A swipe in time
India can save $100 billion over the next five years - and pare poverty, as Brazil did, by depositing subsidies in bank accounts. The UPA's political agenda depends on something that's never been done before. KumKum Dasgupta writes.delhi Updated: Jun 27, 2012 15:50 IST
Darshana Rai, 65, seethed with anger as she stood at the tail end of a long queue outside a community centre in Rohtak, a dusty town 75km west of Delhi. "With every new government comes a new scheme. What a waste of time!" fumed Rai, a housewife.
Inside the community centre, a large hall with cream-yellow walls and Mediterranean blue windows, four data-entry operators subcontracted by the state-owned Punjab National Bank (PNB), were enrolling account holders for Haryana's new electronic scheme to route social-sector benefits like old-age and widow pensions.
Rai has every reason to be sceptical.
The money due to her, part of India's vast, leaky social-security funding network, is presently routed so inefficiently via village heads, sarpanchs, that it threatens to throw national finances, and the UPA government's political agenda of inclusive growth, off track.
Over the next five years, the Centre will spend $250 billion (R11.5 trillion) on subsidies, including old-age pensions, healthcare and the national jobs-for-work programme. Of this, at least 40% ($100 billion) will be siphoned off, mostly by "ghosts" (fake or undeserving recipients), estimates brokerage CLSA Asia-Pacific Markets.
That's enough to bankroll India's largest handout - the food subsidy of R55,000 crore ($12.4 billion) - more than seven times over.
With the government increasingly veering around to the view that direct cash payments into the bank accounts of beneficiaries is the answer, bypassing official middlemen (like the sarpanchs), the project in Rohtak is a harbinger of what might be.
The problem, presently, is that only 40% of India's 1.2 billion people have bank accounts. Of India's 600,000 villages, only 30,000 have bank branches. Contrast that with Britain, where 95% of its people have bank accounts.
The government can save R1 trillion a year - enough to reduce its fiscal deficit by more than 20% or fund the forthcoming Food Security Act - by channeling cash via bank accounts, says a study from consulting firm McKinsey and Co.
But banks can't be everywhere. So, the operators in Rohtak work not for the bank but for Seed Infrastructure and Solutions (P) Ltd, a banking correspondent (BC), a bank-appointed company that provides financial services in unbanked areas. Last month, the Reserve Bank of India (RBI) allowed for-profit companies and individuals - retired bank employees, ex-servicemen, public call office operators - to become BCs with banks.
The BCs extend these services by tapping into India's infotech prowess, using hand-held electronic swipe devices called point of service (POS) machines or mobile phones.
Armed with laptops, biometric registration machines and webcams, the Rohtak operators worked feverishly. After 30 minutes, it was Rai's turn to be enrolled. She gave one of the operators the information they sought, called in banking parlance KYC, know your customer, details: name, father's/husband's name, address, annual income and a copy of her election identity card. After keying in the information, the operator took Rai's biometric details (two thumbprints) and a photo. Rai, who never had a bank account, will soon get a no-frills, zero-balance account into which her R700-a-month government old-age pension will be deposited.
By 2012, the RBI wants such no-frills banking outlets or BC networks in 75,000 villages. On offer will be savings, credit and remittance facilities.
Can India do a Brazil?
Ensuring that every rupee reaches the person it is meant for, as Brazil's popular cash-transfer scheme Bolsa Famila Programme (BFP) shows, can strengthen India's fight against poverty. BFP transfers cash via banks to poor Brazilian families on the condition that their children attend school and are vaccinated.
According to a World Bank study, BFP, which reaches 12.7 million families, helped lift 20 million people out of poverty between 2003 and 2009.
In that time, poverty - based on a purchasing power parity of less than $2 a day - fell from 22% of Brazil's population to 7%. The income of Brazil's poor grew seven times faster than that of the rich, and three times the national average. Inequality in the country is now at a 30-year low.
Brazil has 12.71 bank branches per 1,000 adults; India has 10.11.
