A Little World: Facilitating Safe and Efficient M-Banking in Rural India

South Asia • India

A Little World: Facilitating Safe and
Efficient M-Banking in Rural India
Prepared by • Bimal Arora and Ashley Metz Cummings
Reviewed by • Usha Jumani
Sector • Financial Services
Enterprise Class • MSME

Executive Summary
This study is about a private initiative to process and streamline rural financial payment
transactions conducted by public and private institutions in India. The initiative is led by a
private sector organization, A Little World (ALW) and its sister entity, a non-profit
organization, ZERO Microfinance and Savings Support Foundation (ZMF). ALW and ZMF
act as intermediaries between rural communities at one end, and mainstream financial
institutions and the government at the other end. ALW offers a secure, low-cost technology
driven delivery platform for financial services through special mobile phones that store and
help manage a vast amount of customer bank account data, authenticates account holders
through photo and biometric identification and allows access to the bank accounts as the Point
of Service terminals. The mobile phone is in essence a ‘bank in a box’ run by ZMF for the
villagers in rural India. The services currently offered by ALW/ZMF include: cash deposits,
withdrawals and transfers (as in bank saving accounts), payments for government social
security programmes and welfare schemes electronically – what is generally called the
Electronic Benefit Transfer (EBT), disbursal and collection of loans and loan installments,
collection of cash for third parties, insurance products and premium payments and payment of
utility bills. Thus, ensuring that the financial transactions are safe, reliable, convenient and
transparent and there is no funds leakage in the process.

ALW with its technology platform, and a new reform in the banking policy, that allows the
non-profit making entities (Business Correspondents) to function as intermediaries of
mainstream banks in rural areas, fills a much needed gap for the rural households in India by
offering convenient access to affordable financial services. ZMF acts as the Business
Correspondents (BC) for leading private and public sector banks in India.

Since its pilot project in 2006, with India’s leading bank, the State Bank of India, ALW and
ZMF have rapidly grown and are now present in 22 states, with over four million rural
customers, 8,314 points of presence and an average of 25,000 new account openings every
day. ALW and ZMF’s services in rural India, in tandem with formal financial institutions and
government, may mark a new beginning for rural households in the annals of financial
inclusion. No surprises on ALW being ranked among the top ten most innovative companies
in India in the annual Most Innovative Companies ranking of the US-based Fast Company
news magazine.

Case Study • A Little World: Safe and Efficient M-Banking in Rural India 2

Context
Inclusive finance or financial inclusion is a complex challenge for economies and
policymakers globally. A major barrier to financial inclusion in developing countries, in
particular, has been the non-affordability of financial services institutions and infrastructure
for the poor. To tackle this issue of financial exclusion, the Banking Agent1 Model and
Branchless Banking Model began to surface in different countries since 1990s onwards. Such
models operated through the use of existing infrastructure such as the retail shops, lottery and
postal outlets, thus reducing the costs involved in the traditional branch banking.2 Banking
Agents operate on behalf of the mainstream financial institutions and the Banking Agent
Model is now widely used in countries like Brazil, Colombia, Ecuador, India, Kenya,
Pakistan, Peru, Philippines, and South Africa.3 However, building a profitable and sustainable
business model remains a concern of the banking agents.4 Mainstream financial institutions in
India have been using the services of banking agents since 2006.5

Historically, millions of rural Indian households have been in the clutches of many social ills
arising from indebtedness. To some extent, this can be attributed to the rural households’
unequal access to formal sector banking and credit facilities. Due to many policies of the
government (see Annex, Box 1: Banking Policy and Access to Rural Credit in India), the
availability of rural credit in India has been declining in the last few decades. Since credit acts
as a major form of socio-economic security for the rural poor, the decline in credit had a
devastating impact (see Annex, Table 1: Growth of Bank Offices, Bank Credits and Deposits
in Scheduled Commercial Banks, 1969-2000). Over 40,000 farmers committed suicide in the
Vidharbha region of Maharashtra and Andhra Pradesh states due to the agrarian crisis, and an
estimated total of 168,000 farmers took their lives in India between 1997 and 2007.6 A famous
quote on the Indian rural peasant worker by Darling is still relevant to some extent: “The
Indian peasant is born in debt, lives in debt and dies in debt”.7

Duvvuri Subbarao, the Governor of Reserve Bank of India, India’s Central Bank and the
financial and banking regulator, presented the dismal figures on financial exclusion in India in
December 2009: out of 600,000 habitations – clusters with population of 100 or more – only
about 30,000 have a commercial bank branch. Merely 40% of Indian population has a bank
account, 10% life insurance coverage and 0.06% non-life insurance, accompanied by huge
regional disparities. Analyzing the reasons behind exclusion, Subbarao observed that
“Financial exclusion…is a confluence of multiple barriers: lack of access, lack of physical
and social infrastructure, lack of understanding and knowledge, lack of technology, lack of
support, lack of confidence, among others. Overcoming these barriers is, in a nutshell, the

1
In some countries, like in India these banking agents are called Business Correspondent (BC)
2
CGAP, 2009
3
CGAP, 2009a
4
CGAP, 2009b
5
Kochhar, 2009
6
Dhar, 2009
7
Darling 1928


challenge of financial inclusion”.8 Such gaps have been filled to an extent by NGOs, Self
Help Groups (SHG) and other Microfinance Institutions (MFI) since the middle of the 1990s.

Financial inclusion as a policy has been pursued at different stages since India’s independence
in 1947 and, particularly since the 1970s, targeting the unbanked population and especially
the rural poor9 (see Annex, Table 2: Growth Rates of Population, Banks and Credit for Rural
India). The Committee on Financial Inclusion, constituted by the Government of India in June
2006, recommended to the government to launch a National Mission on Financial Inclusion
and a National Rural Financial Inclusion Plan10 with a target to provide access to
comprehensive financial services to at least 50% of the financially excluded households
(approximately 55.77 million) by 2012 through regional and semi-urban branches of
Commercial Banks and Regional Rural Banks. The remaining households are to be covered
by 2015.11 The definition of financial inclusion in the Indian context refers to formal access
and enrollment in the organized financial system such as banks, insurance services and
processing of government benefit payments directly via a bank account12. For example, this
would mean at the most preliminary level, the owning of bank accounts by poor or what is
termed a ‘no-frills’ bank account (see Annex, Table 3: Number of No-Frills Accounts in
India), and availability of easy access to credit at reasonable rates of interest.13

Regulatory support for financial inclusion of the excluded has become one of the reasons for
banks to link to rural communities in India (see Annex, Box 2: Financial Inclusiveness –
Challenges and Incentives). Technology platforms that support branchless banking14 bring
down the costs for banks in reaching out to the rural poor. In a debating event15 organized by
a media group in Mumbai in November 2009 – involving bankers and banking technology

8
Subbarao, 2009
9
The traditional business models of the formal financial companies are unfeasible and costly in
providing appropriate reach to the unbanked population in remote areas directly for banking, insurance
and other financial services and products, and as a result, a mere 5.2% of Indian villages have a bank
branch (Kochhar, 2009).
10
Committee on Financial Inclusion submitted report to the government in January 2008 (Rao, 2008).
11
Rao, 2008
12
According to Frost and Sullivan (2008) “The Financial inclusion (FI) quotient of a country is
recognized as a key determinant to gauge that country's overall economic and social development.
Even in developed financial markets there are concerns about those excluded from the banking system,
especially, migrant workers. The barriers to access formal banking system have been identified as
relating to culture, education (financial literacy), gender, proof of identity, remoteness of residence,
income and assets, etc.” (Rangarajan, 2008).
13
This definition of financial inclusion does not however include economic growth schemes. It denotes
opening up a secure transactional space for financial activities between banks and rural customers at
the most level. Financial inclusion in India is defined as the process of ensuring access to financial
services and timely and adequate credit where needed by vulnerable groups such as weaker sections
and low income groups at an affordable cost, according to C. Rangarajan, Chairman, Committee on
Financial Inclusion in India, 2008.
14
Branchless banking is the use of technology, such as mobile phones and bank cards, for the conduct
of financial transactions electronically and remotely. The use of third party outlets as agents for the
financial services provider allows customers to use financial services without going to bank branches.
The financial services provider is backed by a government-licensed financial institution. Besides
transactional services, branchless banking provides basic cash deposit and withdrawal (Ivatury and
Mas, 2008).
15 th
Banking: Reaping the Digital Dividend held on 25 November 2009 in Mumbai


experts – there was a consensus that “Indian banks will have to leapfrog into adopting mobile
phones and point of sale (PoS16) terminals as the primary media of banking services if they
are to reap dividends from a large unbanked population through the use of technology...Use
of cell phones will help banks penetrate into the hinterland with a negligible investment and
be a win-win situation for both banks and customers”.17 The experts strongly felt that “an
aggregator for transactions is needed and point of sale terminals have to get cheaper”.18

Mr. Anurag Gupta, a first generation entrepreneur and visionary innovator, had spotted this
way back in the early 2000s and has been developing the concept of domestic payments
platform ever since.19 In January 2006, RBI issued a notification allowing banks to use the
services of NGOs, SHGs, Microfinance institutions and other Civil Society Organisations
(CSOs), as intermediaries in providing financial and banking services through the use of
Business Facilitator (BF) and Business Correspondent (BC) models. The regulatory support
enabled Anurag to eventually set up the organizational entities: ALW (A Little World) as the
technology partner and ZMF (Zero Mass Foundation) as the Business Correspondent to set up
India’s first technologically enabled domestic payments platform.

