Table of Contents

Background to the case: ...........................................................................................2 How does the system work? ......................................................................................2 Processes required:.....................................................................................................3 Advantages of the system:.........................................................................................4 Disadvantages of the system: ....................................................................................7 Opportunities for the system:.....................................................................................8 Issues in such a system: ..........................................................................................11 Sustainability of the model:.....................................................................................13 Economic sustainability:.................................................................................13 Social sustainability: .....................................................................................14 Organizational sustainability: ......................................................................15 Conclusion: ..............................................................................................................16

Background to the case:

The Government of Andhra Pradesh has implemented a social security pension (SSP) scheme targeted at the most vulnerable sections of society. This includes the elderly, widows, disabled, and elderly weavers to provide them succor and ensure their economic development. It is implemented at the State level by Department of Rural Development and by the District Rural Development Agency (DRDA) at the district level. At present, a total of 4.7 million pensions are being disbursed out of which 3.1 million are Old Age Pensions, 0.18 million are Weavers Pensions, 0.12 million are Widow Pensions and 0.5 million are Disabled pensions.1 The rate of pension is Rs.200/- per month. Recently, the government has started the usage of electronic smart cards for the disbursal of social security pension as well as wages under the Andhra Rural Employment Guarantee Scheme (APREGS) and provides at least 100 days of employment every year to each household whose adult member volunteer to do unskilled manual work. The project has been started on pilot basis in the districts of Warangal and Karimnagar. Impressed by the success, the chief minister Mr. Y.S. Rajasekhara Reddy intends to provide the service to all adult residents of six districtsWarangal, Karimnagar, Mahbubnagar, Medak, Chittor and East Godavari. How does the system work2?

Villagers who sought a job under the scheme in the two Andhra districts have their personal data registered on computer chip-embedded smart card issued to them. These cards are fuelled by Radio Frequency Identification Device technology which incorporates a bio-metric scan of their finger print. The smart card stores the customers name, address, photograph etc. The card number and other details are uploaded on to the computer system and then linked to a nationwide network. The smart card forms the basis for wage workers under NREGS to withdraw their wages from banks. Once the beneficiaries have been identified, banks and other financial institutions move in to issue cards and get the hardware in place. Literate women are identified and are trained by the bank. These women are positioned as the Customer service provider
1

www. nceus.gov.in/Final_Edited_Social_Security_Repor.htm www. economictimes.indiatimes.com/.../articleshow/2678339.cms

(CSP). The CSP has a cash chest in her office to make the payment. The money is disbursed four days after release by the government and as a result, the social security pensions are given on time every month. Processes required:

1.

Defining the processes and timelines: The most important aspect in such

a mechanism is to define the processes and timelines that would run the system. The processes would include selecting upon the technology, the vendors, the banks who would participate in the program, selection and training of the CSP, purchase of hardware. Moreover, the process would also include deciding the manner of pension disbursal, the amount to be distributed. The timeline is also important to determine the time it takes the money to be disbursed after release by the government, the frequency of money disbursal, daily schedule for disbursal, the timeline for addressing grievances etc.
2. Database Generation and updating: The database is the backbone if such a system.

The list of pension seekers must be accurate it order to prevent fictitious pension seekers. It must also ensure that genuine seekers must not be deprived. The database must be dynamic in nature and capable of updating at regular intervals to include the changing population of the area. The database also needs to be linked to any other facility that can be provided in the future like insurance, SHG and other forms of subsidies.

3.

Training and estimation: The selection of CSP from amongst the villagers is a

very important task. Training would include awareness about the program, familiarity with the mobile phone and RFID reader, security of cash collected, contingency training etc. Estimation would be dependent on the number of people registered in a certain village and the number of families who have consented to work under the APREGS scheme.

4.

Releasing money for disbursement of pension: The next step after the training

and database generation is the releasing pension funds to the CSP. This is generally done 4 days before the funds are disbursed to the villagers. The time period should be such that there is no delay in giving the funds to the villagers. It is also important that the notes are in correct denomination so that the CSP does not have difficulty in disbursing them.. Proper accounts will be maintained by the online system along with tracking the unspent amount.

