Rebooting India: Realizing a Billion Aspirations (14 page)

The idea of using Aadhaar as a financial address, and its role in the eventual creation of the APB, all sprang from a presentation that Nandan made to the RBI in 2009; a scheme that is now benefiting millions of Indians was outlined on a single slide. The idea gained further traction with the creation of the task force to investigate the
question of direct subsidy transfer. At the time the task force was active and the APB was being developed, the central government-owned LPG companies were already fairly computerized; the ministry of petroleum and natural gas, which handled the national LPG subsidy programme, was also especially keen to reduce the subsidy burden on the exchequer. The entire LPG subsidy ecosystem was thus uniquely poised for transformation, and became one of the first to adopt the APB to deliver subsidy payments directly to LPG consumers.

The only APB in the country so far was created by the NPCI, primarily for use by the government. Dilip Asbe explains how it works. The link between an Aadhaar number and a bank account is created in two layers. The first layer maps Aadhaar numbers to the corresponding bank, and this information is held in the APB. The second layer maps Aadhaar numbers to individual bank accounts, and this information is held by the bank. He explains, ‘We designed this two-layered scheme for greater flexibility. This design also helps to compartmentalize a person’s private information—there is no central database with everyone’s bank account information and Aadhaar numbers in the same place.’ If a person switches to a different bank in the future and wishes to use this new account to receive subsidy payments, all they have to do is to instruct the new bank to update their details in the APB, and payments can continue seamlessly.

Viral and Rajesh Bansal from the UIDAI worked closely with the NPCI team to implement the initial version of the APB. Within a few months, the team had procured the necessary technology and obtained regulatory clearance from the RBI, a record time in government and fast enough to rival the most nimble of private organizations. How was this speed achieved? The team met several times, bringing in relevant people from the UIDAI, the NPCI, banks and government ministries. Rajesh Bansal explains, ‘We all had to agree on a set of common standards and working practices and take everyone’s concerns into account so that we could develop a solution that worked for everyone.’

‘The APB currently has over 600 participating banks—more than the number of banks offering ATM services or mobile payments in
India today,’ he continues. ‘The APB is one of the largest interoperable payments transfer systems in the country, and this scale has been achieved within two years of operations.’ Today, over 200 million Aadhaar numbers are linked to bank accounts in the APB database. In 2014–15, 170 million transactions were performed through the APB, and over Rs 60 billion transferred, with an average transaction size of Rs 365.

How can direct cash transfers help to clean up welfare programmes? In the private sector, we’re already seeing electronic payment models that are easy to use; thanks to technology, entry barriers are low while methods like data mining and fraud detection are used to ensure that all transactions are trustworthy. Technology can help to build a welfare system that is inclusive, allowing deserving individuals to participate while working behind the scenes to eliminate corruption and fraud.

The rules of eligibility, even for well-funded social safety nets, are complicated and cumbersome; a lack of clarity creates grey areas which must then be sorted out by bureaucrats. This provides plenty of opportunities for bribery and fraud, usually targeting the most vulnerable members of society. Technology can help us do away with these rules altogether. People can declare their own eligibility while signing up, and digital processes can be used to check whether these people are indeed deserving beneficiaries.

In the current subsidy system, geography controls eligibility. Consumers cannot obtain goods from any ration shop of their choice, or go to any health centre for medical services. In the accompanying diagram, we explain how an Aadhaar-linked subsidy model can solve the problem of portability, breaking the monopolies that currently exist. Consumers can now obtain goods from any vendor of their choice at market price, and receive the subsidy reimbursement directly into their bank accounts. This change will bring free-market dynamics into the formerly stultifying subsidy network, driving change in favour of the consumer.

