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Implications of Technology On Financial Inclusion A Joint Indian Microfinance Sector Research Project Skolkovo Moscow School of Management & PlaNet Finance With Special Thanks to SaDhan & YES Bank April-September 2013
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Aug 29, 2014

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Page 1: Technology  financial inclusion

Implications of Technology On Financial InclusionA Joint Indian Microfinance Sector Research ProjectSkolkovo Moscow School of Management & PlaNet Finance

With Special Thanks to SaDhan & YES Bank

April-September 2013

Page 2: Technology  financial inclusion

2

Table of Contents• Project Overview, Executive Summary & Key Findings• Project Objectives & Scope• What Is Financial Inclusion?• Microfinance Sector in India• Technology and Financial Inclusion • Financial Inclusion Models: Business Correspondent Model

IMPSFino Paytech Case

EKO India Financial Services Mobile Network Operators: Mobile Wallets

Airtel Money: Open and Closed mWallet M-Pesa in India and KenyaYES MoneyAlpha Payment Services: Union Bank Money and Alpha MoneyJoint Liability Group Model

• Stakeholders & Team• Glossary• Appendix

Financial Inclusion in India: A Market Map Government Initiatives

Page 3: Technology  financial inclusion

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Project Overview

• This research study ‘Implications of Technology On Financial Inclusion’ endeavors to study the various models that use technology for Financial Inclusion . Due to the number of different models the study has endeavored to primarily bring an understanding of the operational details of these models for those working in the microfinance sector and it touches upon some basic questions .

• The models studied are : Business Correspondent Model

Fino Paytech Case EKO India Financial Services Mobile Network Operators: Mobile Wallets

Airtel Money: Open and Closed mWallet M-Pesa in India and KenyaYES MoneyAlpha Payment Services: Union Bank Money and Alpha Money

Joint Liability Group Model

Phase II of the study would be to closely examine the successes and limitations of any of these models already being operated within an MFI or alternatively seed some of these pilots within MFIs.

Page 4: Technology  financial inclusion

Executive Summary

4

India is one of the most populated countries in the world, and yet approximately 40% of the grassroots population do not have access to basic banking facilities.

• The Indian government via the Reserve Bank of India (RBI) has set the goal of growing the country’s banked population through financial inclusion via a variety of favorable models and regulations.

• In 2011 a law was passed to mandate banks to open 25% of new branches in rural areas.

• The government opened new channels for banks to allow them reach a larger population base. In August 2010 the RBI made for-profit organizations eligible to become BC (business correspondence) agents.

• Several organizations moved into the sector by providing no frills accounts and basic financial services to unbanked populations (to date, almost 100 million NFAs have been opened across India).

• Other players in the for-profit sector as well as NGOs have all adapted models with the goal of pursuing financial inclusion. These include “mobile wallets” by telecommunication providers.

• It seems that, even though all major building blocks and regulations are in place, the process of financial inclusion is not accelerating.

• A lack of education and long term sustainable business models are the major challenges for financial inclusion.

Page 5: Technology  financial inclusion

Key Findings (1/2)

5

• Both Indian state and private banks operate in rural areas and are obliged to meet regulatory requirements.

• At this point the BC model seems to have the largest reach but the model is still questionable in terms of viability and sustainability.

• The economic viability of bank’s rural operations at this point is questionable.

• State banks concentrate on the volume of accounts opened (no frill accounts) for villagers, but many of these accounts (up to 75%) remain inactive.

• Private banks concentrate on the the operational efficiency of newly opened bank accounts.

• State banks subsidize transaction fees for rural customers as well as pay BC agents fixed salary and volume based commissions (on the other hand private banks are very accurate in BS management).

• The 2010 crisis created a setback for MFIs but now the trends are coming back to the record levels prior to the 2010 crisis.

• Banks claim that they do not compete with MFIs and MFIs play a complementary role; however at times the roles of the two are unclear.

• Although mBanking represents as an opportunity for Banks to reduce operational and transaction costs, particularly to operate in rural areas, it has not really accelerated.

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Key Findings (2/2)

6

• Mobile Wallets are increasingly mostly used for peer-to-peer remittances by migrant workers who send money back to villages.

• There are two types of Mobile Wallet accounts that allow fund transfers: linked to bank accounts unlinked

• mWallets are usually ‘closed’ systems;

• mWallet coverage is restricted by cash in/cash out ability, it is directly dependent on traditional channels like ATMs or BCs where the user can deposit/windraw money.

• Average transaction costs for users are usually very high (around 2%).

• However, informal channels are even more expensive and unsecure!

• The best way to reduce costs for financial institutions is to employ economies of scale.

• Restrictions for mobile transaction volume are 5-10 000 INR.

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• Project Overview, Executive Summary & Key Findings• Project Objectives & Scope• What Is Financial Inclusion?• Microfinance Sector in India• Technology and Financial Inclusion • Financial Inclusion Models: Business Correspondent Model

IMPSFino Paytech Case

EKO India Financial Services Mobile Network Operators: Mobile Wallets

Airtel Money: Open and Closed mWallet M-Pesa in India and KenyaYES MoneyAlpha Payment Services: Union Bank Money and Alpha MoneyJoint Liability Group Model

• Stakeholders & Team• Glossary• Appendix

Financial Inclusion in India: A Market Map Government Initiatives

Page 8: Technology  financial inclusion

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Project Objectives

3. Applying these technologies in microfinance space to help increase reach and lower costs

Improving financial literacy

Bringing together all stakeholders

Focusing on sustainability

Regulatory changes

2. Understanding why FI is not accelerating despite there being a fertile environment for it

Is technology right for facilitating FI? Assessing needs for regulatory changes

1. Understanding technological models for financial inclusion and assessing all technological aspects impacting the goal of FI

Understanding the policy of FIOverall Objective

To build

understanding and transparency

around the technological

activity to facilitate

microfinance network to

leverage this understanding

and play a valuable

leadership role in the goal of FI.

Page 9: Technology  financial inclusion

Project Scope

9

Redefine rolesAnalyze situation

Find the bottleneck

Where the microfinance sector stands

Interview all the players in the process (Banks / Telecom companies / other Tech Providers)

Find out why the system is not accelerating

Find out what are the costs and who could/should subsidize

OUT OF SCOPE

• People without mobile phones

• Advising clients how to invest

• Gathering feedback from clients on the technology

Find out how clients can become satisfied

PLAYERS

• Telecommunication Providers

• Banks• Technology Service

Providers• Consumers• The Government

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• Project Overview, Executive Summary & Key Findings• Project Objectives & Scope• What Is Financial Inclusion?• Microfinance Sector in India• Technology and Financial Inclusion • Financial Inclusion Models: Business Correspondent Model

IMPSFino Paytech Case

EKO India Financial Services Mobile Network Operators: Mobile Wallets

Airtel Money: Open and Closed mWallet M-Pesa in India and KenyaYES MoneyAlpha Payment Services: Union Bank Money and Alpha MoneyJoint Liability Group Model

• Stakeholders & Team• Glossary• Appendix

Financial Inclusion in India: A Market Map Government Initiatives

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What Is Financial Inclusion?

FINANCIAL INCLUSION

Financial inclusion is the process of ensuring access to appropriate financial products and services needed by vulnerable groups such as weaker sections and low income groups at an affordable cost in a fair and transparent manner by mainstream institutional players.

Source: http://www.rbi.org.in/ , COAI

1. Ability to use formal transaction channels2. Ability to use value added services

Savings

Credit

Remittances

Insurance

FI Products

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Life Cycle

Savings Prepare for Old Age

Credit Managment, Insurance

Working Life

Remittance Facilities Support Others

Insurance Deal with Emergencies

Loans Birth, Education, Marriage, Acquisitions Income

Generation

Why the grassroots need financial products:

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• Project Overview, Executive Summary & Key Findings• Project Objectives & Scope• What Is Financial Inclusion?• Microfinance Sector in India• Technology and Financial Inclusion • Financial Inclusion Models: Business Correspondent Model

IMPSFino Paytech Case

EKO India Financial Services Mobile Network Operators: Mobile Wallets

Airtel Money: Open and Closed mWallet M-Pesa in India and KenyaYES MoneyAlpha Payment Services: Union Bank Money and Alpha MoneyJoint Liability Group Model

• Stakeholders & Team• Glossary• Appendix

Financial Inclusion in India: A Market Map Government Initiatives

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• According to BBC News (July 18, 2010) ‘There are more poor’ in India than Africa. 8 Indian states account for more poor people than in the 26 poorest African countries combined. The Indian states, including Bihar, Uttar Pradesh and West Bengal, have 421 million “poor” people, the study found. This is more than the 410 million poor the study found in the 26 poorest African countries.

