Not by fiat alone

Bank accounts precede electronic payments

The Union finance ministry has reportedly asked all nationalised banks and financial institutions to make payments electronically and not by cheque. The groups identified are banks’ customers, employees, vendors and beneficiaries of social sector projects. The scope for corruption and delay in making payments by cheque is lessened when the electronic transfer mode is used. This is fine but it does not take things substantially forward. A key department under the same ministry that continues to make payments by cheque for all but very small amounts to individuals is the income tax department. Apart from that, banks must be making most of their payments to their own customers and employees electronically. The scope for electronic payments can be extended a little more by making it mandatory for vendors — not large at all in the overall scheme of things.

The real issue arises when it comes to the beneficiaries of social sector projects. Their scope has been vastly extended in the last few years with the introduction of the Mahatma Gandhi National Rural Employment Guarantee Scheme. About a third of the country’s adult population has yet to get bank accounts. The whole process of financial inclusion is aimed at delivering precisely this — taking banking to the unbanked. This is being driven by three efforts. One is to expand the branch network to eventually cover the entire country, even small hamlets. Two is to extend the arm of branches through the use of banking correspondents. Three is to cover a large section of the country’s population under the unique identification (UID) project so that the problem of establishing one’s identity does not arise when someone wishes to open an account and has neither a regular address nor any of the standard proofs of identity like the voter’s identity card.

The real aim must be, therefore, threefold: make the UID project go forward as fast as possible, while expanding the spread of banking so that there is a facility within reach for all adults to begin with, and – this is perhaps the most important and intractable – sit down with banks to find out what the hurdles are in the way of taking banking everywhere and what incentives can be given to banks to make it worth their while to do so. A recent innovation in this regard is the decision by an arm of Axis Bank to team up with a leading microfinance institution, Bandhan, to take microfinance to those at the bottom of the pyramid. Those getting income-generating loans from Bandhan will certainly get to open bank accounts. Microfinance institutions can be used to spread financial inclusion since they have a reach that commercial banks lack. Issuing administrative fiats can help in a small way but it is necessary to know where to act for the maximum impact.