After 201 years of modern banking, India opened 140 million unique bank accounts by 2006. The bank-led, business-correspondent (BC)-aided financial inclusion (FI) initiatives replicated the same feat in the next six years. Between 2005 and 2012, while the number of rural bank offices increased by 5,000 to 37,000, the number of rural BC outlets jumped from zero to 141,000. That is, by March 2012, 80 per cent of the rural banking outlets were being operated by BCs. Can the BC model of FI be called a ‘game changer’? We think so.
Until recently, with 103 million fingerprints the UAE had the world’s largest biometric database. In the past couple of years, the Aadhar platform of the Unique Identity (UID) Authority of India has gathered fingerprints, iris scans and digital face shots of 250 million Indian residents. The optimum capacity of UID enrolment today is to roll-out around 300 million Aadhar numbers a year. That is, India can replicate the world’s second largest biometric database every four months. Can we call this a ‘magic’? Yes, we dare say.
Now, what can be the outcome if the ‘game changer’ and the ‘magic’ are combined? Well, we can call it the Direct Benefit Transfer or DBT in short. Within the next few years, through DBT 500 million Indians are set to receive, on an average, Rs 6,000 ($120) worth of entitlement benefits every year in their bank accounts. Banking services now can be availed from BC outlets situated at the neighbourhood grocery store, milk booth or home-delivered by the local ASHA (Accredited Social Health Activist) worker. Banks, equipped with biometric unique identity of the customer verified by the Aadhar platform and secured by assured welfare entitlement receivables in unique bank accounts through DBT, can now lend to the poor on a for-profit basis without charging usurious interest rates. The unleashing of large consumption and leverage opportunities at the bottom of the pyramid are the key macroeconomic implications of DBT. The process is likely to boost India’s GDP by up to 1 percentage point.
From the perspective of the government, DBT would reduce wastage, eliminate siphoning of benefits through ghost/duplicate beneficiaries and better target the benefit programme by bringing in ‘identity challenged’ poor within the fold of benefit programmes. We estimate that the current yearly spending of Rs3 trillion ($60billion) by the government on welfare/subsidy schemes that can be potentially converted in to DBT, would save at least 10 per cent of the spending or Rs 300 billion ($6billion) per year. Even including the costs of DBT and inclusion of currently excluded eligible beneficiaries, DBT can reduce fiscal deficit by 0.25 per cent of GDP.
Banks would benefit from DBT in several ways. First, benefit transfers worth Rs 3 trillion would generate fee income of Rs 60 billion ($1.2billion). Second, float income from DBT, cross-selling of additional services to the poor including loans and fee-based products like remittance services or micro-insurance would also bring in additional income. Third, mobile technology based transaction processing by the BC model would drastically reduce both fixed and operating costs for rural banking without compromising security. Overall, we estimate the income of banks and BCs to increase by Rs150 billion-180 billion ($3-3.6b) per year. By bringing the financially excluded within the fold of organised banking, India’s savings rate, especially savings in financial assets, is also likely to go up.
Contrary to the benevolent depiction of DBT above, the formal announcement of DBT in November 2012 has sparked off criticisms on the technological, social, philosophical and economic aspects surrounding the process. There are views such as the DBT is a ‘political gimmick’ and project has been ‘flagged-off too early’ without attaining to ‘critical minimum’ NFAs, Aadhar number roll-out and preparedness of the concerned government departments/ministries including digitalisation of the roll of the existing welfare beneficiaries. There are also arguments against DBT encompassing schemes such as public distribution of foodgrains or fertiliser subsidies. One of the repeated criticisms of DBT is that the process would not resolve a key source of welfare leakage – inclusion of ineligible people within targeted benefit transfer schemes.
In contrast to the widespread perception, DBT does not involve any new welfare spending. It just aims at revamping the distribution of the existing welfare spending through technology-enabled means so as to reduce waste and better target it by removing ghost/ duplicate beneficiaries. Clearly, DBT is not a panacea. It can neither resolve all types of welfare benefit leakages nor can its implementation be instantaneous or painless. The process, however, can harness large economic and social transformation by inter alia boosting consumption and leverage at the bottom of India’s population pyramid.
The ongoing pilots of DBT since 2010, involving various welfare schemes in different parts of the country, have highlighted various issues and are a source of important learning. These need to be used for reengineering implementation of DBT under different operating environments. Like any large-scale novel project, implementation of DBT is ‘learning by doing’ process. Towards this end, the government has adopted a sequenced approach for the introduction of DBT for various welfare schemes in different parts of the country. Moreover, bringing certain types of welfare schemes like the PDS for food grains or fertiliser subsidy within the purview of DBT would require larger deliberations, preparedness and contingency planning.
Yet, the basic idea of providing entitlement benefits directly to the beneficiary bank account through technologically superior, cheaper and more efficient distribution channels can hardly be questioned. The process is likely to have large positive macroeconomic externalities. Unfortunately, rather than deliberating on the larger issues, the ongoing debate on DBT is getting bogged down in the discussion of ulterior motives, teething and implementation concerns and thereby missing the wood for the trees.
(Sujan Hajra is Executive Director, Research, and Chief Economist, Institutional Equity, AnandRathi Financial Services. He can be reached at sujanhajra@rathi.com.)
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