Why do we want the common persons to be part of the formal system? The answer to this logical question is that the informal system works well in a feudal society where aspirations of the common man are controlled. If we want inclusive growth, then we need all our citizens to be part of the formal system so that they have the opportunity to go as far as their talent and hard work can take them. For the country, the multiplier effects of all citizens being part of the formal system are huge. It is, thus, a win-win situation for the country and the common man.
*UFA Evangelist, New Delhi. The opinions expressed are personal and intended to generate discussions. Usual disclaimers apply.
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When JFK set a goal to put an American man on the moon no one had all the answers. Money and talent rushed in and the dream became a reality; In telecom, the government made money by auctioning circles and getting a share of revenue and taxes. Private capital funded the massive infrastructure required. If the government had gone down a different route and asked MTNL and BSNL to make telecom reach the masses, it would probably have spent billions to serve less than a few million.
Inspiring Goals
In case UFA by 2013 is made a national priority, then measurable goals that inspire a nation should be set. These goals could be
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Mohammad Yunus famously said during his Nobel acceptance speech, we wanted to go the moon, so we went there; we achieve what we want to achieve. If we are not achieving something, it is because we have not put our minds to it. We create what we want.
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Every legal resident and/or citizen of India ( individual and institution) will have a bank account, Rs. 3,00,000 crore will be available for lending to the weaker sections at 15 per cent or less, Cash transactions will reduce by 50 per cent and be replaced by electronic transfers, Every legal resident and/or citizen of India will have a unique national ID and a reputation score such that there are no loan addicts and systemic risk is minimal, Transactions will be highly secure and easy to use by honest people and will be tough for criminals and terrorists,
The goals, if and when set, may be quite different from this initial set but we should ensure that the goals are not vague and that there is hundred percent integrity in measurement. This maybe a wishful thinking but we think our citizens have matured enough to see through empty promises and would be willing to reward a government which sets ambitious goals, involves people, demands excellence, minimizes corruption and reports progress with integrity even if the goals are not 100 per cent achieved.
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Branchless Banking
Very few bank Chairmen recognize today that UFA could be the growth engine that significantly improves their global market share. Serving the masses profitably requires innovations that could be used across all customer segments and globally. For instance, if they perfect branchless banking in India using web, mobile and correspondents then, they could tap the huge Indian Diasporas globally. In countries like USA, even banks like SBI cannot open huge number of branches. Consider this proposal. Lets say if every customer had a mobile wallet and the average balances in these accounts were Rs. 10000 (Rs. 50000 for some and Rs. 100 for some). The account may be paid upto 5 per cent interest on daily balances which may be exempt from tax and may also be exempt from reserve requirements. The outstanding balances in these accounts may be lent only to the priority sectors and a reputation bureau ensures that defaults on these loans were manageable. Banks could raise around Rs. 3, 00,000 crore through roughly 30 crore accounts as deposits and lend the amount. If the credit need of each of these 30 crore customers is, say, Rs 8 lakh for things like an affordable housing, education, health, entrepreneurship,
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Box 1: Suggestions for Business Correspondent Model and Branch Free Banking
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BCs can mobilize Rs. 3, 00,000 crore in accounts that pay upto 5 per cent tax free interest on a daily basis. Regulation must allow this and citizens must be encouraged to keep upto Rs. 50000 in these Inclusive Growth Accounts (IGA) as a patriotic duty. The deposits mobilized could be exempt from reserve requirements and used for priority sector lending only. However, to build the right credit culture and avoid loan addicts a reputation bureau is required. India has one of the lowest cost distribution networks for retail products and prepaid recharge. This must be leveraged and there is no need to reinvent the wheel. The best DNA fit for BC is telecom prepaid recharge outlets BCs should not be limited to just serving the rural poor. To have an economically viable model for BCs, we have to think big and serving all classes of customers. There is a difference between the BC and the employees or agents of the BC. The BC may have to be a not for profit company with minimum capital requirements and good management but then the company should be free to operate in a manner it deems fit. Unless banks are comfortable with the controls that BCs have, they will not appoint them as BCs. To keep costs low, it is vital that the BC infrastructure is shared. Just as airlines do not have their own airports and yet compete with each other, banks do not need their own BCs. While there are good arguments for large for-profit BCs, large not-for-profit BCs may be preferred because it maybe easier for them to be more customer oriented and to continually strive for cost reduction as volumes scale. Not-for-profit BCs must attract top quality talent and pay outcome based bonuses to employees. BCs will need to be funded well till breakeven. Foundations could fund them with large soft loans and
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BCs and BFs can make Rs. 6660 crore revenue annually. Some of this will be shared with agents. This does not include transaction fees paid to retail transaction points as it is assumed that the banks would pay these with the BC just acting as a pass through entity.