The LPG subsidy programme makes a strong argument in favour of Direct Benefits Transfer (DBT)-based subsidy reform, with the projected savings from this scheme alone running into billions of rupees. The same model, when implemented for other subsidy programmes, can help to drastically cut India’s subsidy burden. An additional push towards such a system has come from the recent Economic Survey, which has advanced the concept of the ‘JAM Number Trinity’—a combination of the Jan Dhan Yojana, Aadhaar and Mobile numbers—as a solution for targeted subsidy delivery. The idea itself is not new; as far back as 2010, Nandan had stated, ‘The slogan of
bijli
,
sadak
,
pani
is passé. Today it’s about virtual things like UID number, bank account and mobile phone number.’
³⁶

Since that time, these three numbers have reached most of the Indian population. Today, 900 million Indians have an Aadhaar number, and this number is expected to rise to a billion by the end of 2015.
³⁷
Over 200 million Aadhaar-linked bank accounts have been created. Finally, India has over 900 million mobile phone users. The combination of these three factors allows for the development of newer and more sophisticated mechanisms for the direct transfer of benefits, including mobile-based payment platforms or via India Post. Finance Minister Arun Jaitley referred to the concept as a ‘game-changing reform’,
³⁸

and in the words of the Survey, ‘If the JAM Number Trinity can be seamlessly linked, and all subsidies rolled into one or a few monthly transfers, real progress in terms of direct income support to the poor may finally be possible.’

One of the most important lessons that our experiences taught us was that the success of any reform effort depends on institutional capacity. LPG subsidy reforms were successful because they were rolled out by oil companies that were state-owned but boasted of professional management and computerization of the entire supply chain and distribution all the way to the last mile. By contrast, reform of the fertilizer and PDS subsidies will require intensive coordination between the central and state governments. The entire distribution chain is not yet computerized and there is no single database of all consumers eligible for the subsidy. This is essentially why cleaning
up the fertilizer and PDS subsidies will be a far more onerous task.

Subsidies are inherently meant to address social imbalances, and are clearly well intentioned. However, failures of policy and implementation, coupled with outright corruption, have turned a well-meaning idea into an albatross around the government’s neck, a burden which is impossible to carry and yet cannot be jettisoned for fear of public outcry. Technology-based solutions, implemented through well-designed institutional mechanisms, are a must for the widespread overhaul of our entire subsidy system, correcting for errors of exclusion and inclusion and eliminating fraud, while restoring the power of choice to where it has always belonged—in the hands of the consumer.

Paperwork is the religion of the civil service.

—Jonathan Lynn and Antony Jay,
Yes Minister

NOT TOO LONG ago, opening a bank account in India meant spending a few hours at your local bank branch, clutching a file filled with photocopies of every single document you possessed that could prove who you were, when you were born and where you lived. Now consider an advertisement for ICICI Bank’s new ‘tab banking’ service, launched in 2013. Bollywood superstar Amitabh Bachchan is flying kites with a gaggle of young men on a rooftop, when one of them gestures to a nattily dressed executive sitting at a distance. ‘Who’s that?’ he asks. ‘Oh, he’s from ICICI Bank, and he’s here so I can open a bank account.’ ‘Don’t you need to go to the bank for that?’ asks another of his companions. Bachchan, busy trying to down a kite, laughingly replies that if he had to go to the bank, he wouldn’t have time for kite-flying. Taking a break from the action, Bachchan dashes off to meet the executive, who has already filled out the necessary form. He needs a photo, and whips out a tablet device to take a picture of his famous client. He then asks for a photo ID and address proof. Bachchan hands over his Aadhaar card, which is duly photographed. And that is
the entire enrolment process. By the time Bachchan makes it back to the rooftop, he’s already received an SMS thanking him for choosing to bank with ICICI.