5.

Website updating: The website also needs to be updated at regular intervals

which will ensure that the information available on the site is current and up to date. This data will also help the authorities to ensure that they are aware of the progress of the scheme, the amount of money distributed, the difficulties and tracking the money that has not been disbursed. The website updating process will also allow external observers and central government officials to track the progress of the scheme.

Advantages of the system:

1. Simple gadgets: The system entails the use of simple gadgets, processes and technology that literate women can use. Moreover, the villagers do not have to depend on anyone to get their money. Just a swipe of the card and a thumb impression on a special mobile phone is all that needs to be done in order to get the social security payout. Moreover, the villagers do not have to go out of their villages for the same. They just need to turn up at the home of the CSP with their smart cards.

2. Bogus beneficiaries are eliminated: The technology ensures that bogus beneficiaries of public funds are eliminated. The system provides fool-proof identification of the beneficiaries due to the finger print reading biometric card. The pilot program in six mandals of Warangal showed that there were 474 fictitious names out of 1284 social

security pensioners.3 These cards go a long way in siphoning off of funds by low level bureaucrats, politicians and middlemen. It has also helped in tackling corruption by close monitoring through web reports that are transaction based. It also eliminates personal contact with officials. All transactions can be seen live on the Internet and citizens can track, for themselves, the progress of various complaints, schemes and payments.

3. Early payments: The payments are made within 4 days of transfer of funds by the

government. The simple process combined with efficient use of technology ensures that the social security pensions are given every month and wages to those employed under the APREGS every month.

4. Growth of Banks: The system puts in place a mechanism to bring the poor into the

banking fold. These people now have the opportunity to be accessible to other schemes like rural microfinance, loans etc. offered by banking and NGO based organizations. Moreover, many banks have come forward to open accounts with zero balance. Some banks, which dont even have branches in remote areas, have offered to appoint temporary officers at gram panchayat level for disbursement of money to workers instead of them travelling long distance to collect his wages from far away bank branches. This will benefit both the villagers as well as bankers by stimulating a banking revolution in India. Initiatives like rural banks, National Bank for agriculture and Rural Development (NABARD) have not been adequately successful. The banks have not been adequately encouraged to open branches in rural areas. This scheme presents them an opportunity to start branch less banking. Facilities like cash deposits, withdrawals, utility payments, transfer of money, insurance etc can be introduced at a later stage.

Swiping reforms, India Today, January 28, 2008

5. Comprehensive services: The system presents an opportunity to extend the mechanism

to housing payments, public distribution system supplies, linkages with self help groups etc. According to the 13th finance commission, the unification of subsidies like food, power, fertilizer etc as a single entitlement on a smart card is a lot more beneficial to the government. It would save a lot of money by way of transaction costs in the form of administrative costs and plugging leakages. In addition to this, the card can be used for identification while voting, to track all transactions including medical history, education, skill training, employment, income and expense tracking, insurance, compulsory savings, income tax, old age pension etc. It can help to keep track of movement of people, particularly in sensitive areas, thereby avoiding cross border infiltration, and minimise terrorism.

6. Reducing administrative costs: The system also leads to drastic reduction in

administrative cost and effort. For one, the banks need not have any major hardware or infrastructure in place. The CSP is a local resident and works out of her home. Moreover, the cost of cards and hardware is borne by the government. The hardware that is essentially required apart from the card is a mobile phone which has a RFID reader. This needs to be linked with the database which is the backbone of the entire mechanism. Personnel costs are also low because of the requirement of only one person in the village. The education levels of the CSP also need not be very high to perform the duties. Moreover, a gram samakya or self help group office is used to provide exclusive space.

