Rebooting India: Realizing a Billion Aspirations (8 page)

After generating an Aadhaar, the data would be sent to India Post for printing. As Ashok Pal Singh recollects, ‘India Post never took us seriously when we told them that in a short time frame, one million Aadhaars will be generated daily—perhaps thinking how a government programme could scale this fast.’ Very soon, the printed letters piled up, and people were waiting for months to receive them. In order to add capacity, other printers were contracted and the backlog was addressed. Letters were also sorted by PIN code and delivered to India Post at different points across the country to ease the load on the postal network.

Despite these efforts, letters do sometimes fail to reach the intended recipient, perhaps because the address is incomplete, the recipient has moved or the letter has been lost in transit. Enter electronic, or e-Aadhaar. The resident can go to the UIDAI’s website, enter their enrolment number, download a copy of their letter and simply print it out for themselves. This printout has the same standing as the official letter issued by the UIDAI, and was made possible by a design decision that we discuss in a later chapter—the decision that Aadhaar would be a number existing in multiple formats, not just a number on a card; it would not be tied to a specific physical form.

What could a person do with their Aadhaar number once they had it? Its most powerful application is that instead of being just
another identification number, it can actually be used to verify your identity electronically—the system can be queried and will provide a ‘Yes/No’ answer if you ask: ‘Is this Nandan Nilekani?’ No other ID system in India can do that. Moreover, Aadhaar provides not one but three different types of authentication: demographic, which verifies a person’s name, address and their date of birth; biometric, which verifies a person’s fingerprint or iris data; and a one-time password system, similar to that used in online banking, where a password for one-time use is sent to a registered mobile phone.

For strong, banking-grade identity verification, one has to carry out multifactor authentication, verifying at least two pieces of information in two different ways. For example, to use an ATM to withdraw money, you need a debit card (‘what you have’) and a PIN (‘what you know’). Strong authentication can be provided by the UIDAI with biometrics (‘who you are’) combined with the one-time password sent to the mobile phone (‘what you have’). Today, 900 million people can suddenly prove their identities online, in real time, using their Aadhaar numbers. This makes it possible to build an entire new class of applications, especially within government, that are shown in the diagram on the facing page.

Over the last two chapters, we have seen that both the Aadhaar scheme and the technology platform upon which it was built are quite unlike anything else in government. Aadhaar is perhaps the only government identity which is entirely open-ended; it can be used for any service, public or private, that requires identity verification. In the same way, Aadhaar runs on an open technology platform, using open-source software and standard, open-market hardware. A small team executed the project, keeping all the strategic thinking in-house while outsourcing the actual execution phase. One simply cannot outsource thinking and design to someone else: one has to get their hands dirty. (This is the exact opposite of the approach government usually takes.) Once the UIDAI put the appropriate technology
standards in place, any vendor could provide the necessary services. By bringing multiple vendors on board, competition increased, costs dropped, and scale was achieved.

Many of the decisions the UIDAI took went against the accepted norm, and the team had to accept both the associated risk and the criticism that came with them. However, the Aadhaar programme has now conclusively proven that we need not look only to the Silicon Valleys of the world for cutting-edge innovation in technology. Government is an equally fertile environment in which to build such solutions, not as an end in itself but as a means to improve the lives of all 1.2 billion of our fellow Indians.

SIX HUNDRED THOUSAND villages in India have no banking facilities whatsoever. What do their residents have to do to get access to financial services? If you are Basudeb Pahan, you trek fifteen kilometres through the hilly jungles of Jharkhand to reach the nearest bank branch, losing a good deal of money in the process. All across rural India, people perform similar feats of endurance. The ordeal of Ram, a villager in Madhya Pradesh’s Atariya district, is chronicled in the accompanying diagram. After walking for an hour and a half, he must catch a bus to cover the twenty kilometres remaining between him and the local bank. The bank has decreed that his wages under the government’s rural employment scheme, MGNREGA, will be available to him only on Thursday and must be collected before 2.30 p.m., the bank’s closing time. If he misses the deadline, he has to come back the following week. To collect the Rs 500 due to him, he loses one day’s wages (around Rs 91), has to pay Rs 10 for the bus fare, and give a cut of his salary to the moneylender, who charges additional interest. In all, Ram effectively loses a fifth of his money before he can collect it.