A Little World (ALW), an entrepreneurial technology integrator and technology platform
provider company established by Anurag (Founder, and at present, the Chief Technology
Officer) is engaged in producing low-cost and commercially viable solutions by leveraging
new generation technologies that work in tandem with existing and emerging public and
private institutions and infrastructure. Zero Mass Foundation (ZMF), the non-profit entity
provides the physical infrastructure network on the ground to serve rural Indian households.

ALW/ZMF: India’s Leading M-Bank
In 2000, Anurag founded A Little World Private Limited (ALW) as a technology integrator
and technology platform provider in Mumbai, India as a private limited company. By
education Anurag is an architect. Prior to setting out as an entrepreneur in 2000, Anurag
worked as an independent, self-employed housing and architecture consultant in India from
1991 to 2000. With the IT boom in India during the 1990s, many people desired to set up
their own IT/ITES businesses. Anurag too desired to carve a niche in the IT space. Being self-
employed all along, Anurag experienced difficulties in obtaining a credit card for himself as
the banks were not too keen on granting credit card facilities to self-employed individuals in
India at that time. Anurag’s encounters with banks made him realize how difficult it was for
people to secure credits in India from the formal financial institutions. In the absence of any
credit card and not being keen on carrying cash all the time, Anurag used the Smart Card
based electronic purse (e-purse) to manage his expenses during one of his weeklong visits to

16
Point of Sale devices (PoS) installed in local retailers such as grocery stores, pharmacies and gas
stations act as agents and expand clients’ opportunities to conduct financial transactions.
17
Rebello, 2009
18
Ibid.
19
Indeed as Dan Balaban (2004) argued that mobile payments schemes so far failed anywhere they
have been tried. Balaban discussed Anurag’s mobile payments venture in India in detail.


Belgium in 2000.20 Anurag was impressed with the concept of Smart Card based off-line
transactions and realized that such a service would be especially useful in a developing
country like India. Anurag also realized that there was need for a domestic payments system
in India, which had to be affordable and equipped to handle small transactions - unlike the
rental PoS based business models of multinationals payment transactions companies such as
Visa and MasterCard.

In order to develop these products, Anurag approached and convinced technology companies
in Europe to work with him to implement the financial payments/transactions system in
India.21 He formed the Zero-Mass Consortium by bringing together a group of technology
vendors from the Smart Card industry and related companies such as France-based Gemplus
International, Giesecke and Devrient and Infineon Technologies of Germany, and ERG Group
of Australia with plans to develop India's e-payment system and market.22 Through
integrating different existing technologies, ALW created a new technology platform which
evolved and innovated to suit the rural conditions during and post pilot operations. Anurag
chose mobile phones as a core device for transactions for three reasons: the low educational
level of users, poor power infrastructure in villages, and limitations of other devices for over-
air transmission. “A mobile stores, computes and transmits, a PoS or laptop don’t have the
same characteristics”, noted Anurag.

A new business opportunity presented itself to ALW when the Reserve Bank of India issued
Business Correspondent (BC) guidelines under its financial inclusion initiative in 2006. The
government proposed BCs as a social initiative, allowing them to earn certain percentage of
the total funds disbursed to cover their operating costs23. Anurag has been advocating for this
with RBI and government for some years and founded the ZERO MASS Foundation (ZMF),
as a Section 2524 company, to operate as Business Correspondent (BC) on the technology
platform provided by ALW.

As a spin-off to the RBI’s Financial Inclusion Project, in November-December of 2006, ALW
began a pilot project for the State Bank of India (SBI) to provide banking transactions in the
rural villages of Aizwal (Mizoram), Madek (Andhra Pradesh) and Pithoragarh (Uttarakhand).
ALW’s role was to provide the technology platform ZERO, and the ZMF developed and

20
Smart Card-based e-purse is a service offered by Banksys in Belgium in which monetary value is
stored on the card chip and not in an externally recorded account. Machines accepting the card need no
network connectivity and work on off-line mode. Such cards are in service throughout Europe since mid-
1990s. Inspired by European models of Smart Cards, Anurag started his entrepreneurial journey with
GO-Mumbai, an application for bus and train travel and MCHQ (now mChek), a mobile payment system.
21
Though Anurag believed that “MCHQ” could revolutionize the payments system in India and worked
for about five-six years in the venture, by 2006 he had realized the huge potential of payments system
and financial transactions in the rural markets. Anurag sold off MCHQ to focus on ALW’s new initiative:
creating India’s first affordable and domestic payment platform for low cash transactions in rural
markets.
22
Balaban, 2004
23
Government mandated that technology be used to monitor field activities.
24
Under Section 25 of the Indian Companies Act, 1956, a company can be established ‘for promoting
commerce, art, science, religion, charity or any other useful object’, provided the profits, if any, or other
income is applied for promoting only the objects of the company and no dividend is paid to its members.


executed on-the-ground operations network. The project was to enrol about 5,000 villagers in
no-frills bank accounts for Electronic Benefit Transfer (EBT) - the disbursement of
government funds using biometric Smart Cards. However, it soon became apparent that the
costs to SBI for delivering the service were too high to make it viable as it lacked a
distribution network to reach rural India effectively. The distribution burden to the villages
was too high for most financial institutions to shoulder alone.

By the end of 2009, ZMF had enrolled over
four million people for standard bank accounts
(see Chart 1: Growth of ALW/ZMF in India
below). More importantly, besides facilitating
the opening of bank accounts, ALW’s
technology platform enables corruption-free
distribution of government funds (see Annex,
Box 3: NREGA Scheme of Government for
NREGA and Pensions Disbursals Rural Areas). Their most notable achievement
is an extensive infrastructure of outreach, the
implications of which will be far-reaching in benefits through financial inclusion of the
millions of unbanked, and in many cases, vulnerable population, and potentially, profits for
the financial and several other services and products operators and providers. An important
change after the pilot stage, that characterizes their technology platform, is the elimination of
Smart Cards and instead customers are provided with a nine-digit code to access their
accounts through the mobile phone at customer service points (CSPs). Additionally biometric
identification through a fingerprint reader at CSPs provides user authentication instead of a
Smart Card.

Chart 1: Growth of ALW/ZMF in India as on September 2009

Source: Gupta (2009a)

Through setting up of a technology-driven ‘Bank-in-a-Box’ or micro-bank - India’s first
domestic payments platform - ALW, together with ZMF, has developed and is executing an
ambitious plan of serving low income customer segments in every village to facilitate rural
India’s integration into the formal financial sector and the mainstream economy. Both the
organizations are contributing to filling critical gaps in a wider ecosystem catering to and
bringing closer the formal financial institutions to the unbanked population with a focus on
continuous improvements, and hence ALW was ranked among the top ten most innovative
companies in India in the annual Most Innovative Companies ranking of the US based Fast
Company25 news magazine.

ALW/ZMF Business Model
Behind a table in a remote Indian village, two women stand together. One is the village bank
Customer Service Point (CSP), a title she holds among others: villager, agricultural worker,
mother, and wife. She holds a mobile phone, a small biometric reader and a receipt printer.
The other lady, slightly her senior, presses her thumb on the small square, displays her photo
ID badge and speaks into the phone. Within moments, her identity is verified and money
exchanges hands. She has just received her wage payment - from a government-run social
security scheme called National Rural Employment Guarantee Scheme26 (NREGS) - along
with a receipt printed in her local language. In a corner of the room, the village headman
watches on, silently. He is not involved in this transaction. When asked about the transaction,
the woman says simply, “I used to get my payment from the post office at a distance, now I

CSP Gives Receipt Printout CSP Does Fingerprint Scanning

get it here, in my village”. To her, here, the ZERO Platform, a transactional technology
created by A Little World (ALW), is a matter of convenience. She has been automatically
enrolled as bank account holder at the State Bank of India, but she doesn’t yet understand
exactly what this means. To others, about 120 of them, receiving payments that day, the story

25
Fast Company is a monthly magazine, Web site, and digital distribution platform covering the
business of innovation worldwide (http://www.fastcompany.com/about).
26
National Rural Employment Guarantee Scheme (NREGS) was launched by the Government of India
after enactment of National Rural Employment Guarantee Act (NREGA) through legislation on August
25, 2005.

is similar. For some, it packs more of a punch, “I never knew exactly how much my disability
benefits were before this (the technology platform)”.

For the villagers, life is almost as normal, with a
few more rupees (Rs.) than before - that had
previously been siphoned off by corrupt
government officials, or a few less - as dead
relatives are cutoff from benefits. The
technology-enabled verification technique
allows for the disbursement of the correct funds
to the right person only. In this entire process,
small shifts in power dynamics and financial
CSP Registry Log literacy are underway, but what the villagers will
learn in a year or so, is that this is the foundation
for a major shift in the way they deal with money, with the government and its social security
and other benefits schemes, and with the financial services providers.

