Designing a Minimum Social Security Floor for the Indian Unorganised Sector

By Vishnu Prasad, IFMR Finance Foundation

This post is the second in a series on Social Security for the Indian Unorganised Sector. The series will look at the challenges in the current implementation of social security schemes in India, and aim to provide a comprehensive framework for effective design, ownership, governance and delivery. This series is based on the report “Comprehensive Social Security for the Indian Unorganised Sector: Recommendations on Design and Implementation” authored by IFMR Research – Centre for Microfinance & IFMR Finance Foundation.

Why are take-up rates for social security schemes such as Aam Aadmi Bima Yojana (AABY) life insurance and NPS-Swavalamban (NPS-S) pension doggedly low in India? What prevents a customer from investing Rs.1,000 in an NPS-S account and doubling her investment through a matching government contribution? While there are significant flaws in the delivery and implementation architecture of social security schemes in India (discussed in the first post of this series), this post argues that customers’ aversion to these products could be rational and can be partially explained by the low levels of protection offered by these schemes. We examine two products below- life insurance and public pension.

(For an overview of the schemes discussed in this post, click here).

Life Insurance

The purpose of life insurance is to help households tide over the shock of loss of income due to the unexpected death of an income earning member. The extent of life and accident cover required for an individual is closely tied to the individual’s ‘human capital’, defined as the net present value of the future real expenditure and earning streams associated with that individual. An individual’s human capital reflects the loss of net earnings to the household in event of her death. Since an individual’s human capital is closely tied to multiple idiosyncratic variables like age, education and skill level, the task of public policy is to choose the human capital associated with a particular age and income profile below which it is considered infeasible for a household to function effectively upon the death of an income earner.

In order to make this assessment, we analyse the human capital matrix across different ages and incomes . The table below provides the value of human capital for ages ranging from 20 to 55 years grouped by income quintiles. In view of the fact that social security is designed to provide a minimum cover in case of the income-earner’s death, it is pertinent to focus on the human capital of the lowest income quintile (Column 2 in the Table below).


Let us compare this with the coverage provided under current social security schemes in India. The coverage provided for natural death under the AABY is Rs. 30,000, which according to the human capital calculations does not provide adequate cover for even a 50 year old in the lowest income quintile. Considering the fact that a younger income earner’s death will have a tremendous impact on the well-being of the household, as evidenced by the human capital calculations, it is clear that the present coverage under life insurance is woefully inadequate.

While there may be financial constraints that prevent extant life cover under social security from being set at this level, it is useful to articulate this – the human capital of a 40 year old in the bottom quintile should be, at minimum, the life insurance coverage goal to work towards over a specified period of time.

Public Pension

The purpose of pension cover under social security is to secure a minimum post-retirement income for an individual. In order to arrive at such a pension floor under social security, we analyse the post-retirement corpus required by individuals across age groups- ranging from 20 years to 55 years- in the lowest income quintile. Our assumptions are based on the current structure of the NPS-S product- customers contribute Rs. 1,000 per annum into their NPS-S account and that the government fully matches the individual’s contribution for the first five years. The customer’s savings in NPS-S are invested in two assets- debt (85%) and equity (15%).

As Column 4 of the table below shows, the expected return from investment in NPS-S for a 20 year old covers only about 31% of her post-retirement expenditure. If the aim of social security pension is to secure a minimum post-retirement income, the present scheme clearly falls short of this objective.


Without a perpetual matching contribution from the government, NPS-S does not provide enough incentive for a person to join the scheme. As the report of the Committee to Review Implementation of Informal Sector Pension (CRIISP) notes, there is strong economic logic to extending the matching contribution from GoI for perpetuity . For instance, an inflation-indexed matching contribution from the government would enable a 20-year old to reduce the shortfall from her minimum corpus to 57.5%, a reduction of 11.5% from the current state. Furthermore, the large shortfall is partly a result of the conservative investment mix of the scheme. We find that moving to the life cycle investment mix used by NPS-Main, together with inflation indexed matching contributions, would allow a 20-year old to reduce her shortfall to 14.5%.

As a general principle for pensions under social security, we propose this- if the aim of pensions under social security is to guarantee a minimum post-retirement corpus, a pension product under social security for the unorganised sector should cover, at minimum, the post-retirement expenditure of individuals in the lowest income quintile.

While there are significant challenges to be overcome in the delivery mechanism, ownership structure, and governance of social security schemes in India, better scheme design that adhere to the principles articulated above could offer all citizens minimal levels of guaranteed financial protection under social security.


