The central government is pushing financial inclusion in a big way. In this article, MS Sriram discusses the role of identity in financial inclusion, and the importance of Aadhaar in this context. He argues that while Aadhaar has facilitated opening of bank accounts by providing a verifiable identity to the poor, it has distracted the financial inclusion agenda by claiming to be a ‘fix-all’ solution.
the last few years, a lot of clutter and noise has occupied the financial inclusion
agenda. This has partly been because of the policy push for financial inclusion
by both the Government of India and the Reserve Bank of India (RBI), through a
number of initiatives with varying objectives, mechanisms and technologies. Examples
include the 100% financial inclusion village scheme1
the banks undertook at the behest of RBI; a scheme to cover all habitations
with a population of more than 2,000 with banking outlets, for which the RBI
set targets and allocated villages to banks; and the setting up of ultra-small
service points, and deploying business correspondents (BCs3
the Ministry of Finance. The Swaabhiman
scheme of the previous government, which envisaged the provision of a bank
account to every household, has now been repackaged and relaunched by the new
government as the Prime Minister’s Jan Dhan Yojana
(PMJDY). PMDJY seeks to
provide universal access to basic banking services by 2018. Besides bank accounts, the scheme will provide debit cards,
overdraft, credit and insurance facilities, and allow account-holders to
receive government transfers through the bank.
the other side, the banking system has rolled out the backbone technology for transactions.
This makes transactions interoperable across banks, and small transactions are possible
at a lower cost if there is extensive rollout of the technology. This has spurred
a fresh thinking on not only pushing banks to open accounts, but also to enhance
banking transactions’ traffic through the direct transfer of government benefits
(example, widow pensions, student scholarship etc.) to the bank accounts of beneficiaries.
project of the UIDAI
(Unique Identification Authority of India)4
been useful to the financial inclusion drive, it has also added to the ‘noise’
and distracted from the agenda in some ways. I discuss this by breaking the financial
inclusion process into two parts: (a) opening an account or establishing a
banking relationship, and (b) undertaking banking transactions or maintaining
the banking relationship.
The role of identity in the financial
inclusion process Opening a bank account
There have been two significant problems from the supply
side in getting the poor and the excluded into the formal banking system. While
the informal sector largely depends on memory, social networks and personal
connections to identify customers and begin a banking relationship, the formal
sector can only use these as a starting point. In formal banking, this memory
would need to be committed to paper, so that it is retrievable, and independent
of the person representing the organisation that is providing financial
services. Identity in the formal banking sector is established usually by a
photograph of the customer. The verification of identity is done through a
system of introduction (by an existing customer of the bank, employee etc.) or
through an alternate document (such as ration card, passport, driver’s license
etc. that have a photograph and name). In addition to verified identity, it is
also important to have an address, so that the formal financial institution can
contact the customer and has recourse in the event of a loan default. Thus,
verified identity and address are two business necessities for opening accounts
in the formal banking sector; with increased global movements of finances
across purposes, they are even more essential from the point of money
laundering. The excluded usually have neither proof of identity nor address.
of the financial inclusion campaigns are aimed at opening bank accounts and
including the excluded in the formal banking system.
While identity and address are needed to start off a
transaction, an identity is also needed every time the customer is transacting
with the formal institution, to establish a trail. This is achieved by having a
proxy for the identity – a signature, a pin or a password. In some cases, the
biometric identity of the customer is also collected and used for this purpose.
The significant problem with transacting is not identity, but the fact that
there are few instances of transaction. The poor open bank accounts but have
almost no occasion to deposit money in the account or withdraw from the account,
since they are not involved in many monetised transactions that are settled in
cash (for instance, agricultural wage payment may partly be settled in the form
of grain). Therefore, the challenge of financial inclusion is much more in
establishing the systems for having money flow through the banking system, than
in opening the accounts. The direct benefit transfer (DBT) initiative will
mitigate this concern to an extent, as it would get the customers into the bank
and inculcate the habit of banking.
distracting the financial inclusion agenda?
