CGAP has released a note on the G2P Payments Sector in India. The note is authored by Paul Breloff and Sarah Rotman.This note is a summary based on the visit and the meetings held with various stakeholders by the authors during their visit to India.
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An Overview of the G2P Payments Sector in India
By Paul Breloff and Sarah Rotman
CGAP has an ongoing focus on branchless banking in India and on G2P globally. The authors of this note visited India from June 27-July 1, 2011 to gain a better understanding of the G2P space as it relates to financial inclusion. This note is a summary based on the visit and the meetings held with various stakeholders.
Our aim was to attempt to organize in one place a cross-cutting look at G2P from a national policy perspective. We have not attempted to offer an exhaustive analysis of all the issues around G2P in India nor the details of particular schemes, and we have deliberately avoided specific policy or business prescriptions. We hope this document is a useful overview that provides a structured framework for thinking about the complexity of G2P across various actors.
Government to person (G2P) payment schemes present an opportunity to provide access to financial services to unbanked beneficiaries by channeling a consistent flow of money into financial accounts. Branchless banking is one way to make such payments and services more accessible while at the same time decreasing the cost and increasing the efficiency of the payment process itself. Although this is a concept whose potential has been discussed at length, there are only a few countries that have experimented in making this link between government payments and bank accounts, and even fewer that are doing it at scale.
India is one country that falls into this latter group (others include Brazil, Colombia, Mexico, South Africa). The Indian G2P sector is complex due to not only the various schemes that exist, but also due to the complex interaction between the central government and the state governments in the management and implementation of these schemes.
Summary of Key Insights
- State governments exercise significant control over the management and administration of central government-mandated G2P schemes.
- Much of this control impacts the significant variability in bank fees paid by state governments.
- Many states do not pay banks any fees for disbursing government payments.
- For banks, the primary motivation for paying G2P beneficiaries, aside from the government mandate itself, is not the potential revenue or the access to a new client base, but rather the possibility of future business with the government.
- To make the business case work better for banks, the challenge is to activate no-frills accounts and to develop new products. Banks seem particularly interested in credit, although they are uncertain how to best offer it to this client segment.
- The variability in state government compensation also affects Business Correspondent Network Managers (BCNMs) that continue to struggle to strengthen their business models as they consider the level of compensation they must pass on to customer service points.
- Despite the use of electronic payments and front-end technology solutions in the payment process in many states, there continues to be an inherent messiness to the entire G2P payments space in India in terms of manual reconciliation, lack of standardization, duplication, and lack of coordination among various stakeholders.
- Several new initiatives could bring more order to the fragmented state level systems.The continued roll-out of the unique identification number (known as the “Aadhaar” number) by the Unique Identification Authority of India (UIDAI) will enable the central government to post the payments due to beneficiaries to NPCI’s (National Payments Corporation of India) central Aadhaar Payments Bridge (APB) platform instead of at a state by state level simply by having a beneficiary’s Aadhaar number and payment amount. The Aadhaar number will also facilitate Know Your Customer (KYC) verification for account opening.
- Both the Interbank Mobile Payments Service (IMPS) and Aadhaar Enabled Payment System (AEPS) platforms have the potential to integrate the payment systems of various G2P schemes and enable the mobile phone to be used more consistently as the front-end technology instrument.
- Even these new initiatives, however, will face technical limitations and political challenges. The central management of payments depends on the efficient data collection at the field level by the programs themselves, a process over which NPCI and UIDAI have little control. Likewise, individual state-run schemes will be more difficult to incorporate into this central system.
- The central government is investigating distribution alternatives for fuel and fertilizer subsidies, potentially converting these in-kind transfers to direct cash transfers, which would add tens of billions of dollars of cash volumes into the G2P ecosystem