Reimagine Financial Inclusion, Imagine Aadhar Bank

Without ado and any more committees, Aadhar should be declared a bank.

Published: 12th January 2014 06:00 AM  |   Last Updated: 21st January 2014 01:10 PM   |  A+A-

The shortest distance between two points is a straight line -- except when the government is drawing the line. In that case, the two points are connected via committees by what appears more like many loops around a bush.

On Tuesday, the Reserve Bank of India released a report by a committee on the state of financial

inclusion and an agenda for action for comments. In keeping with the “loop” approach, the report is titled Report of the Committee on Comprehensive Financial Services for Small Business and Low Income Households. Why not keep it simple: call it the Report on Financial Inclusion?

Be that as it may, what is the status of financial inclusion? Six decades after Independence, only four of 10 Indians have a savings account and barely 15 per cent have access to banking credit. The 50 districts at the bottom of the index have just three branches per one lakh population. The national average: 7.6 branches per lakh population. Add: Only 24 per cent of the population owns insurance, barely 55 million paid for private health insurance, less than 1 per cent retail trade is covered by general insurance and just 12 per cent of the workforce has pension benefits.

So what is the committee’s vision and agenda for action? Universal electronic bank account for every resident above 18 by 2016, access to payment services and deposit products within 15 minutes walking distance, access to formal credit, access to investment and deposit products, access to insurance and risk management products and a right to suitability—aka legally protected right to be offered only suitable financial services. 

The committee envisages every resident will be issued a bank account when they get an Aadhar number. How? The instruction will be issued by UIDAI. The person would choose from a list of banks which are willing to open such a no-frills account. To this end, the committee recommends setting up of niche banks that will cater to low income households and small businesses. These payment banks would be set up with a start-up capital of `50 crore (instead of `1,500 crore for a full service bank), would shun credit risks and accept deposits of only up to `50,000.

And there is more, pages punctuated with clauses and caveats, exemptions and provisions. The moot point is: How many times will India invent banking? What is the need to reinvent structures of a bygone era? Why should government prescribe who should bank how? In short, it is a prescription for a nanny state— within a nanny state.

The distance between exclusion and inclusion is best bridged by technology, open access and empowerment. Over 500 million residents are identified and registered under the Aadhar programme—ready to be blessed with inclusion. Without ado and any more committees, Aadhar should be declared a bank. No, not a brick and mortar bank with branches and counters but an entity that will be a sophisticated book-keeper—perhaps in the cloud with no branches. For purposes of regulation and oversight, the entity could be a subsidiary of SBI or placed under the Directorate of Small Savings. There is no need for a new queue and the melodrama of KYC. The 12-digit unique identification number will represent the account number. Operationally, the UID platform is already aligned to a real-time settlement system (NECS and others) and so transfers into the account or out of it should be possible. Every transaction can be equipped to trigger SMS notifications, even a computer-generated voice call.

Let John Jani Janardhan or Janaki Jamila Jane choose how they wish to manage their money. Imagine an umbrella of business correspondents—banks, credit card companies, post offices, microfinance units, mobile telephony players, prepaid cash cards—serving the 12-digit account holder to transact. Imagine mobile ATMs—a hand-held device or a tablet or a notebook with biometric capability for authentication —deployed by retail outlets, kirana shops or farmer cooperatives or even talatis and even panchayats to dispense cash. Imagine the bus conductor as a mobile ATM. The possibilities are immense.

Of course there will be a chorus from naysayers. Can the poor understand technology? Fact is, they already are transacting. Over 90 per cent of mobile connections are pre-paid and the poorest of the poor are already using PIN facilities. Many are transferring gifts and loans via mobile payment gateways. Children working abroad often leave parents with pre-paid cash cards. Farmers harvesting apples in Himachal or cane in Maharashtra transfer money via a combination of physical and electronic. There will  be those who will shy from and suspect technology. They retain the option of choosing manual but mobile banking—of registered business correspondents at village level. Contrary to popular perception, those left without access or outside the ambit of financial inclusion are not financially illiterate. Nearly two-thirds of the $70-plus billion remittances reach homes without the government babysitting the flow.

India is faced with a historic opportunity. Through Aadhar it has the potential to achieve inclusion at a scale scarcely imagined thus far. The idea must migrate from mere identification to real empowerment.

The question is not whether India can afford to take the risk of propelling electronic banking. The question is whether India can afford not to. Policy cannot be a prisoner of the past. Can we draw a straight line, for a change—for real change?

(Note: Abridged from a forthcoming policy paper)

Shankkar Aiyar is the author of  Accidental India: A History of the Nation’s Passage through Crisis and Change

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