7. Maximise Accountability: The system has been designed in such a way that is

maximizes accountability on the part of the government and district officials in their efficiency of distributing the social security pension. The online records are not tamper able. There is no human contact in the distribution process and there is no scope for middlemen to remove money in between. In addition to this, it is impossible for the villagers to forge the system as it has numerous identifiers like photo, signature, thumb

impression etc. The system also ensures effective targeting of subsidies. Tracking unspent amounts and getting it back also becomes possible. Disadvantages of the system: The system has the following disadvantages and threats:
1. Non-standardized technology: The biggest threat to such a system is that if vendors

built smart card applications using different standards, they may be incompatible and may also affect inter-operability. Different technology systems will make it very difficult to select vendors for the mechanism. These vendors will use readers and RFID tags which will not be detected by the readers of other vendors. In such a scenario, it will be difficult for the government to plan in advance for contingencies.
2. Security standards: the security standards which need to be followed will also be very

stringent. The ever increasing threat of online viruses, trojan horses and hackers can jeopardize the system. Moreover, the different security standards used by different vendors can also be a threat. It is imperative for the banks to agree upon a common format so that a person moving from one village to another can use the same card even if the area is not served by that bank.

3. Duplicate cards: The prevention of duplication of cards is an expensive proposition for

which the technology is not easily available. It is important to prevent fraudulent withdrawal of government benefits. The creation of fool-proof and tamper proof smart cards is a huge challenge in front of the government. The tamper proof cards will enable the government authorities to keep a firm hand over the pension fund disbursal process. Moreover, in situations where the card is being used as a means of identification, the duplicate cards can be of threat to the nation. Too many duplicate cards will also prevent the government from having an idea of the number of people who register for the scheme.

4. Security of the Money: The money which is collected by the CSP for disbursal is

susceptible to loot and dacoits. In rural India where the kind of protection at a womens house may not be sufficient, the government needs to take steps to ensure that the money is safe. The naxalite affected areas of Andhra are prone to such a theat.

5. Break-ability of the card: The plastic card in which the chip is embedded is fairly

flexible, and the larger the chip, the higher the probability of breaking. Smart cards are often carried in wallets or pockets which is a fairly harsh environment for a chip. In rural areas where the level of awareness about the safety of the card might not be very high, such things can easily take place. A card enclosure can be a good idea to prevent the card from breaking or other forms of damage.

6. Virus in host system: such a system is susceptible to failure in cases where the host

server to which the mobile device connects is affected by a virus. In such a scenario, it will be difficult for the money to be disbursed on time.

7. Non-dynamic database: The database which supports the operations and has the list of

the people who will benefit from the scheme must be dynamic in nature. In case where the list is not updated continuously, the entire system will fail and people will be left without receiving the money.

Opportunities for the system:

We have plans to include 14 more services through the smart card, says K. Raju, principal secretary, Rural Development, Andhra Pradesh.4

Swiping reforms, India Today, January 28, 2008

Unification of subsidies leads to lower transaction costs and plugging leakages in the biometric cards can serve as an equivalent to negative income tax. Such fiscal reforms go a long way in promoting financial inclusion of a large section of the society, says Vijay Kelkar, Finance Commission.5

The government is essentially talking about a modern smart card system that delivers cash and/or subsidies to the poor, based on their entitlements in accordance with specified parameters and norms. Such a smart card could be programmed with identity (photo & biometric fingerprint), and have information on social and personal/household characteristics. Each person/household's entitlements could be in the form of specified subsidies for food/cereals, kerosene, midday meals, nutrition supplements, drinking water, toilet/sanitation services, basic drugs, schooling (primary/secondary), Internet access, electricity and a host of other items reflecting the dozens of subsidies and programmes currently in existence. The entitlement could be varied with and dependent on economic and social handicaps such as SC-ST, age (infant or aged), mental handicap, physical disability, female head of household, lactating mother, chronic illness, etc. In this way the current stakeholders, special interest groups and social policies could be accommodated in a single integrated system. The smart card would also constitute a national identity card. For instance the card could contain information on citizenship, tax status, and voting eligibility. Such a system will need the following: 1. Secrecy and confidentiality clauses would have to be built into the card. 2. Procedures need to be built which support the technology at hand, not oppose it 3. Reach the lower segment of the society, the segment which is destitute and difficult to identify. 4. The card would have to be pervasive with no significant loopholes, backed by a computerized database, and capable of dynamic updating and citizen friendly enrollment founded on legislation.
5

www.hindu.com/2008/01/14/stories/2008011456030400.htm

5. Security will also be at the heart of these national ID cards because they will ultimately become access cards for entry into other countries.