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Customer acquisition: Rs. 10 per customer. 30 crores customers Rs. 300 crore Customer service: Re. 1 per customer per month. 30 crore customers Rs. 360 crore Deposit mobilization: 1% of Rs. 3,00,000 crore Rs. 3000 crore Demand Aggregation: Rs. 100 per customer- 30 crore customers Rs. 3000 crore
The reputation bureau can also act as a document repository so that people do not have to give photographs, copy of PAN cards again and again. Fake documents can also be eliminated by setting up electronic verification with issuing authorities. The reputation bureau will be for every one, rich or poor, and the key identifier will be the unique national ID which could be the PRAN from the new pension scheme. A reputation bureau would cut the cost of customer acquisition and credit appraisal. It could also be used by employers and security agencies. The reputation bureau could also be used to identify and monitor household that are BPL (Below Poverty Line) or qualify for various welfare schemes. With techniques such as, random sampling, fraud can be significantly eliminated. Designing a reputation bureau that can get started immediately and becomes better with time is not easy but with advances in technology and database design it is entirely possible to make a revolutionary impact that will help honest people resident in India realize the Indian dream. It will also deter dishonest people. The biggest benefit of a reputation bureau is in changing attitudes towards being part of the formal system. If the common man can see the benefits of enhancing their reputation score, the current mindset of trying to beat the system and stay out of it will change. With the setting up of UID Authority of India with Nandan Nilekani as Chairman, we hope to see reputation bureaus emerge as they are a logical extension of a National Unique ID database. The ideas of Innovative Server Based Smart Card Free Reputation Bureaus are enumerated in Box 2.
Reputation Bureau
A credit bureau is based on documents and on payment history. What does one do if a person has neither? In that case, we need to see the cash flow of the persons and whom they know and who knows them. Generally, lending based on gender or on peer groups works for small amounts. We should be sceptical of scalability and worry about multiple borrowing with progressively increasing household debt which will collapse when fresh debt is no longer available. Pumping more money into microfinance without a reputation bureau and without educating people to use credit responsibly is an invitation to disaster. If lending is done without a reputation bureau and scales to the kind of credit required (Rs. 240 trillion) then, the financial crisis that could hit India will make the current global crisis look tame. It may take many years to hit but the effects will be devastating. We also have to deal with the history of loan melas, hand outs, loan waivers. How do we convince people who are used to this culture to switch to a culture where using credit responsibly gets you lower rates and access to more credit? This is not an easy task and this is where the UFA by 2013 army of volunteers and BF (Business Facilitators) can make a difference. Imagine a reputation bureau which has information on your cash flow, your relationships and your employment history. To build your reputation score, the period that you have been a member is important. This acts as a deterrent for people spoiling their reputations and then starting with a new identity.
At Rs. 8 lakh (Rs. 5 lakh for housing, Rs. 1 lakh for education/entrepreneurship, Rs. 75000 for transport/consumer durables and the rest for other needs) for 30 crore customers, the need for credit is Rs. 240 trillion. This estimate may be contested but the key point is that the credit needs of India are massive. Box 1 showed how Rs. 3 trillion could be raised just from savings accounts. Rs. 240 trillion will be required during many years from now as currently households do not have the cash flow to support Rs. 8 lakh of household debt. This touches upon an important issue of the ability of households to pay back debt. Current lending rates
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everyday life with a bad one being the reverse. There must be controls to prevent a person with a bad reputation coming back with a new ID. As long as the reputation score algorithm has time in the system as an important variable and getting a new ID is tough this can be well controlled. A reputation bureau combines credit bureaus and learnings from microfinance and leapfrogs existing credit bureaus. If USA was to build credit bureaus now, it would build reputation bureaus not credit bureaus.
