9896 - How Modernizing India’s Payment System can Drive Financial Inclusion

How Modernizing India’s Payment System can Drive Financial Inclusion

April 26, 2016

By Sean Creehan

India’s heavy reliance on cash has wasted resources and limited financial inclusion, leaving nearly half the population without a bank account. In response to this problem, the government has introduced policies to promote non-cash payments, provide hundreds of millions of new payment-capable accounts to the unbanked, and encourage new technology and innovation throughout the banking sector. These combined policies could have a major impact on economic welfare and financial inclusion in the coming years.

Non-cash Payments can Improve Economic Welfare and Financial Inclusion

Most Indians rely exclusively on cash in daily transactions. Only an estimated 10-15 percent of the population has ever used any kind of non-cash payment instrument, compared to 40 percent of people in countries like Brazil and China. Meanwhile, as of 2014, India’s ratio of currency in circulation outside of banks to GDP was 11.1 percent, higher than other emerging economies like Russia, Mexico, and Brazil (see Figure 1).

This cash reliance makes households vulnerable not only to theft but also inflation, which erodes the value of cash not earning interest in a formal account. It also means their savings are unavailable to fund broader economic activity, as banks can’t lend cash held at home. Additionally, people operating exclusively in cash and without a bank account often face tougher borrowing conditions.

Figure 1: Cash and coins in circulation outside banks (% of GDP)

Source: BIS Committee on Payments and Market Structure, end-2014 data.

One way to reduce cash-related economic inefficiencies is to create inclusive non-cash payment systems. These systems provide benefits to a country’s poor citizens across a number of indicators, lowering the cost of transactions and increasing the return on savings. The availability of convenient, reliable, secure, and affordable payments can also introduce the unbanked to formal financial products like loans and insurance, creating synergies with broader financial inclusion goals.

Creating a National Payment System

India’s policymakers have taken steps to address these payment issues. In 2008 the Reserve Bank of India (RBI) established the National Payments Corporation of India (NPCI) to consolidate India’s complicated retail payment systems into a standardized, coherent national network to make transactions easier and cheaper. Since then, the NCPI has initiated multiple reforms, including a national automated clearing house system for payments, the RuPay electronic payment card scheme, the Immediate Payment Service (IMPS) for mobile transactions, national check truncation, and a continuously operational system for remittances (see Table 1). Meanwhile, the government’s rollout of universal identification cards—popularly known as Aadhaar cards and held by one billion Indians—lets any holder be authenticated by the Unique Identification Authority of India (UIDAI) and NPCI. This not only makes it easier for financial institutions to comply with “Know Your Customer” regulations, but also allows the payment system to support the government’s financial inclusion efforts.

Table 1: Recent Developments in India’s Payment System

Date Implemented	Payments Entity/Policy
September 2008	National Automated Clearing House
December 2008	National Payments Corporation of India
November 2010	Immediate Payments Service for mobile payments
February 2012	Online verification of Aadhaar universal identification cards
March 2012	RuPay electronic payment card scheme
July 2012	Aadhaar Payments Bridge System
October 2013	Aadhaar-enabled Payment System
August 2014	National Mission for Financial Inclusion
August 2015	Provisional payment bank licenses

Bringing the Unbanked into the Financial System through Payments

Having established a more robust national payment infrastructure, the Indian government and RBI have initiated policies to attract unbanked citizens to the financial system through payment-focused accounts.

Shortly after taking power in mid-2014, the government of Prime Minister Narendra Modi announced the National Mission for Financial Inclusion (Pradhan Mantri Jan-Dhan Yojana, or PMJDY) and instructed banks to leverage Aadhaar cards to provide unbanked citizens with new accounts and link them directly to welfare benefit payments. The program’s goal is to expand financial inclusion, but its initial strategy targets the provision of convenient payment products to attract India’s unbanked and, more importantly, get them to use their new accounts.

This strategy is most evident in the bundling of PMJDY accounts with the Direct Benefits Transfer (DBT) program, established in 2013 to send benefit payments (e.g. scholarships or pensions) directly to the poor in an effort to reduce the siphoning off of funds by corrupt intermediaries. PMJDY accounts can receive various government subsidies via the aforementioned Aadhaar Payments Bridge System. This bundling highlights the potential synergies of coordinated efforts to improve a country’s payment system and increase financial inclusion. DBT-enabled accounts offer benefits to the unbanked that attract them into the formal system. At the same time, a growing customer base of the newly banked creates positive network effects that make the payment system more useful for all participants (see Figure 2).

Figure 2: Stylized Aadhaar-based payments use cases: Aadhaar Payments Bridge or Aadhaar-enabled Payments System

1. Previously unbanked open accounts using Aadhaar identification and NPCI’s Aadhaar-enabled electronic KYC system
2. Government agency initiates Direct Benefits Transfer (APB) or Aadhaar holder initiates payment (AEPS) at participating bank or bank correspondent (“micro-ATM”)
3. NPCI authenticates payee and beneficiary using Aadhaar IDs for clearing and settlement
4. Aadhaar holder receives payment at Aadhaar-enabled bank account and withdraws cash at participating bank or bank correspondent (“micro-ATM”)

As of March 2016, the program had already opened 213 million new accounts, a remarkable achievement in under two years, but it remains a work-in-progress. Roughly 29 percent of accounts held a zero balance, in part because the government has not yet fully utilized the DBT program for all welfare payments. The infrastructure to support the new accounts is also still limited, making it less attractive for new PMJDY customers to make daily payments.

More recently, the RBI licensed new specialty payment banks in August 2015 to promote innovation in delivering payment services to India’s unbanked. The new payment banks are backed by five telecommunications ventures, a mobile payments specialist, three conglomerates, the National Securities Depository, and India Post. They have physical and virtual networks in the rural areas where many of India’s unbanked live as well as international experience promoting electronic payments. The RBI expects the payment banks will take advantage of their parent companies’ strength to leverage new technology and innovative strategies.

The payment banks will need to comply with RBI requirements to receive a full payment bank license. Deposits can be placed in checking or savings accounts and will earn interest. This solves the primary problem previously faced by non-bank mobile payment operators: an inability to let customers participate in these new payments networks without linking to a separate bank account.

Challenges and Implications

The addition of these new players to India’s payment system also brings challenges. One open question is how payment banks will compete with the new PMJDY accounts. With more than 200 million accounts opened, many of the previously unbanked will now have access to formal payments and won’t necessarily need a payment bank account. For existing commercial banks facing asset quality problems and significant capital raising requirements, new competition poses risks to future earnings.

Payment operators will confront financial illiteracy and limited awareness among their customers, a common barrier to financial inclusion efforts around the world. The rapid rollout of new payment models also creates additional operational risks for the industry. The new players face an evolving legal environment in the treatment of customer privacy, with the Indian Supreme Court continuing to debate the extent to which non-government entities can leverage Aadhaar numbers to improve the speed and efficiency of payments transactions. Meanwhile, innovative business models have the potential to lead payment banks into unregulated areas, necessitating enhanced supervision by the RBI.

Less Cash, More Inclusion to Come

While 86 percent of transactions in India are still conducted in cash, the share of non-cash payments is likely to increase rapidly due to ongoing reforms. With a national infrastructure in place and undergoing improvement, hundreds of millions of new payment-capable accounts, and a variety of firms entering the sector, the promise of a modern non-cash payment system has arrived—and with it, potential significant advances in financial inclusion for one of the world’s most important developing economies.

A more comprehensive report on this topic was published in Asia Focus. Please see Modernizing the Payment System to Increase Financial Inclusion.

The views expressed are not necessarily those of the Federal Reserve Bank of San Francisco or of the Federal Reserve System.

SEAN CREEHAN is an analyst in the Federal Reserve Bank of San Francisco's Country Analysis Unit (CAU). He monitors financial, regulatory, and economic developments in Asia with a focus on Northeast Asia and South Asia. His research interests include financial inclusion, cross-border capital flows, and financial technology.

