VZCZCXRO8210
RR RUEHAST RUEHBI RUEHCI RUEHLH RUEHPW
DE RUEHNE #2554/01 2661209
ZNR UUUUU ZZH
R 221209Z SEP 08
FM AMEMBASSY NEW DELHI
TO RUEHC/SECSTATE WASHDC 3527
INFO RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RULSDMK/DEPT OF TRANSPORTATION WASHDC
RHMFIUU/FAA NATIONAL HQ WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE WASHDC

UNCLAS SECTION 01 OF 02 NEW DELHI 002554 
 
SIPDIS 
SENSITIVE 
 
STATE FOR SCA/INS AND EEB 
USDOC FOR ITA/MAC/OSA/LDROKER/ASTERN/KRUDD 
DEPT PASS TO USTR CLILIENFELD/AADLER/CHINCKLEY 
DEPT PASS TO TREASURY FOR OFFICE OF SOUTH ASIA MNUGENT 
TREASURY PASS TO FRB SAN FRANCISCO/TERESA CURRAN 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ETRD IN
 
SUBJECT: MOBILE BANKING PROMISES FINANCIAL INCLUSION BUT REGULATIONS 
HOLDING IT BACK 
 
REF: MUMBAI 555 
 
¶1.  (SBU) Summary.  Two means to financial inclusion in India -- 
business correspondents and mobile banking -- have been slow to take 
hold, hampered by rules from India's cautious central bank (see 
reftel).  Though the central bank allowed the business 
correspondents model -- where intermediaries offer on-site banking 
opportunities in unbanked rural and urban areas -- in early 2007, 
Econoffs found no signs that it had gained traction.  Similarly, 
though some in the government expressed excitement with the promise 
of mobile banking, regulators have yet to finalize rules in this 
area and the growth of mobile banking is therefore on hold for now. 
The spread of mobile bankingservices will largely depend on RBI 
willingness to loosen know-your-customer regulations that impose 
heavy administrative costs on small account holders.  End summary. 
 
Business Correspondents - 
Bridge to Isolated Communities 
---------------------------------- 
 
¶2.  (U) Business correspondents (BCs) were first endorsed by a 
Reserve Bank of India (RBI) internal group on Rural Credit and 
Micro-Finance (the "Khan Committee) headed by Shri H.R. Khan, Chief 
General Manager and Principal at the RBI's College of Agricultural 
Banking in a report issued July 19, 2005.  BCs were subsequently 
allowed by the RBI in a January 2006 circular as a financial 
inclusion effort to spread access to banking services to the 
unbanked, mainly India's poor. BCs perform basic banking 
transactions in rural or urban slum communities that lack access to 
brick-and-mortar bank branches. 
 
¶3.  (SBU) RBI regulations allow only certain people to act as BCs, 
though the list of those allowed - teachers, ex-service members, ex 
banking officials, etc. - is broad and was expanded in April 2008. 
Pulla Rao, Banking Supervision General Manager at the RBI in New 
Delhi, told Econoffs that BCs do not need to be certified or 
licensed by regulators, but they do need to be approved by a bank 
that can be audited and disciplined if it is found to be in 
violation of the RBI guidelines. 
 
¶4.  (SBU) However, even as the new regulations enlarged the scope of 
eligible BCs, the RBI also added a new restriction that limited BCs 
to 15 kilometers from a base branch in rural areas and 5 kilometers 
from a base branch in urban areas.  When asked about the 
controversial regulations, RBI's Rao stated that the regulations 
were presently under review.  [Comment: A Business Standard article 
in May pointed out that there are 600,000 villages in India, but 
only 45,000 rural bank branches, suggesting that the 15 kilometer 
limit would severely limit the potential reach of BCs.  End 
comment.] 
 