The problem assumes a slightly different dimension for the urban poor, who are surrounded by banks yet unable to access their services for want of identity documents. Lal Singh is a migrant labourer in New Delhi who lives in a slum and wants to send his savings to his
family back home in Bihar. Being a poor migrant, Lal Singh has no ID proof, and cannot open a bank account. What channels can he use? Initially, he used to send money through the post office, which charged him 5 per cent of the total amount as a service fee. His family complained that it took them a month or more to actually get the money he had sent. He then switched to a private agent, who would deliver the money directly to his family’s home for a charge of 5–7 per cent of the total. However, the money still takes a few days to reach his village, and he has no way of checking that the money is being delivered correctly. A fellow migrant, Rashid Ul Sheikh, has no bank account and nowhere safe to store his money. The only ID document he has, a village ration card, is not accepted by the bank authorities in New Delhi. He is forced to hand over his savings to his landlord for safekeeping, who charges him 10 per cent for this service.

Basudeb Pahan, Ram, Lal Singh and Rashid Ul Sheikh represent the majority of Indians who find themselves excluded from the formal financial sector, and pay a high cost for it. Marginal farmers, landless labourers, the self-employed and those who work in the unorganized sector, urban slum dwellers, migrant workers, ethnic minorities and socially disadvantaged groups, senior citizens and women alike are unable to open bank accounts or access basic banking and credit services. An estimated 60 per cent of Indians, both urban and rural, do not have functional bank accounts. Out of India’s 90 million farmer households, over 51 per cent have no access to any form of credit at all, while 73 per cent have no access to formal sources of credit. Other measures of engagement with the financial sector are equally dismal.
¹

The absence of a universally accepted identification has in a sense given rise to two economies in India. On one side, people open bank accounts, buy insurance, take out loans and transfer money to their families with relative ease. On the other side of this divide, the poor and disadvantaged rely on a shadowy system of moneylenders and adhoc financial services of questionable legality. Such basic activities as sending money to relatives become fraught with difficulties and costs. On a smaller scale, financial exclusion also sharply limits the ability of people to save, invest and improve their circumstances. Looking at
the larger picture, this results in significant damage to India’s economy. For example, only 3 per cent of Indians file income tax returns; in comparison, nearly 45 per cent of all US citizens pay federal taxes.
²
A nation cannot progress when a huge number of its citizens are cut off from accessing the fruits of the country’s development.

The ultimate goal of financial inclusion would therefore be to bring banking and financial services to the doorstep of every Indian. The microATM that Basudeb Pahan uses to withdraw his pension now will be the instrument that helps us achieve this goal. The power of the microATM, combined with the ability to use an individual’s Aadhaar data to verify their identity, is sufficient to transform the humble kirana store into a local bank branch in every village of India. The simplicity of this idea lends itself beautifully to building a large-scale banking network across the country, one that will usher every Indian into the formal financial sector.

Mumbai’s Dharavi locality is a place of staggering contrasts. With its narrow byways and tumbledown tenements teeming with people, at first glance it lives up to its title of ‘Asia’s largest slum’. Beyond the clichés, however, Dharavi is an economic boom town, the beating heart of India’s informal economy, generating anywhere from $600 million to $1 billion worth of output annually.
³
Viral was given a tour of Dharavi by the local branch manager of the Indian Overseas Bank. Despite having grown up in Mumbai, Viral had never set foot in the area; he was amazed by what he saw. Crammed into a warren of tiny rooms and sheds were factories churning out savoury
chivda
and other teatime snacks, workshops producing fine leather goods, an ice-cream manufacturing plant and a garment factory making T-shirts that were exported to Saudi Arabia and other countries—and this was just a sample.

What was the bank manager’s perspective on the area? He explained that while many of these businesses were raking in handsome profits, almost none of them had a bank account—not surprising when you
consider that 75 per cent of all Indian businesses are unlisted, and nearly 90 per cent of small businesses have no links at all with the formal financial sector. He was wrestling with the dilemma of offering loans and other financial products to companies that were otherwise solid bets except for one problem—on paper, they didn’t exist.

India’s informal sector generates 90 per cent of all employment in India
⁴
—yet these employees have no access to savings accounts, loans or insurance. The contributions of this ‘shadow economy’ to the nation’s GDP are vastly underestimated.
⁵
The idea that boosting financial inclusion can have a huge positive impact on both the nation’s economy and the everyday lives of its people is not a new one—the number of schemes launched to address this very issue bear testament to the fact. Clearly, there is still a long way to go; as recently as December 2013, the RBI governor, Raghuram Rajan, made a strong push for ‘reach(ing) everyone, however remote or small, with financial services’, and said that improved access would be one of the ‘five pillars’ on which further development would be based.
⁶
An RBI report also listed the six key vision statements that would help India achieve full financial inclusion by January 2016.

