Do we need banks for financial inclusion?

India has tried several routes towards financial inclusion - gramin banks, local area banks, cooperatives, micro finance institutions, regional rural banks, self help groups and of course scheduled commercial banks with their business correspondent networks.

Yet, access to any form of formal financial services is still restricted to less than half the population, clearly these routes have run their course.

There are new moves in play now. The recent Pradhan Mantri Jan Dhan Yojana (PMJDY) scheme to provide 75 million households with at least one bank account, and RuPay cards and concomitant freebies, is yet another big step in the same direction. Forty million accounts have already been opened, showing the power of the intent, and inadequacy of previous efforts.

However, this initiative has to be seen in the backdrop of the Mor Committee report, which called for fresh thinking and new directions ''to provide ubiquitous access to banking products and services with a universal account''. Under the concept of 'differentiated banking', Payment Banks were identified as the instrument which will reach out to all financially excluded Indians.

New banks along with other measures, ie, business correspondent networks, Aadhar-linked accounts etc, would complement the efforts to provide banking facility to majority of the population in a short period. While this was a perfectly grand plan, the PMJDY-RuPay mission was nowhere in that scheme of things.

In the current scenario, payment banks have their task more than well cut out in a manner not envisaged by the Nachiket Mor report. They will now have to: (a) Collaborate with new and existing players by way of technology, platform, product, distribution, points of presence, merchant base, delivery channel, brand, etc to plug the crucial last mile, and (b) Board new customers for remittances, deposits, payments, micro financial services and DBT.

Their ability to leverage cell phone technology to enable accounts mapped to Aadhar/ regular savings deposit/ DBT etc in a low-cost and efficient manner will be key.

One assumes that the sine qua non for payment banks was to bank the unbanked by bringing them into the formal financial system in some small way whether that be by small value-high frequency transactions starting with remittances and payments and moving up the value chain onto other micro financial products. It certainly is moot as to whether the PMJDY scheme has taken the wind out of the differentiated bank play. If indeed the JDY does manage to bank the unbanked and offer a few specific products from day one, then the market space for new banks is disturbed.

Further, if the post office is given the first payment or a scheduled bank licence, then the National Payment Corporation of India and post office routes will more than address the market, leaving little space for other private non-telco players to come in. After all the pet peeve of most analysts is how many bank accounts would a person or family want to open!

Therefore, once one has decided to go down the differentiated path, two things are important. First, one can't perforce have a 'one size fits all' regulation. One has to leave dispensation for encouraging innovation and flexibility whilst the new players feel the river bed.

Second, the market space has to be attractive enough to allow for several players to come in and offer pan Indian services.

One way the business case would be buttressed is allowing payment banks to become the official distributors of DBT – both central and state. Quick back of the envelope calculations indicate that a Payment Bank with cell phone focus with 0.75 per cent of the DBT market share in terms of gross disbursement will have enough of a business case to make the concept viable from day one.

As the programme evolves and matures, it is quite possible that with larger reach and volume, this service could be delivered for even lesser 'transaction fee' than is envisaged, ie, 2-3 per cent, thus saving the exchequer a fair bit of extra budgeting requirements and reducing leakages significantly.

Yet, for all this to happen, two things must change. First, a move from the traditional emphasis of a formal account in a regular bank to allow for a unique 'virtual account' (similar to a mobile wallet) linked to the Aadhar and mobile numbers.

This virtual account, 'account-in-the-cloud', will have simplified KYC/eKYC as per RBI norms. Also, cash out must be allowed using established private players (FMCG, retailers, fair price shops, etc), to allow for network effects to kick in a la Tanzania with its 27,000 agents for a population of 37 million.

With this, direct cash transfers, payments or remittances can be done directly into anybody's Aadhar-linked account-in-the cloud, to be redeemed at merchant points for purchases or cash out, via the established private payment outlets. This is the RBI's vision - anybody in India can transact with anybody anywhere at ease - and it can be done, but only if the policy makers use a fresh lens.