7955 - Four financial inclusion schemes and one Aadhaar card - Live Mint

Four financial inclusion schemes and one Aadhaar card

It may be a good idea to get your domestic staff, service providers and vendors to enrolled

Monika Halan 

Shyamal Banerjee/Mint

Suddenly everybody’s heard of the Pradhan Mantri schemes. The driver knows about it, so does the housekeeper, the sweeper, the plumber, the “pressguy” and the fruitwala. Some bank branches are buzzing—long queues and lots of excited chatter. What’s up? We could call it the Modi push. 

On 9 May, he launched three financial inclusion schemes that offer life cover, accident insurance and pension. These ride on the first Modi push—the Jan Dhan Yojana, under which 125 million bank accounts were opened by 31 January 2015. This, in turn, rides on the Aadhaar unique identity card. With more than 810 million unique identity numbers covering 67% of residents in India already issued, the base for a large-scale financial inclusion programme has been built.

Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY) is a group life insurance pure term scheme that costs Rs.330 a year for a life cover of Rs.2 lakh. People between ages of 18 and 50 can enter. The cover continues till age 55. There is a case to extend the cover till age 60 or 65 at least, and not terminate at age 55, given that the average Indian age is now 68. Life Insurance Corp. of India, or any other willing insurance company, can offer the scheme through a bank. I checked around and found that HDFC Standard Life Insurance Co. Ltd has already sold almost 50,000 policies through HDFC Bank Ltd and other banks. ICICI Prudential Life Insurance Co. Ltd is offering the product through ICICI Bank Ltd. The process is simple and tech-enabled and should get traction, says an ICICI Prudential insider. SBI Life Insurance Co. Ltd is offering it through State Bank of India (SBI) and Vijaya Bank. According to SBI officials, till 9 May, SBI had already sold 2 million policies. Kotak Mahindra Old Mutual Life Insurance Ltd is going to begin soon and will vend it through Kotak Mahindra Bank Ltd. The bank will be the master policy holder.

The second scheme, Pradhan Mantri Suraksha Bima Yojana (PMSBY), is an accident insurance scheme that gives Rs.2 lakh if the policy holder dies in an accident or is disabled due to an accident. At Rs.12 per year, the product is really cheap.

The third scheme is the Atal Pension Yojana (APY), which will give a defined benefit contribution of a maximum of Rs.5,000 for defined contributions. This is a watered down version of the National Pension System-Swavalamban (NPS-S), whose subscribers will automatically be migrated to APY. But an opt-out is there for those who want to continue with NPS-S.

The design, execution and delivery of the schemes point to a new pragmatism in the government. Simply announcing schemes in a budget speech and then waiting for the leaky, sleepy system to deliver does not work. 

The life product is right—a pure term plan—the best value-for-money insurance that anybody can buy. It is what is called an OTC (over-the-counter) product—it does not take five pages of legalese to explain the benefit; anybody can understand and buy. The accident cover is simple, cheap and easy to understand. 

The pension product is more nuanced and the jury is still out to see if it works at the ground level. It is not enough to get the right product; it also has to be made available at a mass level. 

That has been done by linking the security schemes to the bank account, which is linked to the Aadhaar number. Connect the dots and you have a robust, executable system of financial inclusion. 

If the first step was to open bank accounts through the Jan Dhan Yojana, this is the next step, to make the bank accounts active by making banks vend a product that will get people to queue up. Auto debit of premiums will ensure that the policies are kept alive and that people are forced to start using their bank accounts.

To get results, targets have been fixed. Banking insiders tell me that a target of 1,000 policies per banking staff has been fixed for both the schemes. Banks will get a transaction fee of Rs.11 (3% commission), and agents and business correspondents get Rs.30 (9% commission) for the life cover. For the accident cover, banks, agents and business correspondents get Rs.1 (8% commission). The responsibility of claim management will rest on the banks or the other vendors. That part will unfold as claims begin to come, and banks will have to strengthen their third-party product teams.

The overall comment from inside the financial sector that I could tap into is this: these are great schemes and will do much for building social security in India. A government with a budget deficit has got the corporate sector to initially pick up the tab—social security through the corporations. Whether corporate profit will get hit will be known once the claims experience builds over the next three years—the premiums are frozen for three years—after which either a re-pricing or a government dole could happen. But an insurance expert I spoke to said that given the scale of this plan, the schemes will be profitable.

It may be a good idea to get your domestic staff, service providers and vendors to open these accounts. And as you do that, examine your own portfolio of financial products and compare costs. If you’re paying a whole lot more, maybe it is time to redo your own financial life with sensible products rather than the junk you are sold.

Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, Yale World Fellow 2011 and on the board of FPSB India. She can be reached at expenseaccount@livemint.com

7367 - Nearly every Indian household has a bank account - Business Standard

Nearly every Indian household has a bank account

Jan Dhan data suggest all but 23,000 households in India have access to banking services, but a large proportion of inoperative accounts and Aadhaar seeding remain a challenge

Akshat Kaushal  |  New Delhi  February 11, 2015 Last Updated at 23:50 IST

If the latest figures for the Pradhan Mantri Jan Dhan Yojana (PMJDY) are anything to go by, all but 23,000 Indian households have already been made part of the banking system - an impressive coverage for the government's ambitious financial-inclusion programme.

According to the PMJDY website, a little more than 127 million new bank accounts have been opened since launch of the scheme on August 28, 2014. Overall, that takes the number of households in the country with at least one individual bank account to 210.5 million.

In what could be a gauge of the scale of coverage, the number of people added to the country's banking system in the past five months is higher than that in the period from 2001 to 2011. 

According to census data, only 36 per cent of Indian households had access to banking services in 2001; this increased to 59 per cent in 2011.

7147 - Jan Dhan Yojana crosses 100-mn mark - Business Standard

Jan Dhan Yojana crosses 100-mn mark

Ministry claims 98.4% households now have bank accounts

BS Reporter  |  Pune  January 3, 2015 Last Updated at 00:29 IST

The ambitious plan of the government to achieve financial inclusion for all has taken a step closer to its target with 98.4 per cent household in India having bank accounts. Under the Pradhan Mantri Jan Dhan Yojna, unveiled by Prime Minister Narendra Modi on 28 August last year, 26 January was set as the deadline to open 75 million bank accounts. The target was later revised to 100 million.

“In the last three months, 103 million new accounts have been opened under the Jan Dhan Yojana. By now, 98.41 per cent households in the country are covered under the scheme,” said Hasmukh Adhia, secretary, department of financial services.

Banks managed to achieve the stiff target of opening 100 million bank accounts a month before the deadline of 26 January.

Adhia said banks had conducted a survey of 219 million household. Of these, 98.4 per cent respondents said they have a bank account. According to the last census, there are 250 million households in the country. “There are 3 crore to 4 crore (30 million to 40 million) who are from the effluent sections of the society declined to take part in the survey,” Adhia said. Adhia added that RuPay cards have been issued to 79.7 per cent of the accounts. The government is also working on seeding the Aadhaar number with the bank accounts; 33 per cent of the accounts have already been synced with the Aadhaar numbers. At present, it is not mandatory for accounts to be seeded with Aadhaar for direct benefit transfers (DBT). But the banks have been advised to do so to make DBT transfers easy.

However, a majority of accounts are still inactive with zero balance, and it is a big challenge for the banks to mobilise savings in these accounts.

“We will be deliberating on how to keep the accounts active. We will have to see how to mobilise savings rate from 30 per cent currently to 35 per cent of gross domestic product (GDP). We will also have to see how to use these accounts for DBT, pension distribution and other benefits,” added Adhia.

To deepen financial inclusion now, the finance ministry will be getting into an “open challenge mode” for opening accounts under the Jan Dhan scheme.

This will be announced once the 100 per cent target is achieved. “Under this, anyone who does not have an account can approach a bank and an account will be opened immediately,” said Adhia.

