It Costs to be Poor; Bank on Tech to Reinvent Inclusion

http://www.newindianexpress.com/columns/shankkar_aiyar/It-Costs-to-be-Poor-Bank-on-Tech-to-Reinvent-Inclusion/2014/08/03/article2361367.ece

By Shankkar Aiyar

Published: 03rd August 2014 

Raghuram Rajan with Narendra Modi

It is expensive to be poor… for individuals and for nations.

Indians and India know this. Poor financial inclusion is the cause and consequence of entrenched poverty. The UPA regime chanted the mantra of inclusive growth for a decade. But the critical imperative of financial inclusion laboured brick-by-brick when it could have piggybanked growth on technology, hitching a ride on the telecom boom. That was not to be.

The good news is that Modi Sarkar has put its weight behind the urgency of financial inclusion. Prime Minister Narendra Modi is leading the charge. The fog around many regulatory and political issues—including the status of Aadhar which has now been bundled with National Population Register (NPR)—has now been cleared. This week Modi deployed his website, myGov and twitter to call for ideas/suggestions (and I have shared “Re-Imagine Inclusion” http://bit.ly/1aslr3e). He has also invited suggestions for a name and a logo. Rather than target geographical access, the focus is expected to be on individual access—to cover 75 million households at the bottom of the pyramid. Indeed, ‘financial inclusion in mission mode’ is expected to be one of the highlights of the Independence Day speech.

The fear though is that mission mode may be retarded. The discourse—many of the ideas from bankers to the babudom—is cloaked in the Seventies’ mindset. There is much re-invention of definitions, exemptions, discretions. The plethora of classifications is scary. The draft guidelines state that payment banks can accept deposits, allow remittances but cannot lend. Small banks on the other hand can lend but will be limited in their area of operations. Really, should India be subscribing to limitations of size or investing in the competitive advantages of technology and scale? The thinking is restricted by old socialist ideology, that the poor do not know how to borrow or to spend. In itself this is laughable, given the magnitude of informal credit in small businesses, and in agriculture, innovative but scandal-ridden savings schemes and the size of the cash economy.

India clearly cannot afford obeisance to incrementalism. Consider the challenge to comprehend how bad is bad. World over, nearly 2.5 billion persons have no access to formal banking. Of this lot, every fifth person is an Indian. Nearly 60 per cent of the populace and 90 per cent of small businesses have no bank account (Source: RBI report on Inclusion). What this means is that individuals pay more on borrowings, earn lower returns, risk losing their capital, face hurdles to finance consumption or investment and live without critical risk insurance. The aggregation of this granular detail translates into a larger cash economy, lower savings, poor tax collections, higher costs and prices, and perpetuates a shallow economy that makes high GDP growth unsustainable.

India has over 850 million mobile subscribers. India also has—through Aadhar and NPR–over 650 million persons registered and ready with a 12-digit-number. These numbers are already settlement ready and can be logged on to the existing inter-bank mobile payment system. The IMPS—promoted by 10 leading banks and set up by the National Payment Corporation of India—affords an opportunity to induct the un-banked onto a financial platform by converting the 12-digit number into an account.

The IMPS platform allows 24x7 operations and instant transfers, is enabled for mobile applications, delivers uniqueness, can be used across ATMs and is portable. In-built interoperability enables the accounts to be good for G2P (government to person for payment of subsidies or relief), B2C (business to consumer for consumption or investment) and C2C (consumer to consumer) transactions. Once inducted, the government must not dictate or caste the character of the account. Allow the citizen to choose the institution he/she wants to bank with and the platform he/she wants to do it on.

Banking is also not an abstract goal. In India’s frugal, thrifty society, need for possession of an account is dictated by utility. Six of 10 adults cite not having money or use as the most common reason for not having a formal bank account. Ergo, it is imperative that the government—immediately if not simultaneously —push for G2P transactions to make inclusion meaningful. For instance, it could deliver coupon credits across the platform utilisable for buying kerosene from PDS outlets—at least in one state, say Goa or Gujarat. PDS sales could be limited—only against electronic coupon payments, thereby precluding diversion against cash. It is a thought. There could be other thoughts that can be introduced to curb corruption, deliver goods and limit subsidy raj. 

Modi Sarkar is poised at the intersection of challenge and opportunity. Modi assigned his faith to technological solutions through the poll campaign. Now his government should unsubscribe from incrementalism, assert its faith and force quantum change. It should deploy technology and adopt scale as its calling card to reinvent inclusion.

shankkar.aiyar@gmail.com