RBI's financial inclusion starts and stops with Aadhaar

While the Finance Ministry is reviving its mission to mandatorily quote PAN for financial transactions, the RBI cannot think beyond Aadhaar for financial inclusion

Reserve Bank of India (RBI) has come out with another strange idea for its financial inclusion drive. Instead of focusing on creating adequate infrastructure for the last-mile service delivery, the central bank thinks only government-to-person (G2P) cash transfer through Aadhaar number would make financial inclusion meaningful. This too without even bothering about the Supreme Court decision on not making Aadhaar mandatory for government schemes even as the Finance Ministry itself is issuing advertisements to quote permanent account number (PAN) for all major financial transactions. If the so-called unique identity is so sacred, why is the Finance Ministry placing emphasis on PAN cards for financial transactions? Does this also mean that financial transactions carried out by using Aadhaar are untraceable unlike where PAN is used?

RBI has placed on its website a report prepared by a Committee on Medium-term Path on Financial Inclusion. The Committee headed by Deepak Mohanty was mandated to review existing policy of financial inclusion, including supportive payment system and customer protection; study cross-country experiences of financial inclusion to identify key learnings, particularly in the area of technology-based delivery models; articulate the underlying policy and institutional framework and finally, suggest a monitorable medium term action plan for financial inclusion in terms of its various components such as payments, deposit, credit, social security transfers, and other financial products and services.

Interestingly, the Committee itself accepted there were significant gaps in terms of usage, inadequate ‘last mile’ service delivery, and exclusion of women as well as small and marginal farmers and very low formal link for micro and small enterprises. There were also systemic issues of stability of the credit system, over-indebtedness and agrarian distress, it said.

However, all it could come up with as a solution was cash transfer through Aadhaar. It says, "...the Committee set a much wider vision of financial inclusion as ‘convenient’ access to a basket of basic formal financial products and services that should include savings, remittance, credit, government-supported insurance and pension products to small and marginal farmers and low-income households at reasonable cost with adequate protection progressively supplemented by social cash transfers, besides increasing the access of small and marginal enterprises to formal finance with a greater reliance on technology to cut costs and improve service delivery, such that by 2021, over 90% of the hitherto underserved sections of society become active stakeholders in economic progress empowered by formal finance."

Dr Anupam Saraph, Professor, Future Designer, former IT advisor to Goa’s former Chief Minister Manohar Parrikar, had a question on the motives of the Committee in endorsing Aadhaar. He said, “If the Committee is ignorant of the orders of the Supreme Court in the matter on Aadhaar, can it be expected to be enlightened in the matter of national security, terrorism, creation of millions of bogus accounts and financial scams involving Aadhaar?”

In addition, Dr Saraph says, “How can a committee with conflict of interest and non-national representation even deal with the matter? The committee members included AP Hota, MD & CEO who represents the National Payments Corp of India (NPCI) that has interest in Aadhaar-based payments, Pawan Bakshi, who represents the (Bill and Melinda) Gates Foundation, Dr Asli Demirgüç-Kunt is a Director of Research at the World Bank; the others represent financial institution. Who represents the excluded or the citizens and consumers of financial services or even researchers who have been studying financial inclusion?” 

The emphasis on Aadhaar by the Committee is contrary to global experience on financial inclusion. The Committee itself states, mobile banking is being used successfully as a delivery channel in several countries. Mobile banking technology has tremendous potential for expanding financial inclusion, especially among the unbanked rural poor. The success of mobile money in Kenya, Uganda, Tanzania and other African nations shows that these innovations can bring about dramatic changes in how people engage in financial transactions, by lowering entry barriers, reducing costs and expanding access, the Committee says quoting from Demirguc-Kunt and Klapper, 2012 report.

Even for making the process of appointing business correspondent (BC) to provide last mile service delivery, the Committee could not think beyond the usage of Aadhaar. The Committee has recommended that the Indian Banks’ Association (IBA) may create a Registry of BC Agents wherein BCs will have to register before commencement of operations. "The registration process should be simple online process with photo and Aadhaar identification," it added. 

Here are some recommendations of the Committee for financial inclusion...

