Vijay Mahajan on Universal Financial Inclusion : How It Can be Done

He writes in the Inclusion magazine:

In terms of bank branch density, India scores fairly well and this is primarily due to the branch expansion policy that was pursued soon after nationalisation in the 1970s. Thus, while we seem to have cracked the “last mile” problem, the poor have still to see the “first smile” from the service providers. More branches have not translated into better access for the poor. They still find it difficult to fulfill the “know your customer” (KYC) requirements to open accounts and contending with surly staff in branches. How can this be changed?
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The interesting thing is that India’s banking system (except for big city-based high-end users) in 2009 is a lot like the Indian telephone system was in 1989, before the STD-PCO revolution. To be sure, there are thousands of ATMs from where even small account holders can draw cash, but even these are mainly present in bigger cities in any reasonable density. To truly take the system to the next level of access, three things are a must – enabling every adult to open a bank account, establishing a dense and nationwide network of transaction points, spanning not just the “last mile” but the “final furlong”, and lastly, an inter-bank exchange or switch, to ensure that all transactions are recorded in real-time. Taken together, this will be the Nationwide Electronic Financial Inclusion System (NEFIS) that we recommended in the report of the Raghuram Rajan Committee on Financial Sector Reforms.
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Interestingly, India is on the threshold of these possibilities. The first, opening of bank accounts, can be greatly enabled by the proposed unique ID (UID) number that will be given to every Indian. This will eliminate the need for further KYC requirements. The second is supported by the recent recommendation of the RBI committee on the business correspondent (BC) model, which says that kirana shops and STD-PCOs (yes!!) can become BCs for banks. The third, an inter-bank switch already exists both for large transactions - RTGS for above Rs 100,000 and NEFT for transactions below Rs 100,000, but rarely below Rs 1,000. Thus, all key parts of NEFIS are falling into place.
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The technologically challenged need not worry if this is possible and how much will it cost. It is already being done in several pilots, such as by the pioneer company in this field, A Little World or ALW, and the whole kit costs less than Rs 10,000 per mobile BC!
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After satisfying itself that such technologies are reliable and tamper-proof, the RBI should permit the use of m-money more widely (that is beyond bank account to bank account transfers), as has been done in European e-money regulations. This will reduce the use of currency for small transactions, just as has happened for larger transactions in the last decade. This will significantly reduce transaction costs of cash pay-in, pay-out and handling currency notes/coins. A day should come when an NREGS worker receives her wages on her mobile phone and uses it to pay her kirana shop and school fees, without using currency. All this, while the balance in her account earns interest!

 Read the full article here.