A long line of over two hundred people snakes outside the gram panchayat office of a village near Ibrahimpatanam—a mandal headquarter, barely 10 kms outside the Outer Ring Road encircling Hyderabad. The undivided state of Andhra and its successor state of Telangana are users of Aadhaar for making transfers from state to citizens. The line was particularly long that day in early September as pension payments made to the elderly coincided with payments for NREGA.
Making the payments was a young lady working for Manipal Technologies Ltd. As part of the ‘financial inclusion’ project, banks have divided geographies among them to ensure that there is a business correspondent (BC), or a bank branch within every 5 km radius. This location was serviced by a BC of Axis bank—Manipal Technologies Ltd.
An elderly lady stepped up to put her thumb on the transaction terminal—a machine similar to ones used for credit card transactions. The machine spat out a message—server error. At the next attempt, the machine dialled up the Axis bank server and the transaction was approved. The lady received her payment and left.
A bank supervisor who happened to be visiting that day explained that often the Aadhaar database is either unavailable or not possible to connect to. Consequently, the bank had set up their database of fingerprints and used these for authentication. In another nearby location, cell phone coverage was so poor that making any connection was difficult. The machine’s local storage was used for validating prints.
A series of beeps from the machine demanded attention. A lady with 9 slips for work done under NREGA was finally being paid—previous attempts at authentication had failed since records of work done, uploaded from the mandal office, did not tally with slips she was presenting. The error had since been corrected, and her relief at receiving the payment was palpable.
Direct benefit transfer through Aadhaar
Aadhaar is a unique identity number backed by a biometric identifier. Its uniqueness lies in its ability to identify a person without error. Its use in DBT of the kind described above is meant to eliminate fraudulent withdrawals and erroneous payments. In reality, it achieves much less.
Cell coverage remains poor in rural India—either there are no cell towers or even if towers exist, they are often ‘powerless’ and cannot be used to make a secure connection to Aadhaar servers. The bank relies on its own database—albeit one where the accounts are linked to Aadhaar. The primary purpose of Aadhaar—real-time authentication—is lost.
A question that remains unanswered—how does the Mandal office ensure that people claiming money for work done under NREGA actually did the work, or worse, work was ever done? There is obviously a process of manual certification of work, of the people who are supposed to have done it and a reporting mechanism. For unscrupulous contractors to make up work receipts and issue it to persons with an understanding that money received as payment will be shared is not difficult. It is not clear how the ability to make a payment to someone who is identifiable, reduces risk of fraudulent payments—except for those cases where the person does not exist. Effectively, for over-billing, real people are now needed. Otherwise it appears to be business as usual.
Disbursement accounts—not real banking
In the above case, each individual to whom payments were made had an account with the bank. These were disbursement accounts—the bank has to ensure that payments are made in cash to recipients by a certain date failing which penalties are imposed on it. Forcing banks to make cash payments reduces attractiveness of these accounts to the bank. With little float and with most of the 2 per cent that the bank earns being passed on to BC’s, there is little incentive for the bank to service these accounts.
Account holders do not even perhaps understand that they have an account. With the focus on receiving payments, there is no deposit transaction, much less savings. No credit history is created. This is hardly a case of ‘financial inclusion’.
Jan Dhan Yojana—it’s the RuPay!
The new Jan Dhan Yojana launched by the government with much fanfare offers yet another no-frills account. Much of the rush to open the account is on the basis that it will be used for direct transfers—so far, its not. The account offers insurance, an overdraft limit (in some cases) and a RuPay debit card.
If RuPay, which is managed by a company owned by banks and the RBI becomes widely accepted by merchant establishments, the need for cash transactions by users dramatically reduces. This also reduces the need to have BC or branches everywhere.
In addition, wide spread acceptability may induce account holders to start operating their bank accounts and perhaps use it even for savings. A sensible credit history could then make the promised overdraft a meaningful banking decision rather than a politically inspired non-performing-loan which it currently threatens to be. If the government were to move direct transfers to this account, and not insist that banks pay cash to the account holders, the account would offer significant advantages to the earlier disbursal method. In short, it is the ‘portability’ of a debit card which is the significant difference that Jan Dhan can offer.
Use mobiles not banks
In all this it becomes clear that for financial inclusion, its not the biometrics that is important, nor are bank accounts. What is important is to allow people to perform cashless transactions. As in other countries, cell phone companies are far more capable of managing small transactions, and are far more cost effective in terms of collections and transaction costs. If RBI and the government were to stop thinking in terms of banks and allow telecom companies to become ‘payment banks’, financial inclusion could be achieved almost overnight. The platform independence that RuPay debit cards offer can be achieved equally easily by a mobile payment system. Identification is equally easy and certain. But then, what does one do with Aadhaar? The search for the problem that Aadhaar will one day solve continues.
Anand Tandon is an independent analyst.
This column appeared in the October 2014 issue of Wealth Insight.
This article was originally published on November 21, 2014.
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