‘Inclusive growth’ has been a buzz word amongst policy makers for a while now and for a very valid reason, Financial Inclusion has become one of the key priorities for the Government of India. The Prime Minister’s office, The Ministry of Finance and the Reserve Bank of India (RBI), all have financial inclusion as a key agenda item in their near term plans.
For years, various banks, both in the public and private sector, have been driving this agenda and have got around 50% of the country’s population in the banking net. Clearly, the penetrations of banking services have a long way to go. In a country where it took just about 20 years for mobile penetration to cross the 90% mark, the rather slow trajectory of banking penetration has both been a concern and a challenge.
Over the years, the Government of India initiated several steps to boost the banking penetration. Some of the major efforts made in the last five decades include – nationalization of banks, building up of robust branch network of scheduled commercial banks, co-operatives and regional rural banks, introduction of mandated priority sector lending targets, lead bank scheme, formation of self-help groups, permitting BCs/BFs to be appointed by banks to provide door step delivery of banking services, zero balance BSBD accounts, etc. The fundamental objective of all these initiatives is to reach the large sections of financially excluded Indian population. Despite all the efforts, the progress has been sub-optimal. Amongst the many causative factors for the slow movement, the most critical one is the inability to ramp up reach and access in a significant manner. Building physical bank branch infrastructure is time consuming and commercially challenging. After all these years and efforts, India has 10.64 bank branches per Lac of population compared to 23.81 in China. ATM penetration too is lower at 8.9 ATMs per lac of population versus 49.56 in China (Source: Financial Access Survey by IMF 2011).
Back in 2002, the story of an adjacent industry, telecom, was no different. The equation started changing exponentially when India chose wireless to cover the length and breadth of the country. The growth of wireless and the profound impact it had on the development of the country is a now well-chronicled story. Clearly the financial inclusion business has an opportunity to take a leaf or two from the story of telecommunications inclusion. It’s time now for the country to look beyond the physical brick & mortar initiatives to drive financial inclusion.
In the recent months, both the Government of India and the RBI have taken initiatives centred on virtualisation and de-regulation to address the issue of reach. Allowing non-banking entities to set upWhite-label ATMs, formation of Payment banks to leverage the reach of adjunct industries such as telecom and retail, setting up of Small Banks, Direct transfer of various benefits (DBT), usage of the ubiquitous mobile device and multiple forms of payment wallets to enable banking transactions etc. are steps in the right direction. Clearly, the willingness to innovate and move forward with a new sense of purpose is a welcome shift of strategy. Consumer demand for the banking services continues to be robust, as can only be expected, as evidenced with the uptake of the recently launched Pradhan Mantri Jan Dhan Yojana. It’s time for the supply side to kick in quickly.
Setting up of White-label ATMs by non-banking entities in rural areas is one such reach enhancing initiatives that attracted the attention of a quite a few players. The conviction has been that an ATM will form the backbone of spreading banking services amongst masses. Creating bank-agnostic common infrastructure of ATMs, pretty much on the lines of Telecom tower companies, will help drive the reach of basic banking services to people who hitherto have not been reached. Taking a cue from this philosophy, companies such as Tata Communications Payment Solutions Ltd (under the brand name Indi Cash), BTI Payments Pvt Ltd (under the brand name India1) and Prizm Payments Services Ltd (under the brand name Money Spot) have led the way over the last 4 quarters and have set up nearly 7000 ATMs in small villages and towns. These companies created with a mandate to set up independent ATMs in smaller towns and villages have been focusing their deployments in villages/towns in tiers 3-6 (population ranging from 5000-50000 people). Several ATMs set up by WLAOs (White-Label ATM operators) are solus ATMs in villages where no bank branch ever existed. Table below shows deployments by various WLAOs. Clearly the numbers are growing, slowly but steadily.
These WLAOs, over the last one year, tested the concept of White Label ATMs, gained consumer acceptance and have started to ramp up. It is heartening to see that the share of WLAs in the overall ATM deployments has been moving up steadily. The chart below shows incremental deployments of WLAs in the last two quarters versus deployments of bank owned ATMs. Data suggests that increasingly WLAOs are taking the burden of rolling out new ATMs especially in the hinterland of the country. One can envisage the contribution of White Label ATMs to go past the 50% mark like in all countries where Independent ATM Operators have been allowed to set shop.
The common infrastructure set up by the WLAOs will be central to the various initiatives launched by the Government of India, the RBI and the NPCI. Schemes such as Jan Dhan Yojana, DBT, Money transfers by Payment Banks etc. will ride on the White Label ATMs set up in deep rural. White Label ATMs will ease the reach of services to the unreached in a secure, transparent and consumer friendly manner. Going forward, it is not difficult to foresee the use of these ATMs for other non-banking transactions such as mobile top-ups, Bill Payments, Insurance Payments and e-commerce transactions. Another vital utility of the White-label ATMs is in the area of propagation of socially relevant messages using the audio-video interfaces of the ATM. If one visualises the ATM as a smart device with connectivity, the use cases can be unlimited.
While the pace of roll outs is picking up, there are a couple of structural faults that need to be addressed immediately to accelerate the deployments of WLAs.
1. WLAOs, as per the RBI mandate, have to source ATM cash only from a scheduled bank and transport the same to ATMs located in remote corners. Given the need of a WLAO to optimise cost of idle cash in an ATM and the cost of transporting cash to the ATM, it’s vital to have cash tie ups in every district HQ and every large town in a district. Banks with large reach across districts who have an ability to supply cash have been less than enthusiastic to come forward to support WLAOs even on a commercial basis. It will help the cause of WLAOs and the larger purpose of the country if an enabling framework is set up by the regulator. A longer term solution would be to create entities entrusted with the responsibility of supplying cash to all stakeholders, be it banks or any other entities that require this critical raw material.
2. WLAO’s roll out ATMs in smaller towns/villages with lower density of population and bank account penetration. Hence the revenue generating ability of an ATM is structurally lower than that of an urban counterpart. Further, costs of roll out are also relatively higher in these places as they have to fight the infrastructural challenges such as poor power availability (hence higher battery costs etc.), security etc. In addition, cost of transporting cash too is higher as cash management agencies have to distribute cash to sparsely populated ATMs over longer distances. Given that the revenue generating ability is relatively lower and the cost of ATM operations higher, there is a strong case to increase the interchange rate they get per transaction. This situation can be compared to the relatively higher margins FMCG companies dole out to ensure rural distribution. The regulated rate of interbank settlement (currently fixed at Rs 15 per cash transaction and Rs 5 per non transaction) prevalent today does not take into account these factors. For encouraging WLAOs to aggressively roll out ATMs in these areas, there is an urgent need to relook at the interchange rate.
If these faults are addressed through appropriate regulatory interventions, one can see WLAOs playing a central role in bridging the ‘reach’ deficit in our financial inclusion journey.