Two steps forward, one step back

Imagine an India where every resident, irrespective of location, is able to make financial transactions electronically with anybody, individuals or firms, anywhere in the country. This is the vision spelt out by the Reserve Bank of India in its ‘Operational Guidelines - Implementation of Electronic Benefit Transfer (EBT) and its convergence with Financial Inclusion Plan (FIP)' , issued on August 12.

This document with its deceptively bland title has some very interesting insights into what is currently the most happening space on the policy front. For all the visionary perspective, the route to this goal appears rather convoluted.

Three pillars

To explain the background, there are three pillars of support being used by the RBI to spread electronic financial transactions in rural areas and lower income segments — Electronic Benefit Transfer (EBT), Financial Inclusion Plan (FIP) and Aadhar(UID). The EBT began around three years ago, pilot projects were rolled out in a few States to route government social welfare payments through bank business correspondents to the beneficiary, electronically, via handheld devices using biometric smart cards. The implementation ran into teething troubles — the subsidy by the RBI towards the cost of the smart card was withdrawn after a year, while State governments were reported to have a ‘nonchalant attitude' towards promoting the scheme. Also, banks lacked the required network of BCs to cover the assigned districts and the capacity to offer an array of financial services at these locations.

The problems were further compounded by the EBT scheme following the ‘one-district one-bank' model, the idea being that one bank is designated as the intermediary for payments. Now this model was seen to be clashing with the FIP that was started last year. The goal of the FIP is to cover all unbanked villages, with population more than 2000, by 2012, and banks had been assigned villages to ensure each unbanked village was covered.

Confusion among banks

Therefore villages could be assigned to one bank for EBT and another bank under FIP and this led to confusion amongst the banks — it was some months before the RBI specified that more than one bank can serve the village. In addition, whether under FIP or EBT, there is the stipulation of a brick and mortar branch within a 30 km radius from the BC outlets, rising costs for all banks. The latest operational guidelines conclude ‘Once banking services are extended to all villages under the FIP, convergence between the EBT Scheme and FIP would be automatically realised. Once FIP is fully implemented covering all the unbanked villages and a UID number issued to each of the villagers, a ‘model' will emerge where the customer will have the option to transact with the bank of his choice in any village by using UID-enabled Micro ATMs.'

The question is that if the end-objective is tooffer choice to customers, does financial inclusion really need such micro-management ? It is true that left to themselves and seeing their track record, banks needed to be pushed into providing financial services in rural areas and to the lower income classes; yet such fine-tuning of areas makes the banks even more wary of not crossing the line with the regulator, while adding to their costs, e.g is the rule of 30 km radius between a branch and its BC network really essential?

Halting progress

What does expansion of financial inclusion need? Simply put, financial service providers – banks or non-banks – must have the capacity and capability to service customers across locations across income segments.

While on one hand, there is the vision and the focus, with regulatory space opening up to new players and new technologies; on the other, there is wariness in letting go that is quite apparent. For every two steps forward, there is one step back and there are numerous examples here.

For instance, take the confusion over banks under EBT and FIP just discussed or take the permission for non-banks to act as BCs while still mandating a strict rule of a brick and mortar branch in rather close proximity. Then look at the other end of the spectrum where the most recent RBI order permits banks to issue mobile wallets to companies for onward issuance to their employees, but limits this to just corporates who are listed on any stock exchange in India.

Of course, rules keep changing and the RBI has to deal with the regulatory dilemma of keeping the balance between maintaining financial stability and not being so prescriptive that innovative models or products are stifled. The road map has been laid out, what it will achieve depends on whether banks see the RBI vision as an opportunity or a business complexity forced upon them.

(The author is with Indicus Analytics, New Delhi. > blfeedback@thehindu.co.in )

COMMENT NOW