Shweta S Banerjee, Sarah Rotman, Stephen Rasmussen, Suyash Rai December 2013

Direct Benefit Transfer and Financial Inclusion Learning from Andhra Pradesh, India

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A Guide to Indian Financial Inclusion Terminology

• AP: Andhra Pradesh – a state in southern India

• G2P: government-to-person payments

• NREGA: National Rural Employment Guarantee Act – a workfare social protection program that

guarantees 100 days of work to every Indian household, if desired

• SSP: Social Security Pensions

• SHG: Self-Help Groups – a women’s-only savings group system

• SERP: Society for the Elimination of Rural Poverty - an organization to facilitate poverty reduction

through social mobilization and improvement of livelihoods of rural poor in Andhra Pradesh

• UIDAI: Unique Identification Authority of India – a project to provide every Indian resident with a

Unique ID number known as Aadhaar

• EBT: Electronic Benefit Transfer – the electronic payment system to pay social cash transfers

• DBT: Direct Benefit Transfer – the electronic payment system build on the Aadhaar system to pay

social cash transfers

• CSP: customer service point – the equivalent of what other countries refer to as “agents”

• BC: Business Correspondent – companies that manage networks of CSPs on behalf of banks

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Research summary

• In partnership with the World Bank and SERP, CGAP carried out a

research project from April to September 2013 to understand the EBT

system developed in the state of Andhra Pradesh since 2006.

• The research analyzed the policy, supply, and demand side aspects

of this EBT ecosystem, with a view that lessons from AP are valuable

for the DBT rollout across India, as well as global knowledge on G2P

and financial inclusion.

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Key Research Questions

1. What are the various types of technology and payment models

being used and which are most efficient?

2. What is the value of a unique ID system?

3. Business Case for Banks: How is the 2% government commission

broken up via cost to bank, BC, and last mile agent?

4. What is the experience of recipients? Why are millions of payment

bank accounts not being used?

5. Is there a business case to provide financial services through G2P-

linked accounts? What are the barriers?

6. Indigenous Peoples and Remote Areas: How can the program

better serve hard-to-reach segments?

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Key Findings

• An electronic system of benefit transfers provides more efficiency and less leakages. Most recipients note a high level of trust and satisfaction with the system as a payment disbursement channel.

• Most payments are delivered to recipients within a month, 25% of NREGA payments are delivered within two weeks.

• The 2% fee paid by the government to banks is not enough, as the cost of delivery is higher. As a result banks are at a loss, and agents make less than minimum wage rate.

• Most accounts are not being used by recipients. The potential of using this channel to achieve financial inclusion is unmet, especially since recipients widely use other formal and informal financial products.

• Technology is not a barrier to use for recipients, but this is largely because transactions are intermediated by CSPs on behalf of recipients.

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Research firms and methodology

Research Firm

Nature of research Supply-side of 4 bank-BC models, including an Aadhaar pilot, and India Post

Demand-side Quantitative

Demand-side Ethnographic

Sample 3 banks4 BC companiesIndia Post

2,460 households 80 interviews

Districts Four (4):• Anantpur• Khammam• East Godavari• Chittoor

Twelve districts (12) Three (3):• Mahbubnagar• East Godavari• Visakhapatnam

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Broad coverage of 12 districts in AP

Government Reported Data:Key numbers from Andhra Pradesh’s EBT system

Scheme Volume of disbursement (2012-13) (USD million)

Number of beneficiaries (2012-13)

National Rural Employment Guarantee Scheme

600 10,641,105

Social Security Pensions

350 6,518,348

Post-metric Scholarships

340 2,847,999

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2012-2013 2013-2014 (through August)

Disbursed within 14 days 25.16% 15%

Electronic 55.91% 81.39%

Manual 33.03% 10.44%

Manual overrides on electronic system

11.06% 8.17%

Government Reported Data for NREGA

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KEY FINDINGS

DEMAND SIDE RESEARCH

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Monthly household income data during May-June 2013

• The main sources of monthly income are wages earned by the household and the payments received from government.