7146 - Bank accounts for all set to become a reality - Business Standard

Bank accounts for all set to become a reality

Fin Min says 98.4% households now have bank accounts; Jan Dhan crosses the 100 million mark

BS Reporter  |  Pune  January 2, 2015 Last Updated at 19:13 IST

Financial Services Secretary Hasmukh Adhia (let) addressing a press conference on the inaugural day of the two-day 'Gyan Sangam', retreat of bankers in Pune

The ambitious financial inclusion plan of the government under the Pradhan Mantri Jan Dhan Yojana has inched a step closer to achieve financial inclusion for all with 98.4 per cent of households in the country have bank accounts now.

Under the Pradhan Mantri Jan Dhan Yojna which was unveiled by the Prime Minister Narendra Modi, a target of opening 75 million accounts was set by 26 January which was later revised to 100 million.

“10.3 crore (103 million) new accounts have been opened in the last three months under the Jan-Dhan yojana. By now 98.41 per cent of the households are covered under the Jan-Dhan scheme,” said Hasmukh  Adhia, Secretary, Department of Financial Services.

Banks have managed to achieve the stiff target of opening 100 milion bank accounts a month before the 26 January deadline.

Adhia said banks had conducted survey of household  in which 219 million households, of which 98.4 per cent respondents said they have a bank account. According to the last census, there are 250 million households in the country.

“There are 3 crore to 4 crore (30 million to 40 million) who are effluent sections of the society and declined to take part of the survey,” Adhia said.

Adhia added that RuPay cards have been issued to 79.7 per cent of the accounts. The government is also working on seeding the Aadhaar number with the bank accounts, 33 per cent of the accounts have already been synced with the Aadhaar numbers. At present, it is not mandatory for accounts to be seeded with Aadhaar for DBT benefits. But the banks have been advised to do so to make DBT transfers easy.

However a majority of accounts are still inactive with zero balance and it is a big challenge for the banks is to mobilise savings in these accounts.

“We will be deliberating on how to keep the accounts active. We will have to see how to mobilise savings rate from 30 percent currently to 35 per cent of gross domestic product (GDP). We will also have to see how to use these accounts for Direct Benefit Transfer, pension distribution etc,” added Adhia.

In order to deepen financial inclusion now the finance ministry will be getting into an “open challenge mode” for opening accounts under the Jan Dhan scheme.

This will be announced once the 100 per cent target is achieved.

“Under this anyone who does not have an account can approach a bank and an account will be opened immediately,” explained Adhia.

5828 - 'Make Aadhaar sole platform for financial inclusion'

'Make Aadhaar sole platform for financial inclusion'

Press Trust of India  |  Mumbai  

August 26, 2014 Last Updated at 20:35 IST

A senior Reserve Bank official today called for resolution of the issues regarding legality of Aadhaar project at the earliest, so that the unique identity number provided by it can become the sole platform for financial inclusion programme including direct cash transfers. 

"We need to resolve the issues regarding the legality of the Aadhaar number so that this can be the sole number for any financial transactions ... Then the whole financial inclusion programme, including the direct benefit transfers, can be rolled out without hitches and any duplication," Reserve Bank executive director Deepali Pant-Joshi said at an event organised by Dun & Bradsheet here. 

The Supreme Court recently invalidated making of Aadhaar enrolment a precondition for government benefits. 

Prime Minister Narendra Modi is set to kick off an ambitious financial inclusion drive on Thursday, which aims to bring 7.5 crore additional households under the banking system by FY18. 

Pant-Joshi also said that e-KYC matched with the Aadhaar would be a sufficient proof for bank account opening. 

Discounting the fear that financial inclusion accounts can be misused for money-laundering, Joshi said there is no logic behind the fear, as there would hardly be any incentives to do so. A basic savings account can transact only a maximum of Rs 50,000 a month, a petty amount from money launderer's point of view. 

She also dismissed the fear amongst bankers that financial inclusion accounts would lead to more NPAs. Over 90 per cent of the 4.1 per cent gross NPAs are created by large corporates, she pointed out. 

"Among the poorer sections, only 4.4 percent of total NPAs are from the farm sector, while the share of the MSMEs is only 5.2 percent. So where is the poor retail customers creating bad loans in the system? NPAs are not a creation of the poor but the rich," she said.

5793 - Jan Dhan Yojana to bank on Aadhaar - Indian Express

Jan Dhan Yojana to bank on Aadhaar

Written by Ruhi Tewari | New Delhi | August 20, 2014 3:21 am

SUMMARY

Modi had on August 15 announced a financial inclusion plan to connect the poor to banks.

Prime Minister Narendra Modi’s ambitious financial inclusion plan ‘Jan Dhan Yojana’ announced on Independence Day will be based on the previous UPA government’s flagship Aadhaar, with the PM himself having indicated the importance of Aadhaar in rolling out the scheme to officials.

Modi had on August 15 announced a financial inclusion plan to connect the poor to banks, wherein a bank account will be opened for poor households who would also be given a debit card, and an insurance of Rs 1 lakh will be guaranteed for each family.

According to sources, once the plan for this scheme was ready, Modi enquired about the role of Aadhaar and was keen to ensure it forms an integral part of this new scheme. The Jan Dhan Yojana has now been designed in a way wherein its implementation would be based on Aadhaar and would, in some ways, be contingent upon it. Modi, however, steered clear of mentioning Aadhaar during his speech on August 15.

Officials say of the 7.5 crore households to be covered under the scheme, those who already have Aadhaar numbers will be able to open their bank accounts using it as their KYC, while those who don’t, will first be enrolled under Aadhaar by banks. This effectively means Aadhaar could become indispensable to the scheme.

While an account opening in a bank typically takes 2-3 weeks, it can be done far more quickly when Aadhaar is used, officials say. Thus, the use of Aadhaar could help speed up the scheme’s implementation while also eliminating duplication. Sources say Aadhaar is also crucial for the government’s unannounced plan to allow an overdraft facility of up to Rs 5,000 with every bank account after six months so as to ensure no household avails the facility through multiple bank accounts.

5783 - Resurrecting Aadhaar - Financial Express

Resurrecting Aadhaar

| Updated: Aug 16 2014, 01:41 IST

SUMMARY

In his maiden Independence Day speech, Prime Minister Narendra Modi announced Pradhan Mantri Jan Dhan Yojana, which will provided a bank account

In his maiden Independence Day speech, Prime Minister Narendra Modi announced Pradhan Mantri Jan Dhan Yojana, which will provided a bank account with the facility of a debit card and a built-in insurance cover of R1 lakh to every poor family.

Click here for graph

Similarly, in Rajasthan, chief minister Vasundhara Raje launched Bhamashah, a financial inclusion and government benefits delivery scheme. Under the scheme, bank accounts in the name of women of 1.5 crore families will be opened and all government benefits like social security and scholarships will be directly transferred to their accounts. In 2008, the state government had rolled out the Bhamashah programme. It collected biometric data of 44 lakh families and opened 26 lakh bank accounts and R160 crore was transferred to 10 lakh accounts. The programme was put on hold after the change of government in the state.

Both the schemes are aimed at financial inclusion and Aadhaar could play an important role in their implementation. These programmes will have to be scaled up to the level suggested by former UIDAI chairman Nandan Nilekani to include all subsidies and government entitlements. A Barclays research estimates that Aadhaar-based direct transfer of benefits and subsidies could reduce leakage of over R30,000 crore in the central schemes annually by 2020.

5778 - Govt's banking plan might hinge on tech - Business Stndard

Govt's banking plan might hinge on tech

Modi likely to announce details in his first Independence Day speech

Vrishti Beniwal  |  New Delhi  August 14, 2014 Last Updated at 00:50 IST

The government's financial inclusion mission, likely to be announced by Prime Minister Narendra Modi in his Independence Day speech on Friday, will heavily rely on technology and have financial literacy, insurance, pension and credit built into the programme - these components were missing in the earlier financial inclusion programme.

The new plan was approved by the Cabinet last week. As many as 75 million households that do not have access to banking services will be covered and at least one bank account opened for each household, against the earlier proposal of two.