• The demand for microfinance services – savings, credit and insurance is apparently insatiable in India. In that sense, India is perhaps the largest emerging market for microfinance services. The Planning Commission in 2004-05 estimated that 27.5% of the total population in India is below poverty line.

• Currently, a total population of 1.1 billion is being served by 50,000 commercial banks, 12,000 co-operative bank offices, 15,000 regional rural banks and 100,000 primary agriculture societies. Despite the density and robustness of the formal Indian financial system, it has failed to reach the deprived segment, leaving approximately 135 million households entirely unbanked.

The Microfinance Sector in India

The Indian microfinance industry will cross 90 million borrowers and $10 Billion in loan portfolio by 2014 and will require a huge capital inflow both in debt and equity.

Page 15: Technology  financial inclusion

All Stakeholders

15

Grassroots

RBI

BANKS

NCPIMFIs

MNOs

GOVT.

TECHNOLOGY SERVICE

PROVIDERSTRAI

SADHANPLANET FINANCE

Page 16: Technology  financial inclusion

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Indian Microfinance Touches 90M+ Low Income People

SHG and MFI Outreach 94.3 Million Peak Loan Portfolio of SHGs and MFIsMilllions Billions

• Microfinance Total Individuals Reached : 90 Million • Microfinance Total Loan Portfolio : 590 Billion (Rs.57000cr) € 6.98 Bn • SHG-Bank Linkage Outreach 60M (6crores); SHG Loan Portfolio 393M (Rs.39375cr) € 4.65 Bn • NBFC-MFI Outreach 30M (3crores); NBFC-MFI Loan Portfolio 209M (Rs.20913cr) € 2.47 Bn

Source : Microfinance State of Sector Report 2012

Rs.590 Bn€ 6.98 Bn

90 Mn

€ 2.47 Bn

€ 4.65 Bn

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MFIs Are Closest to BOP Customers

• MFIs have slowly started using modern technology including mobile and mobile internet to increase efficiency and reduce operation costs

• Mobile applications connected via GPRS for field managers • MFIs have taken small steps to educate customers on

mobile technology • MFIs starts acting as BC agent for banks

Banks

Person/SHG/JLG

MFI (FP/NFP)

Average 14% annual credit

Average 24(14+10%)

annual creditFA (facilitator agent)

• Most customers have mobile phones and saving accounts (NFA) in banks• Customers are slowly moving towards using mobile banking for their saving accounts especially their remittances

• Customers at the BOP prefer loans through MFIs• No collateral needed • Minimum documents and time required• Convenient and transparent, face to face relationship • Very difficult to get loans from banks

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• Project Overview, Executive Summary & Key Findings• Project Objectives & Scope• What Is Financial Inclusion?• Microfinance Sector in India• Technology and Financial Inclusion • Financial Inclusion Models: Business Correspondent Model

IMPSFino Paytech Case

EKO India Financial Services Mobile Network Operators: Mobile Wallets

Airtel Money: Open and Closed mWallet M-Pesa in India and KenyaYES MoneyAlpha Payment Services: Union Bank Money and Alpha MoneyJoint Liability Group Model

• Stakeholders & Team• Glossary• Appendix

Financial Inclusion in India: A Market Map Government Initiatives

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Banks & Financial Inclusion Profitability

Post 60 years of independence, the banking sector has only 320 million savings accounts. Over 400-700 million people are still not included in the banking process.

Almost all models need to be combined with a bank account, which means that there is a huge market for banks in the sector.

Although several banks have taken small steps, the macro picture is that banks still see no commercial advantage/business case in investing in FI as they see no savings potential in the rural last mile.

The importance of livelihood linkages, credit, financial literacy and capacity-building is not even on the horizon.

Banks have large investments in old legacy systems which may not be ready to be scaled up to incorporate the mobile banking technology for enrolling customers/merchants and scaling it up.

Banks would need to extensively train their staff to sustain the customer/merchant move towards mobile banking – the operational cost of FI may be too high for commercial banks.

Opening of no-frill accounts is the only obsession, the active percentage of these accounts and how many have overdraft facilities are questionable points.

Even though there is a massive market in terms of volume, banks do not see FI initiatives as profitable.

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Why Pair Technology & Financial Inclusion?

• The RBI (Reserve Bank of India) is mandating a widening of the base that is financially included

• The microfinance sector leads the financial inclusion space, reaching out to nearly 90 million people at the bottom of the pyramid - need to pay close attention and understand the situation of financial inclusion ramp-up

• The microfinance sector should ask itself the questions: why hasn’t it played a larger role in leading this topic? Is the sector not obligated to? Is it not indeed best placed to do so?

• The microfinance industry needs to speedily understand what has worked, what has not worked, what are the lessons and how can the sector better leverage the immense effort put in by governments, banks, and technology players such as Telcos & (TSPs)

Financial Inclusion (FI) directly impacts the microfinance space we work in

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The Study of Technology & Financial inclusion

• FINO• EKO• ALPHA MONEY• YES MONEY• AIRTEL MONEY• VODAFONE MPESA

• Are these models successful ?

• Do they help financially include people ? How many people have been financially included by these models - what are the statistics?

• Which has worked the best?

• What are our takeaways?

Pairing Technology & FI represents a good business model for several organizations to explore

Why as a sector are we ignoring all this ?Why are MFIs not partnering and participating proactively in these launches ?

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Banking Channels To Acquire & Serve Customers

ATMs

Branches

PoS

CSP

Direct Banking Channel

BC Channel BC (TSP)

END

CUSTOMER

Internet banks

MNO’s POS

• The current regulatory framework allows MNO Banks to try different partnerships and show proof of success.• Players in the Financial Inclusion space have to focus not on single service, but provide a number of services

instead because of decreasing margin and growth of competition.

The Only Way For FI Players To Be Profitable Is To Provide A Bouquet Of Customer Services

MFI Channel

Brick & mortar branch

Mobile WalletMNOMNO Channel

Page 23: Technology  financial inclusion

End-To-End Customer Banking Channels

CustomerBankMNO

network

SMS server

BTSBank-MNO interface SMS

Back-end Service Termination Front-end customer service

Backhaul

CustomerMNO

network

USSD server

Bank BTSBank-MNO interface USS

D

Backhaul

Mobile banking model

Bank-MNO Profit

sharing model

CustomerBankMNO

network

GPRS Gateway

BTSUSSD

Backhaul

Internet

End-to-End seamless customer service

Transparent service provision tunnel

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The Evolution of MFI-NGOs/SHPIs/Societies

MFIs & MFI-NGOs need to re-engineer themselves or become redundant

• There are various technological options available which need to be assessed and understood by all those working in the space of microfinance. Overall transparency in the sector needs to be increased.

• All key players can work together. This can be a win-win partnership for all and, if successful, this new model can be replicated and scaled up to reach a larger audience. The sharing of technology can also increase overall profitability for the players.

• MFIs/NGOs are in danger of being pushed out of the market. There could be a chance that MNOs will replace them by linking consumers straight to no frills accounts with an overdraft of INR.

• Banks may also push MFIs out of the market if they start to see profitability in the FI sector.

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• Project Overview, Executive Summary & Key Findings• Project Objectives & Scope• What Is Financial Inclusion?• Microfinance Sector in India• Technology and Financial Inclusion • Financial Inclusion Models: Business Correspondent Model

IMPSFino Paytech Case

EKO India Financial Services Mobile Network Operators: Mobile Wallets

Airtel Money: Open and Closed mWallet M-Pesa in India and KenyaYES MoneyAlpha Payment Services: Union Bank Money and Alpha MoneyJoint Liability Group Model

• Stakeholders & Team• Glossary• Appendix

Financial Inclusion in India: A Market Map Government Initiatives

Page 26: Technology  financial inclusion

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Models Studied In Depth

Business Correspondent Model

FINO

EKO

Joint Liability Group Model

Alpha Payment Services: Union Bank Money and Alpha Money

Mobile Network Operators: Mobile Wallets

Airtel Money: Open and Closed mWallet

Interbank Mobile Payment Service (IMPS)

M-Pesa in India and Kenya

YES Money

Page 27: Technology  financial inclusion

In Jan 2006, the Reserve Bank of India issued a new set of guidelines allowing banks to employ two categories of intermediaries - Business Correspondents (BCs) and Business Facilitators (BFs) - to expand their outreach. According to the guidelines the BCs are permitted to carry out transactions on behalf of the bank as agents. The BFs can refer clients, pursue the clients’ proposal and facilitate bank transactions, but cannot transact on behalf of the bank.

The BC Model is driven by the Indian government

27

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The Business Correspondent (BC) model

• Technology makes serving the BOP through the BC model economically viable.

