| Updated: Aug 15 2014, 01:59 IST
SUMMARY
The financial inclusion model based on Aadhaar, mobile banking and the business correspondent will dramatically reduce transaction costs
The trinity of the UIDAI card (Unique Identification Authority of India card, also known as Aadhaar), mobile banking and the business correspondent (BC) model provide the platforms to achieve total financial inclusion in India. These platforms dramatically reduce the cost of customer servicing, particularly in remote locations, by automating the customer authentication process. Therefore, total financial inclusion can be achieved at a manageable cost amounting to less than 0.1% of GDP. These technologies can yield benefits in terms of reduced “leakage” from government schemes, better tax collections and better savings behaviour.
India lags emerging market peers and other BRIC countries on most metrics of financial inclusion. Only 35% of India’s adults have a bank account (43% in other developing nations, 61% in other BRIC nations). Poor identity documentation at the account opening stage and ongoing high transaction costs are key barriers to inclusion.
Aadhaar, which is being rapidly rolled out, dramatically simplifies the account opening process by providing identity documentation. Mobile banking and BC mobile ATMs (potentially also Aadhaar based) dramatically lower ongoing transaction costs by automating the customer authentication process. Customer authentication, and associated fraud control, when done manually, requires multiple skilled staff and is consequently expensive. The BC model dramatically cuts costs—both on a per location and on a per account basis. We estimate that in the BC model, the cost per location can be reduced by up to 93% and the cost per account by up to 78% vis-a-vis the conventional branch model. Lower costs per location allow the setting up of outlets in remote areas with low density, while a lower cost per account allows reaching out to lower-value customers.
Achieving 100% financial inclusion would involve setting up 0.6 million customer service points to service 567 million additional accounts in rural and urban areas. Manning and supervising this infra would involve capex of R3,100 crore ($500 million) and recurring cash opex of R7,700 crore ($1.3 billion). Put in the context, the recurring service cost is about 0.1% of GDP or about 5 bps of the deposits plus loans of the banking system. We estimate that about one-third of the costs can be recovered through additional revenues.
The benefits of inclusion are significant. Firstly, reduction in government spending related leakages could result in savings amounting to 0.2-0.3% of GDP (annually). Notably, these gains are 5x of even the most aggressive estimates of potential losses on account of illegal immigrants receiving these benefits. Secondly, financial inclusion could help move savings away from gold to financial products—which could add up to 0.2% to annual growth. Thirdly, UIDAI can be effectively used to minimise tax evasion through tracking of high-value transactions—potentially another 0.4% of GDP (annually).
The key constraints to financial inclusion or not having a bank account in India (apart from lack of income) are distance (because of reliance on the high-cost branch model to reach far-flung low-density areas), excessive documentation, higher cost and low literacy rates. This was confirmed by a World Bank study which suggested that the number of respondents citing distance, lack of necessary documentation and “too expensive” as barriers to having a bank account was close to 20% which was higher than for other BRICS economies. More people in rural India cited distance as a major reason (29%).
Aadhaar dramatically simplifies the account opening (KYC) process by providing identity documentation. Mobile telephone and BC mobile ATMs (potentially also Aadhaar based) dramatically lower ongoing transaction costs by automating the customer authentication process. Customer authentication, and associated fraud control, when done manually requires multiple skilled staff and is consequently expensive. The cost of serving customers using mobile or BCs can be reduced by up to 78% that of the conventional branch-based model. As each “customer service point” is lower in cost it can be established even in remote locations with low volumes.
UIDAI has enrolled 640 million Indians as part of the Aadhaar rollout within a span of five years. This is extremely impressive. For perspective, Facebook’s user base scaled up to similar levels in about 7 years. UID now has more enrolments than WhatsApp.
Until now, states where the enrolment project received unfettered access have achieved high enrolment rates. With the present government’s support for Aadhaar, the nationwide 100% enrolment is no longer a pipe dream. Overall the costs of financial inclusion are manageable; they are also partly recoverable through additional revenues
Our analysis suggests that the cost of achieving 100% financial inclusion in India is manageable (R3,100 crore in one-time capital expenditure and R7,700 crore/year in recurring annual costs). It translates to a one-time setup cost of R55/account, and recurring annual cost of R137/account.
The costs incurred for financial inclusion are also partially recoverable through various charges. The BCs can charge a commission for enabling the government benefits transfer. Customers are willing to pay a small charge for safe and reliable remittance service which can also be captured. And although the No-frills accounts will be low ticket, a small nominal balance maintained can also earn a spread for the BCs. The earnings may not be sizeable—but they contribute in managing the costs of financial inclusion. In addition, the emergence of ‘payment banks’ could further reduce the costs required to help achieve a 100% financial inclusion rate.
Financial inclusion in the true sense will be achieved if access to credit to the rural/urban poor increases. This would potentially lead to conversion of non-productive savings (e.g. gold) into investments. In order to estimate the additional GDP growth it would generate, we assume that a substantial portion of non-productive spending—for example, spending on gold—gets converted into productive investment.
When the rural or urban poor get an account opened, it typically leads to a more prudent spending pattern and the possibility of them exploring other products related to savings offered by the bank.
Anish Tawakley, Rachna Biyani & Sumit Jain
Excerpted from Barclays Megatrends report
The authors are with Barclays Securities India Pvt Ltd
