Friday, August 1, 2014

The NDA’s ambitious financial inclusion plan

Mumbai/New Delhi: Bank accounts for every Indian and banking services within 5km of every town and village, and all by March 2016—that’s the ambitious financial inclusion plan Prime Minister Narendra Modi will likely detail in his Independence Day speech.

The NDA’s ambitious financial inclusion plan

Named Sampoorn Vittiyea Samaveshan (SVS), the scheme has been sketched out in a paper prepared by the department of financial services. Mint has reviewed a copy. In his budget speech, finance minister Arun Jaitley announced the National Democratic Alliance (NDA) government’s intention to launch a financial inclusion mission on 15 August that would provide banking services to all households in the country, and especially focus on women, small and marginal farmers and labourers. According to Census 2011, 59% of the 246.7 million households in India have access to banking services; 54% of the 167.8 million rural households in India have access to banking services, and 67% of the 78.9 million urban ones do. Jaitley will meet chiefs of state-run banks on Thursday to discuss the preparedness of banks to roll out the government’s financial inclusion plan, bankers and a government official said.

“The meeting is mainly to review how banks are gearing up for the rollout of the financial inclusion mission,” said the government official, who did not wish to be identified. The financial inclusion plan will look to provide universal access to banking facilities with a basic bank account with an overdraft facility of Rs.5,000 and a Rupay-enabled debit and ATM card with inbuilt accident insurance cover of Rs.1 lakh. “This account would be linked with the Aadhaar number of the account holder and would become the single point for receipt of all government benefits,” the paper said. Rupay is an Indian government initiative and the country’s own equivalent of Visa and Mastercard. Account holders will also receive financial literacy training sessions and, on completion of these training sessions, a Rs.5,000 overdraft limit.

 According to Reserve Bank of India estimates, 182 million zero balance accounts had been opened in India up to March 2013, but only 3.95 million of these availed overdraft facilities adding up to Rs.155 crore. The approach paper, dated 16 July, outlines six pillars upon which the entire programme will be based. The financially excluded should be provided universal access to banking facilities, the paper said. They should have basic bank accounts and should be provided microcredit, microinsurance and unorganized sector pension facilities, it added. The borrowers under this scheme will undergo financial literacy training, while the entire loan portfolio should be insured against a credit guarantee fund, with an initial corpus of Rs.1,000 crore, which will provide for defaults on such accounts, it said.

To achieve these objectives, the government is open to public-private partnerships while it will also tap into the existing national infrastructure of post offices and the future payments banks network, according to the approach paper. Various microcredit organizations will be allowed to compete with each other while the crucial role will be played by the business correspondents (BCs), or agents of banks who reach out to the last mile, offering simple credit and deposit products to customers. According to S.S. Mundra, chairman and managing director of Bank of Baroda, not all objectives have to be met by 2016 and the entire financial inclusion drive will be done in a phased manner, which should give banks ample time to prepare. “We already have 6,000 business correspondents, and they are doing a very good job. If need be we will hire more such BCs,” Mundra said, adding that banks’ own resources won’t be stretched much because the bank staff will largely play a supervisory role.

“This is not a big task because most of the job has already been done by banks. Accounts are being opened every day and by 2016, we will be covering every household of every village we have been assigned without any problem,” said M. Narendra, chairman of Indian Overseas Bank, which has about 3,500 BCs who are paid Rs.3,500 per month. In order to incentivize BCs, the paper proposes that remuneration for them be set at Rs.5,000. According to Rishi Gupta, chief operating officer and executive director of FINO PayTech, a banking correspondent service provider, the payment of Rs.5,000 is less than what it should be but still a welcome raise. “Government is acknowledging that providing last mile delivery involves a lot of expense and expertise.

 If you don’t incentivize the people who are involved in the last mile delivery, soon they will lose interest and any such financial inclusion plan will not fructify,” Gupta said. Technology will also need to play an important part in the government’s financial inclusion plan. For providing fully enabled bank accounts to the unbanked population, banks will have to ensure that every transaction is part of the core banking solution. Till now, most of these transactions were offline and not connected to the bank’s core banking network.

That could well address the issue of inactive accounts, said a bank official. “Unlike earlier, the bank accounts will be fully operational from anywhere, be it a bank branch, an ATM or a business correspondent outlet,” added this person who did not wish to be identified. “Transfer of money directly to beneficiary accounts under the direct benefit transfer scheme will also make sure that the accounts are active,” the bank official added.

The direct benefits transfer scheme envisages transferring directly to beneficiaries the money they are entitled to under government schemes. Funds will be transferred after a customer’s biometric authentication, either through Aadhaar-enabled payments system or the bank’s own servers. Aadhaar is a unique ID issued by the Unique Identification Authority of India that has thus far issued 650 million cards. To make it lucrative for bankers to open bank accounts and transfer funds from the government to beneficiary accounts, the government is considering paying banks 2% of the transaction amount for every transfer.

The government’s plan could also be a big business opportunity for technology providers. The department of financial services, in an advertisement, has asked interested technology providers to present their innovative ideas to improve the existing last mile connectivity. “The combination of bio-metric, smart cards and low-cost ATMs have not been successful in scaling up. Putting the responsibility on leading banks to adopt a region for financial inclusion hasn’t worked either.

The needle has not moved,” said Rama Vedashree, vice-president at software lobby body Nasscom. “The ministry of finance may be looking for new technology solutions to ensure the outreach of financial inclusion programme as the current technologies being used have not been able to do that.” “This may be an effort to find and understand the scope of new low cost technologies that can fast-track the process of financial inclusion,” she added. Once the mission is launched, its progress will be reviewed quarterly by the finance minister, rural development minister and the minister for communication and information technology. In addition, financial services secretary G. S. Sandhu will review the progress with bankers every month.

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