• The BC model allows for a reduction of the cost per transaction of up to Rs 5-15. (0.08 – 0.25 USD)

• Cheaper than ATM transaction costs

• The BC model allows clients to open No Frill saving accounts and execute money transfers P2P, P2M, & G2P, and in some areas they can even receive loans.

The Business Correspondent (BC) model is based on modern technology. Mobile internet, secure ID (fingerprint scans) and smart cards are paired together with agents acting as “Business Correspondents” to bring banking services to peoples doorsteps.

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Technology Makes Serving BOP Economically Viable

Number of villages

The Business Correspondent (BC) model based on using modern technology: mobile internet, secure ID (fingerprint scan) and smart card together with agents allow to reduce cost for transaction up to Rs 5-15 which is cheaper than ATM’s transaction cost and makes serving rural and poor customers economically viableBC opens No Frill saving accounts and execute money transfers P2P, P2M, G2P, in some areas they issue loans to customers.

Fino is best example of BC model with 60 mln customers across India 2010 2011 2012 2013 2014 2015 2016 2017

0.00

50.00

100.00

150.00

200.00

250.00

300.00

No-ICT NFA (m) ICT-accounts (m)

mill

ions

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Sustainability of the BC Banking model

Organizations or individuals that organize and offer one or more points of transaction outside of bank branches. The BCs organize and manage a network of such transaction points in partnership with a bank.

Business Correspondents

Individuals, shops or other outlets that are responsible for direct contact with the clients. CSPs open bank accounts, conduct KYC, cash out withdrawals, receive payments and in some cases extend credit. Include ATMs & Mini- ATMs.

Customer Service Points (CSPs)

1 2 3

Technology Vendors

There are three major components contributing to the sustainability of the BC banking model

Provide a range of hardware and processing capacity and connectivity which can link clients to BCs and BCs to the bank

The bank’s revenue may come from the extension of services: accounts, savings, credit and payments

• For the channel to become financially viable, regulations require that all revenue from the services be collected by the bank.

• The Tech Vendors, BCs and CSPs are not permitted to charge fees to clients

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Bank Perspective: Challenges to the BC Model

• Cash Handling - Allowing BCs to handle cash is the biggest challenge. 99% of the financial transactions are in cash, warranting high-cost cash-handling operations and added operational risks

• Irregular Accounting - Irregularities have been observed in accounting of clients’ withdrawals and deposits by BCs and as a result there are delays in accounting the banking transactions with the Bank by the BC.

• Client Profile - Recipients of BC services are mostly illiterate and unfamiliar with technology rendering them susceptible to misguidance by the BCs.

• Fraud & Misappropriation - Since the BCs’ staff operate individually without any line supervision, the risk of fraud and misappropriation is higher.

• Inactive ‘No Frills Accounts’ – The majority of No Frill Accounts opened by BCs are not operational. In some locations that have achieved 100% financial inclusion, the accounts in use have been less than 25%.

• Model Viability -There’s a shortage of funding to BCs for meeting the group promotion costs in the case of SHG- Bank linkage models.

• BCs Losing Money - Initial losses are forcing many BCs to shut their operations. Business continuity risk in such cases is impacting banks adversely.

• Interest Capping- Reaching unbanked areas warrants higher delivery costs and the rate cap doesn’t allow much

room for banks to recover the costs necessary to extend credit to hard-to- reach areas and in small amounts. • Distance Criteria – Banks do not always find it easy to get service area waivers from District-level Committees

which are necessary to operate in certain areas. • Cash Settlement - Current regulations mandate BCs to complete accounting and settle cash with bank branches

within 24 hours of transaction.

Operational Issues

Viability Issues

Regulatory Concerns

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• Better than bank branches - Normally a rural bank branch can serve 3,000 to 4,000 families in 12 to 15 villages within a radius of 15kms. A Public Sector Bank branch may require more than 5 years to breakeven in unbanked areas in India, while a private sector & foreign bank with IT connectivity may require about 5 times more. Further, obtaining permission to open a branch is a long and protracted process

• Doorstep banking - Disbursement and loan recovery at the doorsteps of the beneficiary

• Better quality of assets - Target clients are well known to local NGOs, Post Offices, BDOs and similar local social bodies, thus loan facilitation by the NGOs/BCs (who are the promoter/ builder of the groups) enhances quality of assets

• Scaling up of this model is possible within a short span of time.

Bank Perspective: Advantages of the BC Model

The model enables banks to extend financial services to the unreached clients beyond their branch network.

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Revenue Potential

Participant Source of revenue

BANK Account opening Transaction feeInterest on credit

BUSINESS CORRESPONDENT Bank/MNO commissions: enrollments, maintenance of active accounts, marketing and promotion

TECHNOLOGY SERVICE PROVIDER Recurring technology licensing feeEnrollments Transaction fees Device/equipment

MOBILE NETWORK OPERATOR Transaction fee/revenue sharing with Bank

All value chain participants take very small pieces of the revenue ‘pie.’In situations with rural poor, supply costs are bigger than revenues & government subsidies

Although the market requires upfront investments, there is potential for very high revenue

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USSD Technology

MMIDs number reached 50 million as of April 2013 and the number grows at 42% per annum. Number of transactions per month reached 350.000 as of April 2013 and showed 1000% growth per annum.56 Banks participate in the system so far.Choice of USSD technology will eventually meet network capacity limitations so further scalable growth is doubted by MNO’s who are looking forward not to invest in rudimentary technology without native language support.GPRS technology could be a possible win-win solution only when smartphones become commodity in India.There is definitely a dispute between MNO and Banks and NPCI in terms of sharing profits for such service provision.

MNO #2 network

MNO #1 networkCustomer 1

Customer 2

IMPS USSD server

Bank #1 CBS

Bank #2 CBS

IMPS USSD Servers

IMPS USSD Servers

Someone’s going to pay for it, and MNOs are not willing to.

Significant Delays in Discussions Between NPCI and Telcos

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• Project Overview, Executive Summary & Key Findings• Project Objectives & Scope• What Is Financial Inclusion?• Microfinance Sector in India• Technology and Financial Inclusion • Financial Inclusion Models: Business Correspondent Model

IMPSFino Paytech Case

EKO India Financial Services Mobile Network Operators: Mobile Wallets

Airtel Money: Open and Closed mWallet M-Pesa in India and KenyaYES MoneyAlpha Payment Services: Union Bank Money and Alpha MoneyJoint Liability Group Model

• Stakeholders & Team• Glossary• Appendix

Financial Inclusion in India: A Market Map Government Initiatives

Page 36: Technology  financial inclusion

Scalability May Become A Problem For IMPS

Experts question scalability as an issue, as currently the number of transactions is very low to date. The question is whether it can it handle all transactions of several hundred million people.

IMPS applauds USSD Technology, however the MNOs have several concerns over USSD:

Technology is old fashioned - it was appropriate 3 years ago when IMPS was started but is no longer relevant.

MNOs say they have to significant investment for USSD and for which NPCI is not remunerating them adequately and it is better to stay with SMS or internet and cloud.

USSD has not yet been tested out as a mainstream commercial service - access for financial services has remained only in pilot stages. There is insufficient evidence of the results and the challenges from the experiences to date.

MNOs feel that the TRAI-stipulated requirement of a dedicated nation-wide interoperable platform for banking services, with a quality of service—a transaction response time of 2 seconds—without affecting the quality of other services requires a more detailed consideration of network planning and support infrastructure.

There has been insufficient discussion on demand scenarios, customer mapping, rollout schedules, and infrastructure requirements to roll out USSD, while ensuring that the MNOs’ internal signaling bandwidth is not clogged.

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• Project Overview, Executive Summary & Key Findings• Project Objectives & Scope• What Is Financial Inclusion?• Microfinance Sector in India• Technology and Financial Inclusion • Financial Inclusion Models: Business Correspondent Model

IMPSFino Paytech Case

EKO India Financial Services Mobile Network Operators: Mobile Wallets

Airtel Money: Open and Closed mWallet M-Pesa in India and KenyaYES MoneyAlpha Payment Services: Union Bank Money and Alpha MoneyJoint Liability Group Model

• Stakeholders & Team• Glossary• Appendix

Financial Inclusion in India: A Market Map Government Initiatives

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The FINO BC Model

• The first mover in the wide world of financial inclusion business was FINO

• Formed in Mumbai in 2006 with the mission to solve the problem of financial exclusion

• FINO entered into the market using biometric smartcards & hand held device technology and has grown exponentially.

• Today it serves more than 53 million end customers all across India adding one million (net average) new customers to the formal financial system every month.

• FINO’s uniqueness comes from factors such as diversified product offerings (ranging from savings, credit, payment services, remittances, insurance and financial literacy etc), a robust technology, a dedicated channel of bandhus (banking agents) and mature processes.

