Innovative solution for financial inclusion
Given how banks are reluctant to open even no-frills accounts for the bulk of the population—their deposits aren’t large enough to take care of the costs—it is obvious a new paradigm is called for to deliver financial services to 64% of Indians that don’t have access to formal financial services. Mobile phones offer an obvious solution given that 50-55% of Indians have mobile phones. While mobile phone companies have been keen to try and offer payment services to those individuals that don’t have bank accounts, RBI has not been keen to allow this, and prefers that mobile phone firms work in partnership with banks. This is where the Nachiket Mor committee report comes in and, were its recommendations to be accepted, mobile phone firms could apply to become “payment banks”—that is, they would not be allowed to lend the money they get from customers, but would essentially just serve as payment gateways. The funds they get are to be invested in only GSecs to provide complete security for depositors. RBI Governor Raghuram Rajan has taken this a step further in a Nasscom lecture on Wednesday, offering a solution that allows those without bank accounts access to ATMs run by any bank. The way it works, and the technology is still in the process of being vetted for security, is that someone with a bank account transfers money to a person that does not have a bank account. A unique PIN number or bar code is generated and SMS’d to the beneficiary’s mobile phone. This PIN number or bar code can then be used to withdraw money from the closest ATM. Go one step further, and link mobile phone numbers to Aadhaar numbers, and the transactions no longer have to be restricted to ATMs of just commercial banks, but can be extended to post office ATMs and even micro-ATMs in villages.
Rajan’s other solution, again work in process, is important for small businesses, over 90% of whom have no access to formal finance. Right now, if a big buyer does not pay an SME for 90 days, say, the SME has to find ways to get credit and, given its poor financial shape, the credit is available at high interest rates. But if the receivable from the larger buyers was to be converted into an electronic format, and can be traded on a trade-receivables exchange, the credit-history which would determine the cost of credit would no longer be that of the SME, it would be that of the firm that owed the money to the SME. The short point is that there are lots of technical solutions available, and the RBI is doing well to try and use as many of them as possible.