Enabling direct transfers through JAM

Each element—Jan Dhan Yojana, Aadhaar and mobile—needs some significant fixes to work effectively


The JAM Trinity (Jan Dhan Yojana + Aadhaar number + mobile number), a lively acronym to refocus the government’s programme of Direct Benefits Transfer (DBT), was spelt out in the last Economic Survey. While the DBT has been operational since 2013, the trinity makes it easier to pinpoint the remaining barriers as each element in the JAM needs some significant fixes to work effectively. By March 2015, more than 227 million beneficiaries were part of the programme under 36 schemes, with the highest enrolments under DBTL (DBT for liquefied petroleum gas subsidy ). Yet, the DBT programme has a long way to go to become a universal national scheme. This month’s budget can fix some of the stumbling blocks, but there are others that need coordination across multiple departments, regulators and the attention of Parliament.

The Pradhan Mantri Jan Dhan Yojana (PMJDY), the J of the trinity, has succeeded in changing the financial inclusion landscape since it was launched in August 2014. The bundling of a bank account with the RuPay card, pension and insurance schemes, along with the blitzkrieg of advertisements across all media created high levels of awareness for financial services. More critically, the focus under the PMJDY has moved discussions on financial inclusion away from just recording the number of agents and accounts to monitoring parameters that are crucial for sustainable inclusion, like agent remuneration and transaction readiness.

The main challenge remains at the last mile—ensuring that the agent, the point of contact with the customer, remains invested in the business. Agent dormancy has been a huge problem; while the PMJDY has recommended a minimum monthly remuneration of Rs.5,000, the role of the ministry of finance in raising the agent’s income has not met with sufficient attention.

A key issue that has repeatedly raised its head is the low commission paid out to banks on DBT transactions. While the Report of the Task Force on an Aadhaar-Enabled Unified Payment Infrastructure had recommended a 3.14% transaction processing charge to the banks, in reality the rates allowed by the central and state governments have been 1-2%. In January 2015, the finance ministry fixed DBT commissions for banks: for urban schemes, at the National Electronic Funds Transfer/Aadhaar Payment Bridge rate; but for rural schemes, the rate was fixed at 1%, subject to an upper limit of Rs.10 per transaction. Detailed costing analysis fromconsulting firm MicroSave in May 2015 shows that 2.63% is the break-even charge: the break-up of this across the three main constituents in the disbursement chain came to about 0.96% for business correspondent (BC) network managers, 0.85% for business correspondent agents, and about 0.82% for the banks. The analysis also revealed that the savings to the government through lower administrative costs and leakages are significant. Clearly, the government can well afford adequate compensation to the banks and agent networks for their role in the disbursements.

Unfortunately, even the notified commission charges have reportedly not reached the banks. The ministry of finance must make clear budgetary allocation for the commission charges and ensure transparent and timely payment flows through the state government and banking channels. Hopefully, this budget will address this critical concern of the banks and the agents.

As the DBT was already in operation before the launch of PMJDY, the two schemes will now begin to merge. In December 2015, the government directed banks to convert all accounts opened prior to PMJDY and used for DBT payments into PMJDY accounts. This move will bring all the bundled benefits of PMJDY accounts to existing DBT beneficiaries.

Another advantage would be the ease of Aadhaar seeding as the Supreme Court has mentioned PMJDY as one of the specific schemes where voluntary use of Aadhaar is allowed. This brings us to the A in JAM, Aadhaar, which has caused many a hiccup to the progress of the DBT mission. While the Supreme Court is hearing petitions against the very concept and use of Aadhaar, the Reserve Bank of India, Telecom Regulatory Authority of India (Trai), Securities and Exchange Board of India and several state governments have approached the court in favour of Aadhaar as an enabler. The matter of “right to privacy” has been referred to a larger constitutional bench. Meanwhile, it is critical that the government work with all political parties for appropriate legislation towards the National Identification Authority of India (NIAI) Bill.

Finally, we come to M or mobile. Here, it’s easy to get misled by India’s overall teledensity statistic of 81.44%. Reliable connectivity at the last mile is crucial and the correct metric for digital financial transactions would be the minimum threshold bandwidth for data connectivity that enables mobile-based transactions, especially across rural India. The PMJDY Mission Directorate must, therefore, work with Trai, the National Payments Corporation of India (NPCI) and the Unique Identification Authority of India (UIDAI) to set up service quality benchmarks to enable financial transactions and then monitor performance at the business correspondent outlet level.

To conclude, the three critical asks for JAM to be an effective enabler of DBT are: (a) for the finance ministry: adequate and timely disbursement of transaction processing charges for the bank and agent network; (b) for Parliament: passage of the NIAI bill and (c) for the finance ministry, Trai, NCPI and UIDAI: setting up and monitoring service quality benchmarks for digital financial transactions.