March 12, 2013
Poor women and other vulnerable groups in India need a broad range of financial services in order to save for their families' future.
The world’s largest democracy is the new testing ground for what could be the largest plan for putting cash directly into the hands of the poorest people. Cash transfer programs have been successful in Latin America and parts of Africa, but India could be the best example of how to deliver these programs on a large scale.
It’s certainly a gargantuan task. But, overall, it’s a good initiative, with the long-term benefits outweighing the very real obstacles it faces. The most significant impact could be the network of agents (or business correspondents) that will be created to service the transfer system. They could potentially support the other financial needs of the poor, helping India move closer to the goal of true financial inclusion.
Over the past three years, Grameen Foundation has been working with Cashpor, a microfinance institution operating in Bihar and Uttar Pradesh, to provide savings services to its poor clients using the business correspondent model. Our goal is to help the model become a self-sustaining channel for delivering broad range of financial services.
Based on our experience, here are four key ingredients that could help initiatives like the direct cash transfer system succeed.
The Right Products
Poor people need access to a broader range of financial services, such as savings accounts, which can help them build assets and reduce the impact of risks they face daily. The Indian government has already said the new program will not be burdened with these expectations, but we believe bundling other financial services with the direct cash transfer accounts could actually enhance people’s use of the subsidies and help them become more fully integrated into India’s financial network.
The Right Delivery Channels
Research and our own experience have shown that the poor value convenience above all other aspects of access to financial services, even cost. Therefore, creating a delivery system that conveniently puts the cash subsidies at their doorsteps will be critical. Trusted intermediaries can play a significant role here. They will not only deliver the cash payments, but they will also explain the technology and teach recipients how to use the new system, as well as ensure that they have the patience and trust to overlook initial glitches (which are inevitable).
The Right Technology
Smartcard technology is driving most of the current efforts to provide access to bank accounts. While there are benefits, the high cost makes it a very expensive option given the massive number of accounts involved. We believe mobile technology may be a better solution as phones are more widely available and less expensive. The phones don’t come without challenges, but the barriers are lower than those presented by smartcards.
The Right Business Model
The current structure of the business correspondent model in India makes it an unattractive and unsustainable option for the non-bank outlets that serve people without access to bank branches. They earn very little as they cannot charge fees directly to the customer (as it should be) and instead earn revenue solely from commissions and fees from the banks. As a result, there is significant turnover. Our work at Cashpor and the experience of several business correspondent projects have shown that agents may need to provide a wide range of financial services to expand their sources of revenue and deploy cost-efficient delivery models.
The Indian government planned to roll out the program in 20 districts through March 1, but recent reports suggest it is being scaled back until after India’s next election. So, for now, we’ll have to wait a bit longer to see how this experiment unfolds.