India’s Public Distribution System (PDS) has long come under fire for its high cost of delivery and susceptibility to corruption and leakages. The attempts to reform in the last decades however, offer hope that leakages can be significantly reduced if dedicated action is taken. This policy brief discusses two distinct and more recent approaches, namely, Direct Benefit Transfers and e-PDS (i.e. Automation in PDS), as undertaken by different states to address leakages. The findings are primarily discussed from the perspective of delivery to all eligible citizens and highlight existing issues with both approaches. These have implications depending on the specific state context and on this basis, recommendations are made to policymakers and implementing agencies.
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Know more about the PMJDY account from ‘Chavvani’ – Our financially literate parrot!
The following animation prepared by MicroSave is a part of ePaathshala (Digital School) and aims to educate end customers about the benefits of opening and regularly using the PMJDY account.
Agent Network Accelerator Survey: Senegal Country Report 2015
Based on over 1,200 digital financial services (DFS) agent interviews conducted between November and December 2015, the ANA Senegal report, funded by UNCDF MM4P Programme, highlights findings on the DFS agent landscape in Senegal covering agent profitability, transaction volumes, liquidity management and other important strategic considerations.
The findings illustrate that the Senegalese digital finance market is fractured between four major players who tend to share agents, thus agents serve a median of three providers. There is widespread adoption of the OTC transaction methodology with money transfers as the anchor product. High revenues and low operating expenses make agents the most profitable among all ANA research countries. The Senegalese market is facing a watershed moment, as many providers are transitioning to wallet-based products. In this transition, providers will want to maintain agent profitability as well as support its customers—not all of whom may be ready.
Read the full report here.
Low Preference for Cash Transfer in TPDS – What Affects Beneficiary Behaviour?
The cash versus in-kind subsidy transfer (e.g., food, fuel or fertiliser subsidy)[i] has generated much debate all around the globe. However, there is no clarity on which method should be adopted going forward – cash or in-kind subsidies. While both cash and in-kind transfers certainly have an important role in addressing food security, there is no consensus over whether one is better than the other. There are a number of studies that compare in-kind and cash transfers: however, the results are inconclusive. Some studies suggest that in-kind transfer is better as compared to cash transfers, while many others advocate cash transfers.
A cursory look at the issue shows that proponents of cash transfers argue that leakages/inefficiencies are reduced, procurement difficulties are avoided, as are storage and transportation costs, and targeting can be much more focused. While those advocating in-kind subsidy transfers believe that people will consume adequate amount of food grains under an in-kind transfer programme and express concerns related to cash diversion (buying alcohol or putting cash to other uses) in cash transfer programmes. Other reasons cited include inadequate rural banking infrastructure; transaction costs, which are invariably borne by recipients; two trips (at least!) – one to withdraw money and another to buy food grains; inadequate market infrastructure in rural areas; and fluctuations in prices of essential commodities, etc.
In many developing countries, governments are increasingly willing to make direct payments to poor people. Countries such as Indonesia, China, Brazil, Mexico, and South Africa have expanded their cash transfer programmes. India has also introduced cash transfers in schemes on a pilot-basis such as the Targeted Public Distribution System (TPDS), which aims at providing subsidised food grain to low-income families and aims to introduce cash transfers in many other schemes.
The Government of India, on August 21, 2015, issued the Cash Transfer of Food Subsidy Rules, 2015. These lay down the mechanisms for providing cash subsidy instead of supplying food grains through the Public Distribution System (PDS). Under the National Food Security Act (NFSA), the Union Territories (UTs) of Chandigarh and Puducherry rolled out Direct Benefit Transfer (DBT) pilots in September 2015. MicroSave conducted three rounds of assessments (baseline, mid-line and end-line) of DBT in PDS pilots in the above-mentioned UTs.
Beneficiary preference for in-kind subsidy
69 per cent and 80 per cent of the sample respondents[ii] in Chandigarh and Puducherry, respectively, do not wish to continue the ongoing cash transfers, and prefer food grain distributed through Fair Price Shops (FPS). Based on our research, we found the following reasons for such preference:
Insufficiency of subsidy amount: The current subsidy amount provided for grains does not reflect local market rates. For example, the market price of rice in Puducherry is Rs. 35 per kg while the subsidy extended under the cash transfer programme is Rs. 23 per kg. In Mahe (Puducherry), people were concerned about inflation (caused by local traders or otherwise). In Malar (Puducherry) they felt that “prices might increase after the government decides the sum of money’’. Aarti in Chandigarh said, “Prices will not be stable in the market. It will be very difficult for the government to give us the appropriate amount.’’