UIDAI’s Aadhaar project started in
2009. The key goal was to provide a lifelong, unique identifier through
biometrics to every resident of the country, which would be interoperable
across places. But the utility of the project had to be justified. One of the
gaps recognised by Aadhaar
was the identity
issue in the context of financial inclusion. Given that it was difficult for
people, particularly the poor, to provide authentic identity papers to start a
banking relationship, Aadhaar
itself as a solution that would provide an authentic, verified identity
document. This was indeed facilitative as verified identity aided smoother
opening of bank accounts – the first step in the process of financial
criticism from the civil society and other quarters regarding issues such as
privacy, prompted Aadhaar
to promise a
lot more than identity for the first step of financial inclusion. It went a
step further and set up Aadhaar
Payment Systems (AEPS) – a platform that provided interoperability across banks
and ensured last-mile connectivity. It made a promise to the State that by
using this platform for directly transferring benefits to beneficiaries, it
could cut down on transmission costs, eliminate leakages, and reduce petty
the concept of micro-ATMs5
of these were beyond the mandate of the project and an intrusion into the
banking space, thereby hinting that Aadhaar
claimed to solve the transaction-related problem and that it was banking technology
that was holding it up. It distracted the process by putting de-duplicated
the core of all the problems.
both these platforms (AEPS and micro-ATMs) could have been easily managed with
the existing banking system. The banking system has always operated with
identity proxies (at the transaction stage) and has not found the need to
de-duplicate the identity of the customer at every instance of the transaction.
This could be achieved through their own databases and interoperability across
the banks, without Aadhaar
. All that
was missing was interoperability at the last mile – the BCs. This problem could
be solved easily, by connecting the BC with the bank’s core system on a
real-time basis rather than through a day-end process.
UIDAI insisted that DBT should happen through the Aadhaar
platform. Let us consider the example of the direct
transfer of LPG (liquefied petroleum gas) subsidies to the accounts of the
beneficiaries. The banking system spends endless amounts of time and energy in
number with the bank account
number and the LPG number. A direct transfer of subsidies could have happened
even without the seeding of Aadhaar
The promise made by Aadhaar
weeding out fake accounts, duplicates etc. could have happened even without Aadhaar
at the first cut, by ensuring that there was only one bank account per LPG
customer. As far as the issue of multiple LPG connections is concerned, there
have been alternative mechanisms of weeding out bogus LPG connections which are
not necessarily as intrusive as the Aadhaar
methodology. For instance, the Karnataka government at one time required
consumers to associate their LPG connection numbers with their electricity meters.
While it is certainly not the most foolproof way of eliminating multiple LPG connections,
it is a simpler, more cost-effective way of addressing the problem.
larger problem with regard to DBT is in the classification of beneficiaries
into the eligibility pool and Aadhaar
not solve that issue.
did bring to the fore several important issues that were important for the
cause of financial inclusion. It speeded up the thought process and piloting of
DBT, and began the conversation on compensating the banking system for carrying
out these transactions. This provided the necessary transactions for the
accounts opened under the existing financial inclusion drives. Moreover, it made
the customers familiar and comfortable with the banking outlet – which would
possibly lead to greater financial involvement of the customer with the bank.
to package Aadhaar
as a ‘fix-all’ solution was misleading and distracted the
natural progression of financial inclusion.
Aadhaar important for financial
inclusion, but in a limited way
intervention has contributed to
the financial inclusion agenda by shifting focus from the mindless opening of
accounts to the next level of getting transactions into the accounts. However,
by aggressively advocating AEPS, Aadhaar
number seeding and micro-ATMs, the UIDAI possibly added more unnecessary costs and
layers to the banking system. The key question that needs to be asked is
whether de-duplication of identity is necessary at every instance of
transaction, or only at the account-opening stage. If the answer is yes, then
we could see the intervention of Aadhaar
as an investment. If the answer is no, which is what I argue, then we can see Aadhaar
as using the identity vehicle to
intrude into the transaction space. Aadhaar
defeated the purpose of financial inclusion and the appropriate discourse it
raised, by actively becoming a participant in providing a solution much beyond
version of this article has appeared in the Economic and Political Weekly.
- The target was
to open a bank account for every household in a given village.
- These bank
branches operate 2-3 times a week for a few hours, and offer basic banking
services to villagers. An officer designated by the bank is available on
- Business Correspondents (BCs) are essentially ‘last-mile banking
agents’ appointed by banks. These local bank representatives take banking to
the doorstep of people in remote areas across the country. They are the link
between the customer and the nearest banking outlet and undertake routine
transactions such as collection of deposits, payments, cash withdrawal,
recovery of loans etc.
- Aadhaar is a 12-digit
individual identification number issued by UIDAI on behalf of the Government of
India. It serves as a proof of identity and address anywhere in India.
- Micro-ATMs are hand-held devices connected to Aadhaar and the database of banks. These
are operated by BCs and used to undertake transactions such as cash deposit/
withdrawal, balance enquiry and remittance.
- Aadhaar captures the biometric identity – ten
finger prints, iris and photograph – of every resident of India. The database
is checked for the set of identity markers to ensure uniqueness, following
which a unique number is assigned and stored in the database. This process is
called de-duplication of identity.
essentially means that the LPG number, bank account number and the Aadhaar number are all mapped and linked
to establish that the LPG consumer, bank account holder, and the Aadhaar number holder are all the same