Banking for Rural India

Rajesh Jain Quotes WSJ :

Engineers at the Indian Institute of Technology here [in Chennai] smile as they watch a magic brown box grumble, groan and then spit out 12 dirty 10-rupee notes, each valued at about 18 European cents.

They have built India's first rural automated teller machine to serve remote areas of the subcontinent. It can process the worn notes in small denominations that are the main currency in Indian villages, and at $800, or about €650, the machine costs less than one-twentieth the price of a regular ATM.

India's Icici Bank Ltd., with the help of the institute in Chennai -- formerly Madras -- and others, has developed the village ATM from inexpensive homemade parts and programming. Despite its low price tag, the machine is built to survive extreme weather and power outages. It can tell when two ragged notes get stuck together and can scan fingerprints to identify rural savers who are illiterate or are reluctant to use a personal-identification number. The ATM will be tested at an Icici branch in Chennai this month. If it works, the rugged ATM eventually could be used at hundreds of Internet kiosks in remote areas of India.

The project is more than an altruistic attempt to improve the lives of rural Indians. It is the latest example of how India's nimble private-sector banks try to use local high-tech skills to squeeze profits out of small savers.

Indian companies such as HDFC Bank Ltd. and Icici didn't exist until deregulation opened the market to private banks in the 1990s. Now, they boast millions of customers and are among the most-profitable and fastest-growing companies in India. HDFC and Icici both have seen their profits grow by more than 30% annually during the past five years.

The trick, they say, is technology. In a country where most potential savers make less than $100 a month, the banks have mastered ways of attracting small customers, even when they hold accounts with a minimum balance of $100. Setting up a national network of full-fledged branches was too expensive, so the banks expanded using ATMs, phone banking and the Internet to reach new customers inexpensively.

"The challenge is that the transaction sizes are very small by international standards," says Neeraj Swaroop, country head of retail banking at HDFC in Bombay. "We were able to do it in an economically viable manner by investing in the right kind of technology."

Thanks to affordable technologies, the most advanced banks in India say more than 70% of transactions are done outside branches. "They are aggressively targeting the customer like never before," says Gurunath Mudlapur, head of research at Khandwala Securities in Bombay. "They are using a lot of innovation for the Indian context."