If the last century was about invention, this one is all about innovation. Boundaries once considered rigid are being pushed back. Even finance has evolved over the years. “Disruptive innovation” has crossed over into the world of finance. Adding to the euphoria are a set of niche, technological breakthroughs catering to financial needs. It is the era of Fintech, certainly in India as firms like Paytm are getting ready to impact the lives of hundreds of millions of Indians, providing easy one-stop solutions to their daily money-transaction related needs. At a time like this, it becomes all the more essential to ensure that everyone benefits. That no part of the population is left behind.
Pradhan Mantri Jan Dhan Yojna, Aadhar cards, Digital India, MUDRA bank. What do these latest set of initiatives by the Indian Government, which have had heavyweights from all over the world jumping aboard the great Indian economic lift-off, have in common? The answer lies in the main target of these schemes, the so called “bottom of the pyramid”. Even the RBI acknowledges this. With the issue of a new set of licenses for payment banks and small banks, the central bank realizes the importance of bringing the so far financially isolated part of India under the banking umbrella.
To digress a little, finance and poetry may seem a distant match. But on 24 July 1991, as a crippling Indian economy stood on the cusp of its most significant reform, the then finance minister Dr. Manmohan Singh, who is not really popular for his oratory, quoted Victor Hugo in his Budget speech. “No force on this earth can stop an idea whose time has come”, proclaimed an ecstatic Singh, as he threw open the gates of the Indian economy to the world. Times have changed and the Indian economy has shed the “Hindu rate of growth”. It has roared back into life and despite certain reservations, looks all set to become the new engine of world growth.
However, a careful evaluation of India’s progress shows, as Montek Singh Ahluwalia, one of the most respected men involved in the thick of things before, during and after the Indian economy’s transition, himself commented,” We should have achieved what we have in half the time”. He proudly admits that nonetheless, India deserves due credit for its accomplishments given the huge size of the nation and all its diversity, but most importantly, given the numerous bottlenecks in its progress, which come in all sorts of “shapes and sizes”. One such aspect is the unequal distribution of wealth amongst the Indian population where one individual “wilfully defaults” on a Rs. 900 crore loan, while another hardly earns Rs. 900 in an entire month. Even in the mightiest of Indian cities, the so-called “mega-cities”, you see frequent signs of this financial divide.
The variation is huge. India is the 9th largest economy in the world by GDP. Throw in the GDP per capita numbers and the situation no longer seems rosy. A world rank of 125 (in terms of purchasing power parity) hardly substantiates India’s growth story. In fact, it suggests that opulence in India is heavily skewed. The welfare has not percolated down. This undependable and wasteful way of improving the living standards of the poor, which economists Jean Dreze and Amartya Sen have termed as “Unaimed Opulence” is a result of such skewed growth. The poor became poorer and the rich, richer. Reasons? An inefficient implementation of schemes and policies. Another reason for the widening of this financial gap is the lack of a robust government service delivery system, which can in turn be associated with lack of data. And why is that? Because even today, a vast majority of rural Indians are either unbanked or depend on the man of the house to avail these services.
Financial Inclusion is the new buzzword in the corridors of Indian Finance. It is surely the next step in the direction of India’s holistic progress, a country which has a substantial share of the unbanked population of the world. 400 million out of the global 2 billion unbanked population lives in India. Table 1 below shows the position of Indian households availing banking services and how it has evolved between the last two censuses. The numbers though not very high, are positive and promising.
Table 1: Position of households availing banking services
The path to financial inclusion has various roadblocks like little or no bank accessibility in distant rural areas, poor documentation, low financial and overall literacy levels and little acceptance for the banking system. To reach out to these secluded regions banks need to incur high expenses, but the profit is low because of poor income levels in these areas. So opening new branches or sending representatives, though necessary, seem infeasible to be implemented all over these regions in one go. Considering this along with a growing stockpile of NPAs (non-performing assets), the ability of the overburdened banks in India to fuel the inclusion mission is questionable. The numbers in Figure 1 below project that despite having 63% of the total population, the rural population subgroup in India is serviced by less than 40% of the total bank branches. The need for scaling up the number of branches in rural areas is evident.
