RBI Roadblock – Mobile operators not allowed to offer banking services

In the face of strong resistance from the Reserve Bank of India (RBI) and the home ministry, the government has decided to give up (at least for the time being) the idea of a cost-effective and convenient mobile-based model for financial services that allows transfer of funds outside the banking system. The RBI and the home ministry contend that such a system will be difficult to regulate and could cause uncontrolled credit creation outside the banking system. The home ministry has also voiced security concerns about the facility.

The idea behind creating a mobilebased model for financial services was to put the extensive outlets of telecom companies to effective use by allowing them to double as bank outlets for financial services like funds transfer or bill payment, especially in areas where there are few or no banks. The rationale was that while there are only 400 million bank account holders in the country, the number of mobile phone users is close to 500 million and increasing each month by about 15 million users. In that context, financial transactions through mobiles or mobile outlets would help people in the 640,000 villages with no bank account to transact effectively.

The government set up an interministerial group to consider introducing the mobile-based model without links to bank accounts for delivering basic financial services. The model being proposed is similar to M-PESA in Kenya, which enables users to make basic banking transactions without visiting a bank branch. The user can deposit, withdraw and transfer money from a network of airtime resellers and retail outlets acting as banking agents.

The group, comprising top officials from the departments of home affairs, telecom, financial services, posts, rural development, the Unique Identification Authority of India as well as representatives of the Planning Commission, TRAI and RBI, is to define the type of transaction, quantum of financial limits, guarantee to be offered by airtime vendors, eligibility of agencies involved, role and accountability of service providers and interoperability among them.

The group is to give its recommendations early next year. The finance ministry and the Planning Commission do not as of now have problems with the idea mooted by the telecom ministry on the grounds that it would achieve greater financial inclusion. The RBI and the home ministry are, however, not keen to move ahead on this.

In August 2009, the RBI had come out with “mobile wallet” guidelines, which allow mobile users to deposit up to Rs 5,000 with telecom operators for merchant transactions. Some companies offered the service in a manner that allowed the recipient to collect the money from the operator outlet by showing a transaction authorisation code received from the sender.

Says a senior finance ministry official, “The RBI is comfortable about relaxing the (Rs 5,000) cap, but is not in favour of providing financial services without links to bank accounts. It believes that this may lead to security problems as the Know Your Customer (KYC) norms of banks are more stringent than those of mobile operators.”

Operators disagree of course. They feel that the KYC norms can be enhanced if required. The technology for it already exists. Regulatory hurdles should not pose a deterrent in the access of better, faster and cheaper financial services. In fact, this would not only bring down operations costs but could also help in curbing money laundering as all transactions would be through proper channels and would be fully traceable.

But be that as it may, the RBI is currently only comfortable with banks providing mobile banking services while restricting the role of telcos to that of facilitators.