By combining a new generation Near Field Communications (NFC27) technology enabled
mobile phones, contact-less Radio-Frequency Identification (RFID) Smart Cards, integrated
biometrics authentication system and a transaction server, to enable cost effective and
convenient mobile transaction solutions for branchless banking and financial transactions,
Anurag, at A Little World Private Limited (ALW), has created the mobile-phone bank
branch. Anurag, named this as ‘ZERO Platform’.28

The ZERO Platform acts as a bank account
enrollment, financial transaction system, and
information hub for any village in even remotest
areas. The technology platform connects a formal
financial institution – such as a Bank - to villagers
(customers) for standard banking operations, and
disbursement of government sponsored schemes
and other welfare funds, through bank accounts
opened with the help of the ZERO Platform. The
ZERO Platform Kit and Smart Card (ID)
ZERO Platform is wielded by Customer Service
Points (CSPs), manned by two village women, appointed by the local village self help groups
(SHGs). There is a general call for recruitment by ZMF through the Gram Panchayats (village

27
Near Field Communication (NFC) is a new, short-range wireless connectivity technology that evolved
from a combination of existing contactless identification and interconnection technologies. Products with
built-in NFC dramatically simplify the way consumer devices interact with one another, helping people
speed connections, receive and share information and make fast and secure payments. http://www.nfc-
forum.org/aboutnfc/ accessed on 02/12/2009.
28
ALW partnered with several technology companies - such as NXP Semiconductors (for RFID), Nokia
(for NFC mobile handsets), Sagem Securite (for Biometrics) - for different technological product needs
and is the first company in India to develop and innovate a technology platform for low-cost branchless
mobile-banking aimed at facilitating financial transactions in remote villages.

councils) or broadcasting in the villages to inform the SHGs and the villagers regarding the
CSP vacancies. CSP selection process usually happens at the Development Block level.

With constant feedbacks and learning, emerging
from the ground, Anurag kept himself engaged
with finding technologically innovative solutions
to eliminate bottlenecks, including creating cost
effective and feasible solution for enrolments
using mobile phone handsets and the use of local
residents to take care of the enrolment process.
Now, the enrolment is done in offline mode and
on-demand by the Customer Service Point (CSP)
CSP Takes Photo of NREGS Worker manned by local village women. The process of
enrolment begins with photos of villagers being
taken and voice recorded on the mobile phone
which is then sent wirelessly. The Smart Cards
are later delivered to the village. The CSPs who
carry out enrolments are local residents, typically
daughter-in-laws, who are not likely to move
away from the village.

Two women from each village are shortlisted
from a group of five-ten women recommended by
the village SHG, who vouch for their
CSP Training Session trustworthiness and responsible behaviour.
Involvement of local SHGs not just ensures some
sort of institutional guarantee and support, but also joins another link in the ecosystem of
financial inclusion. Anil Tunk, the Country Head of Operations in ALW/ZMF, suggested that
the selected women take an English and Maths test along with a phone round to test their
confidence levels. Selection criteria also take into account their curiosity to learn. The
selected women are then trained at the Block level five-day training programme (three days
training on enrolments and two days on transactions). Besides, Anil noted that the women of
no political affiliation are preferred as they are the most trustworthy and least prone to create
conflicts among the villagers. Women are also chosen for the empowerment and shift in
power dynamics this provides and, women managing ZMF’s operations in villages, receive a
lot of respect from villagers and have become a sort of power centers there.

By May 2008, the ZERO Platform had evolved to its current state (see Operations Model of
ALW below) and ZMF had sprung up to meet the Banking Correspondent demands of the
State Bank of India and others banks. ZMF has since grown to be the largest BC in India (see
Annex, Table 4: Scale of Operations of ZMF in India), providing the most reliable and

Operations Model of ALW

standardized distribution channel for mainstream financial services, with a reach of over four
million villagers, and aiming to acquire five million customers by March 2010.

Anil, the Country Operations Head at ZMF,
explained that as a BC, the ZMF has an operational
structure that starts from the national to the field
level, managing an impressive rural outreach
system. ZMF is structured hierarchically from
country operations to the state’ level with a state
head to a field operations manager to a technical
manager and a CMS manager (cash management),
ALW/ZMF Founder Anurag Gupta and
as well as their teams. Each district office also has
Team at CSP Site
a technology, cash and operations personnel as
well as inventory management, administration and accounts. Under the districts, there are 250
blocks served by one field team each, and each block has 20 CSPs, covering the average
population of 35,000 to 40,000, with 15,000-20,000 being adult population. A Development
Block could typically cover hundreds of villages, as many as 200 or more. With over four
million rural customers in 22 federal states and presence in 1,000 Gram Panchayats (village

councils), ZMF reports having about 50% market share. Anurag’s focus is set on the
deprived, under-privileged rural areas, which represent a larger proportion of financially
excluded population.

Chart 2: ALW/ZMF Organizational Structure

Source: ALW/ZMF Internal Documents

ALW/ZMFs Financial Model
According to the Indian banking regulator RBI guidelines for BCs, ZMF earns commissions
on the funds disbursed, but will also earn commissions from disbursing other core banking
services, which are yet to take off in a big way. Commissions are negotiated with banks and
vary. So far ZMF has disbursed about Rs. 200 Crores (approx. US$42.8729 million) to
villages in NREGS and pension funds and in 2010, with ZMF’s reach extending nationally,
Anil, Country Operations Head at ZMF, expects to disburse Rs. 1,400 Crores (approx.
US$300.11 million). Anil says that “the ZMF had a mandate from different state governments
for disbursement of NREGS funds – by the end of 2009, in Andhra Pradesh Rs. 1,500 Crores
(approx. US$321.54 million); in Orissa Rs. 2,000 Crores (approx. US$428.72 million); and
in Chattisgarh Rs. 200 Crores in two districts (approx. US$42.87 million). Additionally, ZMF
was commissioned to disburse Rs. 600 Crores (approx. US$128.62 million) in Andhra
Pradesh and a small amount of Rs. 2 Crores (approx. US$0.43 million) for pension funds in
Andhra Pradesh and Himachal Pradesh respectively. On an average, over 25,000 new
accounts are opened every day through 8,314 points of presence (as on December 2009)
across 22 states for SBI and other PSU banks”.

During the pilot phase with SBI in 2006, the bank paid for the technology platform
equipments, which currently costs approximately Rs. 20,000 (approx. US$472.73) and is a
fixed cost (see Annex, Table 5: Cost Structure of a BC). With further technological

29
The UN January 2010 exchange rate of US$1 = Rs. 46.65 is used.

advancements, Anurag expects this fixed cost of the equipments to come down to about Rs.
12,000 (approx. US$257.24) soon. There are other costs borne by the banks, such as training
the BC units, administration, cash management, financial literacy and backend technology
costs, which also supports ALW/ZMF in their operations.

Sources of revenue (see Annex, Table 6: Revenue Inflows for BCs) are mainly from the
disbursal fee charged by ZMF for government payments disbursal, and secondarily a
technology fee charged by ALW to active account users.30 For NREGS funds disbursement,
the commission varies between states and ranges from 1.75% to 2%. Commissions are also
earned by BCs for disbursements of other government welfare scheme such as old age
pensions and scholarships as well as on selling of the core banking services such as deposits,
loans, mortgages etc. For savings and deposits, BCs earn 0.5% of the amount and for loans,
0.5 to 1.0% of the loan amount from banks.

According to Kochhar, a BC Point of Presence currently disburses on an average Rs. 1.2
million per annum.31 Currently, ZMF is not earning a profitable margin (see Annex, Table 7:
Economic Viability of ZMF). However, with its scaling up plan and proposal to increase its
commission from Electronic Benefit Transfer (EBT) programmes of the government, ZMF
will be able to achieve economic viability. ZMF also has planned massive expansion through
linkages with hitherto unexplored rural channel partners that have business interest in rural
markets (other stakeholders like MFIs for instance).

Table 8: Expansion Plans of ALW/ZMF
Sr. Categories of Financial Inclusion Penetration Target Market Size (Mn,
No in 3 years in Rs.)
1 Social Security/Pension 20% 40
2 National Rural Employment Guarantee (“NREG”) 25% 90

3 Self Help Groups(Government and Bank Linked) 20% 35

4 Self Help Groups( MFI) 10% 25

5 Kisan Credit Cards 10% 55

6 Farmer Co-operatives and Federations 20% 20

7 Domestic Money Transfer/ Foreign Inward 15% 50
Remittances
8 Scholarships to Students 15% 08

9 Third Party Collections ( MFIs, Insurance, FMCG, 15% 90
Other’s)

30
Dataset is from Andhra Pradesh state for the period April 1, 2007 to May 30, 2009. In Andhra
Pradesh, 70% and 30% of accounts were created for disbursals for NREGS funds and pension funds
respectively. Total number of BC opened accounts in Andhra Pradesh is around 4.4 million. (Kochhar,
2009)
31
Kochhar 2009


10 General Purpose No Frills 15% 80
Accounts(Saving’s/Withdrawal’s)
11 General Purpose Loan/Credit Accounts 15% 75

Source: Gupta (2009b) Presentation made at Sankalp Awards, April, 2009, Mumbai.

