UID to offer banking benefits to poor

New Delhi: India’s plan to offer unique identity (UID) cards to all citizens will bring a range of banking services within reach of millions of poor who currently cannot even open a bank account, says a report released on Friday by the Unique Identification Authority of India (UIDAI), which is executing the project.

People queue up for registration at a special booth set up for the UID of India project in Medak district of Andhra Pradesh/ Photo credit: Nagara Gopal

Facilities such as microfinance are beyond the reach of many poor people in both towns and villages who do not have documentary proof of their identity.

Rashid ul Sheikh, a migrant mason who lives with three workers in a single room in Delhi’s Kapashera area, is an example.

The report says he gives his wages to his landlord for safekeeping because theft is rampant in his neighbourhood. The landlord charges him a 10% fee.

Once issued, UID will offer tamper-proof identity verification and eliminate banks’ need to run costly fraud checks, one reason why they don’t take on customers such as Sheikh, the report said.

“As a result, banks will be able to scale up their branch-less banking deployments and reach out to a wider population at a lower cost,” it added.

The plan will take a “low-cost, high-volume revenue” approach, with a large number of small transactions from poor clients.

“The assumption is that there is a sufficient number of people who want to open bank accounts but can’t right now, which I think is a fair assumption,” said Partha Mukhopadhyay, senior fellow at the Centre for Policy Research. “A lot of very poor people still have savings, so they might want to open an account... If you have a UID, a bank can check that UID and verify that you are who you (claim you) are and can go ahead and open that account for you.”

UID will “be able to increase banking reach in that sense. And it will hopefully eliminate difficulty that certain classes of people have in opening bank accounts”, Mukhopadhyay added.

This will also be crucial for establishing a universal microfinance network and improving the access of the poor to technologies such as mobile phone banking.

Customers in rural areas will be able to interact electronically with their bankers, cutting down on transaction costs, the report said.

In rural areas, measures such as the recent expansion of so-called business correspondents of the banks to include mom-and-pop stores, petrol pumps and self-help groups will also benefit from UID.

These correspondents will be able to network with a larger number of people and bring them under the banking net. The presence of more than one business correspondent in a village will also cut down on corruption, improving the quality of life and the financial security of the poor, the report said.

Banks’ cooperation with regulators and the government is crucial for the successful implementation of a microfinance system, it said.

The UIDAI project seeks to provide at least 600 million citizens with UID based on their location and biometrics, beginning in February 2011.

The effort is being spearheaded by Nandan Nilekani, co-founder of Infosys Technologies Ltd.