6. In order to facilitate such a system, the government needs to undertake an operation

which will help it ensure that enables it to form the database. This database will have to be linked to the individual databases of all the services being provided by the government. This will require setting up of centers and collection points in every district. Franchisees will have to be appointed who will see that information about every person in the area of operation has been collected. Each collection center will comprise of workstations and the work will commence with initial data capture and subsequent updating over a continuous time period. The system will also need to have backup systems, a central database etc. It will be a massive operation. On issues of financial inclusion, the following points need to be ensured: 1. Financial inclusion by the means of loans, microfinance, credit etc. will have no meaning for the rural poor people if they do not have a steady income. Only a source of income will ensure that facilities like savings account, any time money etc. will be of any value to them.
2. Many banks have come forward to open accounts with zero balance. Some banks, which

dont even have branches in remote areas, have offered to appoint temporary officers at gram panchayat level for disbursement of money to workers instead of them travelling long distance to collect his wages from far away bank branches. The government of Andhra Pradesh has asked 15 participating banks to enlist companies. In such a scenario, the banks must be able to see some added benefit in addition to the 2% service charge they receive from the government6 The high costs of setting up and managing infrastructure in rural areas would make the banks seek better profits.
6

Swiping reforms, India Today, January 28, 2008

Issues in such a system:

The implementation of such a system can give raise to a number of issues which may be of concern to the stakeholders: 1. Change management is an issue which is of concern in any organizational process change. In such a system, the government must take into consideration issues like reluctance of the government officials to accept the technological advancements due to lack of knowledge. It is quite possible that people in the rural areas are resistant to such changes and innovations. In such a scenario, the government has to undertake steps to educate the officials and employees alike.
2. Channel conflict also has a role to play in such a system. Channel conflict can occur when

the middlemen are removed from a certain system and the benefits are passed onto the people directly. Here, the role of human beings and their intervention is minimized. Moreover, there can be conflict between the different modes of distribution being used for different subsidies. Even in the case of pension and social security money, the smart card system will take time to be installed across the state. In such a scenario, the time taken for disbursal of funds will be different in different districts.

3. The reduced influence of middlemen and government officials is also something that will

not be to their liking. Since the entire system has been computerized, the scope for these people to reduce the amount reaching the villagers is almost negligible. This essentially reduces their power to manipulate things. Some senior officials may be concerned about how to persuade tens of thousands of bureaucrats, who gain by administering current programs, to give up their lucrative work

4. Security threats are one of the biggest challenges to such a system. The system is highly susceptible to tampering, duplication and theft. In such a scenario, there must be an alternate means of identification in addition to the smart card.

5. The sustainability of such an initiative depends on the ability of the government to

provide financial inclusion to the people by ensuring a regular stream of income for them. The social security payout is something that they can survive on. However, in order to leverage upon the benefits of the smart card, all round social and financial upliftment is required. This can include land allotments, government employment etc.

6. Technological and telephonic connectivity is also a major concern in such a system.

Considering the poor infrastructure of India and scarce telecom connectivity, it would be a challenge to ensure that the money reaches the villagers on time. Backup programs on the steps that need to be implemented in case of connection failure also need to be considered.

7. The cards would be swiped through small electronics terminals and authorized officials would hand out the money. That would still leave room for the officials to bully recipients and deny them their full allocations, maybe demanding a commission, but it would be simpler to administer than post office accounts and far less leakage-prone than the current system.