ALW has so far successfully secured investment of over US$10 million from private equity
investors to support expansion plans. Coronet Capital, a wholly owned subsidiary of Legatum
Capital of Dubai, led the first round of Series-A investments in March 2007 to pick up 13%
equity in ALW with US$2 million investment.32 Enam Financials of India had picked up 10%
stake in ALW, with undisclosed amount, in October 2007.33 ALW’s Series-B funding round
in August 2008 was led by Bellwether Microfinance Private Limited and India Financial
Inclusion Fund, both managed by Hyderabad based Caspian Advisors. ALW managed to raise
Rs. 287.4 million (US$6.16 million) in the Series-B round for building company’s operational
and delivery capacity. Legatum also invested in ALW in the Series-B round and has invested
US$3.67 million in total in ALW.

Constraints & Strategies

Invest in Combine Engage in
CONSTRAINTS Adapt products removing
Leverage the
resources and policy dialogue
and processes strengths of the STRATEGIES
market capabilities with with
poor
constraints others government

D BC provides Constantily Local women Leverages Advocates for
Market training reevaluates
Franchise Model run the “bank” government
financial literacy
information feedback from the programs and transparency
field

Engages local
Uses Biometric Set up a separate ID cards give a Cooperates with governments in
system for proper non-profit entity to sense of identity post offices adoption of
Regulatory identification serve as BC and empowerment
environment innovative
technologies

Parters with Advocates use ot
BC network ZMF investing in ""Bank-in-a-Box" -
technology new technology for
provides cost- creating supply minimal
Physical providers to disbursement of
effective rural channel infrastructure
infrastructure innovate platform gov't schemes
outreach required; mobile

Easy-to-use cell Trains locals for Assists in Teams up with Advocates fiscal
phone system serve as CSPs financially SHGs to select management;
Knowledge and
educatiing the and train CSPs minimizes cash
skills
traditionally un- exchange
banked

Creates last mile Timely. transparent Government and Encourages
Brings bank to bank partnership
Access to operations, and documented savings
rural areas
financial reducing dissenti disbursements of for NREGA, other
services ves for banks gov't funds funds

32
Caspian, http://www.caspian.in/inthenews_details.aspx?id=7, accessed on 17/02/2010
33
Shivpriya and Iyer, 2007


ALW Strategy Matrix
During May-August 2007, the State Bank of India issued a Request for Proposal (RFP) for a
technology partner. SBI received 36 proposals, and chose the lowest two bidders: ALW and
Hewlett Packard (HP). ALW was the smallest company among the bidders and ALW won the
bid. The ZERO Platform was tested again.

During the first month, crowd management was an issue. “All 600 people from a village
would line up at once losing a day’s wage to wait in line,” said Anurag, “so we created an
offline model so transactions could be done at any time and uploaded later”. The ZERO
Platform underwent many technical changes during its early life. “Original ZERO Platform
consisted of a Smart Card and Nokia 3522 mobile phone. During the pilot, we had issues with
connectivity and resolved to tweak the platform”, Anurag revealed.

Recounting the continuous technology innovation, Anurag stated, “Conventional devices can
never meet an unconventional set of challenges. We consistently searched for bottlenecks and
innovated around them. The new offline transaction service was operating on a 32 GB card,
which was too costly, so we replaced it with a 4 GB card. We started working with Nokia
6131 handsets and plain cards. Instead of the villager’s data being stored on the Smart
Cards, which could be lost or damaged and was costly to replace, the cards were only used
for photo and ID number verification and the mobile phone’s memory held the villager’s
transactional data”.

Electricity in villages too is an issue. Anurag stated, “With few electrical outlets in villages,
we decided to pare down the components in our technology platform. We paired the biometric
fingerprint reader with the printer to create one-plug equipment and the mobile phone
included a camera, as part of our switch to enrolments through mobile phone”.

Elaborating further, Anurag shared, “The next fundamental change came in the enrolment
procedure. Enrolment was our largest cost, requiring biometric data: fingerprint, voice and
photo. For this, we were using a laptop. A four-five person caravan would drive in a jeep
from village to village, powering a laptop and digital camera by generator. To enrol a
villager, a photo was taken with the camera, loaded on the computer, collected onto a DVD,
then sent via courier to the ALW back office to be prepared as Smart Card. Each subscriber
received the Smart Card subsequently from ZMF during their next visit to the village. This
procedure was costly for us and also not ideal for the villagers. Besides, as the ZMF
enrolment team had to be technology savvy, usually they were people from cities and not
locals. Our team visited the villages only periodically, and that meant that the villagers had to
forego a day’s earnings to line up for enrolment during the team’s visit. Those who could not
be enrolled during that day had to wait until the next enrolment caravan arrived”. Because
the ZERO Platform is now compact and efficiently distributed due to the elimination of the


laptop-based enrolment system34, ZMF is able to save more money than other BCs might,
which in turn are redistributed to the villages in payment to the CSPs.

Capital was, and continues to be, a constraint for ALW/ZMF, but has to some extent
been overcome by external funding from venture capital firms. During Series-A
investment funding round in March 2007, ALW received investments from Legatum
Capital and later from Enam Financial in October 2007. Later investments were
received in the Series-B funding round in August 2008 when the Hyderabad based
Caspian Advisors managed Bellwether Microfinance and India Financial Inclusion
Fund invested in ALW. Although, ZMF has investors, the investment cap of 10%, put
by RBI, allows it to borrow only on limited terms. Anurag is lobbying the
government and RBI to relax the investment cap norms.

After the pilot stage with SBI ended, the capex (capital expenditure) was not
supported in the scaled operations phase by SBI and other banks. In order to bear the
main expenditure, that is the capex and operating expenses, funding from equity
investors was secured. This highlights the shift toward use of private sector practices
in inclusive business. Breakeven point for a BC unit is projected to happen in its fifth
quarter from the commencement of its operations based on revenue inflows mainly
from fees charged on government disbursals and to a much lesser extent from
technology fees charged to active customers.35

In terms of adapting products, Anurag observed that ALW also cut down costs of
technology inputs, such as printers, by manufacturing them in-house. For this
initiative, ALW developed supplier partnerships with about 40 technology vendors.
In future, to further its market reach in rural areas, this strategy will need to be taken
to the next level by collaborating with telecom service providers.36 ALW also
innovated by doing away with Smart Cards and instead issues a nine digit serial
number unique for individual account holders to enable access to their accounts and
conduct transactions, which saves costs further. Another issue involved attempts to
politicize the BC process by using it for campaigns by political parties. ALW
generally suspends its operations during election period.

As technology and field infrastructure provider for financial services, ALW and ZMF
are susceptible to similar issues faced by other microfinance organizations. Customer
education is critical when it comes to financial products especially in rural areas.
ZMF leverages support from banks to address such concerns through financial
literacy camps and campaigns.

34
Currently, all other financial transaction technology providers in India still use laptops for enrolment,
but gradually switching to mobile phones. ALWs competing company FINO too has now realized the
value of mobile based platform and launched its mobile based financial transaction service called
MITRA in August 2009.
35
Kochhar, 2009
36
Bhandari and Kale, 2008


There is also an issue of lack of trust in formal sector in rural areas as demonstrated
by the inactive accounts and the preference to avoid formal deposit facilities. Though
almost 16 million new accounts have been created by the latest financial inclusion
methods of outreach, only 15% of those accounts are actively used and 41.7% of the
rural population prefers to keep savings at home.37 Only through building sustainable
relationships beginning from extending favorable and appropriate lines of credit and
disbursal of welfare remittances, mainstream financial networks can hope to attract
the poor rural workers and will be able to meaningfully bring the rural poor into the
formal financial infrastructure creating mutual value.38

ALW/ZMF Stakeholders and Value Creation
ALW and ZMF operate in a cooperative and collaborative environment. ALW provides the
ZERO Platform, which makes ZMF more efficient and in turn benefits the several
stakeholders with flexibility, speed, convenience and corruption-free and transparent financial
transactions for the rural economy. Here we aim to broadly map the stakeholders and the
respective value creation for them through the ALW/ZMF venture, however, this mapping is
not exhaustive. The primary stakeholders in the ALW/ZMF venture are: the financial
institutions, government of India, state (provincial) governments39 and financial services
regulators, the rural India and its inhabitants, investors of ALW/ZMF, companies with interest
in rural markets and NGOs, MFIs and SHGs (see the ALW/ZMF Value Map below).