Transaction expenses: Current subsidy amount does not take into account the costs involved in accessing cash from banks, including transportation, particularly for the old and infirm, and the opportunity cost of wage loss due to travel times and long waits at bank branches. Our field research in Chandigarh and Puducherry showed that the average time spent commuting to the bank and waiting for a transaction is between two and three hours. This adds up to a total cost of Rs. 145 if one were to add opportunity and direct costs.[iii]
Awareness: Low awareness about the rate of subsidy (including its calculation) and the entitlement per individual/family – which causes confusion and anxiety.
‘‘I don’t know what I am getting and what should I get, I just know that I get money every month.’’– FGD respondent, Chandigarh
Self-contribution: People tend to overlook the cost incurred by them while buying subsidised grains from the Fair Price Shop. Mentally, they do not add the amount (typically Rs. 3 per kg for rice and Rs.2 per kg of wheat) to the cash subsidy they receive, as they procure grains from the open market.
Subsidy diversion: Women expressed concerns about diversion of cash subsidy by men – the issue is pertinent to Puducherry, where a majority of transfers (> 70%) were made to the bank accounts of male heads of households. With inexpensive and easily available alcohol[iv] in Puducherry, the perception is strong that men spend a significant part of the subsidy amount for buying alcohol. This is reflected in our assessment; respondents reported that only 34% of the cash subsidy was utilised for buying food grains.
“At least if the money comes to me, I will manage the budget. If he has to withdraw it, I can be sure that part of it will go to drinks since the shop is just next to the ATM” – Female FGD respondent, Karaikal, Puducherry.
In addition to these, we also identified other beneficiary behaviours associated with cash transfers:
- There is always opposition to and distrust of change. In this case, beneficiaries have to navigate a significant change in the way the state provides them food subsidy – there is resistance to this. This is compounded by teething challenges in the shift from in-kind to cash transfers, and the inconvenience this has caused the beneficiaries. This reflects Status Quo Bias.[v]
- Beneficiaries tend to avoid options for which they have less or no information. In case of DBT in PDS, many beneficiaries did not know the purpose and entitlements under DBT in PDS. This gap in information flow makes them apprehensive and some of the dislike for cash transfers is driven by the lack of information – highlighting the Ambiguity Effect.[vi] For instance, in Chandigarh, many of the respondents did not know their entitlements under DBT; they were unaware of even the purpose of DBT.
- Beneficiaries do not consider benefits of cash transfers and tend to forget the problems (of inferior quality and delivery of less quantity than allocated; long queues; and bad behaviour of FPS owners) faced under the earlier system of food grain distribution through FPS. The issues under cash transfer seem larger even as challenges of the earlier in-kind system seem to be forgotten – a classic case of the Recency Effect.[vii]
- 69 per cent and 87 per cent of the sampled beneficiaries in Chandigarh and Puducherry, respectively, say that the current cash transfer is insufficient to purchase 5 kg of food grains per family member. While this points towards a subsidy calculation system that appears to be flawed, it also points towards some interesting behavioural aspects of clients. Beneficiaries tend to ignore cash contribution that they had to make in the earlier in-kind system, to buy grains. This shows Tunnelling.[viii]
Some of the above-mentioned challenges – real or just perceived, can be addressed through improvements in service quality of the DBT delivery mechanism and raising beneficiary awareness on scheme features. However, it is imperative for beneficiaries to have access to a regular market close to their residence if cash transfer for food is to be successful. Most of the concerns for cash transfers are because of lack of/less information, and poor rural banking infrastructure. These concern areas need to be worked upon effectively so as to gain wider reach and acceptance for cash transfers.
[i] Targeted Public Distribution System (TPDS) is an Indian food security system. It distributes subsidised food and non-food items to India’s poor. This scheme was launched in India in June 1997. Major commodities distributed include staple food grains, such as wheat and rice, sugar, and kerosene, through a network of fair price shops (also known as ration shops) established in several states across the country.
[ii] MicroSave undertook a study to better understand the implementation of DBT in PDS for the MoCAFPD and sampled 3,805 beneficiaries in Chandigarh and Puducherry.
[iii] Based on focus group discussions in Chandigarh (calculated off Chandigarh’s minimum wage of ~INR 340 for 8 hours of work).
[iv] Puducherry figures in the Top 5 amongst biggest beer, wine and refined/ foreign liquor drinking states and UTs nationwide, as published in 2011-12 consumption data from National Sample Survey Office, India, and quoted as “India’s biggest drinkers”, in a report published in The Hindu, August 23, 2014.
