Indicus Centre for Financial Inclusion


Fixing the Aadhaar-DBT link

While Aadhaar-enabled DBT has been suspended by the UPA government, the problems that need to be addressed lie in the implementation of the programme (See earlier post). It must be kept in mind that even as the government was quick to impose Aadhaar on its DBT, numerous gaps plagued the process, for instance establishing statutory legitimacy of the UIDAI; articulating the roles of banks and non-banks and the limits of jurisdiction by banking and other regulators; affixing the onus of responsibilities in a bank-led model of financial inclusion; and lastly, defining the commercial model for implementation.

The Congress manifesto accepts Aadhaar, but does not push for Aadhar-enabled DBT. Currently, the Aadhaar end of financial inclusion is set: infrastructure and payment bridges and protocols are ready, and have been tested.  However, the other critical pieces have not been put in place, especially the cleaning, de-duplication and mapping of numerous beneficiary databases with Aadhaar, a task that must be done by the government departments. The challenges listed below need attention, so that Aadhaar-enabled DBT can resume effectively and efficiently.

The first step needs to be to recognise the UID as a primary identity document, and accord one institution – whether the UIDAI or any new entity that combines the NPR and UIDAI -  status as an independent statutory institution and allocate resources under the Consolidated Fund of India.

The UIDAI should have complete and exclusive accountability over the personal and biometric data capture and processing, which must not be outsourced to private parties, drawing lessons from the Passport Office. Over time, the Passport Office and Aadhaar number can even be issued by one authority.

The core function of the UIDAI is to collect and archive personal information in safe and encrypted form and issue the UID to any applicant. The UID number is one among several documents to identify a natural person.

Aadhaar online authentication for commercial/ financial transactions is different from the core function of issuance and verification of an Aadhaar number. Aadhaar verification must not be made compulsory or the sole/ exclusive source of identity to access services or benefits provided by government institutions.

For real time, online authentication of the Aadhaar number, the role and scope of UIDAI service should be limited to answering session-based queries real time returning a binary True/False result, without any obligation or power to share any personal data.

Authentication service charges should be session-based, with tariffs based on a normative cost-recovery and reasonable profit principles to ensure sustainability and adequate information security standards.

UIDAI should be liable for any financial losses or damages arising from false positive identification on the UIDAI database against an authentication query. The liabilities should be covered by appropriate insurance and reinsurance on the lines of other banking and financial institutions.

The cleaning and de-duplication of the beneficiary databases under all schemes need to be accelerated and seeded with the identity numbers, irrespective of whether Aadhaar is used for verification.

There is a lot to be done, and a government committed to reducing corruption and leakages in the subsidy process can use the Aadhaar infrastructure, provided the gaps mentioned above are addressed. The key lies in bringing all stakeholders on board before the programme rolls out again, the question is whether the next government can pull this off.


This post draws on insights given by S V Divvaakar and Laveesh Bhandari.

A unique national id for India?

The Aadhaar number has been proving itself to be extremely beneficial for DBT and government payments, see MicroSave research reports on transfers in Aurangabad district in Maharashtra and East Godavari district in Andhra Pradesh, and yet there have been quite a few many problems in the implementation countrywide. The Aadhaar Enabled Payments Systems and the Aadhaar Payments Bridge were platforms set up with the NPCI to route payments using electronic verification through Aadhaar (see ICFI Policy Brief on how Aadhaar Authentication Protocols could be leveraged to mitigate systemic risks in payments for inclusion). By 31 January, 2014 the total transfers through Aadhaar enabled payment system was more than Rs.3,124 crores, of which Rs.2,574 crores alone was through Direct Benefit Transfers, and yet, at the end of January, the Central Government put on hold the programme of Aadhaar enabled DBT.

There have been a whole host of problems in the implementation of the programme at various levels, that have been enumerated in a focus note by Mukesh Sadana and Lokesh Singh of MicroSave. For example, in many cases, beneficiaries never received their Aadhaar card, bank staff were not adequately trained in seeding protocols and processes, leading to considerable confusion, different practices were followed across the country for the actual crediting of the payment in the account, beneficiaries could not access their account to withdraw the money credited etc.

As Sadana and Singh note, “The combination of implementation challenges highlighted above left a lot of genuine beneficiaries unable to receive their benefits. This led to widespread discontent. The government could ill afford to have such large numbers of discontent individuals in an election year. So it took the easy option to discontinue DBT”

However, they conclude that: “We should not throw the baby out with bathwater. It seems that the main reason for the apparent under-performance of Aadhaar-based DBT is that Aadhaar is a first-world solution in a third-world environment. For it to succeed, the infrastructure, readiness of key stakeholders and delivery systems must be in place.”

