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India Takes Aim at Poverty With Cash Transfer Program

January 5, 2013 by Leave a Comment

On Jan. 1, India eliminated a raft of bureaucratic middlemen by depositing government pension and scholarship payments directly into the bank accounts of about 245,000 people in 20 of the nation’s hundreds of districts, in a bid to prevent corrupt state and local officials from diverting much of the money to their own pockets. Hundreds of thousands more people will be added to the program in the coming months.

In a country of 1.2 billion, the numbers so far are modest, but some officials and economists see the start of direct payments as revolutionary — a program intended not only to curb corruption but also to serve as a vehicle for lifting countless millions out of poverty altogether.

The nation’s finance minister, Palaniappan Chidambaram, described the cash transfer program to Indian news media as a “pioneering and pathbreaking reform” that is a “game changer for governance.” He acknowledged that the initial rollout had been modest because of “practical difficulties, some quite unforeseen.” He promised that those problems would be resolved before the end of 2013, when the program is to be extended in phases to other parts of the country.

Some critics, however, said the program was intended more to buy votes among the poor than to overcome poverty. And some said that in a country where hundreds of millions have no access to banks, never mind personal bank accounts, direct electronic money transfers are only one aspect of a much broader effort necessary to build a real safety net for India’s vast population.

“An impression has been created that the government is about to launch an ambitious scheme of direct cash transfers to poor families,” Jean Drèze, an honorary professor at the Delhi School of Economics, wrote in an e-mail. “This is quite misleading. What the government is actually planning is an experiment to change the modalities of existing transfers — nothing more, nothing less.”

The program is based on models in Mexico and Brazil in which poor families receive stipends in exchange for meeting certain social goals, like keeping their children in school or getting regular medical checkups. International aid organizations have praised these efforts in several places; in Brazil alone, nearly 50 million people participate.

But one of India’s biggest hurdles is simply figuring out how to distinguish its 1.2 billion citizens. The country is now in the midst of another ambitious project to undertake retinal and fingerprint scans in every village and city in the hope of giving hundreds of millions who have no official identification a card with a 12-digit number that would, among other things, give them access to the modern financial world. After three years of operation, the program has issued unique numbers to 220 million people.

Bindu Ananth, the president of IFMR Trust, a financial charity, said that getting people bank accounts can be surprisingly beneficial because the poor often pay stiff fees to cash checks or get small loans, fees that are substantially reduced for account holders.

“I think this is one of the biggest things to happen to India’s financial system in a decade,” Ms. Ananth said.

Only about a third of Indian households have bank accounts. Getting a significant portion of the remaining households included in the nation’s financial system will take an enormous amount of additional effort and expense, at least part of which will fall on the government to bear, economists said.

“There are two things this cash transfer program is supposed to do: prevent leakage from corruption, and bring everybody into the system,” said Surendra L. Rao, a former director general of the National Council of Applied Economic Research. “And I don’t see either happening anytime soon.”

The great promise of the cash transfer program — as well as its greatest point of contention — would come if it tackled India’s expensive and inefficient system for handing out food and subsidized fuel through nearly 50,000 government shops.

India spends almost $14 billion annually on this system, or nearly 1 percent of its gross domestic product, but the system is poorly managed and woefully inefficient.

Malavika Vyawahare contributed reporting.

Article source: http://www.nytimes.com/2013/01/06/world/asia/india-takes-aim-at-poverty-with-cash-transfer-program.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Teller-A.T.M. Hybrid Takes Banking to Rural India

September 29, 2011 by Leave a Comment

Swati Yashwant, a 29-year-old mother of one, is part of a growing legion of roving tellers intent on providing bank accounts to the nearly 50 percent of India’s 300 million households that do not have them. Using a laptop computer, wireless modem and fingerprint scanner, Ms. Yashwant opens accounts, takes deposits and processes money transfers for farmers and migrant workers in this small town 70 miles south of Mumbai, India’s financial capital.

To reduce the risk of robbery or theft, no transaction by law may exceed 10,000 rupees (about $212). And in practice, many amount to no more than a dollar or two. But with the bulk of India’s population living in villages that have never had a bank branch, Ms. Yashwant, with her electronic devices, is a missionary of financial modernity.

Many Indians “don’t know anything about banking,” she said in her small office here, which is decorated with a garlanded picture of Ganesh, the Hindu god believed to remove obstacles. “I want to open their accounts and help them understand banking.”

Economists and policy makers say mobile agents like Ms. Yashwant — who also are employed in countries like Brazil, Mexico and Kenya — represent one of the most promising ways to help the rural poor save and protect their money. Many people in India who do not have bank accounts, for instance, buy gold necklaces or simply keep cash in their unlocked homes.