According to the latest Census figures, 58 per cent of Indian households have access to banking facilities. The government was earlier targeting 100 per cent coverage but that might be difficult to achieve, given the last-mile connectivity issues. Banking access in areas with connectivity and infra constraints will be covered in the second phase, likely to be introduced around the Independence Day next year.

"Wherever it is possible to open two accounts, we will do it. About 50,000 villages are in forest or hilly areas. We will have to find alternative solutions for those place. Telecom companies will expand to these areas with mobile facility," a finance ministry official, asking not to be named, told Business Standard.

Finance Minister Arun Jaitley will launch a facility to allow mobile banking on all kinds of mobile handsets, including feature phones that do not support internet or banking applications. The USSD (unstructured supplementary service data) technology, which works in a way similar to short messaging service (SMS) will facilitate this.

The first phase of the programme, comprising universal access to banking facilities, basic bank accounts with zero balance, RuPay debit card and financial literacy, will have to be completed in a year's time. After Modi has made the announcement on August 15, account-opening camps will be launched from August 28.

The second phase (August 2015-2018) will include creation of a credit-guarantee fund for overdraft in basic banking accounts, micro insurance and unorganised sector pension schemes like Swavalamban.

The ministry official said an in-built accident insurance cover of Rs 1 lakh, death insurance schemes and an overdraft with Aadhaar facility of Rs 5,000 would act as incentives for households to open bank accounts. The overdraft facility, though, will not be given at the time of opening an account; it will take six months.

"We are taking them towards some economic activity. Focus will be on online accounts - unlike earlier, not on offline ones," the official added.

Since branchless banking in the form of business correspondents is to be further expanded, a minimum remuneration for these correspondents has been fixed at Rs 5,000. In the earlier campaign, there were no guidelines for remuneration of these individuals but they earned an average Rs 2,000-3,000 per month. The earlier programme could not take off because the correspondents were working on different technological platforms. We want interoperability," the official added. "There will be lot more emphasis on fixed-point business correspondents. Postal Service staff and public distribution shops will be included as correspondents."

Microfinance institutions and non-banking financial companies (NBFCs), which are now eligible to operate as business correspondents, are likely to play a key role in the Modi government's grand financial inclusion vision. Companies like Muthoot Fincorp, which operate in the microfinance space, see the correspondent model as an additional revenue stream.

"Our microfinance business has a customer base of close to one million. We can straightaway contribute opening of a significant portion of the targeted accounts," said Sadaf Sayeed, chief operating officer (microfinance), Muthoot Fincorp.

To incentivise banks, which had expressed concern that managing these accounts would increase their administrative costs, the government will transfer cash subsidies to the bank accounts of beneficiaries. Subsidies for kerosene, cooking gas, fertiliser, food, state-run schemes, wages, pension and many other areas will be transferred directly. These low-cost deposits will help improve Casa (current account, savings account ratio) of banks. The government will also pay two per cent commission to banks on the money flowing to the accounts of beneficiaries.

"Aadhaar will happen side by side. At present, about 700 million people have Aadhaar. Of them, 270 million have bank accounts but only 70 million were covered in the previous campaign. In this round, we will link with bank accounts all Aadhaar numbers that were left out earlier," the official said.

5768 - Banks seek changes in proposed financial inclusion scheme - TNN

Banks seek changes in proposed financial inclusion scheme

Mayur Shetty, TNN | Aug 8, 2014, 07.14PM IST

State Bank of India chairman Arundhati Bhattacharya said that comprehensive financial inclusion scheme announced by finance minister Arun Jaitley in the Union Budget can be profitable for banks and is not a 'loan mela' as made out to me. Banks have, however, suggested incorporating three key features to improve-Sampoorn Vittiyea Samaveshan (SVS)-the financial inclusion scheme expected to be launched by the government on August 15.

To ensure that the scheme works smoothly banks have said that the accounts should be opened only through eKYC using Aadhaar. eKYC refers to the process where a bank uses a biometric reader to scan a prospective customer's fingerprints and sends it to the Aadhaar database. The system confirms the identity of the person and also submits the documents on the basis of which the Aadhaar card was issued. The number of the account so opened is then linked to the Aadhaar database.

" This is so that a person cannot take five accounts in five banks and take advantage of this facility. Second thing is we have requested the government that the DBT should flow through such accounts. To that extent there will be credit coming into the account," said Arundhati Bhattacharya, speaking on the impact of the scheme on SBI. Bhattacharya was announcing the bank's first quarter results in Mumbai.

According to Bhattacharya in many of the experiments undertaken by SBI and other psu banks the rate of defaults in such accounts is very low. She said that while overdraft accounts were prevalent it was dependent on the credit history of the account. " Here too we have requested the government to let us ascertain the credit history of the account for a year or so, look at the transactions in the account and then determine the overdraft that we can give. The Rs 5,000 facility is the maximum that the government is talking about it is not the minimum. Anything between Rs 1000 to Rs 5000 can be given depending on what is the nature of activity in the account," she said.

According to the SBI chairman the government has already agreed to reduce the number of accounts per family from two to one. She said the financial inclusion accounts need not be a burden on the bank's balance sheet. "This will be done through business correspondents. We already have close to 50,000 business correspondents in the bank and last year's costing showed that in the BC channel we have turned profitable," she said.

Banks are also insisting that all these financial inclusion accounts should be the ones used for remitting government subsidies. " If we do it from DBT enabled accounts we will know that we have the right class of customers because these are the persons who are the excluded people and that is the reason why they are receving grants under the direct benefit transfer," said.

5683 - Five reasons why Modi govt’s grand plan to have 15 cr new bank accounts won’t work By Dinesh Unnikrishnan - FIRST BIZ

Five reasons why Modi govt’s grand plan to have 15 cr new bank accounts won’t work

By Dinesh Unnikrishnan 

The Modi-government has somewhat bought the idea of universal bank accounts, something first proposed by the Nachiket Mor panel in January, 2014. The plan will finally come up with a little bit of 'Modi'-fication. Instead of one full service bank account for every adult citizen by January 2016—the idea proposed by the Mor panel—the government plans to offer two bank account for every household within the next year.

This will probably be followed by a second phase, where the remaining citizens of the households will be covered over a period of next 2-3 years.The scheme will be announced on independence day as the flagship financial inclusion mission of the BJP government.

The government will execute the plan using the business correspondent (BC) network of state-run banks to reach out to the un-banked. According to a report in the Times of India, the Modi government plans to open 15 crore accounts with overdraft facility of Rs 5,000 in each account, which would mean that the state-run banks will end up issuing overdraft facility of around Rs 75,000 crore to fresh account holders with no credit history, apart from extending accident insurance of Rs1 lakh—a high risk to the banks.

There will be two key differences with the Aadhaar-linked universal bank account plan of Mor and the BJP-promoted financial inclusion plan. 

First, the latter will have more reliance on the data sourced from the National Population Register to fulfil KYC purposes, along with Aadhaar, instead of the Aadhaar-linked model proposed by Mor. 

Second, the burden of implementation will fully rest with public sector banks.

Why not Aadhaar? Beyond the obvious reluctance to embrace UPA’s flagship programme, there could be one other factor that concerns the BJP government—chances of illegal immigrants from Bangladesh getting the legal sanctity of a national registry by virtue of obtaining an Aadhaar number. Part of this exercise could be a possible examination of the information pool of those who have already enrolled under Aadhaar in certain geographies to see that the enrollment process is kosher.

Spreading financial inclusion—the process of spreading the banking services--in Asia’s third largest economy—is critically important to rescue the poor and economically weaker sections from the claws of informal financiers. There are no two ways about that.

Financial inclusion has progressed in a depressingly slow pace, despite 60-long years of independence, and several decades of existence of nationalised banks and progress of technology, especially mobile-based in the last decade.

This despite the RBI formally launching a three-year financial inclusion plan through state-run banks in 2010 and later following it up with another three year plan beginning 2013 through multiple channels such as BCs and issuance of no-frills or zero balance accounts.

