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CELL PHONES FOR DELIVERING
MICRO LOANS
INTRODUCTION
Cutting-edge technology can provide a transformational role in delivering financial, health, and educational services to the poor. This chapter focuses on India and the potential for providing financial services to the poor through mobile phone technology. Such a delivery has the potential to cut significantly the transactions costs of accessing small loans and this can lead to an improvement in the overall welfare of the poorer sections of society who are currently unable to access financial services from the organ - ized banking sector and credit markets. To provide the reader with a backdrop, it is first useful to review some background data on India.
Demography and Economy
India is a large country with an area of 3.3 million square kilometers. The population of India has exceeded 1.1 billion, and is showing a year-onyear growth rate of about 2 percent. Of immediate interest to the subject matter addressed in this chapter is the fact that India has a fairly high savings rate (2004–05) of 29 percent, and a growing literacy rate. Moreover, there is a large pool of professionals, and the youth population is significant as attested by the fact that more than 50 percent of the population is under 25 years old. An important fact that has been recognized by the policymakers is that there is significant unemployment, especially in the age group 20–24 in rural and urban India.3 The unemployment rate of educated women in rural and urban India is very high as well. Increased availability of credit and other financial services is likely to be an important factor in alleviating unemployment, and in empowering women.
Mobile Telecom
Mobile telecom has already reached where other sectors are yet to reach. Telecom statistics and growth projections are spectacular: mobile subscribers have a cumulative annual growth rate of 86 percent and Wet expected to reach 143 million by November 2006.
The Department of Telecom—DOT—puts forward a target figure of 500 million mobileconnections and mobile access to every village over 1000 population by 2010. Despite this remarkable growth, the mobile penetration is only 10 percent
and is one of the lowest in the world although, even with the 400 minutes/subscriber/month usage, which is close to the United States figure, Indian telecom is well placed in the world markets. Looking at the future, potential projections vary. However, even a conservative estimate sees 300 million subscribers by 2010. Considering that the mobile penetration is lower than many other comparable economies, the growth rate of mobile phones in India is likely to remain very high for the foreseeable future.
Microfinance
The RBI (Reserve Bank of India) Internal Group’s “Report on Micro Finance” has noted that the outreach of the Indian banking system has seen rapid growth in rural areas. Forty-eight percent of the total branches of the scheduled commercial banks (SCBs) and regional rural banks (RRBs) cater to the rural areas (32 303 branches translates to a Population of about 23 000 people per branch). Of these, 31 percent (136.7 million) of deposit accounts and 43 percent (25.50 million) of borrower accounts are in the rural areas. This expansion of the organized financial infrastructure has reduced the dependence of the rural population on the unorganized moneylending sector from 68.3 percent in 1971 to 36 percent in 1991. In spite of this growth, there continues to be wide gaps in the availability of banking services in the rural areas as the SCBs cover only 18.4 percent of the rural population through savings/deposit accounts and even a lower percentage of 17.2 percent of the rural households by way of loan accounts. Though the primary agriculture credit societies (PACS), with about 100 000 outlets, have a deep and wide presence in rural India, their impact in terms of extension of deposit and credit products has not only been minimal but concentrated in a few states only.
A vast majority of the rural population remains unintegrated with the organized banking sector. On analyzing the supply side, we observe some of the reasons for this, such as:
1) people are unbankable in the evaluation/perception of bankers
2) the loan amount is too small to invite the attention of the bankers,
3) the person is bankable on a credit appraisal approach but distances are too far for servicing and supporting the accounts, and expanding branch network is not feasible and viable,
4) there are high transactions costs, particularly in dealing with a large number of small accounts,
5) there is a lack of collateral security,
6) an inability to evaluate and monitor cash flow cycles and repayment capacities due to information asymmetry, lack of data base, and absence of credit history of people with small means
7) there are human resourcesrelated constraints both in terms of inadequacy of personnel and lack of proper orientation/expertise,
8) there is an adverse security situation prevailing in some parts of rural India,
9) a lack of banking habits and credit culture,
10) information-shadow geographical areas (geographical areas where information on identity and residential proof of persons is yet to be completed, which makes know your customer (KYC) compliance difficult for banks; hence the population in these areas remains unbanked),
11) an inadequacy of extension services, which are crucial to improving the production efficiency of the farmers, leading to better loan repayments.
