Financial Inclusion in India

Financial inclusion matters for India’s economic prosperity. It broadly refers to the process of ensuring  citizens sufficient access to financial products and services, particularly low-income groups, by financial institutions. Simply put, when India’s poor are included in the mainstream financial system, they will gain access to various financial channels to generate income, build savings,  invest in assets and insurance to tide over sudden expenditures.

For decades, Indian governments pushed financial inclusion to enable poorest citizens to enter the financial system to improve their livelihoods. But this goal was thwarted by a misaligned system that did not connect lenders to consumers. Banks were unwilling to lend to citizens in need of finance given risk which pushed them to usurious lenders who charged exorbitant rates. Instead, Indian banks were keen to use the poor to build their balance sheets without giving them the incentive to channel money for productive purposes. Technology has altered this relationship.

Since 2012, India has made big strides in deepening financial access and inclusion through technology. When the World Bank’s Global Findex database was released in 2011, 40% of adult Indians had access to financial institutions like banks; in 2018, 80% of adult Indians do. This transformation is due to a series of policy measures undertaken by New Delhi. The first major systemic cause is the introduction of Aadhar, a biometric database, now nearly 1.2 billion strong, that provides Indian citizens a unique identity. Aadhar has already reaped dividends; evidence indicates that the Modi government has saved over $19 billion through the elimination of middleman in the provision of welfare services to Indian citizens. Also crucial to financial inclusion is Jan Dhan Yojana which facilitates financial access through the creation of bank accounts; 365 million bank accounts have been opened since 2014 under this policy. Through Jan Dhan, Indian citizens can obtain a basic account that also verifies their existence (know your customer provision) for financial institutions; New Delhi has leveraged these bank accounts to transfer government subsidies and various entitlements. With these services being frictionlessly transferred, Indian citizens have become more interested in not just getting bank accounts but using them. The Jan Dhan program has been designed to expand citizen access to services like savings accounts, remittance facilities, need-based credit, insurance and pensions for vulnerable cohorts. Also instrumental in deepening financial access the introduction of IndiaStack, an innovative interface that allows governments, businesses and financial app developers to use a digital infrastructure to provide cashless services.

Growing mobile penetration has also deepened financial inclusion, enabling Indians to use financial services for various purposes, including digital payments. The wide reach of mobile phones offers citizens a low-cost tool alternative to expand their banking activities; mobile financial applications also have advantages over traditional banking methods since it eliminates geographical constraints. Little to no physical infrastructure is required for financial institutions to provide services to consumers. Currently, India is second, behind China, in terms of active mobile subscriptions and this number is expected to reach 90% of the population by 2020. With mobile phones, consumers can access a plethora of mobile apps and platforms that they then use for financial activities. The most important platform is UPI or united payment interface (UPI) that enables citizens to transact with each other on mobile platforms. UPI cuts through a litany of requirements, like address, branch codes and account numbers, generally needed for interpersonal payments. Digital applications have also eased the transfer of remittances Indian migrants sent back to their families, cutting the fees tied to these transactions. India became the world’s second largest fintech in 2018.

The strides made by the Indian financial sector has been lauded globally. UN Secretary General Antonio Gutierres praised the Indian government for undertaking revolutionary digital financial initiatives to ensure inclusion for its 1.3 billion citizens. With Aadhar, mobile telephony and a slew of financial apps focusing on payments and credit, India has meaningfully advanced financial inclusion. Yet, to cement these strides, progress on two areas is needed. First, financial institutions must align services to fit seasonal requirements. For example, given the troubles faced by farmers during the non-monsoon seasons, they require tailored financial plans that fit their seasonal vagaries which could mean an extension of payment and repayment rules. The same goes for Indians working in other industries. Special provisions may also be requirement for rural customers given agrarian distress that could potentially displace farmers and jeopardize their livelihoods. Financial institutions must design services that serve their communities given constraints and opportunities. Second, the Indian government needs to enhance financial literacy amongst its citizens. Civil society organizations potentially have a role here working with regulators, banks and digital companies to educate consumers on various aspects of financial services, credit requirements, assets and liability, payment and repayment schedules. The second phase of inclusion has less to do with technology and more with education; Indian consumers are savvy but there is a need to boost digital financial awareness to make citizens aware of the scope and promise of financial intermediation. Instilling confidence in the Indian consumer is a vital task for fintech companies to gradually wean them off their conservative financial preferences.

Financial inclusion is crucial for India to sustain economic growth. It is difficult to bank the unbanked without financial inclusion. With greater inclusion, citizens are able to deploy their incomes through various channels to productive sectors in the economy. When such financial resources are pooled, it has the potential to power India’s development for decades.