Source: Economic Times


The government’s announcement to roll out the direct cash transfer (DCT) scheme to replace subsidies from January next year has generated a heated debate. Generally, while there has been support for digital payments to replace the current subsidy delivery, there are some contentious issues such as identifying the target group and whether some subsidies like food should continue through PDS, etc. Keeping aside such issues, the two-part series looks at the DCT programme exclusively from the point of view of its connection to expanding financial inclusion. The first article examines the issues in extending the banking outreach such that the DCT plan progresses smoothly, while the second article looks at creating a sustainable business case that leverages the DCT plan to achieve full financial inclusion. 

India’s policy for expanding financial inclusion has continuously evolved over the last few years, and the same can be expected of the DCT. As the scheme is rolled out across districts, there will be some learnings and change. However, it is important that the change is in the right direction; unfortunately, the government’s record is not so good on that front. In the case of the DCT, there has already been a lot of confusion. While the petroleum ministry has suggested pushing the deadline for LPG cash transfers by three months, citing lack of clarity over identifying the beneficiaries, the pressure is on banks to provide networks in the districts identified. With so many links in the chain for this scheme to be a success, proper planning should have preceded the announcement.


Yet, there is no doubt that this is the way forward: in 2009, an estimated 25% of global government-to-person payments were made via electronic transfer; by 2012, this share went up to 61% using models that allow for more financial services than just transactions, as financial inclusion has been one of the objectives of cash transfers. Most countries face a problem of infrastructure, and here we have come a long way with the RBI and the National Payments Corporation of India putting in place the required payment systems.


However, when it comes to coverage of banking services across the country, there is still a lot to be done. There has been a significant expansion of banking correspondents (BC) over the last four years; BCs now account for over 80% of the bank presence in villages. However, the aim of DCT to cover the entire country by 2014 seems an unlikely target to achieve. By March 31, 2012, there was banking presence in just 1.47 lakh villages of the country’s 5.93 lakh inhabited villages. This is probably what has prompted the rural development minister to say that the model where the bank had appointed a BC has failed and the government is working out an incentive mechanism to enable anybody becoming a BC. It is all fine to open up the space to increasing BC presence, but lack of clarity in the process and statements from different ministries complicates operations for banks that would ultimately bear the key responsibility.


It is true that the DCT scheme in such a comprehensive rollout as being presented now is a good opportunity for tapping previously unranked customers. Yet, there are two parts to the challenge of financial inclusion: one, ensuring that the DCT works smoothly through the banking system and, two, moving these customers to using more financial services like savings, loans, etc. In the first part, the governmentbank-beneficiary relation would be vital, while in the second, the bank-customer link is important. So far, when it comes to information and communication technology-enabled accounts through BCs in India, while there has been a big rise in the number of accounts here, the actual number of transactions during the year per account does not cross three. In such a scenario, it is clear that even after providing access, the usage of the service is still not being enabled. The link to the customer’s needs has still not been made. True financial inclusion, therefore, remains elusive. Moreover, this link to the customer can be made when banks view financial inclusion as a business opportunity and manage their BC networks accordingly. Unfortunately, while the process of putting networks in place is still underway, the reorganisation of limits and regulations, especially through the financial inclusion plan and then the cluster model for BCs, has made it difficult to plan a coherent long-term business strategy. In such a scenario, banks will continue to see this as an extension of working for the government, rather than take ownership of the scheme. The question that arises is that, even if the policy environment is conducive, can a business case be made that takes DCT forward towards financial inclusion? 

(The author is with the Indicus Centre for Financial Inclusion)