Direct benefit transfer – a game-changer for financial inclusion in India

ADB
Rishi Gupta

Money changing hands at a market in India.

History is replete with evidence of the role played by monetary and financial systems in people’s lives. Observers describe “golden age” periods in which quality of life was better, spirit of innovation encouraged, and prosperity widespread. To the extent that this was indeed the case, it was so because of wider participation in formal financial systems.

Today, the extent of such participation is an indicator of economic wellbeing made possible through opportunities in savings, payments, investments, and insurance. Financial services also help small businesses grow, create employment, and contribute to economies.

Yet a reported 2.5 billion adults worldwide are excluded from formal financial systems. In India, nearly half of the country’s 1.25 billion people have no access to banking services, and close to 300 million people live below the official poverty line. To realize India’s potential, its leaders need to ensure this excluded segment can take part in formal banking and benefit from it.

The majority of people who live below the poverty line—as well as just above it—in India rely on government welfare payments such as the National Rural Employment Guarantee Act, old age pensions, scholarships, widow pensions, discounted LPG cooking gas, and other subsidies. The Government of India makes these payments, with the estimated value being a huge $60 billion per year, through the Direct Benefit Transfer (DBT) scheme covering beneficiaries under 59 different schemes.

The sheer extent of this reach and impact makes DBT an excellent platform to bring banking closer to the unbanked masses, but achieving that objective requires long-term vision, not short-term or ad hoc measures.

Over the last decade, technological developments have fast-tracked the way we do financial transactions. And financial inclusion efforts, too, have felt the impact of emerging technologies with biometrics leading the way in extending banking reach. Technology-aided DBT delivery is the way forward.

However, issues plaguing the existing transfer system need to be addressed, including broadband and mobile connectivity, power, inaccurate data of beneficiaries, leaks and frauds due to corruption, and so on. This is where technology-driven solutions come into the picture.

JAM (Jan Dhan, Aadhaar, Mobile) is a combination of three platforms intended to drive financial inclusion efforts as envisaged by Government of India. First is Jan Dhan Yojana, a project for opening bank accounts for all. Second is Aadhaar, a 12-digit unique identity number issued by the Unique Identification Authority of India. And third is Mobile technology, especially rising smart phone adoption. The JAM trinity, as it is referred to, has the potential to completely digitize DBT delivery and promote financial inclusion.

Under this digital program, the first scheme to be rolled out using DBT is the LPG subsidy payment to nearly 150 million registered beneficiaries. Welfare payments for National Rural Employment Guarantee Act and kerosene subsidy are expected to roll out next. Intended beneficiaries get their welfare payments directly credited to a bank account and can do financial transactions from multiple access points as per convenience—ATM, bank branch or business correspondent point—with the unique identity number for authentication.

4-step direct benefit transfer delivery model



Source: National Payments Corporation of India. Infographics by FINO PayTech.

The latest government reports say that the implementation of direct benefit transfer for LPG subsidy beneficiaries has led to savings of more than $3 billion during the last 2 years. This was possible because of two primary reasons: weeding out over 30 million fake beneficiaries using the unique identity numbers, and ensuring the right beneficiary gets the right amount through the safety of a bank account.

If a single scheme can realize such savings, imagine the potential when $60 billion in welfare payments is seamlessly and directly credited into the bank accounts of all beneficiaries. Gradually, as hitherto unbanked and under-banked people start using bank accounts to transact, various other relevant financial products can be made available, allowing them to save, invest, and insure their future. This innovative model can thus be a game-changer in promoting financial inclusion and fueling economic growth in India.