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LATEST NEWS UPDATES | UPA makes its case for cash transfers by Remya Nair & Surabhi Agarwal

UPA makes its case for cash transfers by Remya Nair & Surabhi Agarwal

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published Published on Feb 24, 2012   modified Modified on Feb 24, 2012

India moved a step closer to implementing cash transfers of direct subsidies and social welfare payments after a high-level panel presented the blueprint for effecting it through an Aadhaar-based payment gateway.

Accepting the report, which details how all payments and cash transfers can be made electronically, finance minister Pranab Mukherjee indicated that it will be the key to plug leakages and ensure more targeted spending under the government’s social welfare programmes.

The timing of the submission of the report, just weeks ahead of the presentation of the Union budget on 16 March, is significant.

The panel, headed by Unique Identification Authority of India (UIDAI) chairman Nandan Nilekani, proposed that eventually all cash payments above Rs1,000 should be transferred electronically into Aadhaar-linked bank accounts, making cash payments using Aadhaar almost universal and lending even greater legitimacy to one of the government’s crucial initiatives that has run into rough weather in recent months.
Subsidy payments and benefits under different schemes amount to almost Rs3 trillion, roughly 3.5% of GDP, according to government estimates.

To incentivize banks to process government payment electronically, the task force has recommended a transaction fee of 3.14% for each payment. It also wants banks to set up a network of interoperable micro-ATMs for ensuring easier access of funds by beneficiaries.

Mukherjee, in his budget speech last year, had announced the creation of the task force to propose a system for direct transfer of subsidy for kerosene, LPG (cooking gas) and fertilizer, and later extended the terms of reference to include the development of an Aadhaar-enabled unified payment architecture.

The task force proposes an e-payment gateway through which the finance ministry will release funds to various ministries for transfer of subsidies and benefits under different schemes. These funds will then be transferred from the government into Aadhaar-enabled bank accounts of beneficiaries through a central payment platform. All the government departments need to do is submit details of the beneficiary such as the Aadhaar number and amount to be paid to the bank. The bank will then process the payment and the funds will be credited into the account.

The beneficiary can withdraw the money through either bank branches or business correspondents equipped with micro-ATMs. National Payments Corporation of India already operates an Aadhaar-enabled payment system.

N.C. Saxena, member, National Advisory Council, said it remains to be seen whether direct transfer of cash subsidies will work in India.

“Cash payments are done in India for pensions and under schemes like Janani Suraksha Yojana and are working well to a certain extent,” he said. “But cash transfer will not work as a substitute for the public distribution system. What will the government do with 60 million tonnes of foodgrains it procures from farmers if it opts for cash payments?”

“At a smaller level, say in a slum area, where there is a bank branch, cash transfers could be effective. But at a macro level, it may not work. As it is, people in rural areas do not have bank branches,” he added.

The task force has recommended that banks be paid a transaction fee of 3.14% with a cap of Rs20 per transaction for each government payment. It also proposes the creation of a network of 10 lakh interoperable micro-ATMs operated by business correspondents across the country for easier access of bank accounts.

“The idea for this task force emerged after it was realized that there is no single platform to transfer Rs1.5 trillion of government subsidy electronically to beneficiaries. If all states and government departments start to build their own platforms, it will result in a lot of duplication, waste of public money and resources, apart from complicating things,” said a senior government official close to the development. “So, a single platform has to be created to handle any kind of transfer by any government department in the future,” added this person, who did not want to be identified.

UIDAI has already started a pilot in Jharkhand to test the Aadhaar-enabled payment system for the government’s flagship job guarantee scheme MGNREGS, another in Mysore for LPG subsidy, and a third in Alwar, Rajasthan, for kerosene subsidy.

To reduce the use of cash in the economy, the task force also recommends that government-owned institutions accept electronic payments at all locations where they collect payments from citizens, without any additional surcharge.

UIDAI has enrolled 200 million people and has issued Aadhaar numbers to 133 million so far. It proposes to issue 600 million unique IDs by 2014.

Bankers and others believe the transition will not be easy.

At the moment, interoperability of business correspondents, central to the Aadhaar-based payment gateway, is not permitted by the Reserve Bank of India.

There are other issues as well, said the representative of a banks’ lobby, notably, the IT systems of the banks themselves and the scalability of the Aadhaar back-end.

“Banks will have to make a lot of investment in upgrading their IT infrastructure as most no-frill accounts are on a financial inclusion server and not on the bank’s core banking platform,” said K. Unnikrishnan, deputy chief executive of Indian Banks’ Association. “The Aadhaar-based verification takes around 5-10 seconds at present. It remains to be seen if UIDAI will be able to scale up to meet the large volumes. Also there are some practical issues such as mismatch of fingerprints if the hands of the worker are dirty and covered with mud.”

Banks may also be reluctant to trust the “know your customer” (KYC) verification procedures followed by other banks and their business correspondents, a senior RBI official, who did not want to be named, said recently.

The finance ministry had in December 2010 amended the Prevention of Money Laundering Rules, 2005, to notify Aadhaar as adequate to meet KYC norms for opening bank accounts, putting it alongside the passport, driving licence,permanent account number card, and the voter’s identity card.

An executive at a technology company said that some issues such as authentication and security still need to be resolved. “Banks are already moving towards two-factor authentication, biometrics-enabled UID number-linked accounts for financial inclusion, etc. So, I don’t see them resisting incremental spending on creating an infrastructure for this as well,” he said.

However, this person, who did not want to be identified, said that it is a significant opportunity for technology companies as it will involve a sizable number of devices, interoperablity, creation of a payment gateway and linking of core banking system.

Live Mint, 24 February, 2012, http://www.livemint.com/2012/02/24001503/UPA-makes-its-case-for-cash-tr.html?h=B


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