Comments by the Centre for Internet and Society on the Report of the Committee on Medium Term Path on Financial Inclusion

The Centre for Internet and Society (CIS) is a non-governmental organization which undertakes interdisciplinary research on internet and digital technologies from policy and academic perspectives.

In the course of its work CIS has also extensively researched and witten about the Aadhaar Scheme of the Government of India, specially from a privacy and technical point of view. CIS was part of the Group of Experts on Privacy constituted by the Planning Commission under the chairmanship of Justice AP Shah Committee and was instrumental in drafting a major part of the report of the Group. In this background CIS would like to mention that it is neither an expert on banking policy in general nor wishes to comment upon the purely banking related recommendations of the Committee. We would like to limit our recommendations to the areas in which we have some expertise and would therefore be commenting only on certain Recommendations of the Committee.

Before giving our individual comments on the relevant recommendations, CIS would like to make one broad comment with regard to the suggestions dealing with linking of Aadhaar numbers with bank accounts. Aadhaar is increasingly being used by the government in various departments as a means to prevent fraud, however there is a serious dearth of evidence to suggest that Aadhaar linkage actually prevents leakages in government schemes. The same argument would be applicable when Aadhaar numbers are sought to be utilized to prevent leakages in the banking sector.

Another problem with linking bank accounts with Aadhaar numbers, even if it is not mandatory, is that when the RBI issues an advisory to (optionally) link Aadhaar numbers with bank accounts, a number of banks may implement the advisory too strictly and refuse service to customers (especially marginal customers) whose bank accounts are not linked to their Aadhaar numbers, perhaps due to technical problems in the registration procedure, thereby denying those individuals access to the banking sector, which is contrary to the aims and objectives of the Committee and the stated policy of the RBI to improve access to banking.

Individual Comments

Recommendation 1.4 - Given the predominance of individual account holdings, the Committee recommends that a unique biometric identifier such as Aadhaar should be linked to each individual credit account and the information shared with credit information companies. This will not only be useful in identifying multiple accounts, but will also help in mitigating the overall indebtedness of individuals who are often lured into multiple borrowings without being aware of its consequences.

CIS Comment: The discussion of the committee before making this recommendation revolves around the total incidence of indebtedness in rural areas and their Debt-to-Asset ratio representing payment capacity. However, the committee has not discussed any evidence which indicates that borrowing from multiple banks leads to greater indebtedness for individual account holders in the rural sector. Without identifying the problem through evidence the Committee has suggested linking bank accounts with Aadhaar numbers as a solution.

Recommendation 2.2 - On the basis of cross-country evidence and our own experience, the Committee is of the view that to translate financial access into enhanced convenience and usage, there is a need for better utilization of the mobile banking facility and the maximum possible G2P payments, which would necessitate greater engagement by the government in the financial inclusion drive.

CIS Comment: The drafting of the recommendation suggests that RBI is batting for the DBT rather than the subsidy model. However an examination of the discussion in the report suggests that all that the Committee has not discussed or examined the subsidy model vis-à-vis the direct benefit transfer (DBT) model here (though it does recommend DBT in the chapter on G-2-P payments), but only is trying to say is that where government to people money transfer has to take place, it should take place using mobile banking, payment wallets or other such technologies, which have been known to be successful in various countries across the world.

Recommendation 3.1 - The Committee recommends that in order to increase formal credit supply to all agrarian segments, the digitization of land records should be taken up by the states on a priority basis.

Recommendation 3.2 - In order to ensure actual credit supply to the agricultural sector, the Committee recommends the introduction of Aadhaar-linked mechanism for Credit Eligibility Certificates. For example, in Andhra Pradesh, the revenue authorities issue Credit Eligibility Certificates to Tenant Farmers (under ‘Andhra Pradesh Land Licensed Cultivators Act No 18 of 2011'). Such tenancy /lease certificates, while protecting the owner’s rights, would enable landless cultivators to obtain loans. The Reserve Bank may accordingly modify its regulatory guidelines to banks to directly lend to tenants / lessees against such credit eligibility certificates.

CIS Comment: The Committee in its discussion before the recommendation 3.2 has discussed the problems faced by landless farmers, however there is no discussion or evidence which suggests that an Aadhaar linked Credit Eligibility Certificate is the best solution, or even a solution to the problem. The concern being expressed here is not with the system of a Credit Eligibility Certificate, but with the insistence on linking it to an Aadhaar number, and whether the system can be put in place without linking the same to an Aadhaar number.

