Financial Inclusion: Bank Account (Jan Dhan), Mobile Wallet or Social Credit Card?

Introduction

    There are three ways to increase financial inclusion (of less well of citizens): (1) Open a bank account with or without an associated debit card. (2) A cell phone based payment system with deposit facility (mobile wallet + banking) and (3) A credit card with no charges to holder and very low charges to payee (Social Credit Card). These three ways are not mutually exclusive. They can be used alone or in any combination.  If combined with a UID number for authentication & elimination of duplicates,[i] all are capable of use by government to make cash transfer directly to recipients(DCT/DBT), minimizing leakage and ensuring that every needy person gets his/her entitlement.  The key issues are (a) how quickly they can be made universal, and (b) how easy they are for the poorest to use.

Bank Act, Rupay Debit card

  Surveys suggest that 47 to 57% of the people have a bank account. Surveys of potential account holders show that poor and lower middle class people find it too intimidating to open a bank account.  One of the major justifications for Bank nationalization in 1969 was to bring such people into the formal financial system and reduce or eliminate their dependence on informal sources and money lenders.  Forty five years later at least 40% of the public still doesn’t  have a bank account. This reflects very poorly on “Nationalization” and the Nationalized banking system. Universalization of banking therefore remains a very difficult task.

The “Jan Dhan” Yojna aims to provide a Debit card, RuPay, along with a bank account. This is a novel idea in the context of financial inclusion.  The debit card will also have Rs 1 lakh of insurance bundled into it. The debit card will make the use of any money deposited in the bank account, and the overdraft facility associated with it easier, therefore providing an incentive to those who hesitate to use banks, even if they have a bank account. Deposits & repayment would still require a trip to the bank or interface with a banking correspondent, who has also been provided some incentives to enroll members. Once the bank account is seeded with UID/Aadhar  and government starts transferring funds directly into it as cash transfers or direct benefits, the account holder can use the RuPay without ever going to the Bank branch. 

Mobile Wallet, Mobile Banking

    Mobile company records suggest that 80% of the public already has a pre or post paid mobile phone. Projections suggest that over the next 5 years this will rise to 90% and in 10 years become close to universal.  Even the poorest person knows how to operate a pre-paid mobile phone that has a pre-paid deposit of money in the mobile account with the phone Company. The phone companies can easily convert these mobile accounts into a mobile wallet that can be used to pay for the purchase of any good or service by transferring funds to the sellers mobile account. The phone account could also be used to provide some simple banking services.[ii] This would the least cost method of achieving universal inclusiveness.

Unfortunately RBI regulations do not permit Mobile companies to use it as a universal wallet or to use to provide deposit-credit facilities.  RBI’s argue that this would put the stability of the payments and credit system at risk. In my view a carefully constructed and limited system can achieve complete inclusiveness, in a shorter time frame than either of the two alternatives, with only a marginal impact on the stability of the overall system.

Social Credit Card

       The third method of attaining universalization is to create and issue “RuCredit Card” analogous to the RuPay card.  Each person’s card would have a credit limit appropriate to him/her. There is no need to open a bank account, as the credit card acts as an account.  If government benefit transfers can be synchronized with the due dates of credit repayments, the credit card becomes a Social credit card with a credit limit linked to the benefits transferred. The recipient can then use the Social credit card like any other credit card to buy goods and services.    Insurance can also be bundled into the card.

Conclusion

     Any of three methods can be used to achieve universal financial inclusiveness, alone or in combination.  However, the genuine mobile payment & banking solution, if permitted by RBI regulations, is likely to be more effective and less costly to the provider, and achieve greater satisfaction levels for the low income user. The “Jan Dhan” Yojna has tried to build in incentives for all participants (bank employees, correspondents, unbanked public). Its public launch involved the PM and his ministers, demonstrating his personal commitment and the importance attached to it by the government.  There is also a hint of regulatory easing with respect to use of mobiles for payments.  If the “Jan Dhan” Yojna achieves its enrolment & usage targets, it would be a feather in the government’s cap.

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[i]  See note at  https://sites.google.com/site/chintan1997reg/institutional-reform/uid for a summary.