Goverment and
Regulators

Financial Other
Institutions BCs/NGOs/MFIs

Rural
ALW/ZMF Investors
India

ALW/ZMF Value Map

37
Manashwi, 2008
38
This will probably take place over a period of time and therefore only those organizations which are
financially viable and with good incentive structures in place will be able to win in the rural marketplace.
39
In the Indian context, referred to as central and state governments respectively

Value for Rural India
With ALW’s ZERO technology platform and ZMF extension service infrastructure in rural
India, the disbursal of government’s social security pensions, NREGS wages and other
government schemes come to the village safely and directly. Each ZMF customer is
biometrically identified and linked to a unique bank account through which the money is
electronically transmitted and documented, ensuring financial inclusion of rural India. Before
this system, villagers used to collect payments at the local post office or Gram Panchayat
(Village Council). The ZMF system of enrolment saves villagers the travelling time, and
hence the opportunity cost of a day’s wage, and provides added empowerment. Prior to ZMF,
when a villager collected payments at government offices, he or she was made to feel as if
they were accepting money from the person at the counter and not the government. Now
people are not humiliated to get the money they deserve as they receive it directly in their
village and through a fellow villager they know and trust. This service tends to the villagers’
needs by ensuring that the money goes directly to them and is not diminished while changing
hands.40

The ALW/ZMF services also helped to shift power dynamics within villages. With politically
neutral, trustworthy women as CSPs controlling the disbursement of money, power has
shifted away from the village headmen. Where there once was one person with power to deal
with government funds in the village, now there are three, and two are guaranteed to be
women (the two CSPs are trained to help one another). “No, my husband doesn’t mind my
new job,” said one CSP, “he is respected more now.” Srinivas, State Manager of Andhra
Pradesh field operations at ZMF added, “At first, most of the village headmen were
agreeable. Then sometimes, they realized that some of their pocket money would disappear
with the new process. Sometimes they tried to prevent the CSPs from doing their jobs, but the
CSPs simply called ZMF on a mobile phone and the matter was resolved. Now, more and
more people are skeptical of anyone not interested in working with ZMF because it implies
they are corrupt.”

The CSPs currently earn some money from their work of enrolling villagers, and this could
become a full time job with the advent of new transaction services funnelled through the
channel. The CSPs are now viewed favourably by the fellow villagers and have earned more
respect. Srinivas noted, “At first the CSPs were nervous of their role and uncertain of their
abilities. ZMF ensures they understand the procedures over the five-day training period. The
CSPs have developed confidence from mastering the technology and this has its own trickle-
down effects, where young village girls can now look up to female role models from their own
communities. The role of the CSP is expected to increase in the future as more banking
services and transactions are run through ZMF”. Srinivas added, “We see CSPs as
instrumental in the financial literacy of the village and they will be included in educational
efforts in the future”.

40
Upon the commencement of the service, some pensioners and other recipients were surprised to find
out how much their disbursals were, as they had never before received the full amount.


The service itself is village-friendly. Receipts can be printed in the local languages; the device
is small, durable and draws little power.41 Exposure to technology and awareness of villagers
may also increase through the use of this service. Many villagers, though now have their own
mobile phones, are also introduced to more technology through the service. CSPs master the
transaction service and each user also interacts with the technology and learns to be
comfortable with it.

Traditionally, banking transaction costs made banking unfeasible for rural households, as
their requirements were mostly of small amounts. With the entry of low cost technology
delivery platforms by ALW, and delivery organization such as ZMF, such banking services,
besides ease in receipt of welfare payments, is now viable for villagers. It also means less
corruption and development of a credit history for villagers, which will eventually lead to
credits at cheaper rates, than what rural population traditionally gets through informal
moneylenders and MFIs, and on the whole linking the rural India inhabitants to the
mainstream economy.

Further, migrant remittances form an important source of income for rural households. With
bank account enrollments, facilitated by BCs like ZMF, migrant remittance in India, both
domestic and overseas, is a huge potential market as well as socio-economic value for the
rural households. Migrant remittances form an important source of income, particularly for
rural households, in states with a low per capita income.42 A World Bank report ‘Migrants
and Remittances Factbook 2008’ claimed that with US$27 billion, India topped the list of
countries of migrant remittance in 2007. Hence the potential market for a mobile payment
system is high in such situations and will be cost effective and efficient if banks started using
BCs like ZMF.

Last but not the least, ZMF hires extensively in local areas for its field operations. ZMF has
provided job opportunities to people with moderate levels of educational attainment (the
minimum requirement is ten years of formal education), which in turn discourages migration
by benefiting local youth, and in turn, the local economy. The ALW team has 125 people, and
the total number of direct employees on payroll of ZMF is approximately 400 and temporary
field staff numbers around 350. Besides, the local youth, trained by ZMF, are also getting
ready for opportunities in the financial services industry, which is increasingly gaining
interest in exploring and exploiting the business opportunities offered by the rural India.

VALUE FOR FINANCIAL INSTITUTIONS
From the supply side of financial inclusion, the main constraint for formal banks is perceived
to be the transaction costs involved in small value transactions.43 Besides, lack of

41
Anurag is now exploring solar power options for energizing the ZERO Platform equipments.
42
Migrant remittances form an important source of income for rural families in some states like Bihar
which has a low per capita income. An estimated Rs. 450 Crores (approx. US$96.46 million) was
remitted through Post Offices in Bihar in 2005-06 (Bhandari and Kale, 2008). This is probably a
conservative estimate of total migrant remittances, which may travel through other channels like
personal contacts, for example. .
43
Subbarao, 2009


infrastructure, low literacy levels, language barriers and low levels of financial literacy
contribute to increase in transaction costs of managing low-value transactions.44

With the move to ALW’s branchless mobile based transaction system banks can drastically
cut down their transaction costs per account (see Annex, Table 9: Financial Costs to Banks),
while ensuring the much needed safety and security of transactions in the process. The
technology cost is almost half of the administrative cost per account, and combined together,
administrative and technology costs are the biggest outflows for banks.45 Similarly, scaling up
of operations by ZMF will also bring down the substantial costs to the banks, as that means
dealing with one partner for the purpose. The already extensive and growing reach of the
ZMF is appealing to banks that prefer to work with one large and reliable partner than several
fragmented BCs with different processes and technology platforms. Many banks have
expressed interest in ZMF scaling up its operations at least by ten times in the current
financial year itself.46 Currently, ALW/ZMF have partnerships with 22 banks – including
State Bank of India (SBI), Dena Bank, Andhra Pradesh Grameen Vikas Bank, Punjab
National Bank, Axis Bank, Punjab & Sind Bank, Oriental Bank of Commerce and the United
Bank of India (See Box 5: ZMF’s Scope of Services Agreement).
In order to profit from the rural markets, banks will have to offer standard banking services,
adapted to the rural markets. Through leveraging its engagement in funds under the NREGS,
SBI is effectively achieving scale without a loss, educating customers and earning their trust.
By providing working capital cash loans as a financial product to suit rural market liquidity
requirements, banks can tap a huge market of rural customers. A representative from SBI
added, “The ALW technology (ZERO) is what has enabled the development of this market,
which we hope to turn into profitable savings and insurance business soon.”

With 2.5 million no-frills accounts customers by the end of 2009, State Bank of India’s (SBI)
goal is to enroll 100 million rural customers by 2012.47 Twenty six out of 50 public and
private sector banks in India appointed BCs that opened 88.60 lakh no-frills accounts by the
end of March 2009.48

For now, banks team up with ZMF to disburse NREGS and other government scheme funds.
Currently, in disbursing the NREGS funds, banks do not make money from the transaction,
but they obtain large sums of government money to hold. When their BCs disburse the
money, it goes through a bank account in the beneficiary’s name. Though as of now, most
rural users of the service are not aware of the operations of a bank account, they do reap the
benefits of having a transparent process that documents the flow of funds to them.
Government pays a 2% fee to the banks, which in turn pay a negotiated commission to the
appointed BC for its services. The bank benefits from holding the government funds in the
meantime. To the banks, this has a long-term value, while the distribution infrastructure and

44
Ibid.
45
Kochhar, 2009
46
Ibid
47
Sharma and Dhall, 2007
48
RBI, 2009


market is being developed with the help of government sponsored programme funds. Once
the infrastructure is built and BCs earn the trust of villagers, with some financial awareness
and literacy spreading in the process, the accounts will be ready for people to make savings
deposits, and receive or transfer funds and other mainstream banking services. Already, the
accounts can be used for different banking purposes, such as remittances, if a customer wants
to.49

Similar to the banking products, insurance products and services may also be delivered
through ALW/ZMF models of delivery in the future, and once scaled up nationally, Anurag
and his teams at ALW and ZMF do have plans to extend their services to the insurance
companies.

VALUE FOR THE GOVERNMENT AND REGULATORS
Before ZMF, and in areas where ZMF services are not yet used by the government and banks,
government disbursements were channeled through the post office or the village organization.
Sometimes people did not get the correct amount of funds (see Annex, Box 3: NREGA
Scheme of Government for Rural Areas). The new system eliminated most of such misuse
and discrepancies. The switch to ZMF was easy. “We used to give 2% to the post office, now
banks gets 2%50”, stated a government official in a personal interview in Hyderabad. The
government in Andhra Pradesh State was among the first to adopt the BC system, and
specifically, ZMF disbursement. They speak of this with a sort of pride. “Now we have
created an infrastructure! We are the first to do this in India. We are the role models. There is
happiness among the beneficiaries when they receive their full benefits.” Mr. Prasad, the
Project Director for Smart Cards Project in Andhra Pradesh, is proud of his state. When asked
about dissent among lower government officials who enjoyed skimming from the funds
previously, he responded, “the ground level has to abide. If an individual feels a certain way,
too bad.”