What happens to India’s unbanked millions if they are given access to formal financial services? For one, their days of stowing money under the mattress will be over, and the usurious moneylender will become a figure of the past. They are already a finance-savvy population; in the book
Portfolios of the Poor
, which examines how villagers and slum dwellers in Bangladesh, India and South Africa manage their money, the authors found that the average poor household had ‘a fistful of financial relationships on the go’, demonstrating a surprising appetite for employing financial tools to manage their budgets while relying on informal networks and family ties to save money and take out loans.
⁷
Clearly, this appetite is not being satisfied by existing forms of financial access. And yet other sectors continue to successfully engage with this same population; even in some of India’s remotest villages, you can go to the local cigarette and sweet shop and top up your mobile’s talktime for as little as five rupees. If the telecommunications industry has worked out how to deliver services at high volume and
low cost, overcoming geographical constraints along the way, why can’t the banking sector do the same?

However, the strongest push for financial inclusion will not be from banks or other financial institutions. It must necessarily come from the government, which runs an enormous financial network disbursing an estimated Rs 3 trillion—3.5 per cent of India’s GDP—as social security benefits to the poor.
⁸
The bulk of this money is spent on schemes that guarantee employment to the rural poor (MGNREGA), offer scholarships to universalize elementary school education (Sarva Shiksha Abhiyaan, or the Education for All Movement), provide cash assistance to expectant mothers and health workers (Janani Suraksha Yojana, or Maternal Safety Scheme) and provide pensions to the elderly, widows and the disabled (National Social Assistance Programme).

How efficient are these social security schemes at delivering financial benefit to the poor? Two volunteers at UIDAI, Naman Pugalia and Mihir Sheth, travelled extensively across India to find the answer to this question. They learnt of leakages in the system that diverted resources away from desperately poor people, who then suffered the added insult of having to pay for services which should have been freely available to them. Minu, who was expecting a child, paid Rs 630 in order to receive a payment of Rs 1400 under the Janani Suraksha Yojana. Anjana Namdev received her 200-rupee monthly pension only once every few months. Suman Kadam had to depend upon the whims and fancies of the local postman for her payment to be delivered. Minzi was forced to mortgage her pension card for a loan to make ends meet. There were also other kinds of errors: some people receiving pensions turned out to be far too young to be eligible; in other cases, dead people’s names were being used to illegally draw monthly payments. In every village Naman and Mihir visited, they found countless errors of inclusion and exclusion, a sad litany that explained why even the most well intentioned of government schemes failed to bring succour to the needy.
⁹
The cost of these inefficiencies, errors and leakages adds up to a staggering trillion rupees—nearly a third of the government’s entire expenditure on welfare schemes.
¹⁰

Every government payment that does not reach the intended
beneficiary, every government entitlement that a deserving individual is unable to claim, every error of inclusion and exclusion is in effect a broken promise made by the Government of India to its people. Millions of such promises are broken every year, even as the government continues to launch additional schemes, pump more money into the system, and enact new laws to ensure compliance and prevent fraud. The only way to ensure that these promises are actually kept is to build a new class of institutions that use technology to design solutions that work for everyone.

Whether it is bringing banking to the masses or the disbursement of government benefits, the existing systems are clearly unable to keep pace with the needs of India’s population. In some cases, the reasons are purely financial—it is expensive to build, staff and operate a new bank branch, and the kind of high-volume, low-value transactions that take place in a rural economy might not offset these costs. As a result, people are denied access to the financial services they need most: credit, so that they can borrow in bad times; savings and investment products, so that they can save in good times; and insurance, so that they can protect themselves against unforeseen circumstances and acts of nature—an accident, an illness, a crop failure or a flood. If these financial products are to be made available to everyone, the prices of such products must come down, and the associated risks must be offset by spreading them across the entire population.

Whether it’s the printing press or the personal computer, technology has been the skeleton key for enabling access, the great leveller when it comes to making things cheaper and easily available. The ubiquity of the mobile phone in India is a textbook illustration. Why shouldn’t this be true of the financial sector as well? In most financial transactions, it is in the last mile—where systems finally meet consumers—that things begin to break down. Here, costs are the problem. We’ve mentioned that the cost of creating a physical infrastructure is one deterrent. Another is the fact that cheques and cash are expensive to manage.
A significant amount of time and effort is expended in shepherding them through the system and finally into the recipient’s hands.

We firmly believe that the only way to bridge the last-mile gap will be through the widespread adoption of electronic payment systems. The government must be the initial driver, using the heft and reach of its social security schemes to drive the adoption of an electronic payments model. As momentum grows, private players can step in. We envision electronic payments as the first step on the ladder of financial inclusion. The immediate next step would be the creation of bank accounts to house these payments. As soon as people have bank accounts, they become eligible for other financial services as well. The next rungs of the ladder are loans, insurance schemes of all kinds—for crops, health, life, accidents—and pension schemes. As people move upward, they become integrated into India’s formal financial sector, with all its attendant benefits.