[ii] See http://dravirmani.blogspot.in/2014/04/mobile-banking-vs-mobile-access-to-bank.html for more details

Poor need Mobile Payments and Banking

   The Government, RBI and many Banks seem to be confuse  “Mobile Banking” with “Mobile Access” to ones Bank Account. The latter requires one to have a pre-existing bank account in a specific bank branch. In the old days, one had to physically go to this bank branch to deposit or withdraw money or to deposit a check. One could and still can issue a check in another person’s name which she can physically deposit in her bank account.  “Mobile Access” (internet access) makes it possible for the account holder to use a mobile phone (internet connection) to check bank balances, transfer funds between different accounts in the same bank (eg saving, checking, credit card) and from ones accounts to another person with an account in the same bank.  Where a system of “Bank correspondents” exists one can use the services of a correspondent who visits you to deposit cash or check or withdraw cash from your account through a physical transfer to/from him cum a digital transaction through his  mobile/ internet  connection to the correspondent’s account at the bank.

    True “Mobile Banking” is an entirely different animal altogether. It is like a super charged prepaid mobile card in which the balance in your pre-paid card acts effectively as a “mobile wallet” from which you can make and receive payments from any other mobile phone. As it stands, anyone can pay cash to charge the pre-paid card of any other person’s mobile phone.  However, the outstanding balance on the pre-paid card cannot be withdrawn or used for any other purpose than making phone calls. A “mobile payments system” would allow everyone to use the balance on her mobile pre-paid to make payments to any other person’s mobile for purchase of any good or service.  Mobile companies have the accounting and software systems to quickly and cheaply convert everyone’s mobile phone into such a mobile wallet and thus create a "Mobile payments system". In fact with sufficient competition they may (if allowed) even start offering a small interest rate on your outstanding balance or offer limited credit facilities for a fee and thus convert it into a true “mobile banking” system.  RBI regulations on “payments systems” and banking however, forbid cell phone companies from offering any such payments or banking services.

The idea took root when I first read about how South African government had started using mobile phones to deliver pensions to retired government servants in rural and remote areas of the country.  A mobile payments and money transfer service called “MPesa” was launched by SafariCom in Kenya in 2007. Since then I have a strongly argued for allowing true “mobile banking” with clear upper limits on deposit & credit balances and transaction amounts, coupled with less stringent/costly regulations. At that time less than 50% of Indian’s had bank accounts, though the percentage has inched up towards 60% (according to official sources, a NGO survey puts it at less than 47%). Most of those without access are either the urban poor, intimidated by the banking system, or the rural poor & middle class who do not have the time, or find it too costly, to access bank services. In contrast an estimated 80% of Indian’s already own mobile phones and the coverage is projected to approach 100% within the next 5 years.  Thus the quickest and cheapest way to make modern payments and banking systems available to the poor and lower middle class, is by allowing true “mobile payments and banking” services.

The stability of a country’s “payments systems,” and “banking system” are critically important to the health of the “financial system” and the modern economy. The RBI therefore has stringent regulations on all payments and credit intermediaries and particularly on banks through which most of these activities take place.  The RBI however has traditionally insisted that any other financial intermediary that undertakes these transactions must meet the same regulatory standards.  One has argued that, the by limiting the set of transactions to a small set of well understood and transparent one and by putting absolute values (for e.g. maximum balances of Rs 10,000 and aggregate transaction of Rs. 50,000/annum and credit to the average daily balance) one can limit the systemic risk allowing a reduction in regulatory requirements such as capital adequacy norms, SLR, CRR etc).

Even within the current system, RBIs regulations were much more stringent than in neighboring Pakistan.  With the result that, use of mobiles for internet transactions has spread much more quickly than in India. It is hoped by many analysts and observers, that the highly unsatisfactory state of affairs, will be corrected through implementation of the relevant recommendations of the Nachiket More committee on inclusive banking. At best this will give the poor a "mobile payment" systems. We will still however be some way from true, “Mobile Banking.”