Bank accounts are indeed the first step for someone in the hinterland to step into the world of formal finance. But merely pushing state-run banks to open banks accounts and extend overdraft to those who do not have a credit history could make financial inclusion a fear-generating word for executives at government-banks, and a form of obligation to appease bureaucrats and political bosses at the centre, regardless of whether the poor will actually end up using the account or not.

The approach adopted to achieve inclusion shouldn't be free distribution of bank accounts but a need-based one.

There are certain aspects that are relevant here:

First, just by opening free/ zero balance bank accounts, or no-frill accounts, no single citizen gets financially included in the system in its true sense. Often, such an exercise—imposing bank accounts to one with little money in hand no idea about what else could one do with a bank account—has backfired by leading to thousands of inoperative accounts. The reasons are obvious. Account holders didn’t have regular and assured income to put money in banks, nor did banks have the appetite to offer micro loans for these customers or accept tiny deposits.

As long as the poor remains poor and don't have savings, bank accounts opened for them as part of a financial inclusion programme will remain inoperative. It might be too early for them to embrace the world of commercial banking. The other way—wherein people with sufficient financial literacy and in need of a bank account to meet their savings and credit needs in line with their improving standard of life —would work better. Those bank accounts are unlikely to remain idle.

Second, absence of tailor-made financial products for the poor. There isn't an accurate estimate available for the actual size of informal finance market in India, but is at least Rs 30 trillion, as per some estimates. A majority of the poor and un-banked still resort to illegal chit funds and private money lenders to keep their hard earned money and avail of tiny loans, not necessarily because a nearest bank branch isn't available but because the bank often doesn't want to give him/her a Rs 5000 loan or accept a Rs 500 deposit.

Whether one has an account or not, a commercial bank typically doesn't do business with a customer unless they see a fairly large value transaction or a stream of potential cash flows.

Hence, a better proposition may be to increase awareness among the un-banked about the benefits of having a bank account, rather than forcing it on them merely for the sake of showcasing better numbers. This could be achieved using the expertise of financial intermediaries at the lower end of the pyramid--such as microlenders and self-help group/joint liability groups--who know much better than commercial banks about dealing with the poor.

Third, further relaxation of the KYC norms for small value accounts. The definition of small value accounts can be decided by the central bank. The RBI has already begun acting on this by making single address proof enough for opening bank accounts. There is scope to relax this further for small value accounts by letting them open a bank account based on their national identity number-Aadhaar or NPR.

This will encourage a lot more people not just to walk into a bank branch and open and account, but also to begin using the facility actively, thus serving its actual purpose.

Fourth, make maximum use of the microfinance companies to reach the poor and un-banked. The platform was set for this move when, in June, RBI allowed NBFCs to act as BCs. This has permitted even microlenders to do this job. NBFC-MFIs have years of experience in dealing with small value loans with rural customers. An arrangement can be designed where banks use such firms more effectively to reach out to the poor and offer financial services.

Fifth, there are no reasons why private and foreign banks are not asked to push financial inclusion in the same way as public sector banks do. Why it is always state-run banks that are used to bring about the greater cause of financial inclusion, something of national interest, and not the private sector banks? In the past three-four years, participation of private sector banks in lending to farmers and other economically weaker sections have lagged way behind state-run banks, despite private banks expanding presence in rural areas. This cannot be the case if inclusion needs to happen. Let's use our resources with prudence.

5233 - Piggybacking on Aadhaar, banks can reach financial inclusion target by May

Piggybacking on Aadhaar, banks can reach financial inclusion target by May

Arun S , Arup Roychoudhury | Updated: Feb 24 2014, 14:04 IST

SUMMARY

If a bank achieves 40% today on the basis of its current disbursement, it will achieve 50% adjusted PSL target.

The RBI panel report on financial inclusion has attracted criticism from bankers and financial sector experts for its “unrealistic” financial inclusion and priority sector lending (PSL) targets. Many have also questioned the viability of ‘payment banks’, a system designed to help banks achieve financial inclusion targets. In an interview to FE’s Arun S and Arup Roychoudhury, the RBI Central Board member and chair of the Committee on Comprehensive Financial Services for Small Businesses and Low-Income Households, Nachiket Mor defended the panel’s recommendations and said the targets are indeed achievable. Edited excerpts:

Are you confident that banks, which are now finding it tough to meet the PSL target of 40% of adjusted net bank credit (ANBC), can achieve the 'adjusted PSL target of 50%' that the report suggests?

The (PSL) target is still 40% of ANBC. The adjusted number is along with weightages. If a bank achieves 40% today on the basis of its current disbursement, it will achieve 50% adjusted PSL target. If we had kept it at 40% and added weights, it would have amounted to a sharp reduction in PSL requirement.

People are commenting on the issue somewhat casually. They need to look at the actual computation method mentioned in the report. At the end of the day, these percentages are a matter of debate. The core issue is does one think specialization is a good idea or not? In the report, sectors and districts are given weightages on the basis of the difficulties in lending to them. The more difficult ones get a higher weightage and the less difficult ones get a lower weightage. A bank will have to achieve an adjusted PSL value of 50% by following the weightages.

Those lending to a difficult sector in a difficult-to-reach district can benefit from a multiplier value based on the specific district and sector. That's the core idea. The RBI has to decide exactly what that weight should be. We have given some regional weights. Some banks say “I don’t disburse in those areas.” The reality is that we have done this calculation and it is in the report. If you disburse your loans today at 40%, you will get to 50 points. There is no increase in the target.

The report has set a target of January 1, 2016 for each Indian resident, aged above 18, to have an individual, full-service and safe electronic bank account. Do you seriously think this is achievable? If so, what is the rate at which banks have to open accounts to ensure that they reach this target?

If you follow the traditional methods of doing this, 2016 is too ambitious a target. In fact, you may need another 20 years. The idea hidden in the report is that you have to use other strategies to get to the target. In State Bank of India alone, in the last two or three years, they have opened 200 million accounts. I learnt about this recently from SBI chairperson Arundhati Bhattacharya. A single bank is opening such a large number of accounts using agents, and not using their branches.

The point we (the panel) are making is that you have to use new approaches to get to those targets. These include agents, PPIs (prepaid instrument issuer) or payment banks and post offices. These are people who are able to move at a different pace and have a different economic structure. If you piggyback on the Aadhaar process, opening a bank account can be done much faster. There are already one billion mobile connections. Tomorrow you (Aadhaar-holder) can get an SMS and you can have a billion bank accounts.

The point being made is, if you follow traditional approaches of opening up branches and identifying customers, even four years is not enough. It is okay to say shift the target from 2016 to 2018. But there is no logic to that number then. We put our recommendations on the basis of our thinking that the Aadhaar process will complete the enrollment, because if you are piggybacking on Aadhaar, then the process will get done by 2016 or even earlier. Aadhaar will cross 70 crore card-holders by May this year. That itself gives you nearly 100% coverage in terms of bank accounts.

There is criticism that the payment banks model is not viable given the proposed norms, including prohibition on them extending credit, even as they will be required to comply with all other RBI guidelines relevant for banks including the Cash Reserve Ratio. They have to also deposit the balance proceeds in approved Statutory Liquidity Ratio securities with a duration of no more than three months and won’t be permitted to assume any credit risks. They will also be restricted to holding a maximum balance of Rs 50,000 per customer. Do you think investors are convinced about the viability of payment banks given the stringent norms?

In fact, ‘payment banking’ is the only profitable part of banking. If you take it away, then banking is not a profitable business. So how can you simultaneously say that it is the most profitable part of banking but it is not viable? If you look at today's PPIs, including Airtel Money, they seem to be doing okay, even though they are not growing. Worldwide there are many institutions that are just doing payments, and that too very competitively. You have to think about what process you have to choose. But if you are going to set up branches and then follow the traditional model, you may not achieve the (financial inclusion) target. In that case, don't set up a payment bank. You have to use alternate mechanisms to get there. SBI uses the agents' route, instead of branches.

Will the final norms be diluted, considering the criticism?

The committee has made recommendations, but I don't know if the RBI will accept those.

When will the guidelines be out?

