Indian microfinance: Increasing reach through mobile banking

Abstract

Microfinance world over has evolved into the preferred means of making basic financial services available to the financially excluded section of population- the so called bottom of the pyramid. MFI initiatives have taken of very well in most developing countries including India, aided by the availability of low cost earmarked developmental funds as well as the low cost of human resources needed for the people intensive MFI operations. However, as in other developing nations, MFIs in India have currently reached a stage wherein further operational efficiency improvements & achievement of scale are limited by the very nature of its business model as well as additional security issues in unpenetrated regions. The opportunity presented by Mobile Banking addresses this very problems faced by MFIs. This study attempts to understand the state of affairs w.r.t mobile banking enablers- technology & regulation- in the Indian context to come up with recommendations on how the twain can meet to increase reach of MFIs. In contrast with the banking penetration in India, the mobile phone subscriber base in India was about 261m at the end of March 2008 and Mobile penetration has increased from 19.8% in 2007 to 29.7% in 2008 and is projected to reach 40% in 2009. With Indian government incentivizing building of mobile infrastructure in rural areas, the mobile penetration in rural areas will be much higher than penetration of internet or brick & mortar bank branches in the near future. Hence, mobile phones pose an attractive opportunity for MFIs to overcome challenges in reaching their target customers & achieving scale. Even in terms of security and cost, it is seen that Mobile Banking provides as high security as an ATM network with proper implementation and the cost of implementation would be much cheaper for mobile banking. Mobile banking implementations in various countries are analysed to understand their applicability to microfinance applications. Mobile Banking has been hugely successful in countries such as Philippines, South Africa, Kenya etc but the application of mobile banking to micro finance has been low due to the charges collected for cash transfers in mobile banking which appear to be significant when compared to the micro finance interest rates. Based on the study, a model is proposed for implementing Mobile banking for micro finance clients in India, where the MFIs take the lead in partnering with banks who in turn partner with Technology service providers, banking correspondents and mobile network operators. In order to preserve the nature of the group meetings which is quintessential for working of the Grameen model of micro finance and to keep the costs low, it is recommended that the MFI gives the group leaders mobile phones one for shared use by the group and another for use by the group leader. The SIM cards would be distributed individually to each of the customers and they would be given a numeric pin which acts a key for the transactions thus making the transactions secure. The group leader will act as the nodal point for all transactions and will get up to an average commission of upto 1.8% for transactions in which she is involved. SIM applications are the best suited for M-Banking due to the ease with which the MFI clients can adapt to the interface and due to the fact that it is menu driven and can be upgraded through push applications at a later point of time. Evaluation of the financial viability of the model concludes that the project is financially viable for the MFI and Bank together, if there is sufficient number of non-MFI M-Banking clients for the bank or if the bank is paid by the MFI for the micro finance transactions. Analysis of the sensitivity of the model towards various parameters used also indicates stability across reasonable variations in the parameters used.