How Aadhaar has revolutionized the whole financial inclusion?

In India, every year central and state government disburses 4% of GDP as subsidies and benefit transfers. During last decade of 20th century & early years of 21st century, almost 50% of the transfers were lost in the system(due to leakages) every year [Amount as huge as Bill Gates’s net worth]. Ghost beneficiaries, ill targeting & ineffective service delivery channels were the prime causes of these leakage gaps. If these deliveries would have been reaching to intended targets, they could have added more value to the economy. Financial inclusion can make the transfer of welfare benefits faster, cheaper, and less prone to leakage. This benefits the state as well as the recipients. Overall, inclusion can help reduce poverty.

Accessibility & availability of these services can be provided to poor people through banking channels. For traditional banks, to manage these low CASA accounts become operationally unsustainable. KYC cost in on boarding one customer was in the range of INR 300-750. Servicing cost for one customer through branches in Rural area falls in the range of INR 50-85 per visit. To plug the leakages and to liberate the poor/rural from clutches of not formalised financial sector, India was in the dire need of a breakthrough which came in the form of “Aadhaar”. The name “Aadhar” figured during an interview in a rural part of India where one of the interviewees had said, “Meri Pehchan hi Mera aadhar hai sahib”. And so the name Aadhaar was decided upon for the world’s largest unique identification programme.

Now the question is how Aadhaar has revolutionized the whole financial inclusion? Prerequisite for financial inclusion was to open an account and KYC cost was the preliminary hurdle of onboarding. Aadhaar based E-KYC has reduced the cost of KYC to INR 30-35(even lesser than that). Through the PMJDY scheme, banks have been mandated to open aadhaar linked account through eKYC in their SSAs. These account holders have been provided with RuPay debit cards(another significant indigenous development in payments space). Till now 37crore+ bank accounts have been opened under National Financial Inclusion mission of PMJDY. Now using the Aadhaar mapper, direct benefits are transferred to beneficiaries’ account. To access these funds beneficiary needs an access point which will be a viable option for the banks as well. Mind you these are the customers who have said that my identity is my foundation. Then why not to utilize the same as payment instrument? Hence a payment product was designed under the category of an assisted model named as “AePS”(Aadhaar Enabled Payment System). Business correspondence (BC) model was designed, whereby approaching any BC these beneficiaries of DBT can access the fund lying the account through AePS. The credit for enabling this product goes to UIDAI & NPCI. The operational cost has plummeted for member banks through Aadhaar. For a rural customer, who was investing almost full day approaching the nearest branch to access the fund; can now utilize those productive hours in economic activities as these funds are available at doorstep through the fingertip. & here we are today standing tall by achieving the great degree of satisfaction in bringing non-banked to formalize banking under a decade time. That’s why Aadhaar become a classic case study for the institutions across the globe.

But have we attained the stage of Financial Inclusion? Providing the DBT without the leakages, bringing the unbanked under the formal financial sector and providing the mechanism to access funds brought us one step closer to achieving the dream of Financial Inclusion but is pertinent to say that there are miles to go before that dream is achieved. Financial Inclusion is also about inculcating the culture of savings, providing access to credit & make people sufficient for contingency planning [through retirement savings, insurable contingencies etc]. In the current scenario also people have tendencies to withdraw entire DBT amount and leaving the account nil. Under the PMJDY, banks are providing the OD facility to develop the culture of credit from the formalized sector but eligibility criteria are such that people can get the OD in the range of INR 200-500, which is not sufficient for small enterprise and/or agriculture. Hence they are being forced to take the credit from the same old channel by paying the poverty premium. Why are people not doing savings in their account, many reasons; lack of trust in the formalized sector [due to the failure of banking ecosystem and associated loss of hard-earned cash that people may have witnessed.], routine expenditures(Cash led). To inculcate the culture, customers must be incentivised by one or the other means which can serve multiple purposes. [i.e. providing the Crop insurance if they keep a threshold of the amount in their savings account, life insurance, a higher amount of OD etc.]. Another, if the payment options will be available at disposal to them for their major expenditures, (i.e. at the PACS[Primary Agriculture Co-operative Society] from where they buy agriculture inputs, utility bill payments and ticket bookings at the nearest shop (probable through BHIM Aadhaar or Card etc.). In the hindsight, whatever was dreamt for India’s financial inclusion journey; we have covered half of the journey to attain this dream. So, the dream is not broken yet. It’s still alive & we the people of India are going to fulfill it.

Author: By Deep Shah

An avid reader, travel enthusiast and digital payments evangelist, Deep Shah is associated with National Payments Corporation of India for more than 3 years. He is one of the fastest emerging Lead in payment & financial inclusion sector. Being payments professional, he has contributed to enhance the system efficiencies by 50% in Aadhaar Enabled Payment system. A financial inclusion strategist, who is working on digitization of EMI collection for MFI sector to enhance the MFI productivity by 10-20%. To increase accessibility exponentially by leveraging the existing network of 8 lakh+ business correspondents for Self Help Group, he is working on technical integration of AePS for SHGs Dual Auth model under the guidance of World Bank & Ministry of Rural Development. He strongly believes combination of technology and empathy towards Rural India, can drive the results in Financial Inclusion. He demonstrates excellent analytical representation skills. He holds Post Graduation Diploma in Rural Management from IRMA [PRM-36].