Source: http://www.developmentoutlook.org/2012/12/rockstar-of-financial-inclusion.html

FINO Pay Tech Ltd is the world’s largest banking agent manager

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The FINO BC Model

FINO is the best example of a Business Correspondent model with more than 50 million customers across India

2010 2011 2012 2013 2014 2015 2016 20170.00

50.00

100.00

150.00

200.00

250.00

300.00

No-ICT NFA (m) ICT-accounts (m)

mill

ions

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FINO’s Network

• Over 5000 employees• 26 Banks• 26 States, 439 Districts

• 12 Govt. entities• 6 Insurance companies

• 60m Subscribers • Annual transactions equal to 4 billion INR• More than 31000 transaction points

• 3 investments rounds so far. Main investors are Corporation Bank, ICICI Bank, ICICI Lombard, Indian Bank, IFC, Intel Capital, Life Insurance Corporation of India, The Blackstone Group, Union Bank of India

FINO’s network covers most of India

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FINO’s Network Growth

2004• Provides technology for MFI’s

2006• Regulation Institutional investors still just

providing technology for MFI’s

2007• Development of BC part of business

Starts to work with 7-8 banks

2009• Government payment programs

(NREGA. SSP etc.)20

08 Q

1-Q2

2008

Q3-Q

4

2009

Q1-Q

2

2009

Q3-Q

4

2010

Q1-Q

2

2010

Q3-Q

4

2011

Q1-Q

2

2011

Q3-Q

4

2012

Q1-Q

2

2012

Q3-Q

4

2013

Q1-Q

2

2013

Q3-Q

4

2014

Q1-Q

2

2014

Q3-Q

4

2015

Q1-Q

20

10

20

30

40

50

60

70

1 35

1014

20

26

36

50

55

60

FINO Customers

Cust

omer

s, m

FINO’s network has grown exponentially since 2008

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FINO Business Model

BanksServices:• Savings• Loans• Remittances• DBT

TPP

Services:• Insurance• Utilities• 3rd party

services

FINO Customer

Customer Access Channels:

• Smartcard• Mag-strip card• Mobile• Card-less• Authentication

Biometric / PIN

Channels:

• POS & BC Merchant

• PC/Laptop & Branch

• ATM• MDM• Kiosk

Backend Frontend

Interfaces:

• Transaction & Service aggregation

• CBS Interface

• Interbank settlement system

• 3rd party system

• Data warehouse

FINO has an integrated business model for extensive coverage

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FINO Payment System

SmartcardJava

SCOSTAContact/ contact-less

Mag-stripe cardMobile

Card-less

Authentication: Biometric/PIN

POS & BC Merchants IngeniseFINO PoTMobile

PC/Laptop & Branch

ATM

MDM

Kiosk

Transaction aggregation server

Service aggregators

CBS interfaces

Interbank Settlement Systems

Other 3rd party system

Data warehouse & MIS

Front end Back end

Service delivery channels

Customer access channels

Interfaces

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44

FINO BC Model: SWOT Analysis

StrengthsLargest BC in India (Economies of scale)Tech SmartUmbrella of financial services for the BOPUnlike MFIs, FINO is able to take deposits from customersFINO owns ALPHA paymentsPOD machines reduce fraud and function both off-line and on-line, so money can get transferred to areas without any networkNot dependent on banks to loan money (FINO bought Intrepid Finance Service, a non-banking financial company)FINO is lending to groups to reduce risk of default

WeaknessesHard to wean people away from informal ways of savingPoor people are saving small amountsHigh operational costsSmall marginsIn-active accountsDelays in working capital: Commission that FINO gets from the banks is often delayed; sometimes month after the money has been disbursed.

Threats Changes in government regulation, e.g. prohibition of BC model Banks accounts lying dormant due to lack of usuage

OpportunitiesSell insurance, loans, remittances an savingsBecome a bank90 million potential customersUse ALPHA payments to pay for utility bills or transfer moneySell financial services to the APL (above poverty line) segment

SWOT

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45

• Project Overview, Executive Summary & Key Findings• Project Objectives & Scope• What Is Financial Inclusion?• Microfinance Sector in India• Technology and Financial Inclusion • Financial Inclusion Models: Business Correspondent Model

IMPSFino Paytech Case

EKO India Financial Services Mobile Network Operators: Mobile Wallets

Airtel Money: Open and Closed mWallet M-Pesa in India and KenyaYES MoneyAlpha Payment Services: Union Bank Money and Alpha MoneyJoint Liability Group Model

• Stakeholders & Team• Glossary• Appendix

Financial Inclusion in India: A Market Map Government Initiatives

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46

EKO Combines The BC Model With USSD Technology

EKO

Eko, a Delhi-based company, is deploying a banking solution for low income people in India. The functions available on the product are specifically geared towards people at the bottom of the pyramid and are distributed through informal retail outlets. Customers can access the service with cheap phones (making use of USSD technology) and perform transactions that they typically need on a day-to-day basis.

Source: http://www.rbi.org.in/

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47

Understanding the EKO model

CustomerCSP

CustomerCSP

Super CSP

Airtel

transaction

Cash management

Transaction connectivity

EKO is a Business Correspondent and Technology Service Provider to multiple banks. It has partnerships with some of the biggest banks in India like State Bank of India (SBI), ICICI Bank & Yes Bank. EKO leverages existing retail outlets, telecom connectivity and banking infrastructure to extend branchless banking services to the common man.

EKO’s bouquet of products and services includes Banking and Money Transfers, Payments, the SimpliBank Platform as well as phone recharge service for every Indian MNO.EKO offers cash management services, namely cash collection and cash disbursal services to government enterprises, MFIs and Large, Medium and Small Scale Enterprises. EKO uses its network of EKO counters, SimpliBank platform, mobile user-interface, authentication (OkeKey) mechanism to enable these services.

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48

How EKO Works

• The ELO SimpliBank platform is a hosted and managed by a low-cost, abridged Core Banking System. SimpliBank supports multiple features:

• A standard double entry accounting system • Multiple types of accounts- savings, current, money

transfer, loan, etc. • Customer and network management modules • Definable interest accrual and posting systems

based on Indian banking guidelines • Configurable limits and fees as per RBI’s AML/CFT

requirements • Secure signature (OkeKey) booklet • Real-time transactions through a three factor

authentication system • User/system management and audit trails • Integration with multiple interfaces like mobile,

internet etc.

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49

EKO SWOT Analysis

StrengthsQuickly and secure send money anywhere in the country Value for customers, banks and agentsStrong relationship with banksStrong technical infrastructure

WeaknessesTiny marginDependents of transaction volumeDependents of agent’s network

Threats Government changesCompetition with other TSP

OpportunitiesGreat amount unbanked population = potential customersIncreasing mobile penetrationIncreasing literacy penetration Demand from banks under government pushing Demand from customers

SWOT

Page 50: Technology  financial inclusion

50

• Project Overview, Executive Summary & Key Findings• Project Objectives & Scope• What Is Financial Inclusion?• Microfinance Sector in India• Technology and Financial Inclusion • Financial Inclusion Models: Business Correspondent Model

IMPSFino Paytech Case

EKO India Financial Services Mobile Network Operators: Mobile Wallets

Airtel Money: Open and Closed mWallet M-Pesa in India and KenyaYES MoneyAlpha Payment Services: Union Bank Money and Alpha MoneyJoint Liability Group Model

• Stakeholders & Team• Glossary• Appendix

Financial Inclusion in India: A Market Map Government Initiatives

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51

Even though mobile banking is still in its early stages in India, with huge domestic remittance channels, ever- growing mobile networks, and increasing financial inclusion mandates, banks and MNOs are increasingly looking to partner with each other. Bank-led and MNO-led models each have specific advantages:

• The bank-led model can more easily integrate mobile channels with existing offered financial services, including a combination of savings, credit, insurance, and/or remittances.

• Furthermore, in order to ensure that consumer financial protections expand to mobile banking services, regulators often see clearer parallels with existing banking regulations.

• The MNO-led model usually leverages a more extensive distribution network, and in many countries, including India, mobile penetration is much higher than banking penetration. Although a model like M-PESA may have been meant for money transfers, there is increasing evidence that users do use M-PESA as a store for their money.

Mobile Banking in India

A key mobile banking issue in India is finding the right partnership between Banks and MNOs

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52

Mobile Wallets: High Potential to Reach BOP (1/2)

• Over the last few years, mobile phones have become an essential communication tool for almost every individual.

• The overall penetration of banking services in India is very low compared to the telecom service penetration. The contrast is even starker in low income and rural segments.

