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India's ATM industry is banking on the unbanked

For the ATM industry, India is a huge market with vast potential. It's a country of 1.2 billion people, 40 percent of them unbanked, according to the Reserve Bank of India (RBI). And Visa estimates that 91 percent of consumer purchases, by banked and unbanked Indians alike, are made with cash.

Just like central banks in other developing nations, the RBI recognizes the importance of getting its citizens' money into financial institutions, where it can drive further economic growth. Not only that, it can cut the government's own cost. For instance, a banked population could receive government benefits and other payments by direct deposit, saving the central and state government the current cost of dispersal by physical means.

In recent years, the RBI has introduced programs designed to reach the nation's 75,414 villages that have more than 2,000 residents, but no banking services, with the objective that every household in the country should have at least the most basic, no-frills bank account by the end of the year. Currently only three out of five households have an account.

Since April of 2010, this initiative has extended financial inclusion to nearly 100 million Indians who now own no-frills bank accounts, the total worth of which exceeds 87 billion rupees ($1.57 billion), but it's tiny fraction of the estimated $450 billion value of the rural economy.

So far, much of the effort to achieve financial inclusion has been led by travelling bank tellers, or "human ATMs." These are agents who go from village to village with a laptop computer, wireless modem and fingerprint scanner, helping residents open accounts, make deposits and process money transfers.

But to provide the day-to-day, 24/7 services needed for true financial inclusion, RBI is pushing other programs to bring banking to the masses. And one major program is its initiative to increase the number of ATMs available to villagers in rural areas.

As of March 2011, the entire country of India had about 90,000 ATMs to serve an enormous population. This averages out to a ratio of 1 ATM per 13,333 citizens. By contrast, the U.S. has about 400,000 ATMs, or 1 ATM for every 779 citizens — more than 17 times higher than India's ratio.

Part of India's ATM-to-citizen ratio problem was that only banks were allowed to own ATMs (though they were able to outsource the management of their networks). This meant that service could only reach as far and as fast as the country's banking infrastructure and economics would allow. RBI decided it wasn't nearly fast enough.

"Although there has been nearly 23 percent to 25 percent year-on-year growth in the number of ATMs, their deployment has been predominantly in Tier I & II centres," said an RBI statement. "There is a need to expand the reach of ATMs in Tier III to VI centres. In spite of the banks' pioneering efforts in this direction, much needs to be done."

This statement was made in connection with a new program just implemented by the RBI. In order to speed up the achievement of its financial inclusion objectives, the central bank announced in April that it would allow, for the first time, the white-labelling of ATMs in India. Final guidelines for the program were announced at the end of June.

Under the guidelines, any non-bank entity with a net worth of at least Rs 100 crore (the equivalent of 1 billion rupees, or $18 million) is eligible to set up, own and operate ATMs. These networks will provide services to customers of Indian banks, who can use their debit card to access cash. White label operators will receive payment for use of the ATM from the bank; they will not be allowed to charge customers for transactions.

The guidelines set several three-year schemes for the deployment of ATMs. The white label provider must commit to at least the minimum requirements of one of the schemes upon application for a permit to operate in the country. The ATM deployment schemes are:

Scheme A — 1,000 installed in year one; 2,000 installed in year two; 6,000 installed in year three

Scheme B — 5,000 installed in year one; 5,000 installed in year two; 5,000 installed in year three

Scheme C — 25,000 installed in year one; 25,000 more installed over the next two years

Of course, all schemes place the onus for upfront capital costs on the ATM operator. However, this has not prevented India's finance ministry from predicting the deployment of between 60,000 and 80,000 ATMs by white label providers between now and the first quarter of 2013.

Indian EFT Prizm Payments is one company that plans to take advantage of the new opportunity. And Wincor Nixdorf anticipates an uptick in its own business as a result of the RBI decision. Both companies will share their perspectives on the future of the ATM industry in India in the second half of our overview of ATMs in India.

For more on this topic, visit the installation/deployment research center.

Indian rupee graphic: Flickr/vishuhospet

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