[LST] CASH TRANSFER—ARE BANKS READY? - Livemint

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Sun, Dec 02 2012. 07 59 PM IST

Cash transfer—are banks ready?
Moving to the cash transfer system will be the biggest challenge for
the Indian banking sector in recent history
TamaL Bandyopadhyay

A file photo of finance minister P. Chidambaram. Photo: AFP
From 1 January, the subsidy amount for 29 of 42 welfare schemes of
Indian government will go directly into the bank accounts of the
beneficiaries in 51 districts across 16 states. The electronic cash
transfers will be based on the 12-digit unique identification number
or Aadhaar, a proof of identity and address anywhere in the country.
The districts being covered in the first phase include five each in
Andhra Pradesh and Maharashtra; four each in Himachal Pradesh and
Jharkhand; three each in Karnataka, Madhya Pradesh, Rajasthan and
Tripura; and two each in Haryana, Kerala and Sikkim. The basis for
selecting these districts is 80% coverage of the Aadhaar scheme. The
second roll-out at more districts will be launched in April. The plan
is to cover the entire country by the end of next year. If implemented
well, the scheme will enhance efficiency of welfare schemes as the
government will be able to reach out to identified beneficiaries and
plug leakages.
Subsidies on cooking gas and kerosene, pension payments, scholarships
and employment guarantee scheme payments and quite a few other
benefits under welfare programmes will be directly transferred into
the bank accounts of the beneficiaries. Food and fertilizer subsidy is
not yet covered under this scheme. The beneficiaries are expected to
use the money to buy goods and services from the market.
The pilot projects for the so-called electronic benefit transfer (EBT)
have already begun in Andhra Pradesh, Chhattisgarh, Punjab, Rajasthan,
Tamil Nadu, West Bengal, Karnataka, Puducherry and Sikkim and, going
by the government's version, the results are encouraging.
Two issues are critical for the success of this ambitious programme.
One, only Aadhaar cardholders will be entitled to the get the cash
transfer facility, but at this point only 220 million Indians have
Aadhaar cards. And, two, is the lack of banking facility. Nandan
Nilekani, who drives the Aadhaar initiative, is confident that it is
achievable. According to him, in three years since the launch of the
project, it has enrolled 270 million people. At the moment, at least a
million Indians get enrolled a day.
Finance minister P.Chidambaram said the database of the beneficiaries
will be digitized by the respective ministries and money will reach
the targeted people through business correspondents, including women
self-help groups, panchayats and even individuals like a school
teacher. The banking correspondents, according to him, will carry
hand-held automated teller machines (ATMs) to enable the beneficiary
to withdraw cash. Is the banking sector prepared for this?
Let's take a look at the data. Indeed, penetration of banking services
has been improving. For instance, the number of bank branches
multiplied 12-fold—from about 8,000 in 1969, when the first set of
banks was nationalized, to at least 99,000 now. And there are at least
110,000 ATMs. The average population covered by a bank branch was
15,583 in 2001. In 2012, it has come down to 12,601. Going by the
latest census report, 58.7% Indian households had access to banking
services in 2011, up from 35.5% a decade ago. For every 100 new
branches opened in fiscal 2012, close to 70 branches were in rural and
semi-urban pockets. The comparable figure was 23.2 in fiscal 2005.
So, the scene is improving, but is the system ready to move to the
cash transfer scheme? It will be the biggest challenge for the Indian
banking sector in recent history. A cross-country analysis of
financial inclusion by the International Monetary Fund shows 100,000
adult Indians were covered by 10.64 bank branches and 8.90 ATMs
against Brazil's 46.15 bank branches and 119.63 ATMs in 2011.
Household loan accounts with banks per 1,000 Indian adults have been
21 against Brazil's 747 in 2011. Brazil runs a successful programme
that provides monthly cash payments to poor households if their
children are enrolled in school.
The Reserve Bank of India (RBI) has been trying hard to expand banking
services across the nation. Till June this year, about 147 million
basic accounts or the so-called no-frills account have been opened and
121,000 banking correspondents have been appointed. Despite these,
about 40% of India's adult population still does not have access to
banking services. About 13% Indians are using debit cards and only 2%
credit cards. The efficacy of the banking correspondent model, on
which the success of the cash transfer scheme depends, is not proved
as yet for various reasons, including the fees that banks pay to such
representatives.
One way of meeting the challenge could be allowing new banks to open
shops. The banking regulator is not willing to do so unless the law
that governs banking regulation in India is amended and RBI is
empowered to supersede the board of a rogue bank. It is insisting on
this as a precondition to allowing industrial houses to open banks as
it feels that without this power, it will be difficult to supervise
smart corporations who can divert money to their own group companies
and deny funds to competition. Incidentally, among the first set of
banks that was allowed to set shops in 1994 there was at least one
corporate house.
If the amendment to the law takes time, there are other ways to tackle
the industrial houses who want to enter banking. For instance, the
supersession clause can be part of the licensing norms. Also, it will
take years for a new bank to get the confidence to fool the regulator
and by that time, the law—one can expect—will surely be amended. India
needs many banks to cover its 1.2 billion population. If the regulator
is not confident of its ability to supervise large business houses, at
the first stage it can allow relatively smaller firms such as
non-banking financial companies and microfinance institutions—if they
are found fit and proper—to set up banks with small capital base in
rural pockets.
Tamal Bandyopadhyay keeps a close eye on everything banking from his
perch as Mint's deputy managing editor in Mumbai. He is the author of
A Bank for the Buck, a book on HDFC Bank.
--
Saurav Datta

Twitter: SauravDatta29
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