"The building blocks and policy framework (for financial inclusion) are in place," said Usha Thorat, who retired as RBI deputy governor in November. "Today, it is possible to have a viable business model for providing affordable financial services."
"For the banks, more customers mean more income from disbursing cash transfers," said Anirban Roy, managing director, Seed. His company has opened at least 1.5 million accounts in 17 states for different banks. On Monday, RBI governor D Subbarao urged commercial banks to see financial inclusion as an "opportunity rather than an obligation" and use technology to achieve their targets.
"What is required now," said Thorat, who in her 38 years at the apex bank also handled the financial-inclusion portfolio, "is scaling up, for which banks need to take strategic steps and make concerted efforts." To scale up quickly and efficiently, banks are using BCs like Seed to reach unbanked areas and people like Rai with the help of technology.
A few meters from Rai at the community centre was Karan Singh, a frail 75-year-old unhappy with the government-pension scheme and unconvinced by the new efforts. "Dead people still get pension. I am alive but I don't get it regularly," he said. "Last month, I was in the hospital and the sarpanch returned the pension to the department. Now I don't know how to recover it."
Once he gets a bank account, Singh's pension will never be sent back to the government; it will remain in his savings account and earn interest. By electronic transfers to the biometric-backed accounts, the government can weed out the ghost pensioners.
The icing on the cake: once included in the banking system, Rai and Singh will not have to go to a faraway branch to withdraw their pensions.
On a designated day, a Seed employee will go to their village with a swipe machine, match their biometric details and hand over the pensions. The account holders will be given transaction slips in Hindi and an interactive voice response system will inform them of the transaction details.
In future, Rai, Singh and others like them would also have access to loans, insurance, money transfer and overdraft facilities via the banking channels.
Despite these obvious advantages, enrolling new account holders is difficult. "The village heads often create hassles because they see the government-bank-people link a threat to their power," explained Saurav Kanti Dev, senior manager, Seed.
Seed also runs one-room kiosks for PNB in bigger villages, through which account holders can withdraw or deposit up to R5,000 per transaction per day via a swipe machine.
THE UIDAI BACKUP
Some bankers say financial inclusion may not be cost-effective in the long-run. "The Centre must subsidise some portion of the costs to make it viable," said Gobinda Banerjee, general manager, PNB. There are teething problems too: Lack of trained manpower and an insufficient number of POS machines.
The next big push to the programme, some say, will come from the Nandan Nilekani-led Unique Identification (UID) programme, Aadhar, a national project to give every Indian resident an exclusive digital identity.
Ashok Pal Singh, deputy director general, Unique Identification Authority of India, explained how Aadhar could push the financial-inclusion programme.
"While enrolling for an UID, citizens can indicate that they need an account. In Temli (Maharashtra), where the UID project was launched, 1,500 people were enrolled. Nearly 97% of them wanted one (a bank account). None had an account, though there is a bank half a kilometre from Temli," Singh said.
Individual data gathered by Aadhar will be enough to meet the KYC requirements of banks, said Singh.
"The UID will be a powerful instrumentality for helping poor people establish their identity to meet bank's KYC norms," Subbarao said last month.
Some banks, however, are not convinced. They want more stringent background checks of new account holders when enrolled to prevent fraud. Singh said there would be no trade-off between security and inclusion in a UID-tagged account because the Authority's encryption technology is of the "highest quality available".
To allow transaction in real-time and increase the BC coverage, Aadhar has proposed microATMs (micro automated teller machines). A BC can use a microATM to connect to the bank, authenticate customers and perform transactions - either via mobile phones or the Internet. But it cannot store or dispense cash.
Wiring rural India so this can all happen is the responsibility of the R20,000-crore public information infrastructure project - to link every gram panchayat to broadband in three years - headed by Sam Pitroda, adviser to the PM on public information infrastructure.
"Once this ecosystem (microATMs, Internet and mobile connectivity) develops," Nilekani said, "a migrant worker in Delhi will be able to send cash to his hometown, effortlessly and without wasting money on intermediaries."