A Reserve Bank of India (RBI) committee on financial inclusion has suggested that the government should transfer cash directly to persons instead of giving subsidies, and should replace interest subvention on agriculture loans with affordable universal crop insurance scheme.

The committee on medium-term path on financial inclusion, headed by RBI executive director Deepak Mohanty, also recommended linking credit accounts with unique identification number, or Aadhaar number, and share information with credit information companies to enhance stability of the credit system and improve access.

The committee was set up in mid-July after Prime Minister Narendra Modi told RBI in its 80th anniversary that a road map should be built to include 90 per cent of India’s unbanked population in the financial fold.

The group opined that the most efficient way for an effective financial inclusion is direct cash transfer.

Presently, the government gives interest rate subvention of two per cent for short-term crop loans of up to Rs 3 lakh. Another three per cent subvention for prompt repayment lowers the effective cost further. Payments towards such subvention have increased rapidly over time, the report said. From less than Rs 2,500 crore in subvention in 2006, government’s subvention in 2016 is projected to be above Rs 12,500 crore.

Besides, actual cultivators are not always the landowners and hence such subventions do not even reach them. The land owners, being the recipients of the subventions, turn into money lenders. The panel said that agricultural credit must flow to the actual cultivator for which tamper-proof digitisation of land records was a must.

“The scheme is for short-term crop loans, and as a result it discriminates against long-term loans and thereby, does not incentivise long-term capital formation in agriculture, which is essential to boost productivity,” the panel said, adding any subsidised credit increases the chance of misuse.

India mainly subsidises fertiliser, irrigation, power and credit, but the subsidy leads to vast leakages. For example, the fertiliser subsidy, which increased from Rs 18,500 crore in 2005-06 to an estimated Rs 73,000 crore in 2015-16 is not financially sustainable in the long run.

“Subsidising farmers by reducing the price of inputs could ultimately be regressive, i.e., rich households could benefit more from the subsidisation than their poorer counterparts,” and panel said and hence, recommended that the government should simply transfer cash to farmers equivalent to the fertiliser subsidy. Similarly, cash transfer can be tried to address problems in the irrigation sector and instead of charging “abnormally low electricity tariffs” for agricultural use, equivalent cash can be transferred into beneficiaries’ accounts.

According to the Agriculture Census (2010-11), 85 per cent of India’s 138 million farming holdings are small and marginal farmers who hold less than five hectares of lands. These groups are heavily dependent on private money lenders, even as those with 10 hectares of land holding have banking facility to tap.

The committee recommended that a mandatory crop insurance scheme covering all crops should be introduced starting with small and marginal farmers with a monetary ceiling of Rs 2 lakh. Farmers will have to pay a nominal premium to get this insurance and the balance could come from government subsidy.

“The government can phase out the agricultural loan interest subvention scheme and plough back that allocation into the crop insurance subsidy,” the panel said.

Heavy use of technology, like satellite images for crop mapping and assess damage, could make the insurance scheme more efficient. Satellite imagery can be used for ‘crop mapping’ and to assess damage.

Among other major recommendations, the panel suggested stepping up efforts to include more women in the financial inclusion fold. The All-India Debt and Investment Survey (AIDIS) suggested that interest rates paid by female household head are, on average, higher than those paid by male household heads. Still, in India, the financial gender disparity is as high as 20 percentage points.

To include more women, and with the government’s emphasis on the welfare of girl child, the panel recommended that a new welfare scheme, called Sukanya Shiksha that can be jointly funded by the central and state governments, be formed. The government has a small savings scheme called Sukanya Samriddhi for girl child.

The proposed Sukanya Shiksha scheme “will link education with banking habits by crediting a nominal amount, in the name of each girl child belonging to the lower income group who enrols in middle school. This would make it incumbent on the school and the lead bank and its designated branch to open a bank account for social cash transfer. This scheme can also have the benefit of lowering school dropout rates and empower the girl child,” the panel recommended.

Similarly, multiple guarantee agencies can be floated to provide credit guarantees in niche areas for micro and small enterprises (MSEs) and a system could be introduced for unique identification for all MSME borrowers and sharing of such information with credit bureaus.

According to the Mohanty report, mobile phones are the way forward for inclusion. Public sector banks account for only 14 per cent of the total mobile banking transactions worth Rs 270 billion, suggesting there is significant room for market players to grow. Even as mobile connectivity might not be commercially viable to start with, telecom service providers could fund the penetration as part of their to use their corporate social responsibility, the report said.

An eco-system should be developed where full-service banks, regional banks, non-banking finance companies, semi-formal financial institutions, as well as the newly-licensed payments banks and small finance banks, could work together for effective inclusion, the panel said.