Monetary Policy And Financial Reform: RBI under Raghuram Rajan

Background

     Despite predictions of a bottoming out of economic growth, the rate of growth of the Indian economy fell to 4.4% in Q1 of 2013-14 from 4.7-4.8% in the previous two quarters.  With the government and the Congress party (UPA II) focused almost exclusively on welfare laws and expenditures,  any remaining hope of decisive action on investment-growth enhancing reforms was rung out of the markets.  This led me to say a week ago that the Government-RBI had boxed themselves into a corner with little room for policy maneuver, and only an unorthodox fiscal-monetary policy, the “Macro-twist” accompanied by bold reform could now get the economy out of this situation.  In this context the appointment of Prof Raghuram Rajan as Governor of RBI was the only silver lining on the dark clouds hanging over the economy.  Raghu, on the day of taking over as Governor of RBI on 5^th August, 2013 used his international credibility among the Global Brahmins of Money and Finance and the World’s Central Bank Governors to expand the box, the range of options available to the RBI.

RBI under Raghuram Rajan

    Raghu’s first speech as governor(4^th Sept 2013), coming as it did on the day that he took charge,  surprised with the  speed with which he spelt out his vision for the RBI. In hindsight, it actually reflects the fact that he is probably the first RBI governor (in my memory), who in a manner of speaking was groomed for the job. Six years ago he was appointed chairmen of a committee on financial sector reforms and developed his ideas on banking, financial and institutional (RBI) reforms needed in India.   Since then he has been an external advisor to the PM, allowing him to keep in touch with the problems facing India.  Last year he was appointed as Chief Economic Advisor, to gain experience of the inner workings of the Ministry of Finance and the Government in General.  He was thus in a position to ‘hit the ground running,’ and he did so!

Given this background, including his international standing as a star economist and the indications he gave in his first speech, I predict that Governor Rajan will follow a two pronged approach to Monetary and Financial policy

(1) He will adopt a modern, neo-conventional monetary policy, and The epitome of ‘conventional monetary policy’ was “inflation targeting” based on the assumption that in the long run this is also the best policy for full employment/maximum Output (growth).  The “Neo” refers to the lessons learned by the Global financial-monetary czars about systemic risks and macro-prudential regulation, after the Global financial crisis (which he was the first to warn about).  Having, warned him about the problems of “inflation targeting” in India and heard his response, I would expect him to adapt it to Indian conditions and move cautiously in implementing this policy.  The new committee under DG Urjit Patel will likely draw up a road map for implementing this and supporting institutional reforms (like the ‘Monetary Policy Committee’).  As he said, he will spell out his monetary policy stance to current and expected  developments, like the unwinding of QE3, in his monetary policy statement on September 20^th , 2013

(2) He will forcefully pursue liberalization of financial markets, including foreign exchange markets and banking, institutional reform of the RBI & other financial institutions, and universalization of modern payment systems, banking & financial instruments (inclusion). He has already announced a number of specific liberalization on banking and foreign exchange.  Liberalization and promotion of competition are risky at a time of low growth and high uncertainty.  Thus timing and sequencing of liberalization measures needs to carefully weigh the gains against the risks: The latter can only be minimized through skillful but ruthless prudential regulation, e.g. on “Non-Performing Assets” (NPAs) and “ever-greening”.  Therefore he has already warned that he may have to take unpopular actions.  Some of the measures, such as new Banking licenses to industrial houses can also be politically contentious.  He has therefore wisely set up a committee under former RBI Governor & Member of Parliament (MP) Dr. Bimal Jalan, to act as the last word on new Banking licenses.

The RBI has been excessively cautious on the use of new technology to spread modern payment and banking systems.  Since the introduction of mobile pension payments in rural South Africa  and MPESA mobile cash in East Africa, I have been pushing the RBI to adopt these systems. As Raghu’s committee strongly advocated inclusion, I expect these to be speedily introduced in India.  This, and his committee’s innovative proposal to introduce ‘tradable priority sector lending commitments’ and other new ideas for inclusion will be chalked out under the ‘Nachiket More’ committee.

Conclusion

    In my view, these reform measures are Raghu’s answer to those of us who have argued for giving greater priority to economic growth.  With the reforms log jam persisting in Delhi, he is implicitly saying that he will follow a relatively conventional monetary policy and it is up to the government to do its part on the fiscal and structural policy side to promote growth.  At the same time he will try to help market expectations and confidence through a new more aggressive financial reforms policy, which will promote efficiency, investment and growth in the medium term.  Having expanded the range of Macro options, through his personal credibility and decisive start, it is now up to the government to act. 

[Note: This article was written on September 5th 2013, a day after Raghu's maiden speech, but has been pending with a newspaper since then.]