[v] Status Quo Bias: The tendency to defend the status quo. Existing social, economic, and political arrangements tend to be preferred, and alternatives disparaged sometimes even at the expense of self- or group-interest.
[vi] Ambiguity Effect: The tendency to avoid options for which missing information makes the probability seem “unknown”.
[vii] Recency Effect: The tendency to weigh recent events more than earlier events.
[viii] Tunnelling: Devoting a great deal of bandwidth to a single scarce resource, while neglecting other things to make space for the focus.
Puneet Chopra in conversation with NDTV Profit on KYC Harmonisation
Puneet Chopra, Associate Director, MSC in conversation with NDTV Profit on KYC Harmonisation. Catch full coverage here.
India Post – Initiatives to Facilitate G2P Payments
India Post has extensive outreach in rural areas of Jharkhand with 13 Head Post Offices (HPOs), 454 Sub Post Offices (SPOs) and 2,643 Branch Post Office (BPOs).[1] With 3,097 (454 SPOs + 2,643 BPOs) outlets present in rural and semi-urban areas, India Post has a reach of at least one outlet for every two of the state’s 4,423 gram panchayats.
India Post plays a major role in disbursement of G2P payments in Jharkhand, especially for MGNREGS (Mahatma Gandhi National Rural Employment Guarantee Scheme). During the financial year 2015-16, out of a total of Rs. 89,364 lakh (USD 135.40 million) disbursed in MGNREGS, approximately 70% of the amount i.e. Rs. 61,905 lakh (USD 93.70 million) was disbursed through India Post. To facilitate payment of such large amounts, India Post has developed technology-enabled systems for payment processing, transfer to beneficiary accounts, and withdrawal by beneficiaries, all of which were earlier on manual systems. This blog discusses the manual-to-electronic transition and improvements at India Post in Jharkhand circle; and the benefits it has brought.
In the earlier system, payment orders were prepared manually at each panchayat from where these were forwarded to India Post for manual processing and transfer of the payment to beneficiary accounts. Beneficiary authentication, at the time of withdrawal and payment to beneficiary, were also done manually because the account details were maintained by the post office concerned in a manual ledger. This system was inefficient, as it led to monetary leakages and payment to ghost beneficiaries, in addition to the inevitable delay in payments.
To address these issues, the Ministry of Rural Development (MoRD) developed the e-FMS (Electronic Fund Management System). e-FMS serves as an MIS for MGNREGS payments and enables electronic generation of Fund Transfer Order (FTO – i.e., electronic payment order), once work details of individual beneficiaries are entered in the e-FMS at block office. It also enables online transfer of FTO from block office to either a bank or to India Post for payment processing. Further, to synchronise with e-FMS and to reduce manual steps in processing of payment order, India Post enabled electronic processing of FTO in Jharkhand. The payment processing steps are given below:
1. CEPT Mysore[2] receives FTOs from MGNREGS block office
2. CEPT sends FTOs to respective HPOs
3. HPOs credit beneficiary accounts
4. HPOs send processed list (i.e., details of credited beneficiary accounts) to CEPT Mysore
5. CEPT Mysore sends processed list to respective SPOs
6. SPOs credit beneficiary accounts (HPOs, SPOs and BPOs are not interconnected, so they manage different databases for customers. HPOs, SPOs and BPOs update their respective customer data bases separately. For this reason, FTOs are routed through all the offices.)[3]
7. SPOs send hard copies of processed list to BPOs
8. BPOs credit beneficiary accounts in a manual ledger.
Even after these changes were effected, transfer of payments to beneficiary accounts took a minimum of 7-8 days from the first step of generating an FTO and sending it from block office to India Post to the eventual credit into the beneficiary account.
Breakthrough
To address the delay in processing of FTO and crediting beneficiary accounts, India Post has rolled out “India Post AEPS” (Aadhaar-Enabled Payment System).[4] In this system, SPO and BPOs are enabled with online front-end devices (tabs, point of sale, and desktops) to carry out beneficiary transactions.
