21 – 22 September 2006, Kuala Lumpur Savings Banks and Foundations, contribution for a sustainable society Mr. Santosh Khanolkar, Platform Strategy Advisor - Banking, Financial & Insurance Services, Microsoft Corporation, India “Savings banks: the retail gateway to a global market. Driving sustainable development”

Rural Banking & Services Delivery Improvement - A Collaborative Technology Approach for Financial Inclusion S. D. Khanolkar Platform Strategy Advisor Banking, Financial & Insurance Services

ContentsContents Issues & Challenges in Financial Inclusion Pilot Project Highlights: Rural India - Solution : Mobile Rural Banking System Shared Role for IT Systems & Service Providers & Opportunities Critical Success Factors

Rural growth critical to Developing World… Rural entrepreneurship critical to this growth Entrepreneurship needs fair access to capital E.g. $1500 to set up a PC as a shared resource in an Indian village Cost of capital needs to be in the 8% APR range for businesses to thrive Issues & Challenges in Financial Inclusion

Economics for rural banking don’t currently work… Micro-credit does not scale beyond small loans > 25% APR needed to sustain micro-credit model APR too high for borrowers for >= $1000 Costs for traditional banks are too high to serve rural markets $1000 rural loan costs $3000 to service! (State Bank of India) Banking infrastructure is better suited to serve urban markets Most branches are in bigger towns Rural areas have very little access to banking infrastructure Issues & Challenges in Financial Inclusion Net result: Rural entrepreneurs have no access to affordable capital

Market Dilemma for Banks….. Huge market opportunity for rural loans Loan needs for rural India (600,000 villages): > $600M/yr. assuming Avg. loan size: $1000 Avg. # loans/village/yr.: 1 Interest revenue opportunity > $ 120M/yr., assuming Avg. loan period: 10 yrs. Avg. APR: 8% (compounded monthly) BUT Cost is untenable In India, it is $3000 per rural loan, needs to be way under $200 Because gross revenue/avg. loan/yr.: $200 Significant profit opportunity if costs can be lowered Cost/loan $100 -> $60M/yr. (10% profit) Cost/loan $10 -> $116M/yr. (19% profit) Issues & Challenges in Financial Inclusion Key question: Can costs be slashed from $3000 to $100 or even $10?

Why is the rural loan service cost so high? Loan servicing tasks are hugely expensive for a rural loan Advertise loan products Verify credit-worthiness of applicant Assess collateral (such as real-estate) Necessary third-party services (e.g. notarization) Finalize loan documents Collect on default Here are the key reasons for this cost: Travel needed either by applicant or bank staff for such tasks most bank staff and facilities in urban locations Physical access to village is expensive and slow Multiple trips needed for complex loan approval process Necessary third-party services require separate trips to county (sub- county) seat or back to the city Phone/fax does not guarantee access (Public Call Office environment) Banks not geared towards rural marketing of its products Issues & Challenges in Financial Inclusion

Microsoft – IIIT-B Pilot– Mobile Rural Banking System – Project Highlights Pilot Site: 300 km from Bangalore – 4000 families – 5 Villages ICT –based Rural information infrastructure for providing banking services on a shared basis Managing and processing this data and for making it available to the various banks for acquiring customers both on the liability and asset sides Shared delivery system through mobile ATMS for increasing access to rural people.

Mobile Rural Banking System: Technology Components

RCDS – RCDS –

Pilot Project Accomplishments Technology- based Rural Information Infrastructure covering data content identification and methodology for validation and updating for banks Crop loan workflow and Document Management System (DMS) integration System for credit rating of rural individuals Voice-based-authentication system Model for credit risk analysis of small loans Automation of the rural credit Societies as delivery arms User-proofing of the Model for supporting banking services (Commercial banks,cooperative institutions and other rural financing agencies)

Opportunities for IT Systems & Service Providers Service Providers’ Opportunities Shared Authorization & Switch Host for multiple Banks Data Center Hosting Opportunities ATMs / Information Kiosks Deployment in Rural India – Next Growth Item in Indian Banking System Solution Providers’ Opportunities: Application & Interface Integration Opportunities with Core Banking Systems of Banks Core Banking Systems – Independent Module Development

Critical Success Factors ConnectivityServices Access Device Abilities of Kiosk Operator Business Model Dial up Mobile VSAT WiFI Offline Hybrid Sales Business Computer Interpersonal Assessment Education Communication Agriculture Entertainment E-Commerce E-Governance Micro-Enterprise Franchise Break-even pt Overhead Revenue sharing Incentives Computer Mobile phone Hybrid devices

SummarySummary Delivery of Banking Services to Rural India through Use of Information & Communication Technologies. Common Information Infrastructure & Shared Delivery System Reduction in Transaction Costs & Delivery Time Improvement in Quality of Services Increasing Availability of Services Academics, IT Industry, Banks and Government Synergy