Removing bank A/cs from the equation

Last fortnight, when the Reserve Bank of India (RBI) Governor Raghuram Rajan met some members of Ela Bhatt's Self-Employed Women's Association and asked them how many borrowed from moneylenders before they came to SEWA. About half the women raised their hands. When asked how many thought of approaching a regular bank before they came to SEWA's cooperative bank, not one raised her hand. Interestingly, many of them said that the loan from SEWA freed them from the moneylender's high interest rate, which gave them enough to service SEWA's loan fully even while focusing on other productive activities. 

Also, Rajan said he heard similarly from other micro-entrepreneurs: the highest return initial investment is often to free oneself of the clutches of the moneylender. Despite this high return from the delivery of credit to the poor, and also much of financial inclusion efforts being focused on credit, Rajan said, “We still reach too few of the target population. So there is much more to be achieved.”

The imperative for financial inclusion is both a moral one as well as one based on economic efficiency. “Should we not give everyone that is capable the tools and resources to better themselves, and in doing so, better the country?” Rajan asked.

He simply meant that the much-talked about financial inclusion should become a doable thing with ease through broadening of financial services to those people who do not have access to financial services sector currently.  The RBI is working on a plan that will enable bank account holders to send money to anyone, even if they do not have a bank account, through mobile phones. 

The plan is to set up a payment system that will transfer funds from bank account holders to those without accounts through ATMs.  An intermediary will be set up to process the payment and a code will be sent to the recipient on their mobile phone that will allow them to withdraw the money from any bank’s ATM, explained RBI governor Raghuram Rajan at the Nasscom India Leadership forum last Wednesday.

“Cashing out is important for remittances because we have a large recipient population in the country, most of whom do not have access to formal banking services,”  Rajan said, adding, “The system will take care of necessary safeguards of customer identification, transaction validation, velocity checks, etc. We need more such innovative products, some of which mobile companies are providing.”

With the apex bank’s new facility is in place, money can be withdrawn from any ATM.  Under the new facility, all that the sender will need is the recipient’s mobile phone number to initiate a fund transfer. And once the sender initiates the transfer, the beneficiary will receive an SMS from the bank with a PIN, which will need to be punched in to withdraw the money.  

National Payments Corporation of India (NPCL)'s Ram Sundaresan avers: “We started working on it from November 2013 and it may take another three months for the process to become functional.” 

Currently, India has about 900 million mobile phones but around half of the country’s adult population does not have access to formal financial services. In this context, Rajan said, “We have consciously adopted the bank-led model for mobile banking, while the non-banks, including mobile network operators, have been permitted to issue mobile wallets, where cash withdrawal is not permitted as of now.” 

Automation could also, similarly, bring down the cost of access to money for small businesses and increase the money flow and reduce fraud.

Among its recommendations, the Nachiket Mor panel proposed that a new set of banks be introduced to push financial inclusion. Called payments banks, these banks will be set up to widen the spread of payment services and deposit products to small businesses and low-income households. It recommended that such banks can be created by converting prepaid payment issuers (PPIs), or companies that provide cards that customers can use to make payments with money that’s stored in them. India has 27 PPIs now.  

Responding to criticism that mandates on financial inclusion do not help and it should be left to market forces to provide financial inclusion, Rajan said, “Markets do respond to need, and competition is a very healthy force for improvement, but market functioning can be impeded by poor infrastructure, uneven regulation, natural or regulatory monopolies, and even cartelization.”

Incidentally, two private banks had introduced a remittance product which enabled bank accoun tholders to send funds to those without a bank account by punching a code in their ATM. The scheme was withdrawn as the regulator at that time was not comfortable with the product.