  1. This analysis has been performed on data from a financial services firm that is operational across rural districts in three states of India for a sample of over 200,000 households.
  2. A perpetual matching contribution provides pension in the informal sector some parity with the formal sector, popularly known as the employees’ provident fund scheme. Currently, all formal sector employees covered by the EPFO are also covered by the Employees’ Pension Scheme, 1995 under which the Government of India contributes 1.16% of their wages (subject to a monthly cap of Rs.6500) towards their pension. Thus, there is every reason to accord the same treatment to the persons in the informal sector to whom NPS applies. For a detailed analysis of the economic logic behind this, refer to the CRIISP Recommendations Pages 45-46 – Available here: http://pfrda.org.in/writereaddata/linkimages/CRIISP%20Report9681894859.pdf
  3. The life-cycle investment mix varies the proportion of investment in the three classes of assets according to the age of the customer and shifts investment from riskier assets (80% of the contribution is invested in equity, and corporate bonds for a 20-year old) to safer instruments (80% is invested in government securities for a 55-year old) as the customer ages.

Niche banking in India: Draft Guidelines for Payments Banks

By Deepti George, IFMR Finance Foundation

The Committee on Comprehensive Financial Services for Small Businesses and Low Income Households recommended developing a vertically differentiated banking structure, in which banks specialise in one or more of three functions- payments, credit delivery and retail deposit taking. The Committee, thus, recommended the licensing of new categories of specialised banks including Payments Banks and Wholesale Banks. Accepting the Committee’s recommendations, the Reserve Bank has released Draft Guidelines for ‘Licensing of Payments Banks’. The Draft Guidelines state that the “primary objective of setting up of Payments Banks will be to further financial inclusion by providing (i) small savings accounts and (ii) payments / remittance services to migrant labour workforce, low income households, small businesses, other unorganised sector entities and other users, by enabling high volume-low value transactions in deposits and payments / remittance services in a secured technology driven environment.

Such Payments Banks would engage in collecting demand deposits (ie, savings bank deposits and current deposits) and provide payments and remittance services, such that the deposits are deployed in Government securities and T-bills (with maturity upto one year) permitted by RBI as eligible for meeting SLR requirements. With access to the Payment and Settlement System, Payments Banks will be permitted to carry out cash-in and cash-out through channels such as own branches and through BCs, and can additionally do cash-out at ATMs as well as POS terminals (subject to instructions under the Payment and Settlement Systems Act). RBI would also be open to entities interested in offering transactions through the internet (similar to the Virtual Bank model in Hong Kong). The deposits will be protected by deposit insurance under DICGC.

Transaction limits while currently set at Rs. 100,000 as maximum balance per customer, can be subject to revision based on performance of this category of banks. Also, if ‘small accounts’ are being offered, these would enjoy the benefit of simplified KYC norms.

Payments Banks are expected to stay away from credit intermediation on own books and thereby not be exposed to credit risk (nor market risk if investments are held to maturity obviating the need to mark-to-market) but be exposed to significant operations risk as well as liquidity risk. The minimum capital requirement set at Rs. 100 cr (one-fifth of that for a full-service bank) is substantiated given that the expectation is that the operations will entail significant investments in technology and fixed assets. Although there will be no credit risk, the Draft Guidelines have envisaged a minimum capital adequacy ratio of 15%, as is the case with NBFCs, the calculation of which will be based on simplified Basel I requirements (perhaps, risk weights for cash in hand and cash in bank would take prominence in the absence of loans and other assets).

Payments Banks will necessarily have to be public limited companies and entities interested in setting up Payments Banks are to have a past successful track record of atleast 5 years in running their business, be it an NBFC, a corporate BC, mobile telephone companies, super-markets or others. Interested banks can also set up Payments Banks subsidiaries subject to shareholding limits.

As has been in the case with the previous round of bank licensing requirements, Promoters of Payments Banks would need to systematically bring down their holdings from atleast 40% (locked in for the period of first 5 years), brought down to 40% within first 3 years, to 30% within 10 years, and to 26% within 12 years of commencement of business.


Infograph: The KGFS Model


Note: You can know more about the model by reading the paper “The Pursuit of Complete Financial Inclusion: The KGFS Model in India” published by CGAP.


Adoption of Mobile Financial Services in Thanjavur – Pudhuaaru KGFS & Qarth Technologies Pilot

Guest post by Jaya Umadikar (RTBI), Prerit Srivastava (Qarth) & Gaurav Raina (IITM)

Since its introduction in 2010, IMPS based mobile banking transactions have been growing month on month reaching 3.5 Million monthly transactions in May 2014. However even with high penetration of mobile phones, mobile financial services haven’t seen a massive adoption among the rural population.

To explore the challenges in adoption of Mobile Financial Services (MFS) among the rural population, a pilot was conducted by Pudhuaaru KGFS & Qarth Technologies (an IMPS based mobile payment startup). The objective of the pilot was to understand the challenges in adoption of MFS, getting Pudhuaaru KGFS customers to make loan repayments via a customized banking application and understanding other use cases for MFS among the rural population.

Neivasal village in Thanjavur district, Tamil Nadu was chosen as the test bed for conducting the pilot. While the majority of Pudhuaaru KGFS customers in Neivasal had bank accounts, most of them were in a deactivated state due to non-usage. The nearest bank branch was 5km away, and the nearest ATM was 7km away from the village. All repayments were done via cash, either by visiting the nearest Pudhuaaru KGFS branch on the due date, or by making the payment to a local Pudhuaaru KGFS collection agent.

To ease the adoption, Pudhuaaru KGFS in partnership with Qarth developed a customized, and user-friendly, application for mobile banking for Java and Android phones. The application enabled the customers to make their loan repayments directly from their bank accounts to Pudhuaaru KGFS, without the need to travel to an Pudhuaaru KGFS branch. The application could be used 24×7, and could transact over the SMS channel. There was no requirement for GPRS/3G for making transactions. A key additional benefit of the application was the ability to provide mobile and DTH recharge functionality. With this facility, customers could earn 2% commission on each recharge provided and thus provided an additional revenue stream. This immediately provided the much-needed incentive for customers to keep a minimum balance in their bank accounts, and to adopt a mobile financial services platform.

The pilot was started off with 5 Pudhuaaru KGFS customers being enrolled for mobile banking with their nearest bank. The customers were small shop owners – two general merchants, a tailor, a fertilizer shop and a brick maker with an average loan installment ranging from INR 700 (weekly payment) to 5,000 (monthly payment). The results were extremely encouraging: within the first 100 days, the customers conducted 2,982 IMPS transactions over a net sum of INR 1.43 Lakhs.


There success in adoption points to range of potential benefits for Pudhuaaru KGFS, the customers and Banks. By implementing such a solution each Pudhuaaru KGFS branch can serve a larger area, as proximity to customers is not required while saving on collection agent costs. Customers opting for loan repayment via mobile also save on travel costs while avoiding being absent from business. It also allows the customers to switch to faster loan repayment cycle leading to reduction in interest rates. The supporting bank also benefits by having more number of active accounts with higher average account balance.

The pilot also provided lessons for simplifying and scaling the IMPS platform for payments. We collected our recommendations in terms of technology enhancements, enrollment processes, awareness and pricing.

Technology enhancements: Currently IMPS transactions are carried over an un-encrypted SMS channel. This has two drawbacks: first, is security, and second, due to lack of security the transaction limits are capped. Given that India has such a large SMS consumer base, it would be important to have standards for encrypting SMS based transactions. Given the success of the customized application, standards for the development of multi-bank applications by third parties should be expedited and encouraged.

Enrollment process: Most banks require multiple visits by customers to the branch to get registered for mobile banking and to get their MMID & MPIN. Such processes should be simplified, and ideally standardized, across all banks. To this end, the use of alternate channels for registration and enrollment like interoperable ATMs should be facilitated.

Awareness: We found lack of awareness not only among the customers, but also among the bank staff. Advertising on popular media can help customers, but the banks should also initiate training and awareness programs within themselves.

Pricing IMPS payments: There are two ways to help customers in this regard. First is by charging customers, per transaction, only after they cross a monthly transaction limit. After this limit, the charges should be reasonable so that they encourage even low-value transactions. Secondly, the cost of the SMS can be reduced by the introduction of toll free numbers for SMS banking.

The above challenges have also been recognized in the Report of the Technical Committee on Mobile Banking released by the RBI on February 7th 2014. However, the pilot provides some on the ground experience on both the potential and some of the bottlenecks for mobile financial services. Overall the pilot was able to provide a sense of the tremendous demand and untapped potential for MFS among rural customers. With over 900 million mobile phone subscribers in India, mobile-based solutions can bring about a sea change in the way rural population avails various financial services and play an active part in the growth of financial ecosystem of the country.


IFMR Capital forays into Rating Advisory

By Mohammed Irfan, IFMR Capital

IFMR Capital recently closed its first ratings advisory with a leading NBFC in India. On the basis of its deep understanding of the sector and its robust data analytics work, the Company advised and guided the originator through the rating process which resulted in an upgrade from BBB Category to A Category. Staying true to its vision of becoming a complete debt solutions provider for its partner originators, IFMR Capital has added yet another product to its suite that will enable it to connect high quality originators to debt capital markets in an efficient and reliable manner.

The ratings advisory drew on synergies across due diligence, risk and credit analytics, on-going originator analysis and industry benchmarking conducted by teams within IFMR Capital.

IFMR Capital’s analysis of the Originator was based on the following:

  • Underwriting framework of evaluating the originator’s quality of origination to provide financial services in informal markets
  • Experience and understanding of multiple originators across the industry gained through structuring and investing in a large number of transactions over the years
  • Extensive risk analytics performed pre- and post- investments based on granular, contract level historical performance of millions of underlying loans

The application of proprietary qualitative and quantitative tools developed at IFMR Capital to evaluate entities and monitor their performance over long periods of time would continue to be critical in the advisory exercise. In addition assisting originator partners in the ratings upgrade exercise would help in expanding the investor class accessible to these originators, thus enabling them to access better pricing and tenors.

Commenting on the closure of the first transaction, Dr. Jim Roth, Director – IFMR Capital and Partner and co-founder of LeapFrog Investments said “I have long believed that asymmetric information is at the root of inefficient credit markets. By facilitating the flow of information and doing it in a sustainable way, you hit at the heart of what is preventing millions of people from obtaining quality, relevant and affordable financial services.