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Aadhar and Financial Inclusion

Posted in Finance Articles, Total Reads: 4565 , Published on June 26, 2013

India known to be  travelling on a fast speed  towards the development of nation but still there lot to travel before reaching the horizon or destination.  We see that many of our peers going on a shopping spree or studying in the best of the colleges receiving education. But a question arises... what is the percentage of these people, it is less than 30% of Indian population. As per Indian stats 2010, World Bank stated, 32.7% of the total Indian people fall below the international poverty line of US$ 1.25 per day (PPP) while 68.7% live on less than US$ 2 per day.

Horrified? Shocked? But this is the harsh truth, that 70% of Indians are not able to get sufficient food, clothing and shelter. Leave the rest such as education or saving for future.  To improve this condition India needs to travel a long road, and to a give a direction, government choose a path or guiding principle of “financial inclusion”.

Financial inclusion in a layman terms means that the basic necessities of food, clothing and shelter reach to the poorest of poor. As per Wikipedia, it defines as “Financial inclusion or inclusive financing is the delivery of financial services, at affordable costs, to sections of disadvantaged and low income segments of society. Unrestrained access to public goods and services is the sine qua non of an open and efficient society. ”

Government has tried a lot of activities in this favour of promoting financial inclusion such as opening of banks, priority sector lending, Opening of no-frills accounts, Relaxation on known-your-customer (KYC) norms, and many more. But this time in year (adhar intro) , it tried to provide an IS solution to this ever increasing problem.

This IS solution was known ADHAR or UID (Unique Identification) programme. It is the world largest biometric based identity authentication project which plays a crucial role for the financial inclusion of the poor.  But first let’s understand what Aadhar does. It actually authenticates the identity of person by assigning a random 12 digit number along with biometric attributes such as finger prints of ten fingers along with the retina of eye.  It is a database which will be shared across globally.

The advantage of creating one more identification card is that

a)      It is a unique database that is shared by all the government or private agencies.

b)      A single source to look up to check the authenticity of an individual. It eliminates duplicate and fake identities.

c)      More coverage of individuals as it help those who don’t have other identification proofs(KYC proofs)

Before learning how this IT solution helps in financial inclusion, we first looked at what were the key challenges in implementing financial inclusion. To list down a few:

a)      Know your Customer challenge: many poor people do not have sufficient ID proof s to open a bank account and therefore couldn’t complete the verification process.

b)      Low coverage of rural areas by huge number of bank branches (82000)

c)      High potential transaction costs for micropayments.

But how this IT solution of introducing Aadhar does solves the problem of financial exclusion in the country.

It serves as an identification proof to open bank accounts which can then act as a payment gateway, so that the financial assistance can be reached to the poor in the rural areas. This was done by launching the Saral prepaid card with the 5 prominent private banks in India namely Axis Bank, HDFC Bank, ICICI Bank, Indian Overseas Bank and State Bank of India. But a question might cross our mind that is what is the benefit to the private banks in this deal. Or is it a win- win situation? Yes it is a win –win situation for both the stakeholders because government on one hand can reach the poor and bank on other hand have a growing database and increase in number of bank accounts which increases the visibility of the bank in the rural areas.

The Aadhar enabled bank account works as explained in the below given figure:

Second, The Aadhar eases the process of direct cash transfer for salaries, subsidies to the poor and make sure that the financial assistance reaches to the intended beneficiaries.

Third, it removes any leakage of funds as there are now checks and balances in place.

Fourth is the use mobile banking like the airtel money funds? The number accounts can now be in reasonable comparison with the number of mobile phones so that people can access their accounts wherever they are present in a single click.

Fifth, all the existing bank accounts will be linked to UIDAI accounts to ensure transparency in process, and easy retrieval of information for the bankers.

Even after everything in place, the conception of this huge IT system, Integration issues still pose as a big threat .Also what is level of readiness among the poor to use this infrastructure? Will this public private partnership foster or solve the problem of financial inclusion? These questions still remain unanswered as of now and will be answered in the near future. Till then hope for the best and do your bit to educate every individual about Aadhar.

This article has been authored by Swati Chopra from MDI













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