• Infrastructure for cash in/cash out is much better for BC networks and MNO agents and outlets

• Demand for mobile remittances increase in tandem with migration processes from rural to urban areas. Migrant workers need affordable instruments to transfer money to their families in villages.

• Banks and MNOs have launched several mobile money pilot projects: Airtel Money & Axis Bank, Vodafone & ICICI.

• Technology service providers have also launched projects: Alpha Money (FINO), SBI Money (EKO)…

Source: Cellular Operators Association of India

There are currently more than 900 million mobile subscriptions in India and about 100 million mobile subscriptions are added every year.

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53Source: Cellular Operators Association of India

Mobile Wallets: High Potential to Reach BOP (2/2)

• 20 mln MFI clients who repay credit 4 times per month with an average amount of Rs 250 (4 USD)

• Approximately Rs 240 bln (3.8 bln) USD cash flow annually

• Customers spend time and money to deliver cash to MFI branches

• Managers spend time and money to deliver cash • It is not secure to physically deliver cash

500 million Rs (8 million USD) could cover operational costs. Case: money discernment and collection in MFIs

The transaction cost of Mobile Banking is approximately:

• 2% of the cost of branch banking• 10% of the cost of ATM transactions• 50% of the cost of internet banking

Page 54: Technology  financial inclusion

The Regulatory Environment

• Government regulation for MNOs has caused hyper competition, which allowed India to have the lowest mobile tariffs in the world. This has increased MNO’s reach immensely without the need for government intervention.

• Banks are not interested in FI from a profitability point of view, because they are regulated by government. If new players could receive a banking license, there would be more competition, and FI could spread easily even to unbanked areas.

• RBI is very conservative, e.g. the use of mobile wallets is very limited in transaction volume and the amount of money that can be kept in wallets. “Lighter touch” regulation is required – not onerous or complicated.

• The BC Model in its current policy design & operationalization is sub-optimal because it makes most of its money on enrollments. Accounts, however, may remain inactive. To increase the model’s efficiency, banks’ earnings from transactions have to be increased.

• Regulatory guidelines have to go hand in hand with cutting-edge technology. Let the marketplace (customers) decide what channel, form, factor, product or service provider to use.

The Regulatory environment needs to allow for more competition between players for FI to work

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55

Mobile Microfinance: Partner Models

Source: http//planetfinancegroup.org

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56

Mobile Money Models Comparison

Name System type

Customers Products CSP’s Model specifics Transaction point

Airtel Money Semi-closed

E-payment, remittance 1.5m MNO dependent Mobile

Airtel Money Super account with AXIS bank

Open 100000 E-payment, cash-out, savings, remittance

1.5m MNO dependent Mobile

YES Money Open 500000 E-payment, cash-out, savings, remittance

MNO independent Mobile

EKO Open 180000 E-payment, cash-out, savings, remittance

MNO independent Mobile

Alphamoney closed E-payment 31000 MNO independent Mobile

FINO Open 60m E-payment, cash-out, savings, remittance

31000 CSP

Vodafone M-PESA with ICICI bank

Open E-payment, cash-out, savings, remittance

MNO dependent Mobile

Page 57: Technology  financial inclusion

57

• Project Overview, Executive Summary & Key Findings• Project Objectives & Scope• What Is Financial Inclusion?• Microfinance Sector in India• Technology and Financial Inclusion • Financial Inclusion Models: Business Correspondent Model

IMPSFino Paytech Case

EKO India Financial Services Mobile Network Operators: Mobile Wallets

Airtel Money: Open and Closed mWallet M-Pesa in India and KenyaYES MoneyAlpha Payment Services: Union Bank Money and Alpha MoneyJoint Liability Group Model

• Stakeholders & Team• Glossary• Appendix

Financial Inclusion in India: A Market Map Government Initiatives

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58

Airtel Money: Open mWallet

• These include transferring funds to another bank account through NEFT and accessing other banking services like RDs, FDs and micro-insurance products.

• However the obvious upside to the initiative is the fact that it will allow banking services to percolate down to the roots of the Indian population.

• As Airtel and Axis Bank add more services and expand the Super Accounts footprint, the currently unbanked population could very well be queuing up to sign up.

Airtel Money Super Accounts promise to be a boon in many ways. Customers can make cash deposits, receive remittances, transfer and withdraw money anytime. These transactions can be done from authorized Airtel Money-Axis Bank outlets only.

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59

Airtel Money: Closed mWallet

• Once the user loads up his phone with prepaid cash he can walk into specified merchant locations and purchase goods and services.

• Semi-closed wallet are prepaid payment instruments that are redeemable at a group of clearly-identified merchant locations/ establishments which contract specifically with the issuer to accept the payment instrument. These instruments do not permit cash withdrawal or redemption by the holder.

• Essentially, what this implies is that operator subscribers cannot use the ‘currency’ to buy talk time (RBI has mandated that the prepaid currency needs to be kept separate from talk time currency).

The "semi closed wallet” service will enable Airtel subscribers to exchange physical cash for virtual money, which can be stored on mobile phones to pay for goods and services for transaction value less than Rs. 5,000 (80 USD)

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60

Airtel Money SWOT Analysis

StrengthsAbility to cash in/cash out in wide network of Axis ATM and outletsInstant, secure payments and money transfer – P2P, P2M to any mobile number/bank account in India

WeaknessesRestriction on amount of transaction Cash out available in special outlets onlyDependent of bank partner

Threats Regulation changes Competition with many other mWallets

OpportunitiesMore and more merchant tie-ups Increasing knowledge on customer behalf about using mobile transactions

SWOT

Page 61: Technology  financial inclusion

61

• Project Overview, Executive Summary & Key Findings• Project Objectives & Scope• What Is Financial Inclusion?• Microfinance Sector in India• Technology and Financial Inclusion • Financial Inclusion Models: Business Correspondent Model

IMPSFino Paytech Case

EKO India Financial Services Mobile Network Operators: Mobile Wallets

Airtel Money: Open and Closed mWallet M-Pesa in India and KenyaYES MoneyAlpha Payment Services: Union Bank Money and Alpha MoneyJoint Liability Group Model

• Stakeholders & Team• Glossary• Appendix

Financial Inclusion in India: A Market Map Government Initiatives

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62

Kenya: An M-Pesa Success Story

• A study conducted in Kenya to evaluate M-PESA’s community-level impact found (1) easier circulation of money allowed clients to remit money in times of financial distress; (2) conducting business transactions became easier and safer; and (3) vendors were able to reduce the transaction costs and apply savings towards business expansion.

• M-PESA’s phenomenal success has prompted Indian policy makers and private partners to consider using similar applications to achieve financial inclusion objectives and to provide a cost-effective alternative to brick-and-mortar bank branches.

Safaricom launched M-PESA in 2007; by 2009, nearly 40% of Kenya’s adult population used M-PESA services; and by 2011-12 Safaricom estimated that over 14 million Kenyans use the service.

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63

ICICI And Vodafone Mobile Wallet: M-Pesa in India

• On applying for M-Pesa, customers get a mobile wallet issued by MCSL called "MCSL Wallet" and also a Mobile Money Account with ICICI Bank. The Wallet and the Mobile Money account are completely inter-operable and the customers have an option to transfer money into the Mobile Money account.

• The mobile wallet can be used as a open wallet for transactions.

• Minimum amount that can be deposited: 200 rupees, of which 100 rupees is deducted as a one-time account activation fee and the remaining balance is credited to the account balance.

• Maximum daily limit: 5,000 rupees.

• Maximum account balance: 10,000 rupees, while Mobile Wallet and Mobile Money accounts can have a maximum account balance of 50,000 rupees.

M-Pesa

Cash Deposits

Money Transfer to any Bank Account

Money Transfer to another M-

Pesa Account

Top-up Credit for Vodafone

Utility Bill Payments

Source: http://www.icicibank.com/mobile-banking/mpesa/m-pesa.html

ICICI Bank and MCSL (a Vodafone group) have launched "M-Pesa" a mobile money transfer service

Page 64: Technology  financial inclusion

64

• Project Overview, Executive Summary & Key Findings• Project Objectives & Scope• What Is Financial Inclusion?• Microfinance Sector in India• Technology and Financial Inclusion • Financial Inclusion Models: Business Correspondent Model

IMPSFino Paytech Case

EKO India Financial Services Mobile Network Operators: Mobile Wallets

Airtel Money: Open and Closed mWallet M-Pesa in India and KenyaYES MoneyAlpha Payment Services: Union Bank Money and Alpha MoneyJoint Liability Group Model

• Stakeholders & Team• Glossary• Appendix

Financial Inclusion in India: A Market Map Government Initiatives

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65

YES Bank Introduced Remittances Services

FLOW OF FUNDS

MigrantWorker

Shopkeeper BCA

Business Correspondent

YES Bank IMPS

Recipient Banks

Recipient person with a bank account

YES Bank has linked up with various partners as Business Correspondents, leveraging their existing retail outlets, telecom connectivity and banking infrastructure to extend branchless banking services to the common man and facilitate remittances services closer to home, effectively at anytime of the day and most importantly, into any bank across the country.

