The Hindu Business Line : Why not pay wages for the poor by cheque?

THE National Rural Employment Guarantee Bill, passed by Parliament has fixed a minimum daily wage of Rs 60 for 100 days of employment for the rural poor. Initially, 200 districts, including 150 under the food-for-work programme, will come under the Bill.

Apparently, the rural poor will be paid in cash, which could lead to leakages, as the bureaucracy and the rural elite might take hefty cuts. The Employment Guarantee Scheme in Maharashtra for the rural poor has this debility. Can wage payments be made by cheque, with the rural poor being helped to open accounts in rural branches of Government banks or in Regional Rural Banks?

It could cut down on the leaks, as it will be hard for Government agencies not to credit fully the accounts of the rural poor. And if there is a shortfall, an audit of the flow of funds can easily pick out the fault lines. The idea was suggested to this writer by Mr Kishor Rithe, who has been studying the Employment Guarantee Scheme in Maharashtra.

Good in principle

One mooted the idea to two top bankers and they thought it looked good "in principle," while admitting to the reluctance of banks to open a large number of accounts in the names of the beneficiaries. The rural poor, mostly illiterate, may need some handholding to open bank accounts, but that should not be a hard job if the banking system is pushed to take it up.

The transaction costs for banks to service a large number of accounts could be a bit steep, but that will be compensated by choking the drift of funds from the rural poor. The cost of servicing a large number of accounts could drop, with most banks going for core banking solutions through which computers can link rural and urban branches.

Banks will have a free float of funds to earn interest incomes to make up for transaction costs. For instance, in a month, the rural bank branch will attract a deposit of Rs 6,000 (Rs 60x100) per beneficiary and it need not be that the entire amount will be withdrawn over time.

Over the years, wage payments in cash or kind have fallen short of the amount promised to the rural poor. There are also time lags in the payment of wages. Opening of accounts should be free of cost. The poor should have the facility to draw on their accounts whenever they want without any conditions. There could be many variations like offering kisan credit cards to the account holders at the second stage. On the way, the depositors could be taught to hold back on withdrawals by placing a part of their earnings in fixed or recurring deposits. The banking system could also think of tying the pool of deposits generated by the rural employment scheme with the micro-credit schemes that are in operation in the South. Banks could lend these funds to Self-Help Groups (SHGs) in districts and provide support services while adding the SHG-lending to their service area plans. In a recent talk at Hyderabad, the RBI Governor, Dr Y.V. Reddy, said, "On the suggestion for bringing the micro-finance entities under a system of regulation through a separate legislation, the RBI felt that the micro-finance movement across the country involving common people has benefited immensely by its informality and flexibility. "Hence, their organisation, structure, and methods of working should be simple and any regulation will be inconsistent with the core spirit of the movement. It was also felt that ideally, the NABARD or the banks should devise appropriate safeguards locally in their relationship with the micro finance institutions (MFIs), taking into account the different organisational forms of such entities. "In any case, if any statute for regulation of MFIs is contemplated, it may be at the State-level with no involvement of the RBI as a banking regulator or for extending deposit insurance." That was the first response and the central bank has decided to revisit the issue.

Pertinent posers

The RBI chief has posed some questions. How does one distinguish an MFI from a micro credit institution and both from other financial entities? Should the SHGs be placed on a par with MFIs? Most importantly, should MFIs be allowed to accept public deposits? "Needless to say, it is the issue of accepting public deposits that poses major challenges, both legislative and moral, more importantly of moral hazard," says the RBI chief. Over the last six months, the RBI, for the first time, has brought on its agenda the `financial inclusion' of the poor and the weak into the financial system. Dr Reddy warned, "One should avoid the temptation of creating one set of banking and financial institutions to cater to the poor or unorganised and another for the rest.

"The medium to long-term objective should be to ensure the inclusion of all segments in the mainstream institutions, while taking advantage of the flexibility of multiplicity of models of delivering a wide range of financial services." May be paying wages to the poor by cheque could drive the process of "financial inclusion."

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
ATM transaction fees for NFS to be halved

Why not pay wages for the poor by cheque?

Rupee unchange; bond prices up

Shriram Life gets operating licence from IRDA

LIC plans to set up data warehouse

Govt seeks performance targets — Now, public insurers nudged to shape up

I-T payment at bank branches

Exim Bank to extend $26.8 m LoC to Mali, Ivory Coast

World Bank asks India to review rural lending policy