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What’s In A Number?

In Gurgaon, Mary Karkatia has a problem. She cannot prove she exists — legally. Mary does not have a birth certificate, a passport, a voter ID card, a PAN card or any other government document. She was born in an obscure village near Ranchi and her birth was never registered. Most of her family are now dead. Working as a domestic help, Mary has accumulated more than Rs 2 lakh in savings with her employer. But she cannot open a bank account because she has no documentation that can meet a bank's KYC (know-your-customer) norms.

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Mary's predicament is about to be resolved though she doesn't know it yet. She will soon get an identity and a basic bank account, and above all, a means to prove to dozens of official agencies that she is a citizen. Provided, of course, that a former technology entrepreneur who is currently leading the government's identification project gets his act right. 

Meanwhile, in his office in North Block in New Delhi, chief economic advisor (CEA) Kaushik Basu is pondering over how to stop the enormous leakages in the government's various subsidy schemes. Though the government will spend close to Rs 1 lakh crore as subsidy for the poor this year through its welfare schemes, an estimated 60 per cent of this will never reach the intended beneficiaries. From food sent to ration shops meant for the very poor to money meant for the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA), everything gets pilfered and only a fraction ever reaches the intended beneficiaries. This has continued for decades. But now, Basu has the solution in sight — provided the same technology entrepreneur and his team can prove that direct transfer of funds to intended beneficiaries can be successfully carried out.

In his own office, just a stone's throw away from Basu's office, Nandan Nilekani, co-founder of Infosys and currently chairman of the Unique Identification Authority of India (UIDAI), is satisfied with the way his job has changed. What had begun as the UID project — a foolproof method of providing an identification number to each and every Indian citizen — has now metamorphosed into a massive transformational project that can change the face of India.

As the next stage of India's largest public sector project since Independence begins, Aadhaar envisages opening basic bank accounts, allowing money transfer from one area to the other, using mobile technology in conjunction with the Aadhaar number for transactions and even direct transfer of subsidies to the very poor using their unique identity numbers. Nilekani's motley team of bureaucrats, bankers and technologists are out to sort out all manner of problems that have plagued India's poor.

Will their audacious dream work? There are still plenty of question marks about the project, including the fact that so far it has reached only very few people. And there are many issues, big and small, that need to be sorted out, details that need ironing out, and kinks that need straightening before one can pronounce that the whole affair is working smoothly. But what is apparent is that the team has moved from a mere identification project to something much, much bigger — and it is this second phase that will make all the difference.

At last count, Nilekani's team had already issued unique identity numbers to 4.3-odd million Indian citizens. That's a drop in the ocean for a country with a population of at least 1.21 billion. But it is a proof of concept. And more importantly, it is what further Nilekani's team will do with the citizens who have been given Aadhaar numbers that makes all the difference. "It is a game changer," says Basu, who is an unabashed cheerleader of the Aadhaar project.

Key To Many Doors

Nilekani says that if the Aadhaar project meets its goals, it will be because of the team, all of whom are fired with evangelist fervour. Ram Sevak Sharma, former principal secretary for information technology in Jharkhand and currently director-general of the Aadhaar project, is certainly a man with a mission. Then, there is Ashok Pal Singh, deputy director-general of UIDAI, who is on deputation from the Indian postal service and is now one of the most dedicated members of the Aadhaar project, leading the financial inclusion initiative. Rajesh Bansal has been lent to the project by India's central bank to work out the financial nitty gritty. Viral Shah, PhD in computer sciences, has no government background — he simply met Nilekani at a conference in the US and talked himself into the project. He worked a whole year without pay before Nilekani put him on the rolls. Shah has the onerous task of making the technology back-end of the complex financial inclusion model work.

"We have been travelling and trying to bring all banks and financial institutions on board," says Sharma. Not an easy task given that many banks do not find it financially remunerative to provide banking facilities to the very poor in remote areas. Having branches or even ATMs that can be serviced in far flung areas is costly — and often, the total money deposited by clients in these areas is too little to justify the expense. Also, transaction values are low and so a bank's revenues from the accounts can be very low.