Similarly on the demand side, there are several reasons for the rural poor remaining excluded from the formal banking sector, such as:
(1) high transactions costs at the client level due to expenses such as travel costs, wage losses, incidental expenses,
(2) lack of awareness,
(3) lack of social capital,
(4) non-availability of ideal products,
(5) very small volumes/size of transactions, which are not encouraged by formal banking institutions,
(6) hassles related to understanding documentation and procedures in the formal system,
(7) easy availability of timely and doorstep services from money lenders/informal sources
(8) prior experience of rejection by indifference of the formal banking system. Under the microfinance program, loans are extended to the self-help groups (SHGs) who pool a part of their income into a common fund from
which they can borrow. The members of the group decide on the minimum amount of deposit, which ranges from Rs 20–100 per month sepending upon the size of the group. The group funds are deposited with a microfinance institution (MFI) against which they usually lend and the deposits are usually placed with a bank by the MFI. The group funds are the way “micro-savings” are enforced, though it may seem like collateral. The loan ticket sizes are usually Rs 2000–15 000. Although loan repayment is a joint liability of the group, in reality individual liability is emphasized. Maintaining group reputation leads to the application of tremendous Peter pressure.6 In India and other Asian countries the majority of SHGs typically consist of women because, in these countries, self employment through microfinance was perceived as a powerful tool for the emancipation of women. A World Bank report (2001) observes that gender equality is a necessary condition for economic development. It reports that societies that discriminate on the basis of gender are in greater poverty, have slower economic growth, weaker governance, and lower living standards. And the results are encouraging. Loans obtained from MFIs are utilized in agriculture and small businesses. Independent incomes and modest savings have made women self-confident and helped them to fight poverty and exploitation.
This can be seen from a statement by a woman beneficiary: “Previously we had to cringe before our husbands to ask for one rupee. We do not have to wear tattered sarees anymore and, today, we have the confidence to come and talk to you without seeking permission from our husbands” (as told to the author of the UNPAN’s Field Survey Suvidha proposes to play a significant role in microfinance using the SWIFT mobile transaction platform and providing Beam (see “The Product” below) services, leveraging its distribution network and customer profiles. Banks have the opportunity to partner with Suvidha to supplement their extension banking services too. Likewise, MFIs, RRBs, SCBs, NBFCs (non-banking finance companies), and banks can also partner Suvidha to extend their product deliveries and manage both inbound as well as outbound payments through the network of Beam Mobile Entrepreneurs.
Payment System Inefficiencies
The GSM Association (GSMA) launched a pilot program in January 2006, aimed at tapping the ubiquity and ease-of-use of mobile technology to enable the world’s 200 million international migrant workers to send remittances easily and securely to their dependants, many of whom did not have bank accounts.
GLOBAL TRENDS
As per a report by IFC Washington-GSMA, the advantage of developing a market for micro-payments (also referred to as m-commerce), is that it continues to drive the economic system toward a cashless transaction environment. 9 Elimination or minimization of physical cash has many advantages, including less opportunity for fraudulent or criminal activity, reduction of cash handling costs, and, for the user, less reliance on having the right amount of cash when needed. It also allows the value of money to be better utilized. Cash held outside the banking system is not available for short-term investment so that the time-value of the cash asset is lost.
In the more affluent economies, there is already a good infrastructure for a cashless environment, with most people having bank accounts and an array of both debit and credit cards. Nevertheless there is an underlying need for cash for minor purchases and there is little incentive to eliminate cash entirely.
In the developing economies however, there is a very large “underclass” that is totally reliant on cash for all their day-to-day expenses. Moreover, this underclass makes no use of the banking sector and so is “invisible” in terms of its cash value. At the same time, the need for cash forces the providers of goods and services in these markets to have adequate cashhandling facilities and this comes at some cost. In these cases, the Commercial organizations have much more to gain by addressing the problem of cash transactions. Not only is the risk associated with cash holdings much greater, but the time-value of the cash being held outside the banking sector is entirely lost. Furthermore, the population in this category is lost, that is, unseen by the banking sector. For these reasons, there is likely to bemore incentive in developing economies to move the population at large away from cash, than exists in developed economies.
That being so, a Solutions that meets the needs of developing economies will also have extensive application in the developed economies. This arises because the Solutions must be accompanied by very low costs as, if it were otherwise, the Solutions would have no appeal in those developing economies. The resulting lowcost solutions can then be applied in the developed economies, resulting in further efficiency gains.