Going from TV adverts to ground reality, consider a new facility launched by Axis Bank, which kicked off in Andhra Pradesh’s Adilabad district in February 2014.
¹
The customers here were not instantly recognizable movie icons but poor, weathered villagers, part of the nearly 40 per cent of rural India that continues to be excluded from the formal banking sector. They carried only one document with them—their Aadhaar card. (If they had memorized their number, they wouldn’t even have needed that.) Their Aadhaar numbers and fingerprints were captured and authenticated with the UIDAI. If this information was correct, they would provide their consent for the UIDAI to share with the bank a digital copy of their photograph, name, address, date of birth and gender, all required for opening an account. A short while later, the customer would walk out with a transaction slip bearing the number of their brand-new Axis Bank account. A process which used to commonly take fifteen days and cost the bank anywhere between Rs 50 to Rs 100 for every new customer was now completed instantly, for a fraction of the original cost.

These are just two examples of the remarkable savings in time and money that are possible if our deeply entrenched dependence on paper-based documents is broken. Whether it’s opening a bank account or buying an insurance policy, any service that requires identity and address proof should be just as simple and hassle-free as in the two cases above. In this chapter we discuss how Aadhaar-linked electronic Know Your Customer services are the first step on the path towards achieving these milestones.

In India, every stage of our lives is neatly bracketed by a document. When we are born, we get birth certificates. We graduate from school, and get school-leaving certificates. We pass major exams, and receive diplomas. We learn to drive, and get a driver’s licence. We
become eligible to vote, and register for voter IDs. We graduate from college, and get degree certificates. We get married, and get marriage certificates. If we buy a vehicle, we have registration certificates to prove our ownership. We insure our cars, and our lives as well, collecting insurance policy documents along the way. If we need to travel out of the country, we get passports. We obtain PAN cards so that we can pay income tax. We get ration cards; if our income is below the poverty line, we get BPL cards that make us eligible for government benefits. Some of us get caste certificates so that we can access the benefits due to us. We buy houses or land, and acquire a whole new bouquet of ownership documents, payment receipts and tax forms. We have children, and the entire cycle repeats itself. And when we die, it’s a death certificate that marks the full stop to our lives.

Every stage we pass through requires documents from the previous one. You can’t go to school without a birth certificate. You can’t go to college without a school-leaving certificate, and you can’t get a job without your college degree certificate. Even when you die, your relatives need your death certificate so that your assets can be managed correctly. Now imagine the plight of the millions who possess either no documents at all, or only one or two in the laundry list we’ve mentioned above.

While the government has yet to break its dependence on paper, in many other areas we have smoothly transitioned to the digital realm. A remarkable example is that of share certificates. Today, all of our share holdings are completely electronic, a switch completed nearly a decade ago. This was made possible by the Depositories Act (1996), which paved the way for the creation of the National Securities Depository Ltd. (NSDL), where digitized or dematerialized share certificates are now stored and accessed electronically. Share trading also moved from open outcry markets with paper trails to electronic trading. When an electronic trade is completed, the shares are automatically transferred from the seller to the buyer.

Similarly, our bank accounts have largely become paperless. We no longer write cheques or money orders but make payments digitally. We no longer have to receive bank statements by post. We no longer
buy railway, bus or airline tickets in a paper format. We buy insurance policies online and the insurance certificates are often in electronic form. Today, many banks have started offering loans online with an electronic approvals process, possible because a person’s financial history and credit score are accessible online for the bank to scrutinize. Most of our routine financial transactions can now be completed electronically without our having to physically step into a bank branch.

On the one hand, paper is the information currency of our government; the image of the ‘sarkari’ file stuffed to capacity with documents still endures. And yet in other parts of our lives, we have long since transcended the need for paper-based transactions. Instead of this uneven distribution, what if our entire society could be completely paperless? What if you never needed another piece of paper to interact with the government? What if all your information was stored in a secure but accessible electronic format, and what if this information could be combined in different ways to offer you innovative new services?

