Jatinder Handoo

A Financial Inclusion Revolution?: How last mile delivery and payment systems innovations could help transform India’s economy

India has been fertile ground for many emerging market innovations. It has provided low-cost housing through Indira Awas Yojana, access to sustainable energy through the LaBI program, public cashless health insurance for poor families through RSBY, and financial services through the business correspondent model. These home-grown, customized innovations coupled with scalable business cases and coherent public policies have translated positively into development and economic indicators. The success of Indian innovations provides both workable models and inspiration to the rest of the world.

But in spite of these successes, it’s hard to overlook the complex problems that India faces. Being home to nearly one sixth of humankind, Indians are besieged by a plethora of development-related challenges, including the large-scale financial exclusion of its population.

The World Bank’s widely cited Findex 2012 tells us that nearly 65 percent of Indians above the age of 15 do not have access to a formal bank account. This data point becomes especially noteworthy in light of the USD 60 billion in public funds that the Indian government transferred to the poor through various welfare schemes and subsidies last year. The public welfare budget has increased, but large-scale financial exclusion acts as a credible barrier in achieving policy objectives. In a nutshell, Indian taxpayer money fails to create much bang for the buck, as structural challenges lead to economic inefficiencies in public finance.

Being a welfare state, one of the prime objectives of government policy in India since her independence in 1947 has been to enable inclusion by reducing abject poverty through interventionist public policies. To that end, nationalization of the Indian banking system took place in 1969. The sole objective of bank nationalization was to enable financial inclusion and to meet the credit needs of a large agrarian society.

This was followed by actions like the formation of Regional Rural Banks and the establishment of a special bank for agriculture, ushering in the self-help group bank linkage programme and the community-based model of microfinance in the late 1990s. However, in spite of all this, public agencies could not find a close-to-perfect apparatus to channel government benefits directly to end beneficiaries, particularly to those who lived across the 600,000-plus villages in India. The predominant delivery channel used to transfer money was line departments and panchayats (local self-governments at the village or small town level). However, this system was flawed, with corruption, lack of transparency, unaccountability, financial irregularities, etc.

In this context, in April of 2007 the southern state of Andhra Pradesh initiated an experiment across two districts (Warangal and Karimnagar) for disbursing government benefits to end beneficiaries. Benefits were disbursed by business correspondents (BCs) – third-party non-bank entities contracted by prudentially regulated financial institutions like banks to deliver financial products and services on their behalf to last-mile customers. BCs were able to identify and verify recipients through the use of technologies like biometric smart cards and hand-held point-of-service terminals.

This innovation in the traditional payments delivery system was known as Electronic Benefit Transfer (EBT). Recognizing its potential and utility, the Reserve Bank of India formed a committee to develop a framework of EBTs under the chairmanship of R.B. Barmanin 2008. The Barman committee report recommended following a bank-led model for the delivery of EBTs in India. But due to limitations in the physical outreach of banks (which reached just five percent of villages), the committee also endorsed the business correspondent model to deliver EBTs to end beneficiaries through biometric smart cards issued to these beneficiaries.

Since 2007, EBTs have evolved from a small experiment to an integral component of the Reserve Bank of India’s financial inclusion plan. EBTs are primarily comprised of Social Security Pensions and MGNREGA wage disbursements, distributed through a nationwide network of over 221,000 business correspondents. The business correspondent model has become even more crucial in India’s emerging financial inclusion landscape, and it holds great promise for the future. The Indian government’s recent introduction of schemes like direct benefits transfers and direct cash transfers could be attributed to its positive experiences and learnings from EBT delivery.

Universal financial inclusion in India largely depends on factors like how banks are able to make use of the existing business correspondent infrastructure and the Aadhaar platform – a 12-digit individual identification number issued by the UIDAI on behalf of the government which serves as a proof of identity and address. Both are crucial pillars for making direct cash transfers and other new product innovations work in India. For example, the Aadhar Enabled Payment System will enable Aadhar Enabled Bank Account holders to carry out seamless financial transactions interoperably across business correspondent points installed with micro and white label ATMs (fee-based ATMs operated by non-bank entities) in rural and semi-urban areas. However a recently published KPMG report found that India’s usage of the Internet is the lowest of the BRICS nations, and interoperability would need connectivity in the hinterlands to operate on a real-time basis.

In spite of the challenges, this country of 1 billion-plus people is on the cusp of a financial inclusion revolution shaped by convergences in payment system innovations and doorstep delivery models. If it succeeds, India may provide the world with another example of how innovation and forward-thinking public policy can help transform emerging economies.

Jatinder Handoo is a financial inclusion practitioner who currently works as Senior Manager of Strategic Alliances at FINO PayTech Ltd, a branchless banking payments technology firm that serves more than 68 million BoP customers all across India.

financial inclusion, governance