Given the present concerns, the Supreme Court has now ruled that the government cannot make Aadhaar mandatory for receiving any service.  However, the crux of the matter is that Indians need a unique national id, a unique financial adress and Aadhaar was well on its way to filling this gap. It is indeed a shame, that lack of coordination amongst the stakeholders within the government and the banking system has lead to roadblocks. Electronic authentication helps speed up account opening, verifying and tracking transactions and gives a level of transparency and accountability that the regulators can trust, it is important that India gets its act together soon on this. While there are many issues to resolve in the implementation of such a programme, without a clear approach, without all stakeholders being on board from the beginning, unfortunately we are now facing setbacks in the inclusion mission.


Innovations in mobile financial services

The RBI has been pushing banks and non-banks to tap technology for increasing access of financial services to the excluded (See Rajan, Padmanabhan). One of the modes that has gained traction globally is mobile money and it is worthwhile to go over a recent paper by Ignacio Mas and Mireya Almazán that reviews the state of product development and innovations in mobile money as it is today. Though the authors do not claim it to be a comprehensive study across all schemes, the paper is a very useful guide to the world of mobile money. In particular the framework used clearly separates monetary transactions into real-time transactions (payments) and inter-temporal financial obligations (savings, credit, insurance) and can serve as an excellent guide to banks and non-banks to push mobile financial services.

In an evolving space of technology and money, innovation is key to raising usage of these new modes of transactions and the paper concludes, ” We feel that innovation and experimentation around the manageability of saved balances and payments ought to be the core focus in the future, especially as we start to prepare for the inevitable transition to smartphones. The greater computing abilities and richer, more tactile user interfaces of these devices should be leveraged to make customers feel more in touch with their money, their business concerns and their goals.”

In a blog post, this point on fostering innovation is taken further by Mas, who gives some reasons behind the slow change: One is that many mobile money providers have inflexible platforms run by small teams on tiny budgets- here, innovation is not a solution, but is seen as a distraction to day to day business problems. Again, almost all mobile money providers run closed systems without adequate application programming interfaces, they are either unwilling or unable to take help from others to experiment. Another possibility is that there could be several regulatory barriers to entry that “could prevent smaller, nimbler, more innovation-minded players from mounting credible competing propositions. (I’m thinking here about the unjustified regulatory insistence that cash in/out presents agency problems, hence requiring a strong contractual binding of cash merchants to individual banks or mobile money providers, which precludes the spontaneous development of cash in/out networks serving all providers. Or the unjustified regulatory insistence that non-bank players shouldn’t promote savings services or pay out interest, even if they are 100% backed-up into fully regulated bank accounts.)”

Of course, whether a regulatory barrier is unneccessary or vital can be a matter of debate and definitely will vary depending on the landscape in each country. When it comes to India, an open dialogue between the banks, non-banks and the RBI should be encouraged, to look at such regulatory issues. The RBI has to balance between opening up the space to new players, without raising the risks in the system; for this both banks and non-banks have to cooperate with each other and the regulator and put in adequate processes and mechanisms that will foster the confidence and trust of the regulator.

Mobile Money for the Unbanked: State of the Industry 2013

With the RBI Governor drawing attention once more to the use of technology in achieving inclusive growth, the latest MMU’s State of the Industry Report shows that mobile money services are catching up across the world:  110 deployments across 56 countries responded to the 2013 survey (up from 78 deployments in 2012 and 52 in 2011). India can use the experiences from other countries, drawing its own appropriate lessons.

The key data points as revealed by the survey are as follows:

  • ·         Registered accounts: As of June 2013, there were 203M registered mobile money accounts. 9 markets have more mobile money accounts than bank accounts (compared to 4 in 2012). All 9 of these markets are in Africa: Cameroon, the DRC, Gabon, Kenya, Madagascar, Tanzania, Uganda, Zambia and Zimbabwe
  • ·         Active accounts: 61M mobile money accounts were active on a 90-day basis. This translates to a 30% active rate.
  • ·         Large deployments: 13 deployments have more than 1M active users, 7 of which passed this threshold between June 2012 and June 2013
  • ·         OTC: In June, there were 17.3M unregistered users of mobile money. This comprises unregistered over-the-counter (OTC) users plus off-net transfers from registered accounts to unregistered users (or vice versa). Note that unregistered users were not counted in the registered and active account figures listed above. South Asia comprises 88% of the world’s unregistered users.
  • ·         Competition: 52 markets now have more than one deployment, signaling increased scope for account-to-account integration
  • ·         Gender: For the first time in 2013, MMU collected data on the gender of mobile money users. All participants were asked whether they knew the gender composition of their customer base. 32% of respondents gave a positive answer and were able to report a number. Within this sample, on average, 36% of mobile money users were women. This percentage ranges from 4% to 86%. Women represented the majority of users in only 6 deployments. Perhaps FSP should explore collaboration with MMU to figure out how to boost the response rate among MNOs on this question.
  • ·         Breakdown by transaction: Airtime top-ups represent 75% of mobile money transactions (up from 61% in 2012), followed by domestic P2P transfers (18%), bill payments (4%), bulk payments (2%), and merchant payments (2%). Bulk payments was the fastest growing product with numbers of transactions increasing at an annualized growth rate of 617%.
  • ·         Breakdown by value: Domestic P2P transfers represent 69% of the value transacted (down from 82% in 2012), followed by bill payments (11%), airtime top-up (9%), bulk payment (7%), and merchant payments (4%).
  • ·         Average active customer: In June 2013, the average active customer conducted 5.8 airtime top-ups, 1.3 P2P transfers, 1.1 cash-in, 1.1 cash-out, and 0.3 bill payments.
  • ·         Ecosystem development: 29% of the value transacted involved external partners (e.g. merchant partners; bill collectors; enterprises; etc.)
  • ·         Revenues: 69 deployments reported revenue figures. Of these, 5 reported that mobile money contributed to over 5% of their revenues and 8 reported revenues of more than $1.0M in June 2013.  These 8 deployments generated a total of $41M in revenue in June 2013. M-PESA’s contribution to Vodacom TZ’s overall revenues increased from 12.6% in September 2012 to 18.7% in September 2013.
  • ·         Airtime sales: 10 operators reported selling more than 10% of their airtime through mobile money.
  • ·         Beyond payments: 123 mobile insurance, savings, and credit services are live – 27 of which were launched in 2013.
  • ·         Agents: The number of agents has reached 886,000; the number of agents outnumbers the number of bank branches in 80% of markets in the survey. However, 48% of registered agents were inactive in June 2013! The average agent conducts 6.7 transactions per day. On average, there are 28.4 agents per 100,00 adults compared to 4.6 bank branches per 100,000 adults; 39% of agents are in rural areas
  • ·         Some formalized agent sharing:  In several markets, providers are recruiting and managing agents that other providers use to deliver services. Examples of this model already exist in Nepal, Nigeria, and Zimbabwe.

MMU predicts three developments in 2014:

  • ·         More examples of account-to-account interoperability, among mobile wallets and also with banksIn 2013, Indonesia was the first market where three operators – Indosat, Telkomsel and XL – enabled their mobile money schemes to directly transfer money in real-time between each other. Given how there are already 52 markets which have 2 or more mobile money services, MMU expects that more markets may also seek to interoperate their mobile money platforms, once they have identified the right technical and commercial models to do so successfully. There is also an opportunity for mobile money services to connect with more traditional financial services, enabling transactions and new products between bank accounts and mobile wallets. Many deployments have already started to integrate their services in this way, and we anticipate that many more will follow.
  • ·         Ecosystem development: In 2013, transactions involving external companies have been driving the growth of mobile money globally, representing 29% of the value transacted in June. This is especially true among more mature services, where external companies and merchants contribute to an even larger share of the product mix. Going forward, we expect to see more mobile money services capture the payments demand from companies and institutions to drive high volumes of transactions on their platforms.
  • ·         Other mobile financial services: A growing number of providers are interested in launching mobile insurance, credit and savings services, and we expect to see many new launches over the next couple of years. Mobile insurance, credit and savings are important new offerings and could serve to deepen financial inclusion, not only in terms of expanding access of these services to low-income customers, but helping to ensure financial stability and security as well. However, more proof points are needed for how these services can be offered sustainably, in order to ensure adequate levels of investments are made by the industry.


Advent of Virtual Banks in India – A relook at Nachiket Mor Committee Report: Guest Post by Probir Roy

The Nachiket Mor Committee recommends the creation of Payment Banks as a step towards using the strengths of non-banks in payments and remittances, to raise access to financial services amongst the unbanked.

The concept of Payment Banks is perfect. This allows existing Non Bank Pre Paid Issuers (Non Bank PPI’s), already licensed by the RBI, to apply for such a license.

