India’s largely urbanised middle class has no dearth of banking options that are technologically on par with the best in the world. The biggest challenge in Indian banking today is to extend banking services to the country's vast rural hinterland. This challenge is driven not only by the need for business growth, but also by the government’s social mandate, which aims to get the unbanked out of the clutches of traditional moneylenders and into the organised banking system. The government recently approved the setting up of a Financial Inclusion Fund (FIF) and a Financial Inclusion Technology Fund (FITF), with Rs 4 billion in funding.

Current scenario in India

Talking about the vastness of India and its rural territory, N P Mohapatra, Asst. GM, NABARD, says, "Rural India is very vast; there are close to 370 cooperative banks, 96 Regional Rural Banks (RRBs) with 14,000 branches, and in addition to that we have 25,000 farmers' clubs. In spite of this network, more than 50 percent of the population doesn’t have access to formal financial services. The government has decided that two funds should be created within NABARD, namely the Financial Inclusion Fund (FIF) and the Financial Inclusion Technology Fund (FITF). We are currently exploring the possibilities and trying to reach the technology providers, the bankers, while at the same time trying to launch some pilot projects, all in an endeavour to see how we can reach the rural masses."

S A Desai, GM, Janakalyan Sahakari Bank, is of the opinion that help or service is definitely being provided by nationalised banks to those in the large rural sector. "These banks have opened a number of branches in villages and all the deposits from the rural areas are collected and, wherever possible, lending is also done," he says.

Hurdles in the way

Despite growth possibilities, financial inclusion isn’t easy. There are many roadblocks, including business viability, challenges of infrastructure and reach in vast, sparsely populated areas; illiteracy, lack of structured information to meet KYC norms, a need for flexibility in timings, besides others.

"There's a war to get the bigger chunk of the unbanked population, that is, a huge portion of the 40-50 percent which is yet unbanked. A related challenge to this pertains to the banks moving into territories that are not infrastructurally, technically or educationally advanced," says Ambarish Dasgupta, Partner, PWC.

In Mohapatra’s opinion, technology service providers have to give answers in the form of technology. Most often than not, there's no connectivity and electricity. There's no guarantee that hand-held devices will be available, which can be taken offline and data uploaded and accessed by the bank. Mohapatra insists that it is imperative to have a facility like this, which is the perfect solution to most of the common challenges.

International banks a threat?

With deregulation scheduled for 2009, it may soon be a free-for-all, and large international banks could flex their financial muscle in India. This is one reason why Indian banks must find new markets – and fast. Deepak Ghaisas, VC, I-flex solutions, reaffirms this concern. "One of the major challenges that banks in India would face is competition from international banks, especially in a scenario where the banking sector is going through a recession and sub-prime problems like other countries. In such a case, Indian banks will have to insulate themselves from a business point of view," he says.

Elaborating on the kind of problems that Indian banks could face, Desai states, "There will be a lot of problems for nationalised banks, old private sector banks or cooperative banks, when foreign banks come to India. This is because multinational banks will come to the country with a good line of credit, and good resources, which will be available at a throwaway price."

Popular channels to reach the unbanked

According to BFSI CXOs, the most popular channels to reach the unbanked are mobile phones, the internet and ATMs. Of these, mobile banking is considered to be the most viable option as mobile penetration in India is growing rapidly and millions of subscribers are added every month. Biometric and low-cost rural ATMs, which can tackle the illiteracy challenge, are also being tried out.

Dasgupta feels that mobile phones – and therefore the concept of mobile banking – is the most viable option, because landlines reaching the remotest parts of India is unlikely. Banks setting up branches in villages seems a difficult proposition as well as a futuristic one.

K S Bajwa, GM - IT Operations, Punjab National Bank, has this to say about the bank’s financial inclusion initiatives. "Punjab National Bank feels that every citizen should have a bank account. We want to reach those who have no access to financial services, using smart card technology and hand-held models, where cards can be electronically used by them."

An interesting way to reach the unbanked is being put in place by Tamilnad Mercantile Bank. Says P R Varatharajan, GM - IT, "We're going to offer a unique mobile van banking project. We have clusters of villages in and around Tamil Nadu with branches of our banks, and these branches will serve as the bases for our project. From these branches, vans fitted with CMDA and GSM chips and routers will take off. With these technologies at hand, we plan to offer all types of services. Another initiative we have taken is that of hand-held devices."

Additional services are a must

With deposits in tiny denominations and loans that are comparatively tiny, traditional banking business models won’t work. The high cost of delivery through traditional channels is a hindrance. Microfinance strategies that include partnering with microfinance institutions is another means by which banks are looking at taking banking services to the unbanked.

Both Mohapatra and Ghaisas agree that microfinance services are extremely important to reach those beyond the periphery of urban areas. Ghaisas says, "Things are looking much better now for those in the rural areas, with a lot being done in the microfinance space." Mohapatra adds, "We have to give additional services such as micro-insurance, and we're currently in dialogue with LIC. NABARD has taken various initiatives in this space, which is amongst the largest in the world."

Despite all the challenges, the business potential and the driving need to find new markets is translating into determination on the part of Indian banks to reach the unbanked. One key enabler would be the Reserve Bank's recently launched e-portal on information and communication technology (ICT)-enabled financial inclusion efforts of banks. The is envisaged to be a platform for sharing of knowledge and experiences of banks in this area, and the best practices gleaned from there will hopefully help to make rural banking in India a win-win for both banks and customers.