Source: Economic Times


In recent years, with financial inclusion in mind, countries in the developing world are slowly moving away from pure cash payments towards bank accounts that will bring the unbanked into the fold of the formal financial system. Though the direct cash transfers (DCT) plan proposed in India does not explicitly recognise financial inclusion as its objective, the basic building blocks for this link to be a success are already there, i.e., strong policy push for financial inclusion, payments infrastructure, etc. Given India’s bank-led financial inclusion model, the RBI is continuously exhorting banks to see this as a business opportunity, rather than a social obligation. Now, with the announcement of a comprehensive DCT plan across the country, this article looks at whether there is a business case for banks to leverage this scheme towards financial inclusion. 


DCT provides a regular flow of payments through the bank and there are various levels at which a business case can be made out for banks for just DCT business. A CGAP study by Chris Bold, David Porteous and Sarah Rotman (see accompanying graphic) outlines these levels using global case studies as their reference point. At level I, the most demanding case, an individual account is treated as a profit centre, with or without government fees made for this service. If profitability holds at this level, it will automatically hold at other levels. At level II, the client is the profit centre with added services like credit, savings, etc, bringing the bank business. At level III, the entire segment of clients under the DCT programme can be treated as a profit centre. Banks could also think of DCT for strategic reasons (level IV) purely as a line to getting other business from the government or just to follow the mandate laid down by the government and regulator (level V). As of now, India seems to be stuck at levels IV and V. For true financial inclusion, there has to be a transition to the other levels. 


While banks in each country operate under different environments, some valuable insights do come from the CGAP study. Banks interviewed said they find it difficult to be profitable at level I without government fees. All banks felt that level II can be achieved over time as savings account balances grow. Brazil’s Caixa achieved profitability at level III without government fees due to massive economies of scale and lowcost payments infrastructure. All banks maintained that branchless banking was the only way to keep costs low during expansion and, apart from initial set-up costs, training and managing the agent network is an ongoing and crucial component of raising quantum and quality of services. Managing liquidity at the point of contact with the customer service points is another vital part of service delivery. Government payments can be lumpy and Caixa, for instance, arranged for staggered payments to avoid peaking of withdrawals. This is a crucial point that shows the extent of attention to detail that is required to keep the payments flowing smoothly at the last mile. It is unlikely that the government or the banks in India have moved vigorously on thinking through these points yet. 


There is a note of caution. Not all banks interviewed have moved into cross-selling other financial services; understanding the need of these customers is still a tough proposition. Clients tend to withdraw all the money and then save through informal sources out of habit. The final crux, therefore, lies in creating suitable financial products for these customers and on raising awareness. While the RBI has been pushing for improving financial literacy, the experiences of first-time customers in this DCT programme would be crucial to get the message across. 

Whatever the models across the world, two points that come through clearly are: (a) the world is moving to delivering social transfers through electronic payments, and (b) bank accounts used to route these transfers are a necessary, but not sufficient, condition for financial inclusion. It is, in fact, a long haul towards universal financial inclusion. As Michael Joseph, founder of the most successful M-Pesa model and now managing director of Vodafone Mobile Money, said recently, there has to be a lot of investment of resources to raise the number and quality of transactions. 

Policy should work towards putting in place more enabling conditions, rather than rules and notifications that deter stakeholders from having a long-term perspective. This is particularly applicable to India where conflicting statements have made the business case for banks rest largely on mandate. This is a pity since the basic building blocks for financial inclusion are in place and RBI’s vision is there to lead the way. What remains is the challenge of working through the specifics of getting the DCT through bank accounts to the beneficiaries and then drawing them into the financial system. As with other issues in India, the potential is there just waiting to be tapped. 

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


Levels of Business Case for G2P Payments 

LEVEL 1: Account: Is each individual account sufficiently profitable? With government fee? Without govt fee? 

LEVEL 2: Client: Is each overall client relationship profitable (i.e., cross-sell)? 

LEVEL 3: Portfolio: Is the overall product or client segment profitable? 

LEVEL 4: Strategic: Does the bank earn direct financial return in other ways (i.e., other government business)? 

LEVEL 5: Mandate: Does the bank’s licences or existence depend on G2P, regardless of financial return? 

SOURCE: CGAP Focus Note No. 77, S o c ial C a s h Tr a n s f e r s a n d F in a n c ial In c lu sio n : E vid e n c e f r o m F o u r C o u n t ri e s, Chris Bold, David Porteus and Sarah Rotman, February 2012