Here are a few thoughts from a Non Bank PPI perspective (there are more than 20 such non-banks providing payment services since the RBI allowed non-banks as Pre-Paid Instrument Issuers (PPIs) in 2009). Some points to begin with:

  1. PPI customers are synonymous with having an ‘account in the cloud’ or ‘Universal Electronic Bank Account’, as the Nachiket Mor Committee terms it, that is a digital account. Today already over 500 million Indians have Aadhar nos, and this already overlaps very strongly with the telco subscriber base, which in turn overlaps significantly with the DBT recipient base. For e.g. LPG customers in 291 districts have  linked their Aadhar number to their consumer no with their local LPG distributor, and ‘seeded’ the same with their bank accounts, thus allowing  for the subsidy amount to be directly credited in near real time. In January 2014 about 20 million such credit transactions were made by the NPCI & SBI.  Now, this could be also be ‘seeded’ with a mobile wallet base of Non Bank PPI’s (who already have a substantial user base of their own) i.e. people averse to ‘seeding’ with regular Banks, or those already with digital wallet accounts – but no regular bank accounts.   This approach will beat the extreme challenge of banks being the whole and sole medium having to provide ‘UEBA’ to all adult citizens by 2016.
  2.  PPIs can send and receive money to/from regular account holders in banks and eventually should be able to do so to other PPI accounts, across an interoperable network.
  3.  Though currently restricted, wallet cash out/cash-in should be allowed at larger base of legitimate outlets since cash-out is an important part of the remittances flow. This effort is now best complemented  by established private players (viz. FMCG, retailers, fair price shops, etc) to allow for ‘network effects’ to kick-in‘a la Tanzania with its 27000 agents for a population of 37 million, or Somaliland with its 8600 agents for a population of 3.85 million. In India a clear a million existing unique established and ‘trusted points’ of presence are there built up over the last 100 years,  even if we don’t count Telco touch points.

The Mor Committee recommends the following: Given the difficulties being faced by PPIs and the underlying prudential concerns associated with this model, the existing and new PPI applicants should instead be required to apply for a Payments Bank licence or become Business Correspondents. No additional PPI licences should be granted.” This may work for new applicants but forces existing PPIs to rethink their business model, and may push out some with considerable valuable operating experience, first mover risk taking, network aggregation & innovation.

One recommendation that ties in with this ‘fear’ of losing some players concerns the minimum capital requirement: “In view of the fact that they will therefore have a near-zero risk of default, the minimum entry capital requirement for them will be Rs. 50 crore compared to the Rs. 500 crore required for full-service SCB.”

Why Rs. 50 crore is not explained in the report.

Currently there are no capital requirements for PPIs, so there should be some justification for making the jump. Why not an instead have a capital limit of say Rs 25 crores for Payment Banks?

The need for initial capital and prudential norms is accepted: a reasonably well capitalized company can ensure proper governance, compliances, technology, customer complaint redressal, professional management and fiduciary obligations. Too low a capital requirement can bring in fly- by- night operators, a high one may run the risk of a greater tendency towards innovative financial engineering & accounting. But the Rs. 50 crore capital requirement for both Payment Banks and Wholesale Banks (which have a wider mandate, role and a credit-spread based business model) has been put for both Payment Banks and Wholesale Banks. This seems a mite unfair. While Payments Banks can hold maximum balance of Rs. 50,000 per customer, Wholesale Banks can accept deposits only greater than Rs. 5 crore. While Payments Banks cannot issue credit, the primary role of Wholesale Banks is lending.

Payment Banks will definitely have a cost structure which is much more economical as compared to Wholesale and SCB’s based on its lower human resources and physical asset costs, use of technology and lower risk profile. Which all lend itself to its transactions-based business model. So could very well do with a lower capital limit.

What would instead be more rational, again following the European Union Standards is to have a tiered system that will allow small and large firms, banks and non-banks to provide services:

  1. Existing Non Bank  PPIs with a capital base of Rs. X crores
  2. Payments Banks (PB’s)with minimum capital of Rs. Y crores (where Y > X, but < Rs 50 crores)
  3. Wholesale Banks (WB’s)with minimum capital of Rs 50 crores
  4. Scheduled Commercial Banks (SCB’s) with minimum capital of Rs 500 crores

Finally, whatever is the entity, capital requirements cannot circumvent the need for regulatory oversight & supervision and monitoring of transactions, inspections, audits, etc. All types of banks and non-banks, as well as the RBI have to upgrade supervisory systems and processes. For the first two categories RBI can help itself out by allowing for a Self Regulating mechanism under the aegis of the respective Industry Associations/Bodies entrusted with regulating its own.

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