Recommendation 6.11 - Keeping in view the indebtedness and rising delinquency, the Committee is of the view that the credit history of all SHG members would need to be created, linking it to individual Aadhaar numbers. This will ensure credit discipline and will also provide comfort to banks.

CIS Comment: There is no discussion in the Report on the reasons for increase in indebtedness of SHGs. While the recommendation of creating credit histories for SHGs is laudable and very welcome, however there is no logical reason that has been brought out in the Report as to why the same needs to be linked to individual Aadhaar numbers and how such linkage will solve any problems.

Recommendation 6.13 - The Committee recommends that bank credit to MFIs should be encouraged. The MFIs must provide credit information on their borrowers to credit bureaus through Aadhaar-linked unique identification of individual borrowers.

CIS Comment: Since the discussion before this recommendation clearly indicates multiple lending practices as one of the problems in the Microfinance sector and also suggests better credit information of borrowers as a possible solution, therefore this recommendation per se, seems sound. However, we would still like to point out that the RBI may think of alternative means to get borrower credit history rather than relying upon just the Aadhaar numbers.

Recommendation 7.3 - Considering the widespread availability of mobile phones across the country, the Committee recommends the use of application-based mobiles as PoS for creating necessary infrastructure to support the large number of new accounts and cards issued under the PMJDY. Initially, the FIF can be used to subsidize the associated costs. This will also help to address the issue of low availability of PoS compared to the number of merchant outlets in the country. Banks should encourage merchants across geographies to adopt such applicationbased mobile as a PoS through some focused education and PoS deployment drives.

Recommendation 7.5 - The Committee recommends that the National Payments Corporation of India (NPCI) should ensure faster development of a multi-lingual mobile application for customers who use non-smart phones, especially for users of NUUP; this will address the issue of linguistic diversity and thereby promote its popularization and quick adoption.

Recommendation 7.8 - The Committee recommends that pre-paid payment instrument (PPI) interoperability may be allowed for non-banks to facilitate ease of access to customers and promote wider spread of PPIs across the country. It should however require non-bank PPI operators to enhance their customer grievance redressal mechanism to deal with any issues thereof.

Recommendation 7.9 - The Committee is of the view that for non-bank PPIs, a small-value cashout may be permitted to incentivize usage with the necessary safeguards including adequate KYC and velocity checks.

CIS Comments: While CIS supports the effort to use technology and mobile phones to increase banking penetration and improve access to the formal financial sector for rural and semi-rural areas, sufficient security mechanisms should be put in place while rolling out these services keeping in mind the low levels of education and technical sophistication that are prevalent in rural and semi-rural areas.

Recommendation 8.1 - The Committee recommends that the deposit accounts of beneficiaries of government social payments, preferably all deposits accounts across banks, including the ‘inprinciple’ licensed payments banks and small finance banks, be seeded with Aadhaar in a timebound manner so as to create the necessary eco-system for cash transfer. This could be complemented with the necessary changes in the business correspondent (BC) system (see Chapter 6 for details) and increased adoption of mobile wallets to bridge the ‘last mile’ of service delivery in a cost-efficient manner at the convenience of the common person. This would also result in significant cost reductions for the government besides promoting financial inclusion.

CIS Comment: While the report of the Committee has already given several examples of how cash transfer directly into the bank accounts (rather than requiring the beneficiaries to be at a particular place at a particular time) could be more efficient as well as economical, the Committee is making the same point again here under the chapter that deals specifically with government to person payments. However even before this recommendation, there has been no discussion as to the need for linking or “seeding” the deposit accounts of the beneficiaries with Aadhaar numbers, let alone a discussion of how it would solve any problems.

Recommendation 10.6 - Given the focus on technology and the increasing number of customer complaints relating to debit/credit cards, the National Payments Corporation of India (NPCI) may be invited to SLBC meetings. They may particularly take up issues of Aadhaar-linkage in bank and payment accounts.

CIS Comment: There is no discussion on why this recommendation has been made, more particularly; there is no discussion at all on why issues of Aadhaar linkage in bank and payment accounts need to be taken up at all.