• Monthly income range is more or less equally distributed between Rs. 2,000-10,000.• Average monthly household income is around Rs. 4,600 per month.• Average monthly expenditure is Rs. 4,031• The months of May and June is an agricultural lean season therefore the volume of

payments through NREGA is higher than average.

Scholarships

Pension

NREGA

0 20 40 60 80 100

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43

59

G2P Scheme Average Income from govt (in Rs.)

NREGA Rs. 2017

Pension Rs. 313

Scholarships Rs. 300

Participation of sample households in type of

government schemes (in %)

1 USD = 62 Indian Rupees

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EBT increases convenience for beneficiaries

Time spent in collecting payment (in %)

Distance travelled in kms

Average time for EBT : 55.49 min

Average time for Manual : 77.14 min

For SSP + NREGA EBT Manual Payments

Average distance travelled (in kms)

0.58 1.15

Base: Pension or NREGA RecipientsEBT – 1482 ; Manual – 551

Figures in percentage except baseEBT payments also include DBT payments

less than 30 min

30 min to 1 hr 1 hr to 2 hrs 2 hrs to 5 hrs Greater than 5 hrs

3743

19

1 0

47

28

138

4

EBT Manual

* The time spent denotes the cumulative time in collecting the payments. This could include travel time, waiting time in the queue etc.

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Trust is high, but suffers in indigenous communities

Strongly Agree & Agree Overall Karimnagar Adilabad Mahabub Nagar Khammam Warangal Nalgonda

Base:All respondents 2460 200 216 196 221 198 183I have trust that money is credited on time from the government and given to me.

82 80 56 96 61 97 87

I have trust that proper amount is transferred from the government to me.

77 61 49 98 57 88 78

I have trust on the mode of payment used by the government to disburses payment to me.

74 56 51 98 52 83 64

I have trust on the agent who hands over the money to me

74 58 49 98 65 80 63

I believe that there is maintenance of proper government accounts

74 60 40 98 54 79 72

I am confident that there is no manipulation of funds by the government.

71 62 34 98 48 77 70

I believe that the system is transparent in disbursing payments to recipients .

72 68 44 98 51 74 86

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Recipients are active users of financial tools

Recipients widely use both formal and informal financial products but not their EBT accounts

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Despite their low incomes, recipients do save

Number of people saving (in %)

Savings account

Insurance

Dwakra group

0 20 40 60 80 100

16

16

72

Common Saving Methods (in %)

Base: All Respondents- 2460 Base: Those who have monthly savings- 833

Average expenditure : Rs. 4031

Average MHI : Rs. 4610

Yes; 34

No; 66

A third of the households claimed to regularly save. A common method of saving is through dwakra or savings groups (self-help groups for women).

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Recipients have comfort yet passivity with technology

• Technology is rarely a barrier to use

• Whether smart card or mobile phone, there is no noticeable different in the user experience

• This is due to the fact that the interaction between the user and the technology is always mediated by the CSP and is perceived to be not more than a government payment channel.

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Recipients are unaware of account functionality

Several aspects of the end recipient experience are compromised because of poor information access.

These include information on : • Whether these are bank

accounts• What services they can avail

through the account• Account balances• Whether payments have been

credited into their accounts• The reasons for payment

delays• An expected date by which

payment is likely to be received.

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Recipients trust community-based agents, but CSPs need more support

One of the biggest advantages of the community-based CSP system is the trust inherent in it and the extent to which it mitigates recipient’s anxieties and frustrations.

However, there is a clear need for additional support:

• To manage crowds at peak transaction times, she would often seek the assistance of someone familiar and trustworthy.

• In addition to an inadequate physical and human resource infrastructure, the CSP also has to negotiate several technical and process glitches without a clear error resolution mechanism for either.

• The CSP’s own salary and associated incentives are often delayed and transferred without any explanation about the basis of calculation.

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There are significant differences in G2P payment delivery in indigenous communities and remote areas

The indigenous communities present a completely different set of challenges when evaluating the impact of electronic delivery of government benefits.