I can’t say. It could be tomorrow, or it could be 20 years from now. Sooner they come out with the guidelines, the better. Fundamentally, we have not suggested any new ideas in the report. All ideas, including PPIs, business correspondents and cooperative banks, are already on the ground. We have simply asked how we can clean them up, strengthen them and make them more effective.

5065 - Aadhaar-linked bank A/Cs for all by 2016: RBI panel

Aadhaar-linked bank A/Cs for all by 2016: RBI panel

ENS Economic Bureau : Mumbai, Wed Jan 08 2014, 01:49 hrs

A panel set up by the RBI to promote financial inclusion has proposed universal electronic bank accounts to all Indian citizens above the age of 18 by January 2016.

While laying down its vision statement for financial inclusion and deepening, the panel headed by Nachiket Mor, who is also a director on the central board of the RBI, said, "every resident should be issued a universal electronic bank account automatically at the time of receiving their Aadhaar number by a high quality, national, full-service bank."

An instruction to open the bank account should be initiated by the Unique Identification Authority of India after the issue of an Aadhaar number to an individual over the age of 18, it said.

The committee has recommended that the RBI should issue a circular indicating that no bank can refuse to open an account for a customer who has adequate KYC proof which specifically includes Aadhaar.

According to the panel, by January 1, 2016, each low-income household and small-business would have "convenient" access to providers that have the ability to offer them "suitable" investment and deposit products, and pay "reasonable" charges for their services. By 2016, the number and distribution of electronic payment access points would be such that every single resident would be within a 15-minute walking distance from such a point anywhere in the country.

It said each such point would allow residents to deposit and withdraw cash to and from their bank accounts and transfer balances from one bank account to another, in a secure environment, for both very small and very large amounts, and pay "reasonable" charges for all of these services. "At least one of the deposit products accessible to every resident through the payment access points would offer a positive real rate of return over the consumer price index," it said.

However, opposing loan waivers and interest subsidies, it said the permission to price farm loans below the base rate should be withdrawn.

Committee's recommendations

* Bank's can't turn down a customer if he has KYC including Aadhaar. No documentary proof of current address to be required.

* SLR should be eliminated

* Cap on all inclusive interest rates (base rate plus 8%) charged by originating entity from borrowers should be removed

* Banks should freely price farm loans based on their risk model and the subventions and waivers by the government should be directly transferred

* Mandatory reporting to credit bureaus by all banks for loans (individual and SME)

* Banks must be required to disclose their concentration to each segment in their financial statements.

* Banks should be permitted to purchase portfolio level protection (including derivatives) against all forms of price risks

* Risk-based approach to be followed for qualification for NPA and for defining sub-standard account.

2542 - Shubhashis Gangopadhyay: The real meaning of inclusion - Business Standard

Shubhashis Gangopadhyay: The real meaning of inclusion

It's a word that everyone uses, even though its definition is fuzzy
 Shubhashis Gangopadhyay / Apr 28, 2012, 00:01 IST


It is always great to talk to teenagers. The other day I was speaking to two of them who are in their first year of college — articulate, ambitious and not afraid to ask difficult questions. The first thing one notices among this age group is that they know how to push a discussion forward. They never stop you when you are yet to complete what you have started saying and, most importantly, they think about what you have said before they speak. In particular, and this may be because they are just about starting to find their feet as adult Indians, they seldom assume that you must be wrong if they do not understand what you have said.

Our discussion was about inclusion in education. And they started with the following question. There are millions of students finishing school who sit for the Indian Institute of Technology exams, but only a few thousands get in since there are only that many seats in these institutions. These are expected to be the very best, and people know it. The fact that a very small proportion of those who try actually get admitted makes IIT-ians end up being a small and exclusive group. Would inclusion mean that more IITs are created, more seats are generated, and a greater number of students get into these institutions? And, if that happens, and the IIT entrance tests are truly discerning, more seats would mean that we will have to go down the talent ladder, and students with lesser and lesser ability will become IIT-ians. This will dilute the average quality of an IIT-ian, reduce their average pay and, hence, the rush to enter an IIT. They did not stop there but went on to say that, indeed, can this not be said for all levels of education?

Obviously, I was immediately tempted to say that everyone entering an IIT is not “inclusion”. But, before I said that, I started thinking how to define “inclusion”. If inclusion is a concept worth striving for, it is worth defining it in the first place.

To ensure that it is indeed a worthwhile thing to achieve, we must be able to distinguish between what is inclusion and what is not. If everything we want to do is “inclusion”, it is a trivial concept; if we cannot figure out what it is we must do, it is a vacuous concept.

Given that all our leaders and all multi-lateral aid agencies and everyone who wants to make a statement are talking about inclusion, it is a great idea to try and understand what it is and what it is not.

In India, financial inclusion is a common term. We have operationalised it into that of opening a bank account for every adult. Unfortunately, when some of us went to some villages to help the villagers open bank accounts, they were totally unexcited about it. We explained the advantages of opening the account – saving their extra cash and withdrawing from it whenever they wanted to – but they were not impressed. At first we thought it was a lack of “financial literacy”, another buzzword doing the rounds in academic, civil society and policy circles. It was only later that we realised the reason was much simpler. Going to the bank for any purpose was difficult, if not impossible, for these villagers. The bank was a frightful place, and they were treated with disdain by its officers. At least, that was their perception. They were more at ease doing other things with their money than saving it in bank accounts. Oh! They would love to have access to something like bank accounts — but not in the institutions we wanted them to open in. The bank to them was exclusively for others, people who were not like them.
So, if having bank accounts is not financial inclusion, what is? We are back to the original question: what is inclusion? Let us try another oft-repeated objective: inclusive growth. Many suggest that our post-reform experience is not one of inclusive growth. I am yet to understand what exactly this means. Does it mean that everyone’s earnings must increase at the same rate? Or, these rates could be different as long as they are all positive? Should the poor first become non-poor and then others can grow?

The students’ question brought back all these confusions that I have long had and tried to cover up so that I was not excluded from the group of people who knew what inclusion is and, hence, talked about it a lot. I did not want the teenaged students to include me in their group — those who do not know what inclusion in education meant.

So, I racked my brains and came up with the following answer. Inclusive education does not mean that everyone must enter, or pass out from, an IIT. It only means that if you wanted to, you could have a shot at it. The child labourer is excluded because she can never dream of entering an IIT; she may absolutely hate IIT, but not trying to join an IIT should be her decision. Even if there is only one IIT train, every child must have access to the platform where the train comes. Of course, not everyone will get on to the train but everyone knows what to do to have a shot at the train. This is called inclusion in education. Everyone must go to school till class 12; those who work hard, and are willing to work harder still, will join an IIT. Others will, by choice, decide not to work that hard and become economists.

2398 - From kisan credit cards to Aadhaar: Pioneer India being watched closely - Economic Times

24 FEB, 2012, 04.02AM IST,

With Niraj Verma, Senior Financial Sector Specialist, World Bank 

Ensuring that the poor are able to save, smooth consumption, mitigate risks, invest, and build assets is critical to broad-based and equitable development. In the past decade, policymakers broadened their approach to financial inclusion from an almost exclusive reliance on expanding bank branches to innovating and taking advantage of new technology. The business correspondent model allows agents to operate on behalf of banks; as a result over 130,000 rural banking points are now available, compared to 2,000 in 1970. 

Over 20 million kisan credit cards have been issued and index-based crop insurance has been scaled up in recent years. India is unique in having nearly five million self-help groups with loans from banks. And despite having recently run into significant problems, microfinance institutions have helped expand access. The biometric-based Aadhaar initiative of the Unique Identification Authority of India can bridge information gaps and facilitate financial inclusion. 

The RBI and the government have recently committed to increasing financial access to 350,000 villages by 2013, covering a significant part of the 100 million households currently lacking adequate access. However, as RBI and the government are aware, scaling up viably and with quality is not easy. We highlight a few of the challenges. 