¶5.  (SBU) Responses from officials at both private and public banks 
regarding their use of BCs tended to indicate that BCs are not 
gaining traction within their institutions.  Rajnish Datta, 
president of Small Business Banking at Yes Bank in New Delhi, had 
not even heard of the concept, and other banking officials did not 
evidence much enthusiasm.  Officials at state-owned Punjab National 
Bank (PNB), for instance, said that they did have a BC program, but 
that it was in phase one of a pilot.  They could not provide 
specificity as to how many BCs the pilot program was using, saying 
only that it was "a number" of them.  Likewise, Rao could not 
provide a good estimate of the degree to which BCs are being used 
nationally because the RBI does not collect data on BC usage. 
 
¶6.  (SBU) Shashank Saxena, a new Director of Banking at the Ministry 
of Finance, expressed skepticism about the BC model, saying that the 
costs of BCs were too high.  He said that despite there being no 
brick-and-mortar cost to BCs, administering small accounts was 
nevertheless costly.  He suggested that financial inclusion was 
instead best facilitated through an interest rate subsidy financed 
through a financial inclusion fund.  [Note: Two such funds already 
exist - the Financial Inclusion Fund for developmental and 
promotional activities, and the Financial Inclusion Technology Fund 
to meet the costs of technology adoption for those services.  End 
note.] 
 
Mobile Banking 
 
NEW DELHI 00002554  002 OF 002 
 
 
-------------- 
 
¶7.  (U) Mobile banking falls into two`QQQo55), whereas MDB uses specialized electronic banking devices 
that are used by personnel affiliated with a bank. 
 
¶8.  (SBU) Private sector interlocutors tended to be enthusiastic 
about MPB, though primarily because of the potential it presents to 
broaden access to banking services with an estimated 200 million 
mobile phone subscribers in India.  Ministry of Finance's Saxena 
voiced more skepticism and caution, saying that while mobile phones 
reached 200 million people in India, they were the richest 200 
million and if the goal is to reach the poor, it wouldn't be done 
through MPB. [Note: Bharti Airtel, a leading telecom provider, has 
indicated that half of new subscriptions are from rural residents. 
Total subscriptions in India now top 300 million.  End note.]  Rao 
acknowledged that MPB had good potential to reach into rural areas. 
The RBI's main concern, however, is with know-your-customer (KYC) 
rules which ensure that money transfer is performed non-anonymously 
to prevent criminal activity. 
 
¶9.  (SBU) Officials at the Ministry of Finance and the RBI were 
generally enthusiastic about MDB, saying that pilots of MDB had 
performed well.  The RBI is in the process of issuing regulations on 
mobile banking, and draft regulations are currently out for public 
comment.  Rao said that for the near term at least, mobile banking 
would only be allowed for informational purposes - checking the 
balance of bank accounts for instance - but not for transactional 
purposes like making deposits or transferring funds. 
 
¶10.  (SBU) Econoffs asked Rao about a mobile banking pilot program 
in Delhi - a joint project between mobile phone company EKO and HDFC 
bank - in which mobile phone users are automatically given a bank 
account with the same number as their mobile phone.  The advantage 
of this is that mobile phone users can establish a bank account 
without having to verify their address, a task that can be difficult 
for the poor.  Rao said that HDFC had notified them of the project 
and that the RBI is allowing the program to continue because there 
are only a couple hundred users and their transactions are small. 
 
Comment 
-------- 
 
¶11.  (SBU) A significant obstacle to financial inclusion is the 
necessity of KYC rules.  There is a tradeoff between having strong 
KYC practices and getting people into the banking system. 
Terrorists, criminals, and the poor share the characteristic of 
being undocumented -- the former intentionally so, the latter by the 
nature of poverty -- making distinguishing between the two a labor- 
and time-intensive process of physical visits to places of residence 
and interviews of friends and neighbors.  The cost of this relative 
to potential revenue from the poor's meager savings has kept 
traditional banking to the poor unprofitable.  New technologies and 
practices, like BCs and MPB can change the cost calculus, if 
regulators and the banking system can get behind them. 
 
WHITE