8. Cost benefit analysis of possible expansion in the future also needs to be worked out. The expenditure that financial institutions need to incur to setup infrastructure for such a model must be lower than the revenues they earn. This revenue can be in terms of the various financial products that they would be offering in due course of time.

Sustainability of the model:

Sustainability for the said system would be achieved when economic, social and institutional sustainability is achieved.

Economic sustainability:

1. The most important aspect of economic sustainability is that whether the government will be able to sustain the high expenditure due to the different forms of pension being distributed. The government spends almost Rs. 3600 crores in social security schemes every year. This model needs to be sustainable for the banks and other service providers. They need to be able to justify the costs they incur with the 2% commission that they receive.

2. In addition to the startup services, the banks and financial institutions aim to provide full scale services in due course of time. The economic viability of the same needs to be analyzed based on the possible expenditure of setting up infrastructure in the village. This will be weighed against the revenue accruing out of a poor rural area.

3. The options that are available might include the following:

a. The government will have to look at providing a pension and all other subsidies under a common banner. If the government decides to start giving commissions to different agencies to provide all the different pensions, then the system does not remain viable.

b. The government must also look at providing the villagers with a source of constant

income so that they come in the ambit of financial inclusion. This income scheme will also enable the villagers to use different services like insurance, ATM, microfinance etc. c. Growth is the path that needs to be chosen for economic sustainability. The overall growth of the people can be ensured through better livelihood, education and employment.

Social sustainability:

It is also important for such a system to be socially sustainable in terms of the benefits it brings to the people. These benefits need to be equitable, justifiable and socially uplifting for the people of the region.

1. It is most important to gain the trust of the villagers and rural people in such a system.

People in India are used to government money reaching them very late or not reaching at all. Such a system must convince them of the ability of the government to help them lead a better life.

2. Measures also need to be equitable in nature. In such a scenario, the villagers also need to be convinced that the social security money which is being given to them is not less than what they are entitled and not less than what a peer might be getting.

3. Social sustainability can be achieved by getting people into the model of financial inclusion. However, such a system will work only when villagers have a regular source of income. Moreover, they must be knowledgeable and aware of using this

money to get benefits like loan, insurance etc. Financial inclusion cannot be achieved just by paying a measly sum every month.

4. Social security can also be achieved by community participation in such activities

where in the entire societys benefits are kept in mind while providing services and opportunities for social upliftment.

Organizational sustainability:

This is achieved when prevailing structures and processes have the capacity to continue to perform their functions over the long term.

1. A major factor behind achieving organizational stability is to ensure that the technology being used is defect-free and easy to use. This is because of the lower levels of education of the villagers as well as the CSP.

2. The money should be collected by the CSP well in time before the time for pay-out comes so that there is no delay in distribution of the money.

3. The cards should be tamper proof and resistant to damage. People in the rural areas may not be aware of the steps that need to be taken in order to take care of such cards.

4. As stated earlier, the system needs to be integrated with other forms of subsidy and ensuring a single point delivery mechanism. Estimates suggest that the single point delivery mechanism would be as much as Rs. 20,000/- per family which would ensure

the such a smart card will help families raise a lot more money by securitizing part of the entitlement.

5. The training of the CSP must be such that he/she must be capable of handing

contingencies in addition to regular disbursal of money. Contingencies may include loss of money due to theft, sudden change in the database etc. The changes in the role of the CSP when financial institutions offer a wider range of services and the responsibilities in such a scenario also need to be formally decided.

6. The government needs to ensure a working framework which ensures the following: a. Well-defined processes and rules in place. b. Effective organizational structure that creates a framework within which the livelihoods of the stakeholders can be continuously improved.

Conclusion:

The initiative taken by a government of Andhra Pradesh is a very novel step in providing social security to the poor and unemployed in the state. However, such a system is also prone to a number of challenges and difficulties, similar to any new system. It is important that the government tries to remove these problems and then moves towards providing financial inclusion to the people of the state by ensuring a steady income and social upliftment.