The range of features available in each market showed significant uniformity as to be expected if the target markets were similar. With minor variations, the features of all systems included:
● provision for cash deposits and withdrawals;
● the ability for third parties to make deposits into a user account (employer, family member, or MFI);
● the ability to make retail purchases at selected outlets;
● over-the-air prepaid top-ups using the cash already in the account;
● the ability to transfer cash between users’ accounts;
● the ability to transfer airtime credits between users;
● provision for bill payments.
These features could be used for microfinance applications involving both loan repayments as well as loan advances, and this area in particular is being exploited in the Kenya trials and in Philippines services in conjunction with the Rural Bankers Association. Apart from the use of the services by MFIs all services studied by IFC operated on a debit account basis, that is, the account could only be operated in credit. As a result, bad debt is not an issue other than loss caused by fraudulent activity. No operator indicated any serious concerns in this area and provided the overall system security was ensured the possibility for fraud could be managed. In that regard, most of the systems studied involved a bank with normal banking systems in place as this arrangement results in the fraud issue being restricted to the bank’s area of involvement for which it will be well equipped.
The possibility of money laundering was considered by all service providers and it was noted that in all jurisdictions the banking regulator authority had established appropriate policies governing the Activities of the banks.
One of the key growth drivers is attributed to higher future mobile phone penetration in India and China. The report projected that the combined markets of India and China would account for over 800 billion SMS messages per annum by 2010. The study predicts that India, with alow mobile penetration rate has “massive potential.” SMS in India is expected to grow from 12.3 billion messages in 2004, to 180 billion in 2010.
In summary, the situation provides an excellent and growing opportunity to Suvidha and its SWIFT technology platform, which uses SMS to perform both inbound as well as outbound transactions. Suvidha’s Networks of Beam Mobile Entrepreneur women become self-employed by providing the front end services at the localities where they live, and thus gain Bette control over their lives.
Table 4.3 Domestic transaction companies operating in India
| Company | Website |
| Paymate | www.paymate.co.in/web/Default.aspx |
| JiGrahak | www.jigrahak.com/site |
| MCheck | www.mchek.com/ |
| ITZ cash | www.itzcash.com/ |
| Done Card | https://www.donecard.com/index-1.aspx |
| Wallet 365 | www.timesofmoney.com/tomsvc/jsp/home.jsp |
| Fino | www.fino.co.in/ |
| A Little World | www.alittleworld.com/ |
THE INDUSTRY
India currently has around eight domestic companies operating in the transaction space as shown in Table 4.3.
Paymate is SMS-based but exclusively for use by customers having accounts with banks, for example, Citibank. JiGrahak requires download of software to a mobile handset and is thus limited to certain types of handsets. MChek works on GSM technology, as it is USSD (unstructured supplementary source data) technology-based solution and provides services to the subscribers of Airtel and some banks. ITZ Cash and Done Card are prepaid card-based solutions that work on the Internet. Wallet 365 is also an Internet-based service for banked customers. Fino is a closed-user proprietary technology service provider for MFIs. Last but not least, the Technology focus of A Little World is on biometrics-based ID, RFID (radio frequency identification) smart cards (Java, PKI) and NFC (near field communication) mobile phones as acceptance and enabling devices (with merchants, field forces of MFIs, and at cashless ATMs).
While ITZ Cash, Done Card, Paymate, and JiGrahak market themselves as m-commerce, their services can only be used if the subscriber has Internet access—microfinance is not their focus. Further, none are interoperable or neutral as they are exclusively tied either to a specific bank (Paymate,MChek, AlittleWorld) or telecom (MChek, JiGrahak) or can be used by special types of phones (A Little World, JiGrahak, MChek via GSM), thus excluding a significant number of CDMA (code division multiple access) subscribers. Except for A LittleWorld, none are focused towards microfinance. Fino, on the other hand, acts only as an application service provider (ASP) for microfinance institutions requiring core banking application andpoint-of-sale devices. The parentage of Fino is ICICI Bank, hence possibilities
of interoperability with other banks will be a challenge. Suvidha-Beam is focused on the micro-payments for the unbanked and enabling microfinance offered by MFI/banks. Beam does not require the Internet, or software to download, change of SIM, or require special equipment. It is interoperable with subscribers of any telecom.
