Financial Inclusion: New operational guidelines on Financial Inclusion

The new RBI guidelines on Financial Inclusion have shifted the onus from “‘one district-many banks” to “‘one district-many banks-one leader bank“. The new operational guidelines are for the implementation of a transfer system (Electronic Benefit Transfer) for servicing low-value accounts and extending banking infrastructure to under-served low income areas. Here are a few notes:

What is EBT?

  • Reserve Bank of India has adopted a “Bank-led” model for ensuring Financial Inclusion to provide low cost, efficient, ICT based banking services utilising multiple delivery channels including intermediary low cost brick & mortar structures, branchless banking through Business Correspondents (BCs) and other modes like mobile vans, rural ATMs, etc. so as to cover all the villages of the country in due course.

What is use of EBT?

  • The Central and State Governments have institutionalized several welfare schemes like social security pensions, Mahatma Gandhi National Rural Employment Guarantee Scheme (MNREGS), National Old Age Pension (NOAPS) insurance scheme etc. for the benefit of the poor.
  • Payments in such welfare schemes are being made directly either in kind/cash or through indirect subsidies like the PDS. Such payments are being routed by the governments through various agencies. The success of any welfare scheme/State Benefit Transfers must ensure timely disbursal of the benefits without any leakages.

The Reserve Bank, therefore, as part of its Financial Inclusion initiative encouraged governments to disburse social security payments through the banking channel leveraging Electronic Benefit Transfers for financial intermediation. EBT is one of the products offered under Financial Inclusion, which facilitates payments to reach the intended beneficiaries through bank accounts. This relieves State Government functionaries of cost and time involved in administering the high volume small value payments. Provision of door step banking services in remote areas entails a cost on the banks. The payment of commission by the State Governments for EBT transactions makes the model economically viable and also helps banks to extend their penetration to remote villages. It also provides banks with a business opportunity of linking credit products to the payments

In which states EBT was launched on Pilot Basis?

The Reserve Bank of India has set up Dr. R.B. Burman committee to design an appropriate framework for EBT implementation by Central and State Governments.

The Committee had recommended the “One District – One Bank model” to be used for implementation of the EBT Scheme.

Based on the recommendations, a few State Governments in Haryana, Karnataka, AP, Orissa, Chhattisgarh, Himachal Pradesh, Uttarakhand, Bihar, Punjab, etc. implemented the “One District – One Bank EBT model’ in select districts on a pilot basis. Electronic Benefit Transfer (EBT) was launched for servicing low value accounts and extending banking infrastructure to underserved low income areas.

What were the problems with this scheme?

In this pilot project, “One District – One Bank” Model has not been able to achieve the objective of financial inclusion. Allocation of villages amongst banks under the Financial Inclusion Plan (FIP), i.e. Roadmap for providing banking services to villages with population above 2000, has been generally on the basis of the Service Area Approach. This has led to a situation wherein the designated bank for EBT and FIP in the same village differed.

This issue has been raised in various fora by the State Governments and banks. For clearer conceptual understanding and based on detailed consultative meetings and interface with stake holders, “Operational guidelines on implementation of Electronic Benefit Transfer and its convergence with Financial Inclusion Plan” has been formulated.

What is the new model?

Keeping in view the need to spread the banking habits to all villages, it is advised that one district – many banks – one leader bank model may be adopted henceforth for EBT implementation. In this model, all the banks present in the district participate in EBT, though for administrative convenience the State Government deals only with one leader bank. State Government shall designate the leader bank, in consultation with the Regional Office of RBI and the SLBC, who will obtain the funds from the State Government and in turn will arrange to transfer funds through interbank transfer to other banks for credit to the accounts of ultimate beneficiaries’ account on a commission basis.

The regulator asked banks to follow the ‘one district-many banks-one leader bank’ model in villages in which the designated bank under the financial inclusion plan and the fund-transfer system varied.

According to guidelines, the state government shall designate the leader bank, in consultation with RBI’s regional office and the state-level bankers’ committee. The leader bank would secure funds from the state government and arrange to transfer funds through inter-bank transfer to other banks.

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