it’s even more tragic because it was perhaps completely avoidable. It was the result of a systemic failure in banking—a sector that still insists on being traditionally centred on cash.
Just why was the young man carrying cash? It was because the villages from which he had collected the cash—weekly loan repayments—had no bank branch where he could deposit the money. He had no option but to carry the cash around.
And why were there no bank branches in these villages? Could other cashless methods of repayment have not been possible?
The Reserve Bank of India (RBI) July 2005 Final Report of the Internal Group to Examine Issues Relating to Rural Credit and Microfinance stated that the scheduled commercial banks covered only 18.4% of the rural population as far as savings accounts were concerned. According to another RBI report in August 2009, at least 41% of the population is unbanked.
Given issues of costs and infrastructure, RBI has also recognized that it is just impossible to have bank branches in every village of India. Clearly the solution is then to encourage a network of business correspondents (BCs) and business facilitators that can provide quasi-banking services for the rural poor.
RBI published the first set of guidelines designed to encourage banks to appoint BCs in 2006. Apart from undertaking facilitation services, BCs were also supposed to undertake services such as the disbursal of small-value credit, the recovery of principal or collection of interest, the collection of small-value deposits, the sale of retail finance products and the receipt and delivery of small-value remittances.
In 2009, three years later, RBI itself reviewed the progress on the appointment of BCs by 27 nationalized banks. It found out that in three years, these banks had appointed a total of only 85 BCs. If you take out three banks—State Bank of India, Punjab National Bank and Bank of India—which had appointed the maximum, the other 24 banks had together appointed just 37 BCs. Several had appointed not even one.
But the bigger question is why can’t India leapfrog from this whole issue of branch banking and go to a situation of branchless banking and cashless payments? Take the example of M-Pesa, a mobile payment service launched in 2007 by Safaricom, Kenya’s largest mobile operator. Such has been its runaway success that more than half of Kenya’s population uses mobile phones to transfer or remit money.
India has all the ingredients to make this system work. It is the world’s fastest growing mobile phone market with a multiplicity of operators. Since competition has driven down pricing on voice telephony, each of these operators is looking at alternative sources of revenues. India is also a world leader in software development, which is required to make such mobile payments safe and secure. What is more, RBI even announced guidelines governing mobile payments a couple of years back. Despite all this, there has been no progress on the mobile payments front: The process is tied down in various bureaucratic procedures within the banking system.
This is really a pity because as someone who heads a company that provides microfinance to at least five million members located in over 60,000 villages, I believe the solution to India’s problem of financial inclusion lies in an innovative combination of policy, microfinance and the technology of cashless—especially mobile—payments.
What is more, it will also go a long way in curbing needlessly tragic deaths such as that of my young colleague a few weeks ago.
Suresh Gurumani is CEO, SKS Microfinance Ltd. Comment at otherviews@livemint.com
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