June 2015

For universal financial inclusion, the first step is to ensure that the unbanked have easy access to formal financial services. In India, the basic network has been largely achieved through the Pradhan Mantri Jan Dhan Yojana (PMJDY). The programme has now moved into the crucial second phase of pushing account usage; this is being done through the rollout of the Jan Suraksha plans of insurance and pension, as well as expansion and consolidation of the Direct Benefits Transfers (DBT) programme. The process of inclusion is a long one and while India has moved ahead on many fronts, there are areas of concern still - a roundup of the past year on financial inclusion initiatives in India can be seen in Sumita Kale's article, Achieving financial inclusion a key matrix (Financial Express, 29th May 2015). The government is acutely aware of the need to raise account usage and keeping the agent network viable and is working on cleaning up many vital operational details. Yet one critical issue that needs to be addressed is the inadequate commission being paid to banks for successful delivery of DBT payments in rural areas. The 1% commission notified by the Finance Ministry in Jan 2015 barely covers the bank's costs, making it difficult to pay Business Correspondents and their agents.

A recent study by MicroSave, How a 1% DBT Commission Could Undermine India's Financial Inclusion Efforts makes the following points:

The success of the PMJDY and DBT hinge on one factor above all: the quality of the last-mile banking agent (Bank Mitr) networks that will disburse DBT payments and enable customers to access their bank accounts.

Bank Mitr networks in India have been weak, with a recent study showing an annual attrition rate of 25-35%. Many have stopped offering services because commission rates for processing government benefit and subsidy payments are too low.

The detailed costing analysis reveals that, at a minimum, it costs banks INR 2.63 to transact INR 100 using the agent network—2.63% of each transaction- the cost was about 0.96% for BCNMs, 0.85% for BCAs, and about 0.82% for banks.

With increased volumes due to the introduction of new schemes, the cost as a percentage of transaction value would decline substantially.

Therefore, the authors of the study, Pawan Bakhshi, Manoj Sharma and Graham A. N. Wright recommend that the government set an adequate rural DBT commission rate, a minimum of 3% for the first few years of PMJDY; this will make the Bank Mitr network more sustainable and will help ensure quality services. Over time, as payment volumes increase and the cost of processing DBT payments decreases, market forces and the bargaining capacity of banks will lead to lower commissions. They also recommend that the government undertake a more detailed costing exercise, making the geographic coverage more representative. Ensuring that the agents at the last mile remain engaged in their business of service delivery efficiently is key to ensuring universal financial inclusion for the country.