ZMF estimates that 60-70% of recipients, on an average, on the beneficiaries list furnished by
government for NREGS and 70-80% in the beneficiaries list in the case of disbursal of
pensions, claimed their payments after going through ZMF disbursement process. But the
remaining lies unclaimed, indicating the extent and number of bogus claimants on the list and
the amount of funds that would have been siphoned off if the ALW/ZMF system and
processes had not been in place.

The state government officials make surprise visits on NREGS wages disbursement days to
monitor the process. The government disburses its funds to banks that have a significant
presence in areas or districts of operations and ‘proven readiness and capability’ (through

49
There is a report of a villager receiving funds through these accounts from migrant relatives in nearby
cities. The villager informed his relative in the city about his bank account and passed on his account
number.
50
In Andhra Pradesh, ZMF receives 2% as commission for its services.


their BC and technology partner).51 The government chose to disburse funds through banks in
an effort to spur financial inclusion. Mr. Prasad believes that the BC system is a better system
for the poor than microfinance. “Many things can be routed through this,” he said,
“collection of SHG Premiums (savings deposits from SHG members for common fund) can be
routed through this. The intention is to use this channel in the future.” Though NREGS
constitutes the vast majority of funds currently distributed through ZMF, this seems to be just
the beginning.

Through ALW/ZMF system there is better tracking of number of people working under
NREGS, the quantum of work done, and geographical spread of NREGS recipients, which
helps in better planning for further development work by the government, creating thus
additional value for the government in availing the services of BCs. The government is also
able to weed out corrupt officials and insist on straight forward and transparent practices.
Officials vocally opposed to the new system are red flagged as it is presumed that dissenters
tend to have unsavory motives. Additionally, people in villages in general do not have a
favourable view of the government, known more for its corruption and power games, but with
the new system introduced, they feel an increased sense of trust in the government.

The Committee on Financial Inclusion has plans to extended financial services to a population
of over 557 million excluded households by the year 2010.52 The technology platform offered
by ALW and the ZMF system and processes for enrolment and disbursements seem to be
helping the government and the banking regulator RBI in meeting their goals of financial
inclusion more conveniently and well within the set timeframes.

VALUE FOR ALW/ZMF INVESTORS
ALW and ZMF have secured funding in Series-A and Series-B rounds of investments since
2007. Investors include Legatum Capital of Dubai, Enam Financials, Bellwether
Microfinance Private Limited and India Financial Inclusion Fund of India for building
company’s operational and delivery capacity. Legatum Capital has in fact invested in both
Series-A and Series-B round of investments and has invested US$3.67 million in total in
ALW. Legatum, which has invested over US$1 billion in several leading private sector banks
in India through stock markets, in its website, explains its investment thesis53 in ALW venture
as follows; “Cost leader with a strong competitive advantage; successfully leveraging
proprietary mobile technology; and accomplished founder and professional management
team”.

51
The bank must choose a BC and technology platform itself. About the fact that banks don’t receive
remuneration for holding the government funds, The Andhra Pradesh Government Official Mr. Prasad
said, “Somewhere, help should go to the banks”.
52
Subbarao, 2009
53
Leagtum Ventures, http://www.legatum.com/casedisplay.aspx?id=420 accessed on 17/02/2010


Although ALW has not posted profits yet, its financial viability and growth prospects are
sustainable. Anurag prefers not to discuss returns promised to its investors. However, the
attractiveness of the ventures for investors is demonstrated through the successful securing of
investments in both Series-A and Series-B rounds of investments.

Graph 1: Projected Growth in Revenues and Enrollment of ALW/ZMF

9,000 100
Revenues(INR Mn)

Enrolments (Mn)
7,200 80
5,400 60
3,600 40
1,800 20

Mar 09 Mar 10 Mar 11 Mar 12 Mar 13

Enrolments(Mn) Revenue(INR Mn)


RBI in its fresh guidelines on BCs issued in November 2009 allowed banks to appoint several
other categories of entities54 to be appointed as BCs by the banks, and also permitted banks to
collect a reasonable service charge from the customers, which would be passed on to the BCs
to increase their viability. However, in future, large BCs with extensive national presence and
technology partner support may emerge as winners. There is still a lot of experimentation
happening at various levels in perfecting the BC model to operate with formal financial
institutions, the confidence of investors in ALW and ZMF shows the robustness of ALW and
ZMF business model and strategies and, therefore, returns for the investors in the long run in
the space of financial inclusion.

VALUE FOR OTHER BCS/NGOS/ PRIVATE SECTOR
ALW’s policy of free tech transfers will enable replication of the technology driven BC
model of ALW by other BCs, while at the same time reducing the cost of market entry for
new players through technology transfers. In future, technology integrators like ALW will
ease the path for social transfer payments to the rural households, whether the payments are
made by the governments or private corporations or NGOs. Anurag also expressed plans to
serve non-government entities to extend the benefits of its technology platform and ZMF’s

54
Banks are permitted to appoint the following entities as BCs, in addition to the entities presently
permitted: (i) Individual grocery/medical /fair price shop owners (ii) Individual Public Call Office (PCO)
operators (iii) Agents of Small Savings schemes of Government of India/Insurance Companies (iv)
Individuals who own Petrol Pumps (v) Retired teachers and (vi) Authorized functionaries of well run Self
Help Groups (SHGs) linked to banks. – Notification no. RBI/2009-10/238, November 30, 2009, available
at http://www.rbi.org.in/SCRIPTs/NotificationUser.aspx?Id=5390&Mode=0 accessed on 17/02/2010.

distribution infrastructure. By building a network of on-the-ground staff, name, recognition
and trust, ZMF, and other such BCs, become crucial for the entire ecosystem.

The ZMF operations can also leverage market information gained from its distribution
network outreach (see Annex, Table 4: Scale of Operations of ZMF) to private corporations
that are interested in the rural markets. This vast and well-structured distribution network will
be an impressive asset to ALW/ZMF for delivering services and products to the rural market,
where reaching a critical mass in a cost-efficient way is important for profitability, especially
in for profit corporations.

Results
ECONOMIC RESULTS
Currently present in 22 states, with 22 bank agreements and 8,314 CSPs serving 16,370
villages,55 ZMF has over four million enrolments. For ZMF, NREGS and pension schemes
account for more than three million plus accounts.56 Anurag noted, that “the financial costs to
a BC for a CSP include an initial capex cost of Rs. 20,000. These costs can be brought down,
especially capex, as the business achieves scale” (see Annex, Table 5: Cost Structure or
Revenue Outflows for ALW per Gram Panchayat per Quarter). Capex cost is also brought
down through manufacturing of printers in-house by ALW. Other cost reductions include
eliminating Smart Cards in favor of biometric identification. Initially, banks funded the whole
cost structure of BCs, but later BCs had to manage their own viability through equity funding
and may pass on the cost at a higher rate to banks or at a lesser rate to rural recipients in the
future.57 ALW/ZMF has a growth plan to reach out to 100 million people by FY 2013.58

Inflows currently consist mainly of technology and transaction fees (see Annex, Table 6:
Revenue Inflows). Revenue inflows will increase with ZMFs proposal to increase its
Graph 2: Projected Growth in Revenues and Enrollment of ALW/ZMF

9,000 100
Revenues(INR Mn)

Enrolments (Mn)

7,200 80
5,400 60
3,600 40
1,800 20

Mar 09 Mar 10 Mar 11 Mar 12 Mar 13

Enrolments(Mn) Revenue(INR Mn)


55
Gupta, 2009
56
Kochhar, 2009
57
Ibid.
58
Gupta, 2009

commissions from government schemes (see Annex, Table 7: Estimating Economic Viability
of ZMF). As future revenue streams, ZMF plans to include third party collections and
general-purpose accounts and other transactions, such as through farmer co-operatives and
domestic money transfers (see Annex, Table 8: Expansion Plans of ALW). Growth
projections chart a dramatic growth path in revenues and enrolments from 2009-10 onwards,
when revenues may touch Rs. 1,800 million and enrollments around 20 million. Between
2010 and 2011, revenue is expected to rise to Rs. 3,600 million with approximately 40 million
customers.

The ZERO Platform is largely used for the Electronic Benefit Transfer (EBT): National Old
Age Pension Scheme, National Rural Employment Guarantee Scheme wages, scholarships
and housing grants for the rural poor. NREGS funds are distributed weekly and the social
security pension funds are distributed monthly. Besides, NREGS disbursement is seasonal in
nature and happens 4-8 months in a year. On average, in each CSP location about Rs. 230,000
to Rs. 280,000 worth of NREGS funds are distributed weekly. CSPs maintain Rs. 5,000 as
working capital and replenishment of funds to CSPs is done by ZMF teams in districts.