In addition, last year Yes Bank launched a mobile point of sale (mPOS) that allows GPRS enabled mobile phones to be converted into Point of Sale terminals.

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66

YES Money SWOT Analysis

StrengthsYES BANK Money is YES BANK’s Domestic Remittance Service which is leveraging the existing technologies and infrastructure designed to meet the remittance need of migrants, unbanked and under-banked population in India .This product brings technology to the end user through the Business Correspondent Agents and simultaneously ensures a technology oblivious experience for the end user

WeaknessesBC agents serve as a bank representatives and non ethical behavior may damage bank’s reputation Access to the bank account in rural areas by recipientsDependence of this on customized devices such as Nokia mobile and printers Currently the entire supply chain is too long Threats

Development of similar models by competition and relatively low entry barrierFinancial literacy of rural population and reluctance to use formal banking channels to remit funds may be an issue for future penetration of rural customer base ICICI Bank model of funds remittance may potential be a threat to “YES MONEY” once ATM replaced by BCs

OpportunitiesCapitalize on opportunity to provide credit to JLB (joint liability group) and SHG (self help group) once this model becomes self sustainable, banks establish trust with local communities, and rural population adapt mobile technology White Label ATM (WLAs) – non-bank entities that intend to setting up, owing,, and operating ATMs. Services provided based on the cards (debit/credit/prepaid) issued by bank

SWOT

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67

• Project Overview, Executive Summary & Key Findings• Project Objectives & Scope• What Is Financial Inclusion?• Microfinance Sector in India• Technology and Financial Inclusion • Financial Inclusion Models: Business Correspondent Model

IMPSFino Paytech Case

EKO India Financial Services Mobile Network Operators: Mobile Wallets

Airtel Money: Open and Closed mWallet M-Pesa in India and KenyaYES MoneyAlpha Payment Services: Union Bank Money and Alpha MoneyJoint Liability Group Model

• Stakeholders & Team• Glossary• Appendix

Financial Inclusion in India: A Market Map Government Initiatives

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Alpha Payment

Alpha Payment

Person-to-person

Payments

Bank Teller Functions

Expedited Bill Payment

Money Transfer

Account Opening

Cash Withdrawal

Cash Deposit

Alpha money is a FINO subsidiary which allows customers to have a closed (Alpha Money) or open (Union bank money) mobile “wallet” for money transactions.

Source: http://www.medianama.com/2013/03/223-fino-alpha-payment-mobile-money/http://www.alphamobilemoney.com

• Union Bank Money, the pioneer in digital wallet is introduced by Alpha Payment Services India Pvt. Ltd. (APSIPL) in association with Union Bank of India. UBM enables people to carry digital money instead of physical cash in wallet, thus removing dependency on physical modes of payment. In addition to wide variety of services, customer can also avail withdrawal facility through ATM Card.

• Alpha Money is the mobile based payment solution designed to cater to various payment needs of enterprises. It offers both standard and customized enterprise payment solutions in the domain of cashless disbursement, remote payments, remote collection, order management and cashless insurance.

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69

• Project Overview, Executive Summary & Key Findings• Project Objectives & Scope• What Is Financial Inclusion?• Microfinance Sector in India• Technology and Financial Inclusion • Financial Inclusion Models: Business Correspondent Model

IMPSFino Paytech Case

EKO India Financial Services Mobile Network Operators: Mobile Wallets

Airtel Money: Open and Closed mWallet M-Pesa in India and KenyaYES MoneyAlpha Payment Services: Union Bank Money and Alpha MoneyJoint Liability Group Model

• Stakeholders & Team• Glossary• Appendix

Financial Inclusion in India: A Market Map Government Initiatives

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The Joint Liability Group Model

• Groups of 5 poor women guarantee each other’s loans.

• Loans used to start and expand simple businesses and increase families’ incomes. Their micro-enterprises range from raising cows and goats in order to sell their milk, to opening a village tea stall.

• Borrowers undergo financial literacy training and must pass a test before they are allowed to take out loans.

• Weekly meetings with borrowers follow a highly disciplined approach. Repayment rates on collateral-free loans are more than 99% because of this systematic process.

• SKS, the best-known JLG model in India, offers micro-insurance to the poor as well as financing for other goods and services that can help them combat poverty.

Source: http://www.sksindia.com/know_sks.php

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JLG Model: SWOT Analysis

StrengthsClient tracking system total transparency.Model based on peer pressure and joint liability very effective (99% payback rate).Financial literacy taught to clients sustainable.Marketing is done by word and mouth cheap marketing. Connectivity: if one family from the village joins the system, others want to join. Employees tend to stay with a company for 5+ years strong relationship with clients.

SWOT

Threats Changes in government regulation, e.g. funding being cut off or FIs not being allowed to collect money.Rogue members.

Weaknesses

Volume business high internal costs.High operational costs.Long training time needed to train employees properly. Duplication of data entry (paper files + software).

OpportunitiesTechnological help to create a mobile payment system, which would save branch managers valuable travel time and fuel, costs. (Big BUT – this might also compromise the human relationship managers have with the clients).Technological help to minimize data entry time and other operational costs. Improve communication: a more holistic approach and more transparency is needed from the governments’ side, specifically 1. A proper regulatory framework, 2. Proper guidance and 3. Soft approach to institutions.

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72

• Project Overview, Executive Summary & Key Findings• Project Objectives & Scope• What Is Financial Inclusion?• Microfinance Sector in India• Technology and Financial Inclusion • Financial Inclusion Models: Business Correspondent Model

IMPSFino Paytech Case

EKO India Financial Services Mobile Network Operators: Mobile Wallets

Airtel Money: Open and Closed mWallet M-Pesa in India and KenyaYES MoneyAlpha Payment Services: Union Bank Money and Alpha MoneyJoint Liability Group Model

• Stakeholders & Team• Glossary• Appendix

Financial Inclusion in India: A Market Map Government Initiatives

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Project Leaders : PlaNet Finance & Skolkovo

Shibani Sachdeva : Regional Director PlaNet Finance [email protected]

Petr Kosikhin : Team Leader : [email protected]

Alina Solotarov : Communications Leader

Dennis Yudchits : Team Member

Rolf Diepeveen : Team Member

Ruslan Smirnov : Team Member

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Major Stakeholders & Partners

74

• PlaNet Finance India, the representative office of PlaNet Finance International in India, is a non-profit and tax-exempt organization that works for sustainable social and economic development in India by supporting and promoting the microfinance sector. PlaNet Finance India has been involved in the Indian microfinance sector since 2001. Thanks to its mixture of highly motivated Indian and French corporate leaders, an extremely well qualified international staff supported by passionate Indian social developmental professionals the organization over this last decade has implemented served activities in rural and urban India, and has served more than 160+local microfinance programs, NGOs and financial institutions across India.

• The Skolkovo Moscow Business School, is one of the world’s most renowned business schools sponsored by many affluent industrialists including Russia's Prime Minister Dimitri Medvedev. Its international advisory board includes Yuanqing Yang, CEO of Lenovo Group, Dennis Nally, Chairman of PricewaterhouseCoopers International Ltd., The First Prime Minister of the Republic of Singapore and one of the authors of the “Singapore Miracle”; John V. Farac Chairman and Chief Executive Officer of International Paper; Brady W. Dougan, Chief Executive Officer of Credit Suisse Group; Ajay Banga, President and Chief Executive Officer, MasterCard Worldwide.

• Sa-dhan is the designated national association of Community Development Finance Institutions (CDFIs) represents a “rapidly growing sector”. Sa-Dhan’s MFI membership 240 Institutions with a collective loan outstanding and outreach in excess of Rs. 20,913 Crores and 2.68 crore (26Million) poor, respectively. Given the nascent nature of the sector, Sa-Dhan has a crucial role to play in increasing capacities, affecting the evolution and adoption of best practices, increasing the number of service providers and contributing to improving the policy and operational context for Microfinance in India.