• Higher workload for the CSP compared to plain areas, forcing the CSP to improvise when it comes to performing her duties comprehensively

• Operational barriers due to network unavailability resulting in a much higher incidence of manual over-rides for making payments.

• Huge delays in receiving payments specially in the case of NREGA wages leading to lesser trust in the system.

• CSPs have to shoulder comparatively higher risk while transporting the money to the village because of the large distances they need to travel.

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Key Messages from Demand Side Research

● Focus on clear and consistent communication• Recipients need to understand what the account is and the

functionality it offers.• They need to be informed when payments have been credited, how

much to expect and any reasons for possible delays.

• Develop an effective grievance redress system• Develop a system where recipients can communicate directly to

express any payment-related issues

• Especially in indigenous communities, create payment access points in the full commercial ecosystem, such as leveraging the weekend markets.

• Design financial products so that small amounts from payment benefits can help to smoothen income fluctuations and consumption needs.

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KEY FINDINGS

SUPPLY SIDE RESEARCH

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Overview of the 5 Business Models Studied

Bank 1 – BC 1

Bank 2 – BC 2

Bank 3 – BC 3

Bank 4 – BC 4 Aadhaar pilot

India Post

Number of CSP points

900

88

750 22

1,333

Number of beneficiaries enrolled to date in district

434,744

67,500

316,200

27,000

717,997

Enrolled / target beneficiaries %

51%

90%

48% 90%

91%

Average disbursement size (Rs)

248

155

249 237

256

Number of disbursements (June 2013)

760,000

58,000

537,779

18,450

632,050

Disbursements per CSP per month

844

659

717 839

474

* Specific bank and BC company names have been taken out for confidentiality purposes

Comparison: CSP Network Management

IndicatorBank 1 – BC

1Bank 2 – BC

2Bank 3 – BC

3

Bank 4 – BC 4

Aadhaar pilotIndia Post

Agent recruitment lead time: Time from the exam /interview of a CSP to appointment.

60 to 270 days 7 to 15 days 90 days 30 days

BPM- 30 to 45 days

CSP- 15 to 30 days

Training support: Depth of training and level of hand holding support provided to CSPs/BPMs during on-boarding.

3 day classroom training. Field level support by MCs

1-2 day classroom

training

2-3 day classroom training

3 days classroom and onsite covering POS handling, cash handling and disbursement processes

1 day of classroom training by AP. Online staff for both BPMs & CSPs.

Salary and Commissions

Rs. 500 per month (fixed) and 0.25% of the total disbursements

Rs. 2,000 (fixed)

Rs. 500 per month or 0.5% of the disbursements made in a month, whichever is higher

Rs. 500 per month (fixed) and 0.25% of the total disbursements

• BPMs- Rs.5,000 to Rs.8,000+ 0.15%

• CSPs – 1.0%

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Comparison: BC Management & System Performance

IndicatorBank 1 – BC

1Bank 2 – BC

2Bank 3 – BC

3

Bank 4 – BC 4

Aadhaar pilotIndia Post

Work load per BPM/CSP (transactions per month)

Between 500-1,000

Between 500-1,000

Between 400-1300

Between 500-1000

Between 700-2,000 (average is 1,700)

Transaction Processing time : Average time per transaction

2 to 3 minutes if connectivity

is good

2 to 3 minutes if connectivity

is good2 to 3 minutes

1 to 2 minutes with good

connectivity

1 to 2 minutes, with good connectivity is and low load.10-15 minutes during peak load.

