By Soumik Dey
Story Dated: Tuesday, December 4, 2012 14:30 hrs IST
Banking hiccups are the biggest challenge for direct transfer of subsidy
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The villagers of Kotkasim in Alwar, Rajasthan, recently experienced something for the first time. Direct cash transfer of subsidy, they were told, would be more beneficial than the existing method. Against their purchase of kerosene at market price (unsubsidised), they received three months' subsidy directly in their bank accounts. But it was anything but beneficial—according to a study by field researchers Bharat Bhatti and Madhulika with development economist Jean Dreze, the amount spent on travelling to banks exceeded the amount they collected as subsidy. Also, the payment of subsidies was erratic and untimely.
Despite the initial hiccups, however, many more bank accounts will be ringing with cash from deposits made by the government in lieu of subsidies from next January. Plans are afoot to provide cash doles instead of subsidising essential purchases by next year. Payouts for farm loans, scholarships and employment schemes would be directly credited to beneficiary accounts even before that.
Is direct cash transfer a better way to give subsidies? Theoretically, yes. It will surely plug the leaks in the messy public distribution system. Also, as Finance Minister P. Chidambaram said, falsification and duplication would be practically eliminated. “I believe it would also result in considerable savings for the exchequer,” he said.
Is direct cash transfer a better way to give subsidies? Theoretically, yes. It will surely plug the leaks in the messy public distribution system. Also, as Finance Minister P. Chidambaram said, falsification and duplication would be practically eliminated. “I believe it would also result in considerable savings for the exchequer,” he said.
The first phase of the project will be based on Aadhaar identities of citizens in 51 districts in 16 states. It would cover 29 of 42 government welfare schemes. The 12-digit Aadhaar number, which has already been issued to 21 crore people, will suffice as the identity to link it with bank accounts.
But even the very first step—that is the government depositing money in beneficiaries' bank accounts—could falter unless a few things are fixed. In a recent meeting with public sector bank chairmen, Chidambaram was told about some “practical problems” that need to be resolved before rolling out the project. The most important concern was about reaching the unbanked people in remote areas, whose livelihoods largely depend on government support.
“To meet the January deadline in 15 states, banks will have to do much. The finance minister has asked banks to speed up financial inclusion for the unbanked districts and blocks by setting up branches or banking
correspondents,” said D.K. Mittal, financial service secretary at the finance ministry, after the meeting, which was also attended by chief ministers of 21 states. It was suggested that bank employees carry handheld machines and dispense cash to beneficiaries in person.
correspondents,” said D.K. Mittal, financial service secretary at the finance ministry, after the meeting, which was also attended by chief ministers of 21 states. It was suggested that bank employees carry handheld machines and dispense cash to beneficiaries in person.
Initially, the cash transfers would be for farm loans, educational loans, and health and social justice schemes. At a later stage, the system would be used for transferring subsidy for anything from food to fuel. “Anything and everything that is a subsidy will have to be paid through this system. Making electronic transfers for retail purchases is still a big challenge, but we are working on it,” said Mittal.
Banks face another serious problem as well. They would be held responsible if any Aadhaar information leaks, an account gets hacked or a wrong beneficiary manages to get enrolled. “Enlisting correspondents can be done very quickly and at a very low expense. But the main challenge here is having a secure technological network. So far we had partnered with private players to use their networks, but having bank's own infrastructure would be mandatory for managing subsidy distribution,” said Pratip Chaudhuri, chairman, State Bank of India.
The government has been urging banks to start new accounts even without Aadhaar, but with other relevant documents, and finish rolling out the direct cash transfer of subsidy by April next year. Banks have opened five crore accounts using Aadhaar so far, but will have to open six crore more in just over a month.
The government's target has largely been accepted by most bank chiefs. However, some of them have said that it could be ambitious on more than one count. “There is also a possibility of enrolling too many fake IDs early on. Without the biometric Aadhaar cards, assuring real identities of beneficiaries would be a problem,” said a public sector bank chairman, who did not wish to be named.
Many states have voiced their concerns about assigning Aadhaar cards as the only recognised identification of beneficiaries. “States do much of the distribution of subsidies aimed at mothers, children and health reliefs for the physically challenged, many of whom may not have enrolled under Aadhaar. Opening zero-balance accounts using Aadhaar cards itself is a very time-consuming affair,” said Sheila Dikshit, chief minister of Delhi, which has been identified by Chidambaram as one of the states to implement the project in the first phase.
While a lot still needs to be done, the stage is set for banks to become a crucial link between the Centre, states and subsidy beneficiaries. If they can achieve this, the rewards are promising. The government's annual subsidy disbursal amounts to around Rs.3 lakh crore. Banks surely know that a lot of their problems could be solved with that kind of liquidity in the system.
Technical support
Technical support
While reaching the unbanked rural population is the biggest challenge before the direct transfer of subsidy, many service providers have already come up with solutions. Delhi-based Starfin India uses a biometric system, with a user-friendly software developed by Tata Consultancy Services, to connect to State Bank of India's servers. The company identifies people in villages with computer and connectivity, and trains them to use the biometric system and become customer service points.
“Currently we have about 300 villages in our network and are opening about 10,000 no-frills accounts a month in rural and urban areas of five states,” said Jitendra Singh, managing director and CEO of Starfin. “We started a year back and have done about Rs. 500 crore worth of transactions so far.” Starfin charges its users Rs.6 to Rs.12 for deposits and withdrawals.
Beam Money, another such service provider, has RBI approval for using mobile phone networks to make money transfers. “Direct cash transfers can be done through mobile or landline phone connections. Given the documentation and verifications for securing phone connections, they are as secure as using biometric cards like Aadhaar for linking beneficiary accounts,” said Anand Shrivastav, chairman and managing director, Beam Money.
Beam Money, another such service provider, has RBI approval for using mobile phone networks to make money transfers. “Direct cash transfers can be done through mobile or landline phone connections. Given the documentation and verifications for securing phone connections, they are as secure as using biometric cards like Aadhaar for linking beneficiary accounts,” said Anand Shrivastav, chairman and managing director, Beam Money.
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