THE PRODUCT
Beam is an innovative and simple way of transacting money using mobile phones. It takes advantage and plugs the inefficiencies in the payment systems of the economy. It enables subscribers to register and use a host of other services, anytime, anywhere, using short message service (SMS). The product has two parts. A robust, future-ready technology platform called SWIFT is at the backend; and a stored value prepaid card that consumers purchase for using services, called Beam.
Backend Technology
The backend SWIFT (subscriber wireless interaccount financial transaction system) is a mobile commerce platform that took several years to develop. It leverages the cumulative knowledge and experience gained by Suvidha from product distribution and providing transaction Management services to banks as well as telecom services. SWIFT is a sophisticated, robust, secure, and scalable application having disaster management and business continuity system too. It lets subscribers use the Beam services via SMS, IVRS (interactive voice response system) or the Internet.
Services
Beam as a service allows mobile phone subscribers to send money, Gide gifts, pay each other, make purchases from merchants besides a host of other services—take credit, make deposits, obtain insurance, make investments, all using their mobile phone. Services can be accessed as soon as a mobile phone customer register with Beam. This can be done by sending a simple SMS message to Beam and assigning him or herself a secure personal identification number (SPIN). The subscriber’s Beam account is established automatically by
SWIFT and the subscriber receives an SMS to this effect within a few seconds. Beam prepaid cards can be purchased from any retailer, Beam Merchant, Beam Express (shops) franchisee or Beam Mobile Entrepreneurs (individuals). Additionally the Beam prepaid cards can also be purchased from Suvidha’s alternative channels comprising SCBs, cooperative banks, RRBs, NBFCs, MFIs, and India Post.
Subscribers not having a bank account can purchase Beam prepaid cards to top up their account and perform a variety of transactions. Money can be gifted via Beam to another subscriber. A Beam Merchant can be paid by a subscriber using Beam. Similarly, refund of the residual amount in the subscriber’s Beam account can also be taken from any Beam Mobile Entrepreneur or Express franchisee.
Besides micro-payment services, Beam Mobile Entrepreneurs can also extend microfinance, micro-insurance, micro-investment as well as international money transfer services of Suvidha partners to the Beam subscribers.
Additionally, the Beam Mobile Entrepreneurs can act as service delivery vehicles and extend microfinance, micro-insurance, micro-investment, as well as international money transfer services in his or her locality. These will be to the customers located anywhere who may not have a mobile phone and/or may not be registered with Beam but are clients of banks, cooperative banks, RRBs, NBFCs, India Post, MFIs, SHGs, and Ladies’ Kitty Clubs (LKCs).
Transaction Ecology
Figure 4.1 shows the human ecology of the various types of transactions. Subscribers can be seen sending money, giving gifts, paying each other, making purchases from member Beam Merchants and also taking refunds from Beam Mobile Entrepreneurs using their mobile phones. Similarly, Beam Mobile Entrepreneurs can be seen providing refund services and also extending microfinance, micro-insurance, micro-investment, and international money transfer services to Beam subscribers, as well as to the customers of banks, SCBs, RRBs, NBFCs, MFIs, SHGs, India Post and LKCs, who may have mobile phones and/or are not registered with Beam.
THE FUTURE AND CHALLENGES
Suvidha is starting off with micro-payment services. As it moves forward, it will use the flexibility and scalability of SWIFT technology platform, leverage the distribution network and the profiles of Beam subscribers to offer microfinance products, micro-insurance (life and general insurance products like crop insurance and so on) of its partners. As the feeton- street, that is, Beam Mobile Entrepreneurs mature, it will offmicro-investment products of partners. Suvidha will also offer international money transfer services of partner money transfer Organization (MTOs) through the Beam Mobile Entrepreneurs and Beam Express franchisees. In addition to offering partner products, Suvidha will provide micro- payments transaction management services to customers of banks, SCBs, RRBs, NBFCs, microfinance, micro-insurance, micro-investment, and MTO companies. It will move to other countries at an appropriate stage.
Challenges
1. Regulation. The regulatory environment for payments, microfinance, micro-insurance, micro-investment, and international money transfer is still evolving and there are no clear guidelines.
2. Taxation. While service tax is well understood, VAT is administered by individual states who are not clear on what the treatment should be with regard to charging or not.
3. Anti-money-laundering (AML). Customers may not yet have been issued the required documents with regard to anti-money-laundering.
4. Combating the financing of terrorism (CFT). Here again no clear dissemination
of information has occurred at the enforcement leve