At present, commissions earned from the banks by ZMF are mostly used to cover the costs of
operation. Surplus earned is invested in boosting ZMF’s infrastructure and network. In
August 2008, ALW successfully closed Rs. 287.4 million (US$6.16 million) in Series-B
funding to expand its operation and delivery network. As long as ALW/ZMF have the
backing of long term investors and ZMF continue to scale-up on a successful course, the
financial viability of ALW/ZMF looks bright. The company is looking ahead to international
expansion, where it can replicate its ZMF outreach network and use of the ZERO Platform.

SOCIAL IMPACT
Right now, social results are limited to the stakeholders discussed above. Jobs created by the
CSP function and field operations provide local employment and help arrest migration on a
small level and change power dynamics within villages. Access to funds carries the social
benefit of control over one’s own money, removing the feeling of being inferior to those
disbursing money. Anil notes that over 16,000 women are employed as CSPs in the ZMF
delivery platform, which has brought these women a certain level of social recognition and
status in their villages.

Besides social empowerment, income enhancement by working as CSPs for ZMF is another
important outcome for the village women. For every enrolment, ZMF pays Rs. 10 to the CSP.
CSPs also earn either 0.5% of monthly transactions, or Rs. 500, whichever is higher. The
average monthly income of CSPs is about Rs. 1,000. This is divided between the local village
SHG, which gets 20% and the CSP and the stand-in CSP. Each woman, as a CSP, therefore,
earns about Rs. 400 and the village SHG earns Rs. 200. Anil stated that for general banking
services in a typical village which might have about 600 people, almost 50 % of whatever
ZMF earns is shared with the CSPs. Besides, ALW’s innovation in technology integration
allows enrolments to happen onsite on a mobile phone instead of on a laptop. Prior to May of
2008, this money was used to pay for the enrolment team caravan from cities, but now that
money stays in villages.


The identification cards give a sense of identity and empowerment to villagers in addition to
facilitating income generation, productivity and well-being by offering fair access to funds. In
the future, the benefits of access to other financial products and use of no-frills bank accounts
will aid in economic and social empowerment, while benefiting the national economy overall.
Besides, the impact on corrupt practices at the operational levels of the government is a great
benefit to all stakeholders.

ENVIRONMENTAL IMPACT
By switching to mobile-phone enrolment, driving to villages has been eliminated. The rural
households save themselves the cost of trips and savings on transport fuel to the local post
office or to the village headman or government officials to obtain government disbursal
amounts. Mobile phones and printers admittedly add to e-waste. The environmental costs of
disposal and production are important, but considering the fact that a single phone can act as
an entire bank branch, the waste is minimal compared to that from a fully equipped brick and
mortar branch. Only one or two sets of mobile handsets and a minimum of other equipment
are used to service a set of proximate villages.

Conclusion
Technological and process innovations of ALW and ZMF, with their reliable, transparent,
quick, cost effective and efficient delivery mechanisms of financial services from mainstream
financial sector to rural poor households, are commendable and a viable value proposition.
With bleak scenario of financial exclusion in India, this new infrastructure of outreach has an
enormous potential to bring needed financial products and services to rural India.

ZMF has mastered the operations network and created a strong distribution channel which
continues to develop further. At present, there are few competitors, but the competition is
building up fast, which may lead to the development of a healthy market for facilitating easier
rural access to finance. As in microfinance, the rural market in India is so vast that any player,
who manages to scale up at national level fast, streamline its processes and reduces delivery
costs, can easily grow and gain an enormous customer base.

Lessons from past development experiences reveal that financial inclusion without
sustainable avenues for economic growth and income policies in rural areas will not be
helpful or meaningful and financial inclusion cannot work in an atmosphere of poverty and
stagnant growth.59 Additionally, the formal financial system has to be viable in terms of
organizational structure, incentives for functioning in the rural area and with a sustainable
base to support financial inclusion in a long term perspective. In that sense, encouraging
profit oriented BCs or BFs, as intermediaries, may be an apt strategy. In sum, amongst several
kinds of inclusion movements and talks of inclusive growth, financial inclusion is another
important development policy instrument in the hands of the state and in the present context,

59
Mulenga, 2009


an excellent opportunity for inclusion is available to the state through low cost technology
and delivery mechanisms offered by ALW/ZMF. After all, the financial inclusion of rural
households can only be a means and not an end in itself, as the broader goal through such
initiatives should be the social inclusion of the excluded groups in a society and economy.


REFERENCES
Principal research assistance for this case has been contributed by Hema Swamy.

INTERVIEWS
Personal interview with Anurag Gupta, Founder and Chief Technology Officer,
ALW/ZMF on 18 August 2009 in Mumbai Head Office.
Personal interview with Mr. Ram Chandra Reddy, DGM, Local Head Office, State
Bank of India (SBI), Hyderabad on 22 August 2009 in SBI Hyderabad.
Personal interview with Beneficiaries of NREGA and ALW/ZMF account holders on
22 August 2009, in their village in Andhra Pradesh near Hyderabad.
Personal interview with Srinivas, State Manager of Andhra Pradesh Field Operations
at ZMF on 22 August 2009 in Hyderabad.
Personal interview with Anil Tunk, Country Head of Operations in ALW/ZMF on 25
August 2009 in Hyderabad.
Personal interview with Anurag Gupta, Founder and Chief Technology Officer,
ALW/ZMF on 08 September 2009 in Mumbai Head Office.
Telephonic interview with Anurag Gupta, Founder and Chief Technology Officer,
ALW on 12 December 2009.

PUBLICATIONS
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10. Pp. 47-49.
Bhandari and Kale, (2008) Indian States at a glance 2008-09. Performance, facts and
figures. Indicus Analytics Pvt. Ltd.
Bhatnagar, S.C. (2009) Exploring Conditions for Delivery of Successful M-
Government Services to the Bottom of the Pyramid (BOP) in India”. LIRNEasia
Working Papers v1.2, Teleuse@BOP3.
Kochhar, S. (2009) Speeding Financial Inclusion. Skoch Development Foundation,
New Delhi.
Prahalad, C.K. (2004) The Fortune at the Bottom of the Pyramid: Eradicating Poverty
Through Profits. Wharton School of Publishing. New Jersey.
Sharma, S.N. and Dhall, A. (2007) Nearly half of Indian financially excluded.
Economic Times, Mumbai August 12, 2007.
Shivpriya, N. and Iyer, P.R. (2007) Enam Financial picks 10% stake in rural financial
inclusion firm. Economic Times, October 4, 2007, Mumbai.

WEBSITES
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02/02/2010.
CGAP (2009a) Country Examples
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02/02/2010.


CGAP (2009b) The Business Case.
http://www.cgap.org/p/site/c/template.rc/1.11.1029/1.26.1527/. Accessed on
02/02/2010.
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16/02/2010.
Dreze, J., Khera, R. and Siddharta (2008) Corruption in NREGA: Myths and Reality,
The Hindu, January 22, 2008,
http://www.thehindu.com/2008/01/22/stories/2008012254901000.htm. Accessed on
29/12/2009.
Dhar, S. (2009) Beyond the first anniversary of the debt-relief programme.
Committee for the Abolition of Third World Debt. http://www.cadtm.org/Beyond-
the-first-anniversary-of. Accessed on 29/12/2009.
Frost and Sullivan (2008) Technology a drawback for Financial Inclusion.
http://www.ciol.com/Enterprise/BFSI/News-Reports/Technology-a-drawback-for-
Financial-Inclusion/19908110597/0/. Accessed on 22/11/2009
Gupta, A. (2009a) ZERO: Mobiles+Biometrics for MicroBanking, presentation made
to NABARD on 12 September 2009.
http://www.nabard.org/departments/pdf/seminar/Zero%20Mass%20Foundation.pdf,
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16/02/2010.
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29/12/2009.
Manashwi (2008) Inclusive Growth - Casting the Net Wide: Financial inclusion
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Way Out? Indira Gandhi Institute of Development Research, Mumbai.
http://www.igidr.ac.in/pdf/publication/WP-2007-014.pdf. Accessed on 29/12/2009.
Mulunga, M. (2009) Financial Inclusion and Poverty Reduction.
http://www.articlesbase.com/credit-articles/financial-inclusion-and-poverty-
reduction-857871.html. Accessed on 26/12/2009.
Rangarajan, C. (2008) Report of the Committee on Financial Inclusion. Government
of India, New Delhi. http://www.nabard.org/pdf/report_financial/Full%20Report.pdf.
Rao, B. (2008) Financial inclusion to overcome exclusions. Business Line newspaper
article dated May 13, 2008.
http://www.thehindubusinessline.com/2008/05/13/stories/2008051350090800.htm.


Rebello, J. (2009) Mobile phone technology key to financial inclusion.
http://www.livemint.com/2009/11/26232941/Mobile-phone-technology-key-to.html.
Subbarao, D. (2009) Financial Inclusion: Challenges and Opportunities. Speech at the
Bankers’ Club in Kolkata, 9th December, 2009.
http://rbidocs.rbi.org.in/rdocs/Speeches/PDFs/IFFG091209.pdf. Accessed on
12/02/2010.


