SYDNEY - 23 April 2013

The Ambitious Aapka Program

On January 1, the Indian Government deposited government pension and scholarship payments directly into the bank accounts of 245,00 people. These payments were the first of the government’s nation-wide program, titled ‘Aapka Paisa Aapke Haath’ (Aapka Program), which is designed to bypass corrupt state and local officials, and ensure social security payments go straight to Indian citizens. On 26 November 2012, at the first meeting of the National Committee on Direct Transfers, Indian Prime Minister Dr Manmohan Singh emphasised the ambitious goals of the direct transfer program:

‘Direct Cash Transfers, which are now becoming possible through the innovative use of technology and the spread of modern banking across the country, open the doors for eliminating waste, cutting down leakages and targeting beneficiaries better. We have a chance to ensure that every Rupee spent by the government is spent truly well and goes to those who truly deserve it.’

But Will it Work? The Lack of Banking Infrastructure

There are reasons for skepticism about the likely effectiveness of the Aapka Program. It will not eliminate corruption in the government, and problems of identifying those in India’s enormous population who require social security payments will remain. However, similar programs in other large emerging markets, such as Mexico and Brazil, have met with at least some success.

The Bolsa Familia program in Brazil is considered particularly effective. Under this scheme, families who meet certain qualifying considerations receive family income support, in return for fulfilling certain human development conditions such as education, nutritional monitoring, vaccination, and use of additional social services. The Bolsa Familia program currently reaches around 50 million people, and is estimated to have prevented an additional 12 percent of Brazil’s population from moving into poverty during the global financial crisis.

However, the Aapka Program faces a challenge more fundamental than the lingering effects of corruption. Payments under the scheme must go to a bank account. This condition looms as a potential problem because one third of India’s low-income population, precisely those people the Aapka Program is designed to benefit, do not have a bank account.

India’s problem is shared by many other emerging economies, which also contain large ‘unbanked’ populations. Generally, the high transaction costs involved in providing financial services to low-income populations means it is not profitable for banks to deploy banking infrastructure and market financial services where the majority of the unbanked population live and work. The result is little, or any banking infrastructure across large swathes of emerging economies. Branch penetration, for example, averages only two branches per 100,000 people in the poorest country quintile, compared with thirty-three in the richest-country quintile. Automated teller machines are even more scarce in under-developed countries, averaging only 1.3 per 100,000 people in the poorest-country quintile, compared with 67 in the richest-country quintile.

Enter Telecommunication Companies

Telecommunication companies may be able to help extend the Aapka Program to India’s unbanked populations. In India, like in many other countries, mobile phone use is exploding. India now has over 850 million subscribers. This sort of coverage opens up the opportunity for the government to provide social security payments through mobile phones, and the recipient can then cash in these payments at retail outlets.

This type of service, ‘mobile money’, is growing rapidly in a number of countries around the world, led primarily by Kenya and the Philippines, as noted elsewhere in this portal. The benefits are obvious. Telecommunication companies tend to find it easy to manage large numbers of tiny accounts and micro transactions. More importantly, their network tends to be much larger than banks. As a benchmark, the largest mobile operator in a country usually has 100–500 times more airtime reseller outlets (a form of cash deposit for electronic value) than banks have branches. This large distribution network is considered one of the main reasons for the growth in mobile money programs in under-banked countries.

Consistent with these world-wide trends, in India telecommunication companies tend to also have a much larger distribution network than banks. As noted above, only one third of India’s population have bank accounts, and over 500,000 Indian villages do not have a bank outlet of any type. At the end of March 2012, commercial banks had a combined network of 129,381 service points (81,240 branches and 48,141 off-site automated teller machines) and 141,136 business correspondents, which can be used to reach customers. In contrast, telecommunication companies had more than a million contact points, in the firm of retail outlets, to serve the hundreds of millions of mobile users in the country.

Other countries are already using telecommunication companies in social security payments programs. For example, in Tanzania, the Government Employees Pension Fund operates a program through which citizens can make voluntary retirement savings through Vodafone M-Pesa, a service enabling money transfers through mobile phone networks. The M-Pesa network is used widely throughout East Africa for paying school fees, utility bills and interpersonal transfers.

The Catch: How to Regulate Telcos? 

The problem for the Indian government, and other governments around the world who might be interested in using telecommunication companies to make social security payments, is how to regulate them. Like any other organisation, telecommunication companies are vulnerable to individuals who choose to do the wrong thing, such as commit fraud. For example, in May 2012, it was revealed that staff members of a mobile money provider called Telco MTN Uganda stole around US$3.5 million of customers’ funds. The Rwanda Utilities Regulatory Authority has also reported incidents of fraud, particularly when a person steals a pin number of a client and uses it to transfer money to their phones.

Generally, a regulator’s tools supervising for basic financial services, such as payments, savings and loans, are those which relate to banks. Obviously banking tools cannot be applied directly to telecommunication companies because these institutions are not banks. They do not tend to take deposits and on lend these deposits to firms and households.

However, some aspects of banking regulation will be useful. For example, often, after providing electronic money in exchange for customer’s cash, telecommunications companies must usually store this cash in a bank. Some policy makers have argued that telecommunication companies should be able to pay interest on that deposit account to customers. However, this looks suspiciously like the telecommunication company is receiving a ‘deposit’ from the customer. Can banking regulation be used to deal with that situation and if so, how?

Regulating telecommunication companies is also complicated because they tend to partner with banks. Sometimes the telecommunication company contracts directly with the customer and stores its money received with a bank. In other models, the bank contracts with the customer and the telecommunication company effects payments. Where should regulation lie in those instances? And what sort of consumer protection regulation is required so that these customers are not mistreated by the telecommunication company? Should it be different to consumer protection regulation that applies to banks and if so, how?

India currently takes the conservative, ‘bank-centric approach. Telecommunication companies have a limited role because mobile money is only available to those who already have bank accounts. This makes it easy: banking regulation applies to the bank. The trade-off for this safety first approach is that the Indian government cannot rely upon the vast distribution network of Indian telecommunication companies when it rolls out its Aaapka Program. This means that the very large Indian ‘unbanked’ population will have to wait until either the Indian government brings telecommunication companies into the picture or banking infrastructure eventually reaches them. The latter is likely to take a very long time.

Conclusion

India’s Aapka Program may be a political stunt to win votes in the upcoming Indian election, or a genuine attempt to improve the delivery of government benefits to the citizens. If the latter, India’s banking infrastructure is likely to impede the full benefits of the program from reaching those who need it the most.

Telecommunication companies can use their much larger distribution networks to help. However, to bring telecommunication companies into the program, Indian regulators, like those in many countries around the world, need to work out how to regulate them. This is quite a task.