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Monday, February 11, 2013

Charting the Financial Inclusion Groundswell in India: The NPCI's top innovations

By Naman Sanghvi

Sonia Gandhi launching the Bank of Maharashtra 'RuPay Card' during the launch of Delhi Annshree Yonjana.

When it comes to financial inclusion in India, the National Payments Corporation of India (NPCI) is aggressively leading the government’s efforts to bring banking to all sections of society, across the country. And after nearly a decade of research and trials, many of these financial innovation measures for the poor are starting to make their way to the marketplace.

The NPCI has been set up with the help of the Reserve Bank of India (RBI) to foster better financial inclusion by: creating high-impact infrastructure and business processes for better, cheaper, consolidated and more efficient banking and retail payment systems in India; and facilitating outreach of these banking services to those who normally do not use banks or do not have access to them.  

These efforts are the result of the Khan Commission, set up by the RBI in 2004 to come up with recommendations and action items to achieve better financial inclusion. An abridged list of the major initiatives that the RBI is pursuing (as per its 2009 – 2012 vision pertaining to payment systems in India) can be found here.

The NCPI is a government initiative and is working closely with various stakeholders in achieving many of these set targets. It facilitates creation of infrastructure ‘outside’ the banks, which can be used by banks to interact with each other, and thus makes banking easier for end users. Four key facilities developed and implemented by the NPCI that directly bring about financial inclusion are:

  • The National Financial Switch (NFS) network

  • The Rupay Card

  • The Interbank mobile payment system

  • The Aadhaar Enabled Payment System (AEPS) and Aadhaar Payments Bridge System (APBS)

National Financial Switch (NFS) network

The NPCI’s National Financial Switch (NFS) network enables an ATM/debit cardholder to utilize the services in any ATM of any bank in the country. Today close to 200 million transactions are processed every month in NFS, 75 percent of which are cash transactions with an average amount of INR 3,300. Earlier a user was able to obtain services only from his bank’s ATM, which proved to be a great setback as users moved further away from cities into rural areas. This access to multiple ATMs provided by NFS represents a landmark moment in financial inclusion and for the banking sector, especially given the fact that the number of ATM’s will double in two years from the current 104,500 (as of October 2012).

Rupay card

The NPCI achieved yet another milestone in financial inclusion last year, when it launched the Rupay card - a domestic card payment system. The Rupay card provides direct competition to service providers like Visa and MasterCard. The card is accepted at all 91,000+ ATMs across the country. As of last September, close to 1.2 million debit cards were under Rupay service, and by the end of January 2013, they were expected to be available at 650,000 Point of Sale (POS) terminals across the country. Work is underway for the cards to be accepted on the internet and also at ATMs/ POS terminals abroad.

The benefits of the card and its services are:

  • In comparison to international service providers, banks will pay nearly 40 percent lower fees for availing card payment services with Rupay. This would bring down costs of banks significantly, saving them as much as three billion INR annually (and a lot of foreign exchange); enabling them to pass on benefits to consumers. Oriental Bank of Commerce (OBC), which has adopted the Rupay card, claims that their savings will be as high as 75 percent.

  • Many co-operative banks, regional rural banks and smaller commercial banks do not provide card services due to high costs like participation fees and recurring processing fees, among other reasons. The Rupay card being a domestic system cuts down these costs significantly, making it feasible for these very banks to provide card services, something that they could not do earlier.

  • Increased usage of card services in semi-urban and rural areas, and among urban households of lower economic levels.

Along with these benefits, Rupay will also:

  • Facilitate ‘lower amount transactions’ for which people don't currently use a card
  • Make it feasible for smaller shops, businesses and consumer service providers to accept card payments (as they pay lower card service usage charges)
  • Promote a behavioral shift from cash transactions to card payment transactions
  • Lead to better financial reporting

The Rupay card payment system is a step towards greater and deeper financial inclusion, as it brings in more banks and a wider spectrum of users into the system. In fact it is estimated that by 2015, Rupay will have 50 percent market share in the card services space.

Interbank mobile payment system (IMPS)

The NPCI launched a 24-hour Interbank mobile payment system (IMPS) that allows customers to use mobile instruments to access their bank accounts and obtain services like transfer of funds. Within this system, the NPCI is also developing the National Unified USSD Platform (NUUP), a service which eliminates the need for users to go to a physical location (like a bank services center) every time – something which is a big issue in interiors and remote areas. Anyone in the country with phone and network connectivity can use his/her mobile to obtain banking services across all banks - regardless of region, telecom service provider, mobile model type and make. One of the key innovations of the NUUP is the technology developed by the NPCI. This service works on any GSM mobile, does not require GPRS connectivity or a software download, and will be very simple and easy to use. Currently, 23 banks and two telecom service providers, BSNL and MTNL, are providing this service. As of April 2012, nearly 33 million customers had already registered for this service, and as of October 2012 a total amount of 296,161,000 INR had been transacted.

Aadhaar Enabled Payment System (AEPS) and Aadhaar Payments Bridge System (APBS)

Under the Aadhaar scheme, a 12-digit unique number is issued to all residents in India (on a voluntary basis), which will serve as a unique identification for that person, providing basic demographic and biometric information.

The NPCI has set up AEPS, which allows any person to use banking services through his/ her allotted Aadhaar number (Aadhaar-linked bank account). Through simply an Aadhaar number, basic transactions like balance inquiry, cash deposit and withdrawal, and Aadhaar to Aadhaar account funds transfer can be seamlessly performed. Out of the 200 million enrollments for Aadhaar in its first phase, 84 percent opted to open an Aadhaar-linked bank account.

biometric fingerprint reader

The NPCI has also created the Aadhaar Payments Bridge System (APBS), an ‘electronic benefit transfer system’ that facilitates disbursements of government entitlements and benefits to recipients directly through their Aadhaar numbers. What this means is that government benefits like fuel subsidies, public distribution systems, Social Security pensions, handicapped and old age pensions, and wage disbursement can be electronically deposited in the person’s account directly.

In fact on January 1, 2013, some 1,980 Direct Cash Transfers (subsidies disbursed) were done through the APBS, totaling INR 3,545,000. The Karnataka state government conducted a pilot for electronically transferring MNREGA wages (Mahatma Gandhi National Rural Employment Guarantee Scheme) under the APBS. Similar pilots are being conducted across various states across India. It is expected that through the APBS, about three trillion INR of welfare benefits will be verified for entitlement and disbursed directly to individuals.

The NPCI is also working towards converting ‘check clearing’ from a physical process to a digital one, in order to make the process faster - this is expected to be put into effect by April 2013. Currently, funds transferred to another account are ‘credited’ and reflected only during banking hours. The NPCI is also working on a new platform – ‘India money line’, which would enable customers to transfer funds in real time, any time of the day, which are credited immediately.

(Above: A biometric fingerprint reader. Image credit: The Hindu)

Along with bringing better infrastructure platforms to the banking sector, the outreach and use of the NPCI’s services and products by both banks and end consumers is exponentially increasing across India. The NPCI’s operations have been successful in bringing various private and public sector banks together, providing various affordable banking and payment services to the common man, and achieving greater nationwide financial inclusion in India.

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