Still, the team is gung ho about the whole affair. It has powerful backing — including CEA Basu and deputy chairman of the Planning Commission, Montek Singh Ahluwalia. It has also managed to get the blessings of the Reserve Bank of India, which has agreed to the Aadhaar identity being the KYC norm for all banks operating in India. The project team has already talked to over 50 banks and it expects to have all of them, as well as the others, on board by the end of the year, by when about 60 banks will be empanelled to open Aadhaar-linked accounts.

Starting July or August, when a new UID number is handed out, the holder will be asked whether he wants to open a no-frills bank account. If he does, an empanelled bank will open a new account for him. "It is a bit like we are laying the identity expressways. Based on the network, we will know where we can actually reach," says Bansal, assistant director-general of the UIDAI. Aadhaar will make it cheaper for banks to open an account for the poor because it will cut out the effort needed to verify the antecedents of the customer. "As a result, it will be much cheaper for banks to net new accounts," says Singh. The industry estimates that it costs Rs 200-250 for each new account they manage to secure. "With the UID, the cost of acquiring a new account for banks is zero," explains Singh.

At present, only 250 million Indians have bank accounts, according to some estimates. If the Aadhaar-linked accounts take off, the number will go up three times, says the project team. "You can imagine what an opportunity it is for the banking and insurance sector," adds Bansal.

Already, in the first 5 million enrolments that have been carried out by UIDAI, 88 per cent UID holders have chosen to open a new bank account. "If I go by this trend, we would expect some 800 million new bank accounts to be opened. Even if I assume that this will come down since many people may choose to link to existing accounts and not open a new account, at least 500 million new bank accounts will be opened," says Singh.

What about the capital costs involved in setting up branches or ATMs in far-flung areas with very poor customers and small populations? The team has a way out for this as well, with the help of the central bank.

Business Correspondents, Micro ATMs

About five years ago, in 2006, the RBI sent out a circular explaining the business correspondent model to all banks. It was to solve the problem of infrastructure costs in remote and low-traffic areas. The Reserve Bank allows banks to use certain cooperative societies, non-banking financial companies (NBFCs) that are not taking public deposits, as well as post offices, to be treated as business correspondents by banks. In essence, after performing its due diligence, the bank can ask the post office (or the NGO) in the area to act as its agent for collecting savings or disbursing money.

With Aadhaar, for every 2,000 accounts that a bank acquires, it is required to put up one business correspondent in that district so that these accounts can be serviced (the aim is to have two business correspondents in every district so that some competition creeps in). The business correspondent will use micro ATMs to provide services and service accounts.

Micro ATMs are small point-of-sale machines that connect online and will be operated by the business correspondent. Those with Aadhaar-linked accounts can either deposit or withdraw even very small sums — say, Rs 50 — using these micro ATMs (see ‘Aadhaar And Micro ATMs').

The big hurdle for the micro ATM concept was verification of identities of customers. Aadhaar solves that problem. All that a business correspondent needs is a small machine that will match the customer's thumb print with the central database. It is an elegant solution.

The second step is allowing micro transfers of money from one part of India to another. Once that works out satisfactorily, an immigrant working in, say, Mumbai can send a part of his salary or savings back home to his village in, say,  Kerala, without any hassle and without having to pay hefty transfer fees.

"With the micro payments system in place, the transfer can happen instantly, at very low cost and can be absolutely hassle-free," says Bansal. The system can be effectively used for remittances, to sell insurance, for loans from banks, and so on. Stretching the concept a bit further, project officials say that the system can even be used for booking and accessing railway tickets — the bank account would be debited for the amount and the ticket can be sent online on the micro ATM. "Depending on your imagination, this can be used for all kinds of value-added services. That is its power," adds Sharma.