Annex
Box 1: Banking Policy and Access to Credit in Rural India

Banking Policy and Access to Credit in Rural India
Three eras of rural banking policy in India can be demarcated in implementing financial
inclusion of rural poor (Ramachandran and Swaminathan, 2001). The first era began in
1969 with the nationalization of 14 major commercial banks (Bank Nationalization Act,
1970), the setting up of social and development banking covering the unbanked and
opening of regional rural banks. The second era from the late 1970’s and early 1980’s
was the era of directed credit mainly to needy rural recipients in the form of loan and
subsidy schemes, programs like the Integrated Rural Development Programme (IRDP)
and later Swarnjayanti Gram Swarozgar Yojana (SGSY) to create income bearing assets
for asset-poor rural households which failed due to inadequacy of public infrastructure
and provisioning systems among other reasons, and the growth and strengthening of
institutionalization of rural banking system which was however extremely limited in
reaching out to the rural poor.
The third era began post liberalization in 1991 which did away with the directed
subsidized credit schemes of the earlier era and set profitability, capital adequacy norms
and market decisions as the norm of organizational functioning overturning the social and
development banking principles of 1970 (see Table 1: Growth of Bank Offices, Bank
Credits and Deposits in Scheduled Commercial Banks, 1969-2000). This period also saw
a decline in priority sector and preferential lending to the poor in rural areas and a shift,
relative to earlier periods, in credit from rural to urban and metropolitan areas
(Ramachandran and Swaminathan, 2001).
In this context, declining credit from the formal sector, coupled with diminishing growth
yields post Green Revolution in India, lack of rural infrastructure to withstand drought
failures and natural disasters, and inefficient rural markets leading to low earnings
contributed to an agrarian crisis from mid 1990’s onwards (see Table 2: Growth Rates of
Population, Banks and Credit for Rural India, 1973-1999)

Table 1: Growth of Bank Offices, Bank Credits and Deposits in Scheduled
Commercial Banks, 1969-2000

Year Bank Bank Credit Credit Deposit Deposit Credit - Credit-
Office Office advanced advanced Deposit deposit
ratio ratio
Rural % to Rural(In Rs % to total Rural(In % to Rural All areas
(Number) total 10 Million) Rs 10 total
Million)
1969 1443 17.6 115 3.3 306 6.3 37.6 71.9
1970 193 4.5 400 7.3 48.3 78.1
1971 159 3.1 378 5.2 42.1 69.7
1972 5274 36.0 257 4.6 540 6.5 47.7 67.2
1973 6024 36.5 379 5.3 741 7.4 51.1 70.3
1974 6447 35.9 483 5.9 923 8.0 52.3 71.0
1975 7112 35.5 608 6.0 1171 8.5 51.9 73.5
1976 8588 36.6 870 6.4 1539 8.7 56.5 77.0
1977 10856 40.3 1105 7.2 2010 9.4 55.0 71.7
1978 12534 42.5 1530 8.4 2664 10.1 57.4 69.1
1979 14171 44.0 2003 9.3 3559 11.4 56.3 68.9
1980 16111 46.9 2643 10.7 4644 12.6 56.9 66.9
1981 19453 51.2 3600 11.9 5939 13.4 60.6 68.1
1982 21626 53.0 4473 12.5 7414 14.2 60.3 68.2
1983 23782 52.4 5576 13.6 8828 14.4 63.2 67.0
1984 25541 52.9 6589 13.5 9603 13.4 68.6 68.3
1985 29408 54.6 7489 14.1 11722 13.6 63.9 61.9
1986 29700 55.7 9387 14.5 14375 14.0 65.3 63.0
1987 30585 56.2 11127 15.3 17527 14.7 63.5 61.0
1988 31641 56.2 13452 15.3 20907 14.7 64.3 61.9
1989 33572 57.3 15546 14.8 24383 15.0 63.8 64.7
1990 34867 58.2 17352 14.2 28609 15.5 60.7 66.0
1991 35216 58.1 19688 14.7 33163 15.1 59.4 60.9
1992 35218 58.0 20587 14.5 35058 15.0 58.7 61.0
1993 35301 57.6 23156 14.0 40672 14.8 56.9 60.5
1994 35379 57.2 25074 13.9 47776 15.0 52.5 56.6
1995 35008 56.2 28183 12.7 57399 15.3 49.1 59.2
1996 33092 52.7 29122 11.1 61106 14.3 47.7 61.9
1997 32909 50.5 32525 11.4 73769 14.7 44.0 56.8
1998 32854 49.9 37598 11.4 86706 14.5 43.4 55.3
1999 32840 49.2 42090 11.0 102697 14.7 40.0 54.8
2000 32673 48.7 48753 10.6 120539 14.7 40.0 56.0
Source: Kochhar (2009)


Table 2: Growth Rates of Population, Banks and Credit for Rural India, 1973-
1999
Growth rates of rural population, rural bank offices, rural and agricultural credit of
scheduled commercial banks, India, 1973 to 1999 (in percent per annum)
Period Rural Rural Credit Rural + Credit from Credit to
population bank from Semi urban rural + semi agriculture
offices rural branches urban
offices branches
1973-1981 1.78 15.54 23.46 12.32 16.72 18.76
1981-1991 1.84 7.15 9.97 5.95 7.91 6.64
1991-1999 1.66 -0.86 2.51 0.13 2.88 2.16
Source: Chavan (2001), Table 2.9,p.40.
Note:- Credit figures were deflected with the GDP deflator (base year-1933-94)
Source: Kochhar (2009)

Table 3: Number of No-Frills Account
Data From April 1, 2007 to May 30, 2009

No frills account Points of
(in Mn) presence
Technology Provider enabled no frills account 10.752 13077

Estimated Direct Accounts opened by Banks net of 2.5 18
Mn of Bhamasha Project
Total No- Frills accounts Net of MFI, RSBY and 25.15
Bhamasha
Estimated Number of operational accounts out of the 2.77
above(11 %)
Credit / Over Draft in the above Negligible

Total number of rural households targeted for financial 111.55
inclusion##
Source: Kochhar (2009:40)


Box 2: Financial Inclusiveness – Challenges and Incentives
Financial Inclusiveness – Challenges and Incentives
Traditionally, the formal banks have not seen the poor as potential customers because
their business models were largely developed to cater to a section of society with a
certain socio-economic profile and so were insufficient at serving the low-income
segments of society. Existing products of the formal financial institutions are usually
inappropriate for the poor and are rigid and complicated. Transaction costs for
establishing and enabling contacts and servicing accounts did not make it worthwhile,
and the formal sector bank branch managers were often evaluated on the volume of
deposits and loans they created and thus had no incentive to sell to the poor, who had
smaller incomes and therefore small saving potential.

However, changes in the sector, the customers and the regulatory environment created
additional need and incentives for linkages between formal banking and the poor.
Banks experienced diminishing returns with current customer segments and began to
look to the poor as a new segment while social and research institutions continued to
highlight the necessity of financial inclusion for economic development. New products
were created especially for the poor. For example, so-called “no-frills bank accounts”
offer standard savings accounts for the poor that are designed to work with the rural
poor’s unique lifestyle. The customers were also given increased opportunity to avail
of formal banking facilities with the advent and spread of microfinance institutions.

Box 3: NREGA Scheme of Government for Rural Areas

NREGA Scheme of Government for Rural Areas
The National Rural Employment Guarantee Act (NREGA) of 2005, introduced by the Government
of India, was designed, “to provide for the enhancement of livelihood security of the households in
rural areas of the country by providing at least one hundred days of guaranteed wage employment in
every financial year to every household whose adult members volunteer to do unskilled manual
work”. With the guarantee of 100 days’ wages for all interested villagers came the need to deliver
payments to many financially excluded people.

Considering India’s low social security and financial inclusion numbers, which are particularly low
for the rural poor, the Indian Labour Ministry created specific guidelines for overseeing payment
disbursal of the National Rural Employment Guarantee Scheme (NREGS). Wages were to be paid
out by post offices and available banks, the infrastructure available at the time. According to the
provisions of the Act, the details of the payments were to be paid on time, weekly and made public
to ensure fair compliance. For any delays, workers were to be compensated. Special educational
efforts were to take place to ensure all workers understood the bank procedures for collecting their
payments. To avoid delays caused by cheque clearance or lack of staff, state government protocols
would be established. These guidelines were established to protect the poor from inferior execution
of the National Rural Employment Guarantee Scheme, but it was difficult to enforce them.

According to audits done by G.B. Pant Social Science Institute (Allahabad), under well known
development economist Jean Dreze et al (2008), NREGS corruption has declined substantially from
large scale proportions in 2005-06 to being confined to a few districts in 2007, and that NREGA has
a good scope for success with transparency safeguards. However, there is no doubt that abuse of
NREGS is still rampant as seen in some districts or regions like Bundelkhand in Madhya Pradesh
and Uttar Pradesh, where recipients have not received their NREGS payments for eight months or
for funding from the BPL (Below Poverty Line) aid programs.

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