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75

• Project Overview, Executive Summary & Key Findings• Project Objectives & Scope• What Is Financial Inclusion?• Microfinance Sector in India• Technology and Financial Inclusion • Financial Inclusion Models: Business Correspondent Model

IMPSFino Paytech Case

EKO India Financial Services Mobile Network Operators: Mobile Wallets

Airtel Money: Open and Closed mWallet M-Pesa in India and KenyaYES MoneyAlpha Payment Services: Union Bank Money and Alpha MoneyJoint Liability Group Model

• Stakeholders & Team• Glossary• Appendix

Financial Inclusion in India: A Market Map Government Initiatives

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Aadhar/UID:ATM: Automatic Teller MachineBC: Business CorrespondentBCS:BOP: Bottom of the PyramidBTS:CBS: Core Banking SolutionCRAR: Capital to Risk Weighted Assets RatioCSP: Customer Service PointFDs: Fixed DepositsFI: Financial InclusionFP:G2P: Government to personGPRS: General Packet Radio ServiceICT: Information and Communications TechnologyIMPS: Immediate Payment ServiceINR: Indian RupeeJLG: Joint Liability GroupMDM:MF: MicrofinanceMFI: Microfinance InstitutionMMID: Mobile Money IdentifierMNO: Mobile Network Operator

Glossary

76

NABARD: National Bank for Agricultural & Rural DevelopmentNEFT:National Electronic Funds TransferNFP:No frills account: No minimum balance neededNPA: Non-performing assetNPCI: National Payments Corporation of IndiaNREGA: National Rural Employment Guarantee SchemeP2M:P2P Person to PersonPOS: Point of SaleRBI: Reserve Bank of India)RDs:RRB: Regional Rural BanksSCB: Scheduled Commercial BanksSHG: Self Help GroupSSP:Swabhimaan:Telco: Telecommunications ProviderTPP: Third Party ProviderTRAI: Telecom Regulatory Authority of IndiaTSP: Technical Service ProviderUSB: Ultra Small BranchesUSSD: Unstructured Supplementary Services Data

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77

• Project Overview, Executive Summary & Key Findings• Project Objectives & Scope• What Is Financial Inclusion?• Microfinance Sector in India• Technology and Financial Inclusion • Financial Inclusion Models: Business Correspondent Model

IMPSFino Paytech Case

EKO India Financial Services Mobile Network Operators: Mobile Wallets

Airtel Money: Open and Closed mWallet M-Pesa in India and KenyaYES MoneyAlpha Payment Services: Union Bank Money and Alpha MoneyJoint Liability Group Model

• Stakeholders & Team• Glossary• Appendix

Government Initiatives Financial Inclusion in India: A Market Map

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KOFI ANNAN

”The stark reality is that most poor people in the world still lack access to sustainable financial services, whether it is savings, credit or insurance. The great challenge before us is to address the constraints that exclude people from full participation in the financial sector. Together, we can and must build inclusive financial sectors that help people improve their lives.” 

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Government Initiatives for FI in India 1960s - Present Day

Source: Central Bank of India FI Initiatives: http://119.82.71.21/fi/download/INTRODUCTION_TO_FINANCIAL_INCLUSION.pdf

Post

196

0s

Post

199

0s

Cu

rren

t Ini

tiativ

es Setting up of financial

literacy centers and credit counseling

Launching national financial literacy campaigns

Forging linkages with informal sources with suitable safeguards through appropriate

Legislations

Evolving industry-wide standards for IT solutions

Facilitating low cost remittance products

Establishment of a wide network of financial institutions: Commercial Banks Regional Rural Banks Urban Co-operative Banks Primary Agricultural Credit Societies Post Offices MFIs Self-Help Groups

Recent Initiatives: The National Rural Financial Inclusion Plan The Financial Inclusion Fund The Financial Inclusion Technology Fund

Nationalization of banks

Prescription of priority sector targets

Lending to weaker sections at concessional rates

Initiation of the lead bank scheme.

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RBI Initiatives For FI

• The RBI has permitted Scheduled Commercial Banks (SCBs) to open branches in areas with a population of up to 100,000.

• Domestic SCBs have been advised that while preparing their Annual Branch Expansion Plan (ABEP), they should allocate at least 25% of the total number of branches proposed to be opened during the year in unbanked Tier 5 and Tier 6 centers i.e. (population up to 9,999) centers which do not have a SCB brick and mortar structure for customer based banking transactions.

• Regional Rural Banks (RRBs) are also allowed to open branches in Tier 2 centers (with population of 50,000 -100,000), provided they meet the following conditions:

• (i) CRAR of at least 9%; ii) Net NPA less than 5%;• (iii) No default in CRR / SLR for the last year; • (iv) Net profit in the last financial year; (v) CBS compliant.

• RRBs have also been advised to allocate at least 25 percent of the total number of branches proposed to be opened during a year in unbanked rural centers.

Source: Indian Government. http://financialservices.gov.in/banking/Overviewofefforts.pdf

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Government Strategy For FI

A roadmap for providing banking services covering villages in a structured way. In the first phase villages with populations above 2000 were targeted. The focus has now shifted to villages with population less than 2,000.

Introduction of New Products – Introducing a minimum of four banking products through the ICT based BC model.

Creation of an ecosystem comprising of a combination of branches and ICT based BC outlets to develop an effective financial inclusion delivery model.

Interoperability at the retail outlets or sub-agents of BCs (i.e.  at the point of customer interface), provided the technology is available with the bank that has appointed the BC supported interoperability.

Banks have been advised that they may set up intermediate brick and mortar structures (in rural areas) between the present base branch and BC locations. Such branches should have minimum infrastructure, such as a Core Banking Solution (CBS) terminal linked to a passbook printer and a cash-safe retention for operating large customer transactions. It would have to be managed full time by the bank’s own employees. Such an arrangement is expected to lead to efficiency in cash management, documentation, resolving customer grievances and close supervision of BC operations.Source: Reserve Bank of India http://www.rbi.org.in/scripts/BS_SpeechesView.aspx?id=749

Stage 1

• Mobile Business Correspondents

Stage 2

• Fixed Location Business Correspondent Outlets

Stage 3

• Low Cost Intermediate Brick & Mortar Structures (Ultra Small Branches)

Stage 4

• Full Fledged Brick & Mortar Branches

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Progress Towards FI

Nevertheless, India’s advance towards financial inclusion is showing progress

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Reasons For Financial Exclusion

Financial Exclusion

Remote geographical

location

Low income, little or no

assets

Ease of availability of

informal credit

Financial illiteracy, lack of

awareness

Documentation (none,

incomplete)

Inefficiency of the financial Institutions.

Source: http://119.82.71.21/fi/download/INTRODUCTION_TO_FINANCIAL_INCLUSION.pdf

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The Economics of Financial Inclusion

CONSEQUENCES OF EXCLUSION• Affects individuals and the economy alike

• Households, micro and small enterprises dealing entirely in cash are susceptible to irregular cash flows

• Limits options for providing for old age security

• Recourse to informal lenders

• Exposed to higher interest rates charged by informal lender

• Highest risk as loans are often secured against the borrower’s property

• Banking with informal sources does not provide interest benefit and tax advantages and are far less secure

BENEFITS OF INCLUSION• The regulator benefits from the audit trail

which is available as transactions are conducted transparently in supervised environment.

• The economy benefits, as greater financial resources become transparently available for efficient intermediation and allocation, for uses that have the highest returns.

Source: Central bank of India , World Bank 2012 http://119.82.71.21/fi/download/INTRODUCTION_TO_FINANCIAL_INCLUSION.pdf

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Constraints to the Spread of FI

LOW LITERACY LEVELS, lack of awareness and/or knowledge/understanding of financial products. IRREGULAR INCOME, frequent micro-transactions. LACK OF TRUST in formal banking institutions.CULTURAL OBSTACLES (e.g., gender and cultural values).

OUTREACH, low density areas and low income populations are not attractive for the provision of financial services and are not financially sustainable under traditional banking business models.REGULATION, frameworks are not always adapted to local contexts.BUSINESS MODELS, high fixed costs; limited number & type of service providers ADAPTABILITY, products and services that are not adapted for low income populations and the informal economy.AGE, financial service providers usually target the middle of the economically active population, often overlooking the design of appropriate products for older or younger potential customers.BANK CHARGES too expensive for BOP clients.

DE

MA

ND

SID

E C

ON

STR

AIN

S

SU

PP

LY S

IDE

CO

NS

TRA

INTS

Source: http://www.rbi.org.in/scripts/BS_SpeechesView.aspx?id=749

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Market Growth & The Banked Population

Sources: http://economictimes.indiatimes.com/economic-survey-2013-live-update/liveblog/18705924.cmshttp://defenceforumindia.com/forum/politics-society/30771-indias-population-2012-a.html http://rbidocs.rbi.org.in/rdocs/Speeches/PDFs/FICHI121011S.pdf

1971

1981

1991

2001

2011

Foreca

st 20

13

Foreca

st 20

160.00

200000000.00

400000000.00

600000000.00

800000000.00

1000000000.00

1200000000.00

1400000000.00

548,16 683,33846,42

1,028,741,210,19 1,223,58 1,268,96

Indian population

Source: Population Projection Report 2006 by RGI

Literacy 2001 - Census

Literacy 2011 - Census

Forecasted Literacy 2013

Forecasted Literacy 2016

0

20

40

60

80 66,9677,08 79,05 82,00

Literacy Rates

Series1

%

• India’s market has been growing rapidly (around 6%) in the past 10 years. It has been amongst the top 10% of the world’s countries in terms of economic growth since 1991.

