m-banking for the BOP

The McKinsey article on financial services using mobile for the people devoid of banking, referred as unbanked, (Capturing the promise of mobile banking in emerging markets) provides an interesting insight to how mobile phones can be used to integrate a wider population into banking net. Not only social inclusiveness, it also brings in a large portion of informal money into the formal system thus helping the overall macro-economic indexes of the country. There are no two opinions on how banking inclusiveness reduces the risk to the saver and the borrower.

There are successful models on m-banking which have been used across the world, especially, by M-Pesa in Kenya and Smart Money and GCash in Philippines. Please see that m-banking here refers to micro-money on mobile, something of the range of Rs 50-500 in Indian context which is uneconomic for banks of today to work with. And that is where a mobile comes in to reduce the overall cost of banking. Given, the bank penetration rate in India at less than 25% compared to mobile penetration rate at 46%, Indian market can be an ideal ground for such mobile banking for the people at bottom of pyramid.  

The model as followed by m-Pesa is illustrated below –

As pointed out by mcKinsey too, for the m-banking model to succeed, the provider needs to have skills in both telephony and banking. In India, people trust and recognize the mobile brands more than bank brands. So the initiative has to be from mobile operator. Given their reach, I personally feel, BSNL, Vodafone and Airtel could be possible players in this arena. And yes, first mover advantage should definitely accrue !

And before I end, a note on some progress in this area- Nokia Money has tied up with Yes Bank to provide such services. Read here -> (http://telecomtalk.info/nokia-to-launch-mobile-payment-facility-nokia-money/19875/). More details on what is on offer is yet to be seen. 

Bond STRIPS allowed in India

An interesting development has taken place in bond market in India. The RBI has allowed ‘stripping’ of bonds from April 1, 2010. For the uninitiated, STRIPS, or Separate Trading of Registered Interest and Principal of Securities (STRIPS) refers to a process of separating principal and coupon payments on bonds and turning them into zero-coupon securities.

The advantages that accrue from STRIPS is multiple – One, it allows corporate to plan their payments and receivables for required amount per the STRIP that they buy/ sell. Two, it allows for a more accurate price determination in the market as the strips provide liquidity. Three, there is no reinvestment risk arising from coupons.

To start with, here is what RBI has allowed-

1. 1.  Stripping for bonds with coupon or maturity dates of Jan. 2 and July 2, irrespective of the year of maturity.
2.  Minimum amount to be submitted for stripping will be INR10 million and subsequently multiples thereof
3.  Reconstitution, which is the reverse of stripping, allowed. That means the coupon and the principal are reassembled into the original government security.
4.  The stripped financial instruments will be reckoned as eligible government securities for statutory liquidity ratio (SLR) purposes.
5.  RBI will not charge any fees for stripping/reconstitution of Government Securities.

Among the existing bonds, the 6.35 percent 2020 bond and the 9.39 percent 2011 bond are eligible as per their coupon dates.

Impact to bank's bottomlines due to fluctuating bond yields

Bond yields have an impact on prices of bonds- they share an inverse relationship. If yield rises, prices fall and vice-versa. Bond yields have an impact on Indian banks bottomlines because the banks have a substantial investment in govt. bonds necessitated by statutory liquidity that banks have to maintain per RBI guidelines.


Lets take an example of SBI in this case. The following calculation takes the standard g-sec (10 yr, 6.35% coupon). At 7.85% yield, this was available at Rs 89.895. 

Now if there was to be 10 bp increase in yield, it would mean yield to rise to 7.95% and resulting price as Rs. 89.2698. 

Given SBI domestic investments and proportion of that in SLR and AFS (Available for Sale), it comes to Rs. 60,732 crore. A Rs. 0.62 loss on Rs. 100 of bond value means Rs. 380 crore for SBI. 
Because every loss in AFS investments (made by mark to market provisions) have to be compensated, this would mean more money parked by SBI and less available money for credit. 


P.S: All figures above have been picked from Economic Times, April 1 edition.