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On 22 February, the Reserve Bank of India (RBI) announced that companies from any business sector will be allowed to seek a banking license.

A strong part of the rationale behind this controversial and surprising move from India’s generally conservative central bank and regulator is the need to bring more banking services, more efficiently and more quickly, to almost half the country’s 1.2 billion who remain outside the formal banking system .

India’s state banks, currently managing financial inclusion efforts, face increasing difficulties including a deepening shortage of trained staff, particularly in rural areas. Their “business correspondent” agent networks which these banks have set up to manage new accounts and cash-in/cash-out problems have their own long list of complaints. (For a summary and useful links to more substantive analysis, please see MicroSave’s Paint by Numbers: Profiles of Bank Agents in India)

Branch penetration in general is low in India. The world’s second most populous nation has about one-fourth the ratio of branches to adults that Brazil offers. The Philippines, an archipelago with arguably more daunting cash-distribution problems, nevertheless boasts better branch growth in poor and remote areas, according to World Bank data tables.

These and other inclusion issues may or may not concern L&T Finance, Reliance Capital, Tata Capital, and at least seven other finance firms already lining up to apply for bank licenses. The IMF is in fact cautious about the advisability of RBI’s expansion, warning in a recent report on India and banking the risks may outweigh the benefits.

One area these new banking entrants may wish to consider for  the ~41% who remain financially excluded  are the burgeoning payment technologies available to this very large market, including mobile money transfers and electronic benefits via cards.

Traditionally retail banks have made their money with credit and loans, and by moving customer deposits around to the banks’ short-term advantage. Low-income clients offer little or no opportunity for them to do so, (especially since inactivity and dormancy in savings accounts are often as high as 70-80%, according to MicroSave research).
With the exception of remittances, the minimal profit margins available in most G2P and other money transfers are of little interest to banks.

Finance companies, however, use different business models. And though self-dealing(whereby the new “banking” division overextends credit to another internal group with adverse consequences) is an issue RBI and others worry about, these firms’ greater appetite for risk—and their potential willingness to invest in more expensive, more sophisticated, more reliable digital payment systems—may help serve the needs of India’s poor more effectively than banks have so far.

Who knows? A more corporate business approach with more meaningful incentives may even be able to boost agent profitability and inactivity. The list of agent problems hindering financial inclusion is quite a lot longer, but bank management of agent networks could use help improving these two in particular.

Kenya, the most famously forgiving of regulatory environments, seems to have produced at least one successful alternative to conventional banking for more than 17 million subscribers. India may now accomplish something equally meaningful for their half billion without easy access to financial services.