The Good News in Cash Transfers Scheme

Ahona Ghosh

Mohan Mashankar is under pressure. This Bank of India official has to make sure that every beneficiary of certain government welfare schemes in Wardha district has a bank account. Yesterday. As the Congress-led government steps on what it is positioning as its big calling card for the 2014 general elections—wiring welfare money into bank accounts of individuals—bankers like Mashankar are feeling the pressure to do something they have ambled on in the 65 years since independence: give every Indian a bank account. According to an April 2012 World Bank report, only 35% of adults in the lower middle-income levels in India have a bank account. Despite the imploring and the arm-twisting of the Reserve Bank of India (RBI), the banking regulator, banks never branched out aggressively in rural areas as the poor did not make a good business case. But now, with the Congress looking at cash transfers not just as good economics but also as good politics, that appalling deficit is being chipped away faster then ever. Numbers are unavailable, but Mashankar, the lead district manager for Wardha, says: “There is a lot of pressure on banks in semi-urban and rural areas to open accounts within the timelines.” The all-India timeline for cash transfers—and, as a subset, bank accounts—is April 1, 2014, which is likely to be missed. Yet, what is unmissable in all this is that, thanks to cash transfers and despite the enormity of the task at hand, India is likely to bring its unbanked into the banking fold several years ahead of the old schedule. “It (cash transfer) is a faster way to implement the government and banks’ goal to cover unbanked villages,” says Rama Murthy, general manager, financial inclusion and priority sector, Corporation Bank. Alongside, the RBI has opened another flank in the assault on banking and financial exclusion. Its guidelines for new banks, announced earlier this month, specify that new entrants will have to open 25% of their branches in unbanked areas. While all this is a step up from the halting approach of banks to rural India, it’s still not financial inclusion in the truest sense. 

Towards Financial Inclusion 

The RBI’s definition of financial inclusion mandates a bank to offer at least four services: savings account with an overdraft facility, business loan, remittance facility and an insurance-cum-retirement benefit product. Today, for the purpose of cash transfers, banks are offering merely a bank account. Mostly, it’s a no-frill account: this does not burden an account holder with a minimum-balance requirement, but also places restrictions like a monthly cap on number of withdrawals. At present, only 5% of no-frill account holders access more than two banking products, the most common being savings accounts and remittances, according to Bartronics India, which works with banks to enable transactions. MV Subramanian, president of rural and inclusive banking at Axis Bank, says there is no remuneration for banks in no-frill accounts. The balance in them is very low, and banks end up spending more on staff and infrastructure than they earn from them. “It is tough to take financial inclusion to the last mile,” he adds. Professor MS Sriram, visiting faculty at the Center for Public 

Policy in Indian Institute of Management–Bangalore, calls for changing the prism through which the financial inclusion picture is viewed. “If this (financial inclusion) is to be achieved, we need to look at clients and not numbers,” he says. “If we start looking at clients as individuals, we need to have a clear business plan.” Bank officials say the business case is developing. “The beneficiaries are very poor,” explains SD Pisi, deputy branch manager at the Palghar branch of Bank of Maharashtra. “We are opening accounts for subsidy payments only and only offering them a savings product.” But, he adds, other services will follow as more and more welfare benefits are delivered via cash transfers to bank accounts—in full flight, estimated at about Rs 3,00,000 crore. But, in order to reach that place, banks face numerous internal challenges. Public sector banks, which are driving the banking leg of the migration to cash transfers, are understaffed following a 10-year hiring freeze, which was lifted about four years ago. “They are going through an HR crisis, which will peak around 2016-17,” says Sriram. “We do not have experienced bankers, and there is a huge missing middle that is supposed to design these channels and mechanisms.” 

Towards A Business Case 

At present, government efforts to cover the unbanked are focused on the 43 districts, where the first phase of cash transfers began on January 1. For the earmarked 43 districts, meanwhile, the government has appointed a lead bank. Further, each government department handling a particular payout or subsidy sends a list of beneficiaries to the district collector in each district. To receive cash transfers, a beneficiary needs a unique identity number called Aadhaar and a bank account that is linked to Aadhaar. The district collector works with the Unique Identification Authority of India (UIDAI) to ensure Aadhaars, and with the lead bank to ensure bank accounts and their linkage to Aadhaars. Although banks don’t have a choice on these enrolments, the emerging view is the viability of these accounts will increase with the amount of money that flows through them. A senior government official, speaking on the condition of anonymity, sees a business case for banks in three years. “If I look at direct cash transfers as a social objective, it will be a burden,” adds C Rajendran, the Punebased executive director of Bank of Maharashtra. “If I see it as a business opportunity, where opening accounts for these customers over time will become viable, then there is an incentive for banks.” Banks are hoping that Aadhaarlinked cash transfers, by removing middlemen and bureaucracy, will plug leakages. Over time, the amount of money in these accounts will increase, and make it viable for banks to offer more products. “Banks need to take a longer-term view and not just look at quarterly results,” says the government official quoted earlier. Banking correspondents (BCs)—intermediaries between banks and customers that enable doorstep banking—are a critical long-term piece, though they are currently groping for direction (See adjoining story). Meanwhile, according to Ashish Ahuja of FINO, the country’s largest BC company, banks need to keep it simple with products as these will first have to be understood by BC agents, who are typically village locals. “The onus of introducing simple products lies with banks,” says Ahuja, head of products and sales, FINO. “They (banks) have been slow because they were in a compliance phase so far. They need to scale up their service offerings and be more creative in their response.” The banking habit is increasing, even extending beyond traditional domains. Mobile telephony companies, for example, are tying up with banks to offer remittance and payment services via the phone, which has become more accessible than banks. “There needs to be a separation between payment systems and bank accounts,” says Sriram Jaganathan, CEO, Airtel mCommerce Services. “If mobile payments service providers are allowed to make low-value cash payments, government benefit transfer can gain from the use of our technology to deliver cash in a reliable and timely manner, at outlets conveniently accessible to the recipient.” According to Sanjay Kuberkar, president, financial inclusion, Bartronics, banks and government entities will be busy institutionalising cash transfers till 2014, or even 2015, and may not prioritise the launch or rollout of new products or financial literacy. Yet, thanks to cash transfers, the banking system might have gained a few years towards that larger goal.