Transactions per day per BPM/CSP

During SSP disbursements can go up to 70 transactions per day

During SSP disbursements can go up to 70 transactions per day

During SSP payment days transactions can go up to 100 per day

During SSP payment days can go up to 100 per day

During SSP disbursements can go up to 70 transactions per day

Interconnectivity: Beneficiaries are able to transact at multiple BPMs/CSPs and also at the linked branch

No No No No Yes

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• For every Rs. 100 that the AP Government disburses, the Government pays the bank Rs. 2

• 1 Rupee is withheld until proof is submitted that all payments has been disbursed

• This final payment is usually paid to the bank with significant delay, forcing the bank to front the 1 Rupee

• For every Rs. 100 that the bank disburses, the total costs of disbursement in locations with full scale are

• Rs. 2.93 in Bank 1 – BC 1• Rs. 2.65 in Bank 3 – BC 3

APThe Business Case for Banks is Weak

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Per Disbursement Cost to EBT Channel

Model Bank 1 – BC 1 Bank 3 – BC 3

Total Cost to EBT Channel

2.93% 2.65%

Bank loss -0.93% -0.65%

BC profit 0.58% 0.46%

CSP commission (Rs)

1082 1389

Based on normalized assumptions of monthly disbursements

2%

Additional Cost

Bank 1 - BC 1 Bank 3 - BC 30.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

0.25% 0.25%

1.23%0.97%

0.52%0.78%

0.93%0.65%

Additional

CSP

BC

Bank

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Two EBT models That Have Achieved Scale

-1.50%-1.00%-0.50%0.00%0.50%1.00%1.50%2.00%2.50%

2.26%

3.19%-

0.00929627494892101

Bank Viability to Bank 1(% of disbursement)

Total income Total cost per month

Total Profit/Loss

-1.00%

-0.50%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

2.26%2.92%

-0.0065430846

9947404

Bank Viability to Bank 3 (% of disbursement)

Total income Total cost per month

Total Profit/Loss

Total channel cost per Rs 100 of disbursement: INR 2.93 (2% + loss of 0.93%)

Total channel cost per Rs 100 of disbursement: INR 2.65 (2% + loss of 0.65%)

Net loss/profit per transaction: INR -2.3 Net loss/profit per transaction: INR -1.6

The bank has a higher cost structure which reflects in its higher management and supervision cost overhead.

No Smartcard in the model, leading to lower enrollment costs.

It is important to note that there are potential adjacent benefits which have not been accounted for on the revenue side:

• Potentially integrating the EBT channel with the broader FI strategy of the Bank (Cross sell revenues).

• This is especially relevant as the costing model accounts for broader costs such as the cost of hosting the account – which

the bank will certainly aim to offset through cross sell revenues.

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Department of Post is a Unique Model in Partnership with the Technology Provider AP Online

• Department of Post relies on Branch Post Masters (BPMs) to distribute 60% of payments, leveraging existing cash management networks.

• BPMs are spending 40% of their time delivering G2P payments, but not getting adequately compensated. They are even refusing the 0.15% per payment.

• The remaining 40% of payments made through traditional CSP network

• During the month of June 2013, 61% of payments were made through Aadhaar authentication.

Through a proposed hub and spoke model, payment costs would decrease by 24.2% from Rs 8.31 per disbursement to Rs. 6.3 (for the average disbursement of Rs. 256)

BPM

CSP CSP

Village 2

Village 3

Village 4Village

1

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The India Post Model Has Two Possible Approaches

-1.00%

-0.50%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

2.50%3.24%

-0.0074092536

9358158

India Post Viability in Current Model (% of disbursement)

Total income Total cost per month Total Profit/Loss

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

2.50% 2.46%

0.000418051309562847

India Post Viability(% of disbursement) –Proposed hub & spoke

model

Total income Total cost per month Total Profit/Loss

Total cost per Rs 100 of disbursement: INR 3.24 (2% + loss of 1.24%)

Total cost per Rs 100 of disbursement: INR 2.46 (2% + loss of 0.46%)

Net loss/profit per transaction: INR -1.9 Net loss/profit per transaction: INR 0.1

• Under the hub & spoke model – the disbursement role played by higher cost BPMs is carried out by external CSPs hired and managed by the Post.

• However, this model does not account for an additional cost of a reasonable return for stakeholders such as AP Online.

Note: The hosting charges make a big impact on all the models. For the post, hosting costs are half of bank costs – this works out to be a substantial cost saving.

But the Post also loses any adjacent benefits (potential cross sell, etc.), which is not accounted for within this model.