1. Given the predominance of individual account holdings (94% of total credit accounts), a unique bio-metric identifier such as Aadhaar should be linked to each individual credit account and the information shared with credit information companies to enhance the stability of the credit system and improve access.
2. Deposit accounts of beneficiaries of government social payments, preferably all deposits accounts across banks, including the ‘in-principle’ licensed payments banks and small finance banks, be seeded with Aadhaar in a time-bound manner so as to create the necessary eco-system for cash transfer.
3. In order to increase formal credit supply to all agrarian segments, digitization of land records is the way forward. This should be backed by an Aadhaar-linked mechanism for Credit Eligibility Certificates to facilitate credit flow to actual cultivators.
4. Provision of credit history of all self-help group (SHG) members by linking with individual Aadhaar numbers to check over-indebtedness. This will ensure credit discipline and will also provide comfort to banks. 
5. Aadhaar and e-know your customer (KYC) should be the uniform KYC accepted by all regulators including Telecom Regulatory Authority of India (TRAI)  
6. Banks to complete the task of linking of deposit accounts with Aadhaar in a time bound manner so as to create the necessary eco-system for social cash transfer. 
7. Bank credit to micro-finance institutes (MFIs) should be encouraged. The MFIs must provide credit information on their borrowers to credit bureaus through Aadhaar-linked unique identification of individual borrowers 
8. State Level Bankers Committees (SLBCs) to focus more on inter-institutional issues, livelihood models, social cash transfer, gender inclusion, Aadhaar seeding, universal account opening, and less on credit deposit ratio which is a by-product.
9. As a part of second generation reforms, the government can replace the current agricultural input subsidies on fertilizers, power and irrigation by a direct income transfer scheme.

“How can the committee that has no methodology and framework to assess financial inclusion even arrive at any recommendations?” Dr Saraph questions.

While the Committee reports goes on talking about linking Aadhaar for everything to make financial inclusion a success, it fails to provide any new idea to help resolve consumer grievances in a time bound manner. On resolving customer issues, all the Committee says is to use bank's internal ombudsman. "Each branch should, therefore, be required to prominently display the name, phone number and email address of the designated officials for such complaints," it says. 

In addition, it recommended putting in place a technology-based platform for SMS acknowledgement and disposal of customer complaints, which can provide an audit trail of grievance redressal. All banks must have an online portal for customers to fill complaints, it added. However, there is neither any time limit to resolve customer grievances nor any provision for levying penalty on erring officials, recommended by the Committee.  

The Committee said it believes that addressing significant pockets of exclusion, the adoption of technology and allowing multiple models and partnerships to emerge could effectively buttress the cause of financial inclusion. "While financial products have their benefits, there is a clear danger of mis-selling, which could damage marginalized segments who have an uncertain cash flow. Efforts on financial education need to be strengthened, including product-driven financial literacy so that the poor are not short-changed. Grievance redressal for customer complaints in banks needs some imaginative thinking. The overall governance structure would have to be more business-like, focused on delivery," it added.

Despite improved financial access, usage remains low, underscoring the need to better leverage technology to facilitate usage, the Committee noted. It says, "On the basis of cross-country evidence and our own experience, the Committee is of the view that to translate financial access into enhanced convenience and usage, there is a need for better utilization of the mobile banking facility and the maximum possible G2P payments, which would necessitate greater engagement by the government in the financial inclusion drive."

The Committee also recommended a universal crop insurance scheme covering all crops starting with small and marginal farmers with a monetary ceiling say of Rs2 lakh. "The insurance should be mandatory for all agricultural loans. The insurance should be made affordable, with the farmer paying a nominal premium and the balance coming from government subsidy. The government can phase out the agricultural loan interest subvention scheme and plough back that allocation into the crop insurance subsidy. A graded crop insurance could be made available to medium and large cultivators with higher monetary ceiling and lower government subsidy," it said.

The Committee says it feels that the use of technology would make the insurance scheme more efficient. It says, "Satellite imagery can be used for ‘crop mapping’ and to assess damage. GPS-enabled hand-held devices can be used for ‘ground trothing’. In addition, drones and dove, micro satellites could also be deployed to assess crop damages. This will reduce the number of crop-cutting experiments required and will ensure faster claims settlement."

The Committee has invited comments on its report before 29 January 2016 either via email (cgmincfidd@rbi.org.in/ cmpfi@rbi.org.in ) or by post to the Principal Chief General Manager, Reserve Bank of India, Financial Inclusion and Development Department, 10th Floor, Central Office Building, Shahid Bhagat Singh Marg, Mumbai- 400001.

--Source "MoneyLife.com"