Latest Posts


Wednesday, April 30, 2014

How Aadhaar, India Post can transform India's finance

In an episode, Raghav Bahl discussed the idea of setting up a new payments bank which could be a joint venture between Aadhar and India Post.

In a four-part broadcast series called 'Change India', Network18 founder Raghav Bahl looked at ideas that appear simple but could be transformational in addressing problems that have dogged India for decades. In an episode, he discussed the idea of setting up a new payments bank which could be a joint venture between Aadhaar and India Post. Aadhaar started off as a simple idea with boundless potential. In 2009, the UPA government rolled out the Aadhaar scheme that was capable of not only providing an identity to 1.2 billion Indians but also link their unique identity number to a bank account. However, in a country where commercial banks are inaccessible to 60 percent of its citizens even today, this potential remains untapped. And reaching the remotest corners of India through nearly 2 lakh post offices, India Post is much more than a national postal service, a beacon of hope and good news. Change India's big idea was to enable India Post to function as a payments bank by linking it to the Aadhaar card instantly ensuring that 60 crore Indians have access to basic banking services. To discuss the idea, Bahl spoke with journalist and author Shankar Ayar, Bindu Ananth, president of the IFMR Trust, an organization committed to financial inclusion, and Dhiraj Nayyar, CEO of Network18's Think India Foundation. Q: Let us begin with the current controversies around Aadhaar. There is a lot of negativity around Aadhaar. There are calls to junk it essentially on grounds of privacy infringements and the fact that it does not have legislative backing. What is your sense should this idea be junked or is it reformable and then can we put to good use? Ayar: To start with the opposition is more in terms of whose idea it is and how it has been implemented. This was the biggest idea of the UPA and they failed it so miserably, it is unbelievable. The Americans have a phrase that the animals eat their young. The UPA has done effectively that. The problem with Aadhaar is that the UPA shied away and sort of neglected giving it a legislative statutory backup. After all you are collecting data about people and this concerns privacy issues. It also concerns the issue of integrity as to where it is being hosted. Eventually it will be hosted with the National Population Register but governments can't take years to fix what is a necessary statutory issue. The objection is not so much to the idea but the identity of Aadhaar. Bahl: If you can tell us how to fix these two problems? Is it as simple as saying that we will get the law passed by the new government and then we are fine to go or something else needs to be done to fix Aadhaar? Ananth: From a financial inclusion perspective Aadhaar is important because it solves two important problems. One is the whole KYC issue. How do you go about establishing KYC for million of individuals who don’t yet have a bank account and second is authentication to say what is the secure way to establish for every transaction the identity of the customer. For years we have done this without Aadhaar, without biometrics. So, I am sure there is a version of this that can be done. However, it would be a shame to lose the momentum of Aadhar because this can truly accelerate the pace at which financial inclusion happens. So, political issues aside, technically it is very important for financial inclusion. Bhal: The consensus seems to be it is too good a thing to just junk which is what the debate is around. I quickly want to understand from you, will legislation solve it or is there something in the design and the architecture of the scheme that needs to be worked on as well? Nayyar: There are always small technical flaws in the scheme of this scale. You are trying to give unique ID numbers based on biometrics to a billion people. That itself is a massive exercise and there has been turf war between the National Population Register and Aadhaar. So, there are technical issues. I am sure some machines don’t work well, some don’t pick up finger prints, those are issues which are solvable. However the big thing is the legislation. To get legislation done you need to persuade people. Now the Congress for some reason despite it being a great idea of theirs and probably should have been the flagship of UPA-II failed to get the backing for it. I hope whichever government takes office doesn’t abandon it and builds the necessary consensus to pass the legislation because once it has a legal backing, once privacy issues are sorted, are backed by legal framework then resistance will reduce.   Bahl: This idea that we are propagating of a joint venture between Aadhaar and Indian Post even though the thought is that if you were to do this, if you were to put this two things together then you would be expanding India's savings base dramatically because you would get many more people into the banking system who would then place their deposits with you. Are you in sync? Any estimate of where this could go? Ananth: I have a slightly different take on the concept. The payments bank really implies two things. One that, as an institution you can take deposits and do payments but all your liabilities will be invested in government securities, in other words no lending. What I am describing now is exactly what the Indian postal system is today. We don’t have formal nomenclature called payments bank but it perhaps comes closest to being a payments bank. So, we don’t need a lot of organizational and institutional changes. To my mind two things need to change to make the post office even more powerful in the realm of payments. One is that the post office at the Panchayat level typically tends to be operated by a franchise. We need to bring all of these nodes into the common network. Today a lot of the last man post offices still remain out of the network. Second thing is interoperability with the banking system. So, let India Post continue to do the good work that it is doing but is there a way I can walk into my neighbourhood post office and transact not just with the post office but with the entire banking sector. With those minor tweaks we actually get a lot of power in the existing system.

No comments:

Post a Comment