• Current population is at 1.22 billion, increasing at a rate of 1.64% per annum It is the second most populous country in the world after China, representing 17% of world’s population.

• The literacy rate of India as per the 2001 Population Census is 66.96%, and reached 77.08% in 2011 showing growth of 0,9% per annum. With current growth the literacy rate will hit 82% in 2016.

• A significant proportion of households, especially in rural areas, still remain outside the coverage of the formal banking system. It is estimated that about 40% of Indians lack access even to the simplest kind of formal financial services.

Despite rapid market growth and population increase, 40% of India’s population remains unbanked

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India’s Banked Population By Region

18%

2%

15%

21%

16%

27%

% Number Of Bank Accounts Per Region

NorthNorth EastEastCentralWestSouth

Source: National Sample Survey Organisation (2012). Http://www.ijmds.com/admin1/adminsettings/upload/5826Paramasivan.pdf

• South India has the largest % of bank accounts per region, followed by Central India.

• North-East India is the most unbanked region in India, with only 2% of the population having bank accounts.

• In 2012, there were 32,902,390 total current account and savings accounts in India.

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Banking facilities: India & The World

Number of Bank Branches

India

Austra

liaBraz

il

France

Mexico

United

Stat

esKore

a

Philipp

ines

0

5

10

15

20

25

30

35

40

45

50

Number of ATMs

India

Austra

liaBraz

il

France

Mexico

Philipp

ines

United

Stat

esKore

a0

20

40

60

80

100

120

140

160

180

Source: http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/0TPB021112FLS.pdf

India has few banking facilities compared to other countries

All data per 0.1 million adults. No data available for nr. of ATMs in USA and Korea.

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Access to Financial Services: India & the World

India WorldShare with an account at a formal financial institution

All adults 35 50

Poorest income quintile 21 38

Women 26 47Adults saving in the past year Using a formal account 12 22

Using a community-based method

3 5

Adults originating a new loan in the past year

From a formal financial institution

8 9

From family or friends 20 23

Adults with a credit card 2 15Adults with an outstanding mortgage 2 7

Adults paying personally for health insurance 7 17

Adults using mobile money in the past year 4 7

Source: Asli Demirguc - Kunt and Klapper, L. (2012): ‘Measuring Financial Inclusion’, Policy Research Working Paper, 6025, World Bank, April, RBI Annual Report 2011-12

*Data indicated as %

India is still falling behind the world on key financial statistics

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Income Level & Access to Financial Services

Agricultural wage labour

Wage labour - non agricultural

Own account worker

Street vendor

Other self-employed workers

Self-employed in primary production

Part-time earner

Shopkeeper

Private salaried workers

Government salaried workers

Self-employed professionals

Business people

14

25

25

39

45

49

50

67

68

86

90

95

% of People with Bank Account

Agricultural wage labour

Wage labour - non agricultural

Own account worker

Street vendor

Other self-employed workers

Self-employed in primary production

Part-time earner

Shopkeeper

Private salaried workers

Government salaried workers

Self-employed professionals

Business people

21,295

31,676

33,100

37,300

59,687

60,078

64,507

100,044

105,670

140,001

319,555

478,985

Average Annual Income (INR)

In India, access to financial services correlates closely with income. Although the majority of households do save, close to 40% of Indians do not have a bank account and choose to save money in other ways

Source: Planning Commission, Government of India, Broadening Access to Finance http://planningcommission.gov.in/reports/genrep/rep_fr/ch3_fr.pdf

India’s population at the bottom of pyramid is largely excluded from the formal financial system

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Indian Regulatory Initiatives Favoring FI

Aadhaar Campaign

• Aadhaar is a 12-digit individual identification number issued by the Unique Identification Authority of India to all residents of India on a voluntary basis. The number can be used as identification for opening a bank account or to get social benefits from both the Central and State Governments, such as the Direct Benefit Transfer.

USSD Based Mobile Banking

Offers basic banking services such as:• Money Transfer, Bill Payments, Balance

Enquiries, Merchant payments etc. • All on a simple GSM based Mobile phone,

without the need to download an application.

Swabhimaan Campaign: Opening of Bank Branches

• At Least 1 Bank Account Per Household• Setting up of Ultra Small Branches (USBs) • Banking Facilities in Unbanked Blocks• (Roll out Direct) Benefits Transfer 2013• Geographical Information System (mobile

app that allows the identification of areas to open new branches. )

BC Model

• BCs represent the bank concerned and enable a bank to expand its outreach and offer a limited range of banking services at a low cost

• Particularly used where setting up a brick and mortar branch is not viable.

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Banking Outlet and No-Frills Account Growth

2010 2011 20120

50000

100000

150000

200000

250000

300000

54258100183

14753433042

57329

95767

Total number of banking outlets in villages BCs/BC agents deployed

2010 2011 2012 2013 2014 2015 2016 20170

50

100

150

200

250

300

No-frills accounts ICT-accounts

actual forecast

• During the last 3 years the growth of banking outlets in rural areas slowed from 84% to 47% per annum.

• The slowdown in rural outlet expansion could be explained by BC agent enrollment.

• The No. of opened no-frills account growth is also experiencing a slowdown, but still growing at 39% per annum.

• ICT accounts are enrolling at faster pace than No-Frills accounts, increasing by 76% during last year.

• Current growth trends indicate ICT accounts will dominate No-Frills accounts by 2017.

Source: RBI Annual report 2011-2012 part 4 – Credit Delivery and Financial Inclusionhttp://rbidocs.rbi.org.in/rdocs/AnnualReport/PDFs/IVCDFIN230812.pdf 

mill

ions

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Rural Mobile Penetration

2009 2010 2011 20120.00

100.00

200.00

300.00

400.00

500.00

600.00

700.00

800.00

900.00

Rural area penetrationPeople, m

2008 2009 2010 2011 20120.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

100.00

87.9379.24

70.99

43.30

18.29

Percentage Growth Per AnnumPercentage Growth Per Annum %

Mobile penetration in rural areas of India is still growing. However, the growth rate has suffered a decline from 87,93% to 18,29 % per annum. The rural mobile market is starting to saturate. The rural penetration rate has reached 39,2% with the rural penetration growth rate decreasing from 62,69% to 16,07% during the last 3 years.

The growth rate of rural mobile penetration has declined over the past 5 years

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FI & Poverty

Philipines India Bangladesh Brazil China Malasiya Sri Lanka Thailand0

10

20

30

40

50

60

70

80

26.6

35.239.6

55.9

63.866.2

68.572.7

26.629.8 31.5

21.4

2.8 3.88.9 8.1

Composite index of FI Poverty%

The correlation between composite FI index and poverty ratio in developing countries shows that India still has a way in leveraging FI to decrease poverty

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MFIs Taking Banking to the Doorsteps of the Poor

1. Group Formation

2. Sangam Formation

And Borrowing

3. Member Invests In

Enterprises

4. Repayment

Of Loans

5. Sangam Size

Increases

Witnessing the success of members, more women jointhe Sangam

Five member groups are formedafter they undergo compulsory training.

Loans are repaid in weekly installments bymembers.

4-10 groups together form a centre or sangam and loans are given to individualmembers.

A member invests the loan forincome generation.

Source: http://www.sksindia.com/downloads/methodology.gif

GROWTH

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ATMs in Rural Areas

7%

38%

33%

22%

Share of Population Groups in Increment of ATMs

Rural MetropolitanUrban Semi-Urban

20%

17%

2%17%

12%

32%

Share of Regions In Total Number Of New ATMs Opened

NorthernCentralNorth-EasternWesternEasternSouthern

• Metropolitan areas accounted for the maximum number of newly opened ATMs. The southern regions had the highest number of newly opened ATMs, followed by the northern region. However, the share of rural areas in the total number of ATMs continues to remain small (7%).

• Off-site ATMs play an important role by providing basic banking services like cash withdrawals & transfers of funds even without the presence of full-fledged brick-and-mortar branches.

• During 2011-12, there was an addition of 14,365 new off-site ATMs.

Source: http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/0TPB021112FLS.pdf

The share of rural areas in the total number of newly launched ATMs remains small