Leveraging existing distribution networks: For "last mile" reach, banks have embarked on an effort to increase banking correspondents. But low transaction volumes are making viability difficult. Could scaling up tie-ups between banks and post offices and co-operatives, and allowing MFIs structured as non-bank finance companies to act as banking correspondents, help optimise capacity utilisation and lower transaction costs? Likely. However, the government's facilitation may be needed for such integration to take place. It is also possible that covering some villages with very small population may never be viable, and would require explicit or implicit subsidies. 

Expanding market infrastructure: Credit bureaus have recently expanded coverage of informal sector MFI clients and generate over 500,000 monthly credit reports assessing client indebtedness prior to new lending. Policymakers could facilitate getting rural banks and SHGs to also share information on their borrowers with credit bureaus. Better customer protection is also essential, particularly as delivery channels other than banks expand coverage. 

Expanding products: Recent efforts have helped create 90 million no-frills accounts, a creditable achievement as savings help manage risks, investments and cash flows. However, transaction volumes have been low. The experience with South Africa's mzansi (no-frills) accounts shows that linking up with brands that clients recognise and allowing the use of multiple outlets helps increase transactions. 

Enabling a better microfinance sector: SHGs and MFIs account for more small-borrower accounts than the entire banking system. Once enacted, the draft microfinance law will bring regulatory clarity and promote customer protection. 'Patient' capital can be mobilised by domestic development banks to help sustainable MFIs scale up. 

For SHGs, ensuring quality of lending as scale grows is essential for their long-term sustainability. Also, banks typically price SHG loans at thin spreads over cost, leading to the plateau in disbursements. Pricing that reflect margins better could spur greater lending. India's progress in its financial inclusion efforts, given the numbers and innovation involved, are of great significance. The world is watching.

2008 - MNIC Vs UID - M.Moni - Inclusion

It is better to complete either MNIC or UID without biometric inputs for 1.2 Billion people and as and when the technology matures and gains confidence of the citizens, get the biometric inputs collected and add to the MNIC database or UID database. The 24-questions put to Nandan Nilekani, Chairman, UIDAI, and his answers in the last issue of INCLUSION is what makes me write these observations in my personal capacity. Nilekani says “In India, the purpose of the UID project is very simple; it is to give every Indian resident a unique number, preventing the kind of duplication that currently exists. The complexity of the issue is in making sure that everybody in a population of 1.2 billion gets a unique number, and therein lies the challenge of scale and technology.” The categorical statement as per the UIDAI website notes: “Aadhaar is a 12-digit unique number which the Unique Identification Authority of India (UIDAI) will issue for all residents. The number will be stored in a centralised database and linked to the basic demographics and biometric information—photograph, ten fingerprints and iris—of each individual.” He also mentions that “the UID project is a complex technological project. It is unprecedented in scale, and a huge amount of energy and time has been spent in creating an open technology platform, which is adaptable to changes as technology develops.” I agree with Sir James Crosby’s Case on UID (in Britain) that “the Government should avoid picking a technology and building a strategy to match.” This impression is gaining strength day by day. Understanding requirement of establishing unique identity for Indians, the Government of India introduced, in 1993, photo identity cards for citizens who were eligible to vote,   in 2009, a 12-digit Unique Identification Number (UID) for all residents. The National Population Register, which will give MNIC, is covered under the Citizenship Act 1955. Both MNIC and UID have got biometric inputs. There are strong ‘Say-no-to-Aadhaar’ as well as ‘Say-no-to-MNIC’ voices. The Ministry of Home Affairs (MHA) has questioned the reliability of data being collected by UIDAI and this data is likely to be rejected by the NPR. Verification of identity by the UIDAI will be charged at 10 per query. I strongly feel that as the UIDAI has been established with the tax payers’ money, this verification charge should be waived so as to strengthen both national security and social security. The Internal security, after all, is the most important service required in the country. Union Minister for Planning, Ashwini Kumar says that “the review (of Aadhaar) by Planning Commission is extremely important and necessary as the initiative is based on usage of ICT platform.” Ironically in India, legal systems are ICT-enabled whereas the lCT Systems are not legally enabled. After reading various related articles, I gain the impression that it has become a clash of interests between MNIC and UID. To facilitate “inclusion” and march towards “more inclusive growth” during the 12th Plan period, it is better to complete either MNIC or UID without biometric inputs for 1.2 Billion people and as and when the technology matures and gains confidence of the citizens, get the biometric inputs collected and add to the MNIC database or UID database. Let us not spend too much of tax payers’ money on this sub-component, i.e. bio-metric. Given our 15,000 km of international border and 5,500 km of coastal intelligence agencies find it difficult to keep a check on infiltrators, because illegal immigrants acquire proof of identity and address from intermediaries and mingle with common Indians. There is a need for a national policy on “identity access and management (IAM)” for the National e-Governance Programme (NeGP) in India. Report of a National Task Force, set up under the chairmanship of Professor Syed Ismail Ahson, Department of Computer Science, Jamia Milia Islamia, can take care of “privacy and security” issues. This report is available at http://egovstandards.gov.in. I wish UIDAI spells out at the earliest that it is not concerned with how its data will be used. This will help it to provide Aadhaar to all Indian Citizens in time before the 2014 general election. I also wish that the Election Commission of India as well as the State Election Commissions make MNIC mandatory for voting as the MNIC has UID as its AADHAAR. M Moni is Deputy Director General with National Informatics Centre (NIC) Feedback | N K Singh, Rajya Sabha MP “Fostering a meaningful discussion outside Government on implementation of the UID would be beneficial. It is a project which has wider policy implications beyond the mere completion of the UID project itself. A number of NGOs have already raised important concerns. The UID bill is pending Parliamentary enactment. This is a good time for Think Tank organisations like Skoch Foundation to trigger a meaningful debate with a mix of NGOs, experts with domain knowledge, and others who are likely beneficiaries/implementers” –  N K Singh, Rajya Sabha MP

1607 - Issues in Financial Inclusion - Identity Project

Submitted by S. Ananth on Thu, 09/15/2011 - 14:57

There is a large latent demand for credit in most parts of India. Building an elaborate credit delivery network/mechanism has been the focus of policy interventions since Independence. The problem of credit availability and credit delivery has been a topic of debate over the past few decades. Due credit needs to be given to the RBI for their long standing attempts to sensitise other financial sector participants, especially banks to their concerns. However measures aimed at improving the credit access by various sections have achieved only a limited success. This limited success has been due a number of reasons foremost among which is the complexity of country and the nature of its economy.

A perceptive RBI report in 2005, Report of the Internal Group to Examine Issues Relating to Rural Credit and Microfinance, pointed out the demand side as well as the supply side perspectives and the causes for the constraints in the rural supply of credit. The supply side perspectives include:

(a) the perception of ‘unbankability’ of borrowers, 

(b) small average size of the loan, 

(c) problems of distance in servicing customers of banks, 

(d) high transaction costs particularly when dealing with innumerable small accounts, 

(e) lack of collateral security, 

(f) problems related to evaluation and monitoring of cash flows cycles and repayment capacities due to information asymmetry, lack of data base and absence of credit profile of borrowers, 

(g) constraints in availability of qualified human resources, (h) lack of banking habits and credit culture, 

(j) information-shadow areas and, 

(k) inadequacy of extension services crucial to improve the production efficiency of farmers leading to better loan repayments (p.6). 

The demand side causes for exclusion included 

(a) high transaction costs at the client side, 

(b) documentation, 

(c) lack of awareness, 

(d) lack of social capital, 

(e) non-availability of ideal products, 

(f) low volumes 

(g) hassles related to documentation and procedures in the formal system, 

(h) easy availability of timely and doorstep services from moneylenders/informal sources and 

(i) prior experience of rejection/indifference of the formal banking system (p.7)1 .

