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Resource centre on India's rural distress
 
 

Micro ATMs Planned for Transfer of Cash to Poor -M Rajshekhar & Dheeraj Tiwari
-The Economic Times

The government is likely to shoot down the department of financial services’ (DFS) plan to appoint common banking correspondent companies for transferring cash to poor people, and replace it with a countrywide network of ‘micro ATMs’, as it seeks to finalise the last-mile payment architecture for cash transfers.
 
In a meeting on Monday evening, Rural Development Minister Jairam Ramesh, UIDAI Chairman Nandan Nilekani, and Planning Commission officials met Finance Minister P Chidambaram to share their reservations about the common banking correspondent model. An official who attended the meeting told ET that it was agreed in-principle to junk this model, but a final decision will be taken by the finance minister.
 
In an SMS to ET, Ramesh confirmed the move. “The DFS model is now history. Women SHG, Ashas, anganwadi workers, post offices, teachers, kirana stores, fertiliser shops etc can now be banking correspondents,” he said.

Banking correspondents are individuals who work as banks agents in areas that don’t have branches. A banking correspondent company manages these agents. The UPA government has made cash transfers an important plank for its 2014 election campaign as it plans to make a wide range of payments from pensions to scholarships to kerosene subsidy directly to the bank accounts of beneficiaries, eliminating leakages and avenues for corruption. It is estimated that once the system is fully rolled out from mid-2014, cash transfers to the tune of Rs. 3,00,000 crore will happen annually. Doing Away with Monopoly Financial inclusion experts say the success of this strategy will largely hinge on the ease and efficiency with which the targetted beneficiaries receive their entitlements. Says MS Sriram, visiting faculty at IIM-Bangalore's Centre for Public Policy, “For this model to work, cash logistics is key. Welfare payments will come in peaks and the village agent may not always have enough cash with him. Just as there can be a run on a bank, there can be a run on the village micro ATM as well.”

While DFS, which falls within the finance ministry, has been promoting the common banking correspondent company model, a committee on micro-payments headed by Nilekani has proposed that handheld machines be given to individual banking correspondents. These handheld machines will be connected to all public sector banks and will allow the targetted beneficiaries to access their accounts from anywhere.
 
In a presentation made at Monday’s meeting, Nilekani said with each micro ATM or handheld machine costing about Rs 15,000, the cost of a 10-million-terminal network will work out to about Rs 1,500 crore. Add to that a margin of 3.14%, as recommended by his committee on micropayments, and the total cost of effecting cash transfers of around Rs 3,00,000 crore will work out to Rs 5,332 crore.

The critical difference between the DFS model and the micro-ATM approach is that under the first model, the country was divided into 20 clusters, and there was going to be a common banking correspondent company servicing customers of all state-ownedbanksin eachcluster.But bankers and ruralfinance professionals expressed apprehension that the banking correspondent company could become an all-powerful intermediary.

These fears were further amplified by the low bids put in by companies for securing contracts. While the banking correspondent industry had said it would need to earn more than the existing 2% margin to be viable, bids were placed as low as between 0.86% and 0.03%. These concerns came to head when Seashore, a Bhubaneswar-based business group under investigation for cheating depositors of Rs 300-400 crore and whose 25 bank accounts lie frozen, emerged as the lowest bidder to be the intermediary between banks andthe poor in Odisha after bidding an incredible minus 0.06%.