Figure 1: Number of functioning branches (bank and population group wise) as on 31 March, 2015
A fresh breeze in the form of RBI’s issue of licenses to 11 new payment banks and 10 small banks last year, could not have come at a better time. The payments industry is set to witness the entry of 300-400 million new customers in the next 2-3 years. Indians are lucky to have an intelligent and far sighted banker in Dr. Raghuram Rajan at the helm of RBI presently. These licenses have been granted to entities that collectively can have a pan-India reach and impact, even in isolated regions, to reign in the excluded population. Firms like Airtel, Tech Mahindra, Vodafone m-pesa, Reliance and Aditya Birla Group and individuals Vijay Shekhar Sharma of Paytm and Sun Pharmaceuticals’ Dilip Sanghvi are the influential ones. They can combine the banking services with their distribution expertise and digital services like mobile wallets, online transactions for all sorts of bill payments and other day to day transactions which can be availed on mobile devices. By laying down a mandate on the structure of services to be provided, RBI is trying to direct them towards the unbanked and the not so financially competent population.
The new Fintech firms have the potential to leverage technology and provide these services to the rightful beneficiaries, achieving financial inclusion on an unprecedented but required scale. A visit to the website of Jan Dhan Yojna, and you can see that the government is trying to make India financially literate via financial literacy videos and other such material in regional languages. Even comic videos are available. So the next step is to ensure this content reaches the right audience. Here’s where the bigger picture fits in perfectly. The technology part of it: Digital India, mobile wallets, expanding the internet and smartphone user-base, which already is growing quite fast, all these are key supporting pillars of the bridge to financial inclusion. A month ago we surpassed US to become the world’s second largest smartphone market. Adding the fact that India is set to become one of the fastest countries to skip the plastic money phase and move to electronic and mobile money, the prospects seem huge. It is surely the link that had been missing thus far, a transformation that we as a nation need to undergo. A boost in the internet connectivity and digital competence in the rural areas, combined with the Fintech services can work wonders for our country. As we can deduce from the figure 2 below, Indians are becoming more comfortable with plastic and electronic money transactions. The latest trend is the growing popularity of mobile wallets over the last three years, as debit cards continue to be the most used mode of transaction.
Figure 2: Growing acceptability of electronic and plastic money in India
Source: CEIC India Data Talk: Increasing Adoption of Mobile-Based Financial Transactions in India
The government realizes this, and is working in this direction. 942 million Indians have been enrolled under the Aadhar system so far, which also includes a substantial amount of rural population. According to the Ministry of Finance, as of January 2016, 206.3 million bank accounts had been opened under Jan Dhan Yojna. The Indian government even holds the Guinness World Record for the most number of bank accounts opened in one week, 18,096,130 accounts from 23 to 29 August 2014! The flipside, 30% of these have a zero balance. Globally, the major reason for being unbanked is lack of money. However, what it has done is that there is no longer a deficit of data now. The government can better plan and target their schemes to gradually drag these people out of their misery. It can even allow them to digitize the payment system, which in turn will bring a large number of adults under the banking system for the first time. This will also increase the efficiency and transparency in the transfer of government payments and services by making the process “leakage-proof”, unlike the various subsidy schemes which seldom reach their targets, resulting in a lose-lose situation for both as it not only deprives the needy, but also wastes the nation’s resources. Figure 3 below shows ranks of countries based on their performance in four dimensions of financial inclusion: commitment, mobile capacity, regulatory environment and adoption, as per the 2015 FDIP report.
Figure 3: Country rankings based on Financial and Digital Inclusion
Source: The 2015 Brokings Financial And Digital India Inclusion Project Report
However, it’s easier said than done. It involves challenges like investing in setting up the adequate infrastructure in a country like India, on a scale that is as large as it gets. Can the government do this on its own? Certainly not. The ambitious Digital India program alone carries a cost of Rs. 1 lakh crore, recently approved by the Modi cabinet. It needs a careful structuring of strategic public-private partnerships to come through at a time when the government looks to restrict its fiscal deficit. Fortunately, India Inc. have responded with enthusiasm and are backing the government initiatives. Financially educating rural people, making them comfortable with this digital experience and ensuring security and reliability are essential to nurture the formation of the required financial environment. That there have been problems, has always been known. Solutions are now being developed and they look promising. Today we are gradually seeing all pieces of the puzzle fall in place. Problems are being encountered with the right set of policies and initiatives. In this regards, financial inclusion is therefore a necessary precursor to the increase in the welfare of a nation. With due credits to Robert Frost, as a nation we still have “miles to go before we sleep”, before the Utopian dream of a “cashless and connected” credit economy is realized.
Featured Image Courtesy: BCCL, 2015.
This article was originally published in the March 2016 Issue of Niveshak, IIM-Shillong.