Further, Head Post Office servers remain in sync with a server installed by the state government, which maintains mirror accounts of beneficiaries of government-sponsored schemes. Front-end devices at SPOs and BPOs are connected with the server installed by the state government. Thus, beneficiary accounts can be synced and updated in front-end devices as soon as the FTO is received at the HPO. The revised FTO processing after AEPS enablement is as follows:
1. CEPT Mysore receives FTOs from MGNREGS block office
2. CEPT sends FTOs to respective HPOs
3. HPOs credit beneficiary accounts, i.e., HPO servers are updated
4. HPO servers synchronise beneficiary account data with the state government server
5. State government server synchronises beneficiary account data with front-end devices, which show updated balance in beneficiary accounts at BPOs
The Last Hindrance: Liquidity Challenges
India Post AEPS has significantly reduced FTO processing time. Beneficiary accounts are now credited within 3-4 days as against the earlier system that used to take more than a week. With core banking system (CBS) implementation in India Post, processing time will be further reduced to just 1-2 days. However, delays still happen at the Branch Post Office in making payments to beneficiaries due to cash/ liquidity shortages. This is a concern due to:
1. The inability of bank branches at block level to provide sufficient cash to meet the requirements of SPOs – many bank branches are not able to provide cash of more than Rs. 50,000 (USD 757) in a single day.
2. India Post’s procedures limit the amount of cash that can be transferred from SPOs to BPOs to between Rs. 10,000 (USD 151) and Rs. 20,000 (USD 303) at the discretion of the SPO.[5] One SPO typically supervises 5-6 BPOs. Moreover, SPOs are not able to meet the cash requirements of BPOs, given the limited availability of cash from block-level branches (as outlined in 1 above).
3. Cash holding of BPOs in Naxal (left wing extremist)-affected regions is limited to Rs. 5,000 (USD 75).
The Department of Information Technology, Government of Jharkhand, commissioned MicroSave to study the existing India Post-AEPS system and cash management practices of India Post for MGNREGS payments in the state and to suggest cash management measures to address the issues. Based on the study, MicroSave recommended the following cash management measures, in addition to transit insurance, to the state government:
1. Availability of Cash: Cash availability could be ensured at SPOs through one of two ways:
a. Alternative 1:
i. Once the FTO is received, the HPO can inform the SPOs under its jurisdiction and sponsor bank branch at district level about the cash requirement at SPOs and block-level branches in the next 2-3 days.
ii. On receiving the information from the HPO, the sponsor bank branch at the district level can inform the block-level branches to arrange for cash.
iii. Thus sponsor bank can ensure the availability of cash at block-level branches when SPO visits the branch to encash the Demand Draft (DD) made by HPO.
b. Alternative 2: Where multiple banks are present, HPO can prepare multiple DDs that can be drawn from more than one bank at the block level. So, if, at present, SPO can withdraw only Rs. 50,000 (USD 757) in a single day from one bank, it can withdraw Rs.100,000 (USD 1,515) from two banks, or Rs.150,000 (USD 2,273) from three banks and so on.
2. Disbursement of Prescheduled Dates: Disbursement to beneficiaries can be organised on pre-scheduled dates by communicating specific dates to beneficiaries. This would help BPOs that have limited cash available with them for disbursement. This would also reduce rush at BPOs, reduce waiting time for beneficiaries and ensure payment on the same day. However, there is security risk of money being looted while in transit from SPO to BPO, if disbursement dates are communicated in advance. If this is managed well, this approach can be very helpful in areas where security risk is low.
Conclusion
With these initiatives, turnaround time (TAT) to credit beneficiary accounts has come down from over 20 days to 3-4 days. India Post has also started CBS implantation in the country to cover all HPOs and SPOs. India Post will provide front-end devices to BPOs, which will remain connected with the CBS. These initiatives will bring all the offices of India Post on the same platform to further enhance delivery of G2P and other payments. But, even after such initiatives, cash management will remain a concern. With these initiatives, better cash management practices, recent approval to function as Payment Bank, and the push for Direct Benefit Transfer (DBT), India Post has the potential to become one of the key success stories in India’s drive for financial inclusion.
[1] India Post has three administrative layers at district level, i.e. Head Post Office (HPO) at district, Sub Post Office (SPO) mostly at block, and Branch Post Office (BPO) at panchayat/village level.
[2] Centre for Excellence in Postal Technology (CEPT) Mysore manages back end technology aspects of India Post.
[3] Since the time of this study, India Post has adopted a Core Banking Software (CBS) and will be able to update accounts at all levels simultaneously.
[4] State/India Post utilises SRDH (State Resident Data Hub) database, which is a state-specific copy of Aadhaar database. Payment to beneficiaries is done through Aadhaar-based biometric authentication.
[5] The standard operating procedure permits Rs. 5,000 as cash holding per BPO. But the limit given does not suffice for the volume of business at the BPOs. Hence, SPO, at its discretion, provides the BPOs with cash over and above to the stipulated limit.