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Business correspondents may be paid for cash transfers

Talks are currently under way between the Unique Identification Authority of India, the finance ministry and the Planning Commission to determine the amount to be paid for each transaction carried out by a correspondent. Photo: Pradeep Gaur/Mint (Pradeep Gaur/Mint)Premium
Talks are currently under way between the Unique Identification Authority of India, the finance ministry and the Planning Commission to determine the amount to be paid for each transaction carried out by a correspondent. Photo: Pradeep Gaur/Mint
(Pradeep Gaur/Mint)

The incentive rate for transactions carried out under direct cash transfer scheme likely to be announced in budget session

New Delhi/Hyderabad: The government is considering offering incentives to so-called business correspondents, who provide banking services to the poor in rural India, for every transaction they carry out under the United Progressive Alliance’s direct cash transfers project.

The programme is aimed at transferring subsidies and payments under public welfare schemes directly to the bank accounts of targeted beneficiaries, cutting out multiple bureaucratic layers and middlemen. It will use a network of one million business correspondents across the country to provide basic banking facilities to the poor.

A robust incentive mechanism for business correspondents has to be put in place to make it viable for banks to invest in the network and the supporting technology infrastructure, including small cash-vending machines, according to government officials and business correspondents.

Talks are currently under way between the Unique Identification Authority of India or UIDAI, which is spearheading the Aadhaar project to provide a unique identity number to every resident of India, the finance ministry and the Planning Commission to determine the amount to be paid for each transaction carried out by a correspondent.

At a meeting on the proposal in December, chaired by finance minister P. Chidambaram, UIDAI had suggested an incentive rate equal to 3.14% of the total transaction value while the finance ministry had suggested 1.5% , according to documents reviewed by Mint. Several meetings after the December meeting on the subject have remained in conclusive. The final incentive rate is expected to be decided soon and is likely to be announced during the budget session of Parliament starting this month.

Non-governmental organizations and microfinance institutions registered under the societies Act or Indian Trusts Act, societies registered under the mutually aided cooperative societies Act or the cooperative societies Act of the states, post offices or individuals who meet Reserve Bank of India criteria can become business correspondents.

A government official familiar with the discussions, who spoke on condition of anonymity, said the correspondents were needed to provide last-mile connectivity “which is the key for the success of the project and banks will only set up a robust network if it is financially viable for them".

Anything less than 2% will be “less attractive for banking correspondent channels to make it efficient and convenient," said Haresh Bathija, chief executive of Mumbai-based Suvidhaa Infoserve Pvt. Ltd.

The most serious challenge facing the business correspondent model in the country is its commercial viability, said a joint report by Sa-Dhan, an association of institutions working towards financial inclusion, and Citi Foundation.

The report titled Financial inclusion and efficacy of banking correspondent model was released on August 2012.

“The whole compensation structure is too meagre to sustain the BC system with a single product like no-frills account on offer by the banks," the report said.

The government had initially planned to implement cash transfers in 43 districts across 34 schemes, including pensions and scholarships, from 1 January and in the 18 states where UID will enrol residents from April 2013. Cash transfers are set to be rolled out nationwide by April 2014. However, the government later said that the initial plan was being changed and now cash transfers will happen across 26 schemes in 20 districts in January; in another 11 districts from February and in an additional 12 districts from March.

The task force report on Aadhaar-enabled unified payment infrastructure, submitted in February last year, which laid out the initial blueprint for the direct cash transfers of subsidies, had recommended that the government bear the last-mile transaction processing fee of 3.14% with a cap of 20 per transaction, “in order to make government payments viable at the last mile".

Manish Khera, founder and chief executive of Mumbai-based Fino PayTech Ltd, said that incentivizing banking correspondents was important to take the national financial inclusion mandate forward. There are costs associated with banking correspondents and agents need to be compensated adequately, Khera said.

“We believe that the government should consider the role the banking correspondent sector plays in taking banking to large unbanked and un-serviced masses and accordingly come out with an incentive structure that is a win-win for all stakeholders," he said.

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