india’s payments dilemma. continued.

The Financial Sector Legislative Reforms Commission (FSLRC) could recommend that the Reserve Bank of India should grant limited purpose bank licences to telecom firms and other industries in order to promote financial inclusion. A working group led by Morgan Stanley India chairman PJ Nayak, tasked by the Commission to propose changes to the country’s payment laws, has proposed a radical new approach to ensure the unbanked get access to formal and secure payment systems, which includes restricting the central bank’s regulatory grip over payment and settlement systems.

Its prescriptions are significant as they offer an alternative last mile solution that could help UPA-2 operationalise its ambitious direct benefits transfer programme to ensure subsidy payouts reach intended beneficiaries through the use of technological innovations.

At the same time, it is getting flak from sectoral experts for not paying enough attention to accompanying risks. Says MS Sriram, a member of IIM-Bangalore’s Centre for Public Policy, “The report doesn’t balance risk and innovation. What is at stake here is small depositors’ savings. The RBI has to be conservative on these issues.”

The complete story by my colleague vikas and yours truly, here.

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The End of the Silly Common Banking Correspondent Model?

since may this year, i have been tracking a plan from the department of financial services to split india into 20 clusters, and to appoint a common banking correspondent company for all public sector banks operating in each cluster. it is a textbook case of policy adventurism. the department, a part of the finance ministry, has not paused to wonder whether putting one company in charge of all financial transactions of the poor — between the government and them, and amongst themselves — can result in that company developing monopolistic tendencies. something that banks themselves are deeply apprehensive about. strangely, alarm bells did not go off inside the department even when the auctions to appoint BCs started, and bids touched unexpectedly low levels.

well. there is good news at the end of all that. as this story reports today…

The government is likely to shoot down the Department of Financial Services’ (DFS) plan to appoint common banking correspondent (BC) companies for transferring cash to poor people and replace it with a country-wide network of ‘micro ATMs’, as it seeks to finalise the last mile payment architecture for cash transfers.

In a meeting on Monday evening, Rural Development Minister Jairam Ramesh, UIDAI chairman Nandan Nilekani, and Planning Commission officials met Finance Minister P Chidambaram to share their reservations about the common banking correspondent model. An official who attended the meeting told ET that it was agreed in-principle to junk this model but a final decision will be taken by the Finance Minister.

In a SMS to ET, Ramesh confirmed the development. “The DFS model is now history. Women SHG, Ashas, anganwadi workers, post offices, teachers, kirana stores, fertiliser shops, etc, can now be BCs,” he said.

the government is now thinking of using micro-atms, as the nandan nilekani report on micropayments had suggested, to make cash transfers reach across the last mile to targeted beneficiaries. whether these will work or not is an open question as well. but that is another story. to be written after another set of field trips. for now, i am glad that this one cluster, one BC model might be on its way out.

In which the Banking Correspondent Auctions finally go below the psychological zero percent margin mark…

for a while now, i have been reporting on the never-ending happiness that is the finance ministry’s “one cluster, one BC” model — essentially, to split india into 20 clusters and then to have one common banking correspondent company for all public sector banks operating in each cluster. this company would then be the only conduit through which welfare programme monies (and cash transfers) would flow from banks to the poor pensioners, nrega workers, what have you.

for a while now, there has been some concern that entrusting such a vital role to one company would sooner or later result in it developing monopolistic tendencies. this concern has been deepening as one saw companies put in incredibly low bids to win clusters — for an industry which has been saying that a 2% margin is not enough, bids have ranged between 0.86% to 0.02 and 0.01%.

but now, there is something new under the sun. a company called seashore has emerged as the L1 bidder for Orissa after bidding minus 0.06%. these guys propose to pay the govt 6 paise for every rs 100 the company delivers unto poor households.

makes sense?

no?

read the story, jointly written by my colleagues nageshwar, atmadip and me.

Another update on the banking correspondent auctions

A newly-formed association of banking correspondent (BC) companies has criticised the finance ministry’s ongoing plan to split India into 20 clusters, and to appoint a common BC company for all public sector banks operating in each cluster. In a white paper released on Thursday night, the Business Correspondent Network Managers (BCNM) Forum, a grouping of 25 BC companies, faulted the ministry’s decision on a number of grounds.

The complete story here. For context, see this and this. Or scroll down this page and you will see a bunch of more granular posts on how this finance ministry plan has unfolded since it was first unveiled three months ago.

On the banking correspondent auctions…

for some time now, ET has been reporting on a worrying move by the philosopher kings in the department of financial services (the offshoot of the finance ministry tasked with managing the banking sector) to overhaul the banking correspondent (BC) model.

well, the auctions to appoint common BCs for all public sector banks in a “cluster” (one large or a couple of smaller states clumped together = one cluster) are underway. and the bids are frankly astonishing. after complaining for years that a 2% fee to deliver payments, etc, is not enough, companies are bidding ridiculously low amounts – the fourth auction was won by a company that bid 0.11% (or 11 paise to deliver to hundred rupees).

till now, i had been filing online stories (only for the ET website) after each reverse auction. the story out today, however, is written for the paper. it takes stocks of how the auctions are going and flags the fact that companies, about to be entrusted with a lot of public money for welfare, are bidding oddly low amounts.

this raises three possibilities. either, the economics of the BC model have changed entirely in the new approach (perhaps due to the fact that a monopoly is being created). two, companies are bidding out of desperation and they will fail to deliver. or, three, they are going all out to win contracts figuring they will work out ways to make it viable later (the time-honoured strategy of contract renegotiation after winning the bid, perhaps).