UIDAI is looking to cover 600,000 villages through 1.2 million business correspondents. Adds Basu: "A banking system of the kind that we are envisaging, whereby the banker goes to the customer's doorstep, identifies the customer using a hand-held device and the Aadhaar identification, and acts as a human ATM, can transform India's financial architecture. This system can free the poor to migrate to where the opportunities are the greatest, without fearing that they cannot access their savings or get their subsidised rations. On this, India has the potential to develop a pioneering model for all emerging nations to use." As things stand now, the poor have to pay a premium to access the same services as the rich.

A study by Boston Consulting group on financial inclusion has estimated that the penetration of formal financial services can go up from around 47 per cent to 65 per cent with an additional profit potential of Rs 1,500 crore for the financial services providers by the fifth year (subject to various assumptions and conditions). The study estimates that remittances could be made at a fee of 3 per cent of the amount or loans could be provided at 22-28 per cent, which is much lower than the informal sector (5-10 per cent for remittances and 35-100 per cent for loans). The study has further estimated how penetration can be deeper and costs can be lowered further if the policy makers (state governments) create an enabling ecosystem through regulatory and policy changes.

Re-engineering Public Services

Although Singh says Aadhaar is not the solution to the nation's problems, it could well be used to resolve some of them. The second leg of financial inclusion is where UIDAI is working very closely with all state governments so that any benefits that are transferred through any social security or welfare scheme is done through Aadhaar-enabled bank accounts. At present, leakages are high and so is corruption. In many welfare schemes, the money or benefit that is required to be disbursed is paid out through contractors who demand a cut. In some villages in Bihar, for example, the cut can be as high as 50 per cent. "This (Aadhaar) will break the nexus. The beneficiary does not need to go on a fixed day at a fixed time to a fixed spot and meet a fixed contractor. He can go to any available business correspondent on whichever day and at whatever time," explains Singh.

One of the main advantages of using Aadhaar would be that the benefit would reach only the beneficiary, directly, and no one else. "Due to the Aadhaar authentication process, there is no way to forge, duplicate or wrongly identify the beneficiary," explains Bansal.

A recent pilot run by the UIDAI in January-March 2011 in Jharkhand to test "proof of concept" has demonstrated how the Aadhaar can help in transfering money. With five partner banks — Union Bank of India, ICICI Bank, Bank of India, SBI and Axis bank — around 3,000 Aadhaar numbers were given, bank accounts were opened and people withdrew and deposited money through micro ATMs. Similarly, this is being tested for MNREGA payments to be made by Jharkhand to Aadhaar-holders. An account mapper will determine which bank the Aadhaar number is connected to and the money would be transferred to that account. "In Tikamgarh district in Madhya Pradesh, we found that a person was spending Rs 126 to collect Rs 526 that was due to him," says Sharma, arguing that Aadhaar and micro ATMs will help resolve "all last-mile delivery problems". The bank, in turn, will simply credit the account and then the worker can go to a business correspondent to withdraw the money. "The difference between an ATM and a micro ATM is that the latter is operated by a person who will give physical cash," explains Bansal.

Stumbling Blocks

Barring the fact that state governments are slow to change, many sceptics have raised the issue that a system that will reduce discretion and, therefore, the opportunity of various stakeholders to take a cut, will meet stiff resistance. Many feel that the whole process as envisaged by the UIDAI sounds "too good to be true" or "utopian". While some states are ahead of others — Karnataka, Tripura, Jharkhand, Andhra Pradesh lead both in terms of enrolment and their keenness to adopt Aadhaar for state-level payments — the UIDAI team says all other states are also willing to come on board. "Initially, there may have been some resistance. But now, as many states realise the potential and scope, they are coming on board. It is an idea whose time has come. All the stars, so to speak, are positioned favourably," adds Sharma in a lighter vein.

Nilekani points out that while Aadhaar can be used very effectively to better deliver welfare funds, it is not to be confused with policy changes. For instance, whether or not the government decides to move to a cash subsidy instead of providing wheat and rice to the poor is a separate matter. The Aadhaar number can help the state identify its beneficiary clearly and help deliver the subsidy straight to the target. It is a grand dream. Basu, Nilekani, Ahluwalia, Sharma, Singh, Bansal and the others are actually re-imagining India.