“This is something that could be powerful,” said Abhijit V. Banerjee, an economist at the Massachusetts Institute of Technology who wrote “Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty” with Esther Duflo.

The banking agents enable the poor to easily save money they otherwise might be tempted to spend, Mr. Banerjee said. And when times are lean, people could withdraw money they had saved, instead of borrowing cash at high rates of interest.

The accounts earn currently earn 4 percent annual interest, which is standard for savings accounts in India. There are no maintenance fees, or charges for deposits or withdrawals.

“It’s true that this will not make them rich,” Mr. Banerjee said, “but it will make them less likely to face starvation someday.”

Ms. Yashwant is one of an estimated 60,000 of what Indian bankers call “business correspondents,” who are not bank employees but earn commissions that the banks pay them for each transaction.

The Reserve Bank of India, the country’s central bank, began the push for banking correspondents about five years ago. After slow initial growth, the central bank predicts the ranks of correspondents will more than double, to 126,000, by March. The Reserve Bank has ordered commercial banks to set up correspondents in every village with more than 2,000 people and has assigned each of those villages to one bank or another.

For India’s banks, it is a relatively inexpensive way to recruit customers. While about 70 percent of India’s population is dispersed among more than 600,000 villages, the entire country has only 33,500 bank branches. Correspondents like Ms. Yashwant have set up 74 million bank accounts in India.

“If you used the traditional high-cost banking system, you will never reach these people,” said Jayant Sinha, who is managing director of the India office of Omidyar Network, a philanthropic investment firm set up by Pierre M. Omidyar, the founder of eBay.

Ms. Yashwant has been a correspondent in Kolad for four months, for State Bank, India’s biggest bank. The $200 or so she earns in an average month is a good wage in rural India, where the average monthly income is only about $65.

Article source: http://feeds.nytimes.com/click.phdo?i=3a4c02fe0547cc52a86cb95342c6ad1a

Filed Under: Business News Tagged With: , ,

Bucks: Considering Money Transfers in Calculating Credit Scores

July 29, 2011 by Leave a Comment

Can data about electronic money transfers be used to help create credit scores for people who rely on them?

That’s the subject of a study to be undertaken by the new Consumer Financial Protection Bureau. The agency, which officially opened for business on July 21, was directed to look into the matter by the Dodd-Frank financial reform law. The new agency is also reviewing ways to provide clearer disclosure of the exchange rates and fees charged for the transfers, which can be substantial — up to 13 percent of amounts up to $200, according to a preliminary report from the agency.

The question is whether money transfers, known as remittances, are in any way predictive of a consumer’s ability to repay loans. Remittance users typically rely on the transfers instead of using banks or credit cards. Right now, credit histories generally don’t contain remittance data. So people who rely on money transfers often have trouble getting credit scores, which limits their access to loans and even housing.

Many remittance users were born outside the United States and use the transfers to send money to family members and friends in their native countries. About six million households make personal transfers, mostly to Latin America and Asia, with amounts averaging $200 to $400. The overall volume totals billions annually. The funds are generally sent on a cash basis — the sender submits cash at a money-transfer location like Western Union and the recipient picks up cash in the foreign country, sometimes within minutes.

Remittance payments are usually voluntary transfers, made without any sort of contract. But it’s possible that payment patterns indicate a user’s ability to meet payment obligations. To study whether this may be the case, the bureau is assembling a database of information from a large remittance provider, as well as credit score information from a credit bureau (the report doesn’t identity them, but says they won’t provide any personally identifiable information to the federal government).

“A finding that consumers who send remittance transfers are more likely to repay their debts than other consumers with similar credit histories could suggest that adding remittance data to credit scores would tend to raise credit scores relating to remittance senders,” the report says.

Assuming that there is some connection between regular remittance use and credit behavior, there would still be hurdles to incorporating the data into the credit reporting process. Some users of money transfers prefer to remain anonymous (transmitting companies are required to obtain identifying information only when the customer sends amounts of $3,000 or more), and probably wouldn’t be interested in having their transactions recorded to help establish a credit file.

One way to address this, the consumer bureau noted, would be to give senders the option of reporting their remittance history to a credit reporting agency to “build credit.” “This opt-in approach to reporting,” the report said, “might enable the company to build loyalty among certain remittance senders without alienating other senders who wished to retain their anonymity.”

Do you think it makes sense to consider money transfers in the credit reporting process?

Article source: http://feeds.nytimes.com/click.phdo?i=0fd35c3e490cbdab87eb59585eaaf113

Filed Under: Your Money Tagged With: , ,