Financial Inclusion

There are a number of definitions for financial inclusion. We lay primacy on the most commonly accepted definition is the one by Rangarajan Committtee or Report of the Committee on Financial Inclusion (2008), and the one provided by Usha Thorat. Rangarajan Committee defines financial inclusion as: “the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost” (p.1)2 while Usha Thorat rightly points out that, financial inclusion is more than micro finance or access to payment systems and there are several dimensions to this including facilitating real sector parameters3 . The UNDP suggests that “inclusion” has to go beyond financial inclusion and should encompass livelihoods, economic and social inclusion. The Centre for Financial Inclusion (Accion International) defines it as a “state in which all people who can use them have access to a full suite of quality financial services, provided at affordable prices, in a convenient manner, and with dignity for the clients. Financial services are delivered by a range of providers, most of them private, and reach everyone who can use them, including disabled, poor, rural, and other excluded populations”4 .

Financial Inclusion is not merely the expansion of micro-credit. Micro-credit is but one component, albeit the largest component in India. Unfortunately, for a number of years, micro-credit has often been the most important pivot around which financial inclusion strategies have been conceived. This has however has begun to change, albeit belatedly. Various issues and challenges (the ground realties) that need to be surmounted if the policy of financial inclusion is to have the desired effects. An attempt has been made to highlight some of the issues that hinder the development of a more inclusive financial system.

In recent years, policy makers are struggling to expand financial inclusion in the country. The President of India, Pratibha Patil, recently pointed out, that only about 45 per cent of Indian population had access to bank accounts, and there was a low ratio of one bank branch for 16,000 people and that “banking coverage of the large population living in six lakh villages in the country was particularly low” while calling for a holistic approach to meet the financial needs of target consumers5 . The need for financial inclusion should be looked at in the context of reported observations by the Deputy Chairman of the Planning Commission, Montek Singh Ahluwalia, that inclusion will be an important part of the Twelfth Five Year Plan6 .

The most recent initiative of the Government of India to expand financial inclusion is Swabhiman. Under the programme, the government has set a target of providing banking facilities in habitations with a population of more than 2000 (as per 2001 census) by March 2012. The banking correspondent model will be used by the banks. This necessitates the banks to cover an additional 73,000 unbanked villages. This does not mean that the banks will provide full fledged banking services, but would instead five major products, which are deemed essential. These products include: savings, micro-credit, remittances micro-pension and micro-insurance. Due credit needs to be given to the government attempts to cajole the banks, especially the public sector banks (herein referred to as PSBs), to expand their inclusionary policies. The PSB were reached more villages than targeted in the financial year 2010-11. It has been pointed out that the PSBs targeted 23,629 under the government’s ambitious financial inclusion plan and reached 26,630 villages7 . It needs to be seen if over the next few years, they expand the bouquet of services they provide to these villages, or if their measures are only due to government directives.

Issues in Expanding Financial Inclusion

The nuances of implementing financial inclusion are more complex with different dynamics seemingly at work. Convincing formal institutions, especially in the banking sector is more difficult. It is pertinent to note that without the participation of the banking sector, financial inclusion may be difficult to achieve. The importance and role of the banks should be seen in the context of the overwhelming capital deficiency in a country like India.

Despite years of growth in the formal banking sector, they have not been able to expand their service or product portfolios. Any field study indicates that there is a clear urge to borrow from the banks on the part of the borrowers and a fond hope that at least in future the banks will lend to the poorer sections. This is not to claim that only the poor access non-formal sources of credit. It is common for Small and Medium Enterprises survive mostly on accessing non-formal sources of credit.

Any attempt at expanding financial inclusion will have to acknowledge that there important factors that inhibit the development of a more inclusive financial system is possible only with the active participation of the banking system. However, since the reforms of 1991, the banking system is oriented to the stock markets with their emphasis on short-term profits. This often forces the banks to look at various opportunities through a short-term cost-benefit analysis. Such practices have over the past two decades been detrimental to the health of the banking sector and importantly will serve as a major obstacle to the growth of a more inclusive financial system.

Four important factors that the banks will have to deal with include:

(1) The viability gap that arises due to the fact that the cost of servicing the cost of providing these services (or ‘social’ or ‘holding costs’) involves. In an era when the banking sector is concerned as much as profitability and growth, it is unlikely that the banks will be willing to go make a substantial departure from their current practices, without an implicit or explicit subsidy from the government.

(2) Recovery, especially in the rural areas will be an issue and unless the institutional framework is more efficient, it may not be an attractive business proposition. The social dynamics of a village compound the risks for a large institution such as a bank.

(3) Financial inclusion for the banks is a miniscule part of the portfolio in the present juncture and compared to their growth rates possible in other sectors. Therefore, this segment (financial inclusion) is unlikely to be a focus area in the near future. Credit to the excluded sectors or even deposits mobilised from the poor invariably consists of only a small part of the overall portfolio of the banks. This is unlikely to change in the near future. Hence, for the banks, which have an obsession for growth, it is difficult to make a substantial shift from current policy that would accommodate financially inclusive policies beyond a point. Banks like most of the formal institutions are not willing to spend inordinate amounts of time and resources in order to create a market. Historically, the large formal financial institutions have found it more convenient to move into a market that has been assiduously built and nurtured by either the smaller companies or by informal players.

(4) Banks (at least till now) view financial inclusion through the prism of existing business opportunities and often in comparison to other business segments. Banks need to view FI as being akin to creating and nurturing a new market segment rather than as one that readily exists. FI is invariably a long-drawn out process requiring large scale investments over the years to bear fruit to the banking sector in terms of profitability.

The above obstacles to financial inclusion may mean that the banks will be looking to the government to subsidise their activities in the sphere of financial inclusion. This subsidy is often expected to be in the form of costs that need to be incurred, especially those related to the technology infrastructure.

FI requires banks to customise their products and services in order to suit the requirements of the poor. As Usha Thorat succinctly points out “financial inclusion should be led by understanding the needs of the customer rather than achieving targets. In rural areas banks should reach out rather than expect playing a numbers game. A well planned strategy should focus on customising products for transactions, remittances, savings, loans and insurance. Improving financial literacy and credit counselling in fact should precede delivery of financial products. In fact a localized approach would require banks to rethink their policy on having uniform products for the entire country ....”8

Interestingly, the unwillingness of the banks to expand their financial inclusion portfolio has provided a business opportunity that has been quickly filled by the microfinance companies. The MFIs provide ‘filler loans’ (as a senior banker called it) with few questions about the end-use of funds invariably helped them. In contrast, the banking sector operates, rightly, with more stringent conditions. The existence of a clearly discernible formal structure, in the MF organisation helped the banks to lend it is convenient (business proposition wise) to deal with a few companies rather than millions of customers dispersed in remote areas. Unless these complex issues are solved, a paradigm shift in financial inclusion may remain elusive.

It is in the above context that one needs to approach the financial inclusion and the role of Aadhaar. Financial Inclusion requires large investments in the form of the need to establish a wide network of agents/branches in order to serve a large number of small volume transactions. The costs for the financial service providers include the cost of opening the accounts (KYC norms, etc), infrastructure costs, staffing costs and importantly, the cost of funds. Aadhaar has the benefit of reducing the costs related to KYC norms as the RBI has now accepted the Aadhaar number as the equivalent of KYC. This eliminates the need for banks to undertake the need for verification in order to meet the KYC obligations. Aadhaar has the additional advantage of portability in case customers move to different places, apart from being the number to which they can flag various transactions.
 

1 http://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/65111.pdf (Website last visited 20 June 2011).
2 http://www.nabard.org/pdf/report_financial/Full%20Report.pdf
3 “Micro Finance to Financial Inclusion and Responsible Finance-A Paradigm Shift”, Speech Delivered at Financial Inclusion Policymakers Forum, Malaysia (http://www.bnm.gov.my/index.php?ch=263&pg=848&ac=878 – Website Accessed on 18 May 2011).
4 http://www.centerforfinancialinclusion.org/Document.Doc?id=778
5 “Inclusive Economy needs strong banking sector: Pratibha Patil”, The Hindu, 24 December 2010, p.19.
6 http://www.inclusion.in/index.php?option=com_content&view=article&id=536...
7 “Public Sector Banks reach out to more villages in 2010-11”, Businessline, Hyderabad Edition, 21 May 2011, p.6
8 http://www.bis.org/review/r061107e.pdf