None of these visions can be realized unless all residents of India are in possession of a secure digital identity. This is where Aadhaar enters the picture. It is the only official document that exists in both paper and electronic forms. Most government-issued documents are in the form of an official card, which must be produced when required—the entire value of the document resides in that piece of paper. On the other hand, Aadhaar was deliberately conceived as a number with information linked to it, with no restrictions on what form it could take—it could be either paper or electronic, depending upon the needs of the individual. It could be printed on a government-issued card or made available online in a secure digital format. This was a very hard sell to many in the government, who were completely unfamiliar with
the idea of a government document that could exist entirely in the digital world. As Ram Sewak Sharma memorably puts it, ‘I tried giving the analogy that the cards were like the body and the number was like the
atman
(soul) and when the atman is available on the cloud, you do not require intelligence in the body!’ As we shall see, the entire e-KYC system could be implemented only because Aadhaar can be used in a digital form; with a paper-based ID, e-KYC would have been impossible.

In order to prove your identity as part of the KYC process required for everything from opening a bank account to buying a mobile SIM card, you are asked to provide proof of your identity and proof of your address. It is these two documents that Aadhaar replaces. This may not seem like much, and certainly isn’t the kind of radical reform that typically makes headlines. But add up those two pieces of paper across the millions of KYC transactions taking place every day in India, and the numbers begin to speak for themselves.

Why is there an increasing interest in the idea of going paperless? For one, paperless products are cheap. The biggest expense is to develop and implement the technology that makes these products paperless, which is still much less than the cost of collecting, verifying, authenticating, storing and retrieving paper-based records. As costs come down and products get cheaper, more consumers can afford them, promoting inclusivity—look at the mobile connectivity boom in India spurred at least in part by cheap talktime recharge options.

A prime example of cutting both paper and costs is in the case of opening bank accounts. Every account that a bank opens for a customer comes with the cost of collecting documents to verify the customer’s information, storing and retrieving this information when needed, and ensuring compliance with government regulations around the KYC process. Given these costs, it makes financial sense for a bank to open accounts only for those customers likely to maintain a relatively high balance. In practical terms, this means that banks have few incentives to offer services to the poor, who are likely to have lower balances in
their accounts, assuming they even have one. In effect, the regulatory costs around KYC act as a barrier preventing financial services from reaching the poor and disadvantaged.

If the same process could be made entirely paperless and electronic, banks could now offer financial services to people like the villagers of Adilabad. Just as mobile phone companies came up with the idea of ten-rupee mobile top-ups to serve poor clients, so also banks and financial institutions can come up with innovative services to target this new class of customers. Digital information can be mined and the flow of money through the system can be easily tracked. Remittance records can be used to develop a credit rating system for all customers. Small businesses that formerly ran on cash will now have electronic tax payment records, making them credit-worthy. Millions of people who are invisible to the government and the system at large can now become visible in one fell swoop thanks to technology, as explained in the diagram on the facing page.

As paperless KYC processes become the norm and financial services begin to spread across the population, what kinds of changes can we expect to see? Imagine being able to remove the friction in opening a small bank account, issuing a micro-insurance policy or selling a micro-pension product or a small investment product like a micro-mutual fund. Imagine that, instead of meeting a representative from a bank or insurance company, a customer can go to their local kirana store and complete an e-KYC process to buy any financial product he wants, from shares in a company to a pension plan.

This scenario isn’t that much of a stretch when we consider the fact that millions of people use exactly the same operating model to top up their mobile phone balances. The only paper involved in the process is when the customer is buying a new SIM card; a one-time KYC process must be completed at this stage. Account statements and balance updates are all sent electronically to the customer via SMS, obviating the need for paper statements. Top-ups are done electronically at kirana
shops. Multiply a low-cost top-up by the millions of people carrying out such transactions, and we can see why the Indian market has been such an attractive target for telecom companies.

Today, your local kirana store also doubles as a mobile recharge centre; equip it with a microATM to carry out electronic customer verification, and the store now becomes a centre for basic banking
transactions. People can deposit and withdraw money, pay bills, send remittances, pay their insurance premiums, contribute to their pensions or perhaps buy a slice of corporate India in the form of shares and mutual funds. As the accompanying diagram shows, customers of Priya Stores can now pay their bills and withdraw money with the same ease that they buy biscuits, toffees and fizzy drinks.