At Rs. 240 trillion, a 5 per cent default rate is Rs. 12 trillion. Peer pressure and lending to women are not scalable. India needs an innovative reputation bureau to prevent a nation of loan addicts Four main points, (i) there should be one or two national identity bureaus based on unique national IDs that talk to each other; (ii) a server centric approach is far cheaper than a card centric approach; (iii) numeric signatures are better than fingerprint biometrics and, (iv) reputation bureaus can drive down costs by making the credit process instant and lowering defaults thus making the dream of low cost unsecured lending a reality, are to be considered. The government should invite proposals to build these bureaus and possibly take a minority equity stake and a board seat. While the author advocates a smart card free approach, all approaches should be welcomed by the government. Reputation bureaus differ from credit bureaus. They have data on the customers cash flow and on who the customer knows and who knows them. They have links to document issuing authorities so that they can instantly verify whether a document submitted is fake or genuine. The social networking aspect of reputation bureaus mirrors peer groups and self help groups but at a fraction of the cost and with much greater flexibility. A person may vouch for the character of a friend but may not be jointly and severally liable. If the friend uses credit responsibly, the person who vouched for him benefits with a higher score. If the friend defaults the score gets impacted. At any point a friend can revoke their recommendation. Jointly and severally liable groups can also be created. Reputation bureaus can mimic microfinance group meetings at a fraction of the cost, thus, lowering the cost of credit. The financial literacy aspects and human interaction cannot be mimicked and will have to be tackled separately by business facilitators. For the reputation bureau to work, people must value their reputation scores and one way of doing this is to make a good reputation score a facilitator for
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Vested Interests
As with any major change there are going to be winners and losers. Incumbents do not want change and do all they can to block it. People whose jobs depend on existing poverty will have to get new ones if poverty is eradicated. Poor people work for less wages. Wars have been fought over the abolition of slavery. We want to eradicate poverty so that we can live in a safer world as poverty leads to a lot of social ills like terrorism, separatist movements, etc. The winners will gain financially if poverty is eradicated so all of us should think like winners. The forces of change are strong and hence the slogan adapt or die is more applicable than ever before. At the same time, incumbents are very smart and have a lot of money power. They will continue to disrupt and block change unless they see a clear signal from regulators and government. The ones with most to lose are large companies such as Visa, MasterCard, and Western Union. Paradoxically these are the companies that could be major players in the new world. Historically, whenever there is a major inflexion point the large incumbents get disrupted. The resistance from the informal sector in blocking change cannot also be under estimated. Money lenders, criminals, extremists, terrorists and many others will not want change.
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9. 3. NaMFI should also invite bids for the Reputation Bureau and the Global Payment Switch and also see how it can get a common infrastructure built that lowers the AML and CFT compliance load on banks. The PRAN number under NPS should become the new unique national ID and a logistics plan should be devised such that every legal resident in India and every Indian citizen have a unique in PRAN and no individual has two PRANs. This should be complete in 90-180 days. This could be combined with a clean up of the electoral rolls such that all citizens over 18 have a voter ID. Alternatively the unique national ID could be the voter ID for all citizens who are over 18. To open NPS accounts / inclusive growth accounts (IGA) the only requirement should be the unique national ID. No other document is required. Initially usage limits will be adequate but low. People who have regular bank accounts can link their regular accounts to get higher usage limits Every legal resident should have an IGA with banks that pay upto 5 per cent tax free interest on daily balances. These accounts could be linked to the NPS account. Banks need not keep regulatory reserves on these deposits but must use them for priority sector lending only. A law should be passed for all employers whose employees are not under EPFO or a similar pension scheme to pay 10 per cent of annual wages or Rs. 5000 whichever is lower into the NPS account of their employee. 10.
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To us, UFA by 2013 is an imperative which must be achieved. Given the enormity of the task, the numerous stake holders, and the attitudinal change it requires, the chances of success will be greater if it is elevated to the status of a national priority and tackled on a war footing. After Mahatma Gandhi, the tradition of rallying people to support an inspiring goal has withered away to be replaced by cynicism. We fervently hope that the government and the Reserve Bank provide inspirational leadership that a task like UFA by 2013 requires.
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