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Aadhaar pilot revealed many benefits and challenges of the new DBT system

Benefits

• The process of seeding new banks accounts was inefficient

• Biometric authentication often fails for the elderly.

• Online authentication is an issue for areas with low connectivity.

• CSPs must do manual reconciliation based on the amounts disbursed at the end of the day.

• After the introduction of DBT, the district administration identified ghost beneficiaries to whom payments were being made.

• From Dec 2012 to April 2013 the number of payments reduced from 8,884 (EBT) to 8,444 (DBT).

• A large part of this can be attributed to existence of ghost and duplicate beneficiaries.

• This accrued savings of Rs. 88,500 for the government, with the total amount of SSP payment reducing from Rs. 2,922,700 in Dec 2012 to 2,834,200 in June 2013

Challenges

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A scaled up version of the Aadhaar pilot is the most efficient model of all – but still faces a sustainability challenge

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

2.26%

4.40% -0.0213647063

577586

Bank Viability to Bank 4(% of disbursement) – actuals

Total income Total cost per month

Total Profit/Loss

-1.00%

-0.50%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

2.26%2.74%

-0.0048106233

0850995

Bank Viability to Bank 4(% of disbursement) – scaled up scenario

Total income Total cost per month

Total Profit/Loss

Total cost per Rs 100 of disbursement: INR 4.14 (2% + loss of 2.14%)

Total cost per Rs 100 of disbursement: INR 2.48 (2% + loss of 0.48%)

Net loss/profit per transaction: INR -4.5 Net loss/profit per transaction: INR -1.1

• Scale 22 CSPs (actual) v/s 900 CSPs (Scaled up scenario) – reduces the fixed cost overhead on the model on a per

CSP/ disbursement basis.

• Aadhaar takes out the smartcard cost and lowers some of the KYC verification costs for the Bank.

• At scale the Aadhaar enabled model goes from the least cost efficient model to the most cost efficient model

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The Business Case for CSPs is Weak

On Average Agent Earns Rs 1200 Per Month for Ten Days of Full Time Work. This is lower than the AP minimum wage rate of Rs 149 per day.

The Channel is Designed to Only Make G2P Disbursements

• Regulations and technology allow the channel to be used for a range of financial services

• Current incentives of the channel make it difficult to offer any financial services other than disbursement of G2P benefits

• Commission to banks tied to disbursement in cash• Penalty of 0.1% per day for banks for every day of delay in disbursement• Mandate to disburse the entire benefit in cash within a few days puts pressure on the

channel, and makes it unavailable for other purposes• The state is setting up a parallel Financial Inclusion channel providing a range of

basic financial services

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Key Messages from Supply Side Research

● Improve Bank Business Case• Increase current commission paid to from 2% to 3%, and 3.5%

in tribal areas. A minimum of 1% should be passed down to CSPs

• Remove withholding of 1% service charge• Enable banks to provide diverse financial services

• Improve CSP Business Case• Currently CSP does not even make the daily minimum wage

rate, so increased incentives need to be prioritized• Remove the full disbursement mandate so that recipients can

leave small value deposits• Merge the G2P and FI payments by allowing CSPs to carry out

other kinds of financial transactions such as loan repayments for SHGs members

• Stagger payments throughout the month to make the CSP’s role less stressful

• Systemize a process for manual overrides, where necessary• Online payments will not be possible in all areas. A systematic

manual process needs to be established in parallel with DBT with effective monitoring and supervision at the village level

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Government Level: Develop an integrated payment architecture, managed by a payments unit (DBT Cell) at the state level to reduce redundancy

Develop standards of service deliveryInterface with providers

Monitor quality of implementation

Develop and maintain a common technology middleware that standardises processes

Maintain a centralised complaint and feedback centre to track quality and hasten resolutions

Be a single point of contact for financial service providers, technology service providers, and agent network management companies.

Department A

Department B Department C

DBT Cell

RecipientsDistrict

Administration

Providers

Advancing financial inclusion to improve the lives of the poor

www.cgap.org