In 2014, India was the biggest receiver of remittances—money sent back home by non-residents—in the world.
According to the World Bank (pdf), Indians sent $70 billion (Rs4.67 lakh crore) home last year. China, the second biggest receiver of remittances, received $64 billion.
And although this amount in itself is huge, informal channels of transferring funds are also flourishing—for both international and domestic remittances. This is primarily because of the high cost of formal avenues as well as low penetration of banks and money transfer agents in the interiors of India.
Quartz spoke to Dilip Ratha, manager of migration and remittances at the World Bank and head of KNOMAD (Global Knowledge Partnership on Migration and Development), about the trends of remittances in India.
Here are the edited excerpts:
Q: India is the largest receiver of remittances, but the costs are still high. What is the government doing to reduce that?
Ratha: India has ignored remittances all along. But now, I am hearing that the discussions about remittances are happening at the highest level. I heard prime minister Narendra Modi said at the G20 summit that India is now championing the cause for reducing remittance cost. This is the first time ever that I have heard it come up at a higher level.
Q: Why are the costs high?
Ratha: The reason why remittance costs are high is because of regulations. The technology to provide remittance service for cheap is already there. Because of regulations, new players with efficient technology are not able to get into the market.
If you consider the unrecorded volume—remittances through informal channels—it is quite likely that remittances to India are larger than revenue from IT exports. It’s that large. It is more than twice or even three times the size of foreign direct investment coming to India. And you see how much is being done for IT, for foreign direct investment (FDI) and how little is done for migration or remittances. India, being the largest recipient, should pick up a leadership role in this area. It is quite likely that remittances to India are larger than revenue from IT exports.
Q: What sort of regulations are pushing up costs?
Ratha: There are regulations to combat money laundering and the financing of terror. Typically the whole thing is labelled as AMLCFT—anti-money laundering and the countering of the financing of terror. They want to know who is sending the money, they want the track record of how often the person is sending money, and to whom. So you are supposed to have proper documentation to show who you are, who you are sending money to, and sometimes why. Sometimes, you even have to declare where you got the money from. For small sums like $100-200, this seems like too much scrutiny. Why is it that you want to monitor every $100 that is being sent through the money transfer company? Every small transfer means a lot of paperwork for the company and that increases the cost.
The banks that are getting involved in the process of transferring money are now worried that these money transfer companies might go wrong somewhere and then the banks will be hit with a money laundering fine. And that fine often runs into hundreds of millions or trillions of dollars. And on top of that, once you get a fine of that kind, the share prices fall and then you lose another few billions. Banks are now saying that they don’t want to hold accounts of these money transfer companies.
Q: So then what is the most efficient model for remittances?
Ratha: My recommendation would be to go into a risk-based approach as opposed to a rule-based approach. A rule-based approach is when you monitor each and every transaction. With risk-based approach, you monitor every 10th or every 100th transaction and then you rely on some additional information from the intelligence communities.
The second recommendation is to recognise that small remittances are not money laundering. Suppose you are transferring money to India from the US or Germany. The per capita income in those countries is more than $50,000 a year. If you see in India, typically, what people probably receive (as remittances) may be $5,000 or $3,000. So do you really want to go after $3,000 a year. My sense is that from richer countries, amounts up to let’s say $10,000 per year—so $500 or $1000 per transaction—could be the threshold limit.
Q: You spoke about informal channels. Can you give some examples?
Ratha: There are several things going on there. Lot of people actually bring cash. When you are coming into the country, you are carrying things for your family or even other people. It is not only gifts; it could be remittances in the form of gold or jewellery. There is money coming in from hawala.
There are two genuine reasons for these informal channels. One, if the family is in a village, then there is no proper money transfer agent or a bank. So, the only option to send money is through someone who can deliver the cash and then you have to pay that person.
Remittances also get misclassified as tourism revenue. For example, I am here from the US, I am using my credit card and all payments I make—including the cash I withdraw and hand over to my sister—would look like tourism revenue.
Q: How high are the remittance costs right now? And how can they be lowered?
Ratha: Flows through the banking channels and other formal channels are being affected by high cost. The average cost of sending money to India is about 6%. Sending money within India is 5%. At a time when we could have this conversation heard on the moon for no cost, sending money within the country at a 5% cost is too much. If you look at the large corridors like the UAE or the US, remittance costs (from these countries) are 3%. If it is from Canada, the cost is more than 9%. In this day and time, this is completely unacceptable. Costs should be lower. Again, what can we do to reduce costs? From a technological point of view, the cost of remittances could actually be zero. So it is all add-on. And this is because of complying with regulations. The average cost of sending money to India is about 6%.
Q: Internal remittances are also high in India. How can these remittances be brought more under the formal channel?
Ratha: India has 200-400 million people who are internal migrants. There is a huge number of labour migration happening within the country. Within India, sending money should also be cheaper. In fact, with the new payment banks, we might have addressed the issue already, but we will have to see.
Next is the money order. The cost of money order is an administrative decision taken by the post office and they can easily deflate that price by decree. My sense is that with the network of banks like the State Bank of India (SBI) and the post office, if we wanted to, we could easily bring down the cost of sending money within the country to almost zero.
Q: How big are the remittances as a part of the GDP?
Ratha: India has a GDP of about $2.1 trillion and remittances are let’s say $72 billion (recorded), so we are talking about 4% or so. When that money comes in, it generates a lot of multiplier effect so you are talking of a 1% impact, if remittances grow. Facilitating remittances can push growth by 0.5% or so.
Q: How important is financial inclusion for remittances?
Ratha: Globally there was a study done 10 years ago, by the World Council of Credit Union, which found that when people walk for transferring money, after the third or fourth time, they open a bank account. This is because they have established trust which is very important in this case. Remittances improve and promote financial inclusion. They can take the lead for increasing financial access for the poor people. That applied to domestic remittances too. Migrants are always looking for a safer way to send money.