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Resource centre on India's rural distress
 
 

Need regulation to make sure that financial inclusion becomes cost-effective by Ashok Khemka

One of the key factors to inclusive growth is financial inclusion for all. Financial inclusion refers to universal access to a wide range of banking solutions and financial services in a fair, predictable and transparent manner at affordable costs. The poor tend to be ignored because the transaction costs in serving them are high. Initiatives that reduce these costs will allow service providers to begin thinking of financial services for the poor as a business opportunity. 

Policy can make financial services for the poor attractive and increase competition among banks to serve them. To reduce transaction costs, public policies must facilitate the use of technology and the creation of low-cost organisations. The mode commonly adopted for the transfer of benefits under central or state schemes is the business correspondent (BC) model of branchless banking using biometrics-authenticated smart cards to access and operate accounts on hand-held micro-ATM devices that use mobile phone connectivity. 

In Haryana, welfare benefits amounting to .`130 crore are paid every month to 21 lakh registered beneficiaries, comprising senior citizens, widows, destitutes and the disabled. More than two million bank accounts comprising this most vulnerable 9% population of the state have been created in the department of social justice and empowerment. The success of the program depends on the timely disbursal of the benefits without leakages. To catalyse quicker implementation, the state started electronically crediting financial benefits under various social security schemes directly into the two million bank accounts under the BC model of branchless banking, popularly known as the Electronic Benefits Transfer (EBT) scheme. 

The EBTs go directly into bank accounts ensuring benefits reach the intended targets without time lag, minimising the chances of misappropriation. The EBT scheme is presently operational in 20 out of the 21 districts in the state in which a total of 1.9 million accounts are in active use. The state government intends to establish an EBT cell as basic state financial infrastructure and use this to remit all welfare payments directly into bank accounts to make payments more efficient. Beneficiaries will also be able to transact from their bank account at the customer service point (CSP) established for the village. Due to the absence of regulatory guidelines from either the Reserve Bank of India or the finance ministry regulating the standards of service of the BC, one CSP was to be established for every 700 account holders. 

In case the coverage area of the CSP consists of more than one village, the schedule of visits of the BC agent would be earmarked day-wise for each village in the coverage area. However, the infrastructure established by the banks to service them was grossly inadequate. The banks are able to carry out only three lakh transactions a month, amounting to one transaction a month for every seven active accounts. Due to this default by the monopolist BC appointed by the banks, the state government was forced to lay down guidelines mandating minimum quality of service at one terminal-day for every 50 accounts in a month. 

With this minimal standard, the account holder cannot undertake more than one transaction in a month and will not be able to operate his bank account like other account holders. He will be able to carry out at most one withdrawal of his welfare benefits remitted to his bank account. Financial inclusion is, thus, limited to channelling welfare benefits through bank accounts at high cost to the state. While the cost of distribution through normal channels of panchayati raj institutions are hardly 0.15%, channelling benefits through bank accounts cost the state nearly 15 times at 2.206%. The BC model will remain unviable as long as both customer and state government find that it is more costly to go through it than established panchayati models. 

The real challenge in financial inclusion covering normal banking, which include all types of deposits, transfers and payments, pension and insurance services to unbanked citizens is to afford him real choice to choose the BC as well as the bank. There must be real competition among the banks and their correspondents for every citizen's account. The citizen should be able to choose the BC through whom he would like to avail of banking and other financial services, including remittance. 

For this to materialise, it is important that the micro-ATM devices be interoperable through a common gateway of the National Payment Corporation of India. Greater confidence will also have to be instilled among the citizens that the BC is, indeed, the agent of the bank. It is also important that the biometrics captured are reliable and the beneficiary has a single bank account and is not required to open new accounts for separate welfare schemes. The financial inclusion of the unbanked is to be seen as a societal opportunity and not as a charity left to the mercy of the individual banks without regulatory mandate. 

Some banks actually seem to have modelled financial inclusion as a separate profit centre, depending upon the commissions received from various state governments. The commissions accruing to banks on account of service charges for remitting welfare benefits cannot fully offset the costs of financial inclusion. The obligations under financial inclusion need to be regulated and well-defined as part of the licensing condition of all scheduled banks by the RBI. The social benefits of financial inclusion far outweigh its banking costs. 

(Views are personal)