India has been building on the momentum from JAM and DBT. The next phase of financial inclusion will be about digital delivery that is sharpened by leveraging of consent-based data sharing
By Amitabh Kant
Undisputedly, financial inclusion is the bedrock of inclusive growth. It is crucial for empowering every citizen, streamlining the economic and social welfare agenda of the government, and mobilising resources for allocation. A formal economy with a mature financial system effectively facilitates avenues for domestic savings and productive investments while supporting both consumption and expenditure. The substantive network effects of financial inclusion have been a formidable component of the welfare paradigm in India since 2014. Consequently, there has been a relentless focus on universalising access to banking and financial services.
Over the years, the financial inclusion mission has taken strategic and multifaceted steps. It has pushed new and innovative products and services. Gone are the days when one had to go to a bank to open an account, it is now just now a click away. There have been curated efforts to make the banking system more robust, augment its reach, and change the outlook of service providers to acknowledge the potential opportunity of business models that leverage financial inclusion.
These have extensively advanced the ease of living for citizens. Significant prominence has been given to acknowledge feedback from both citizens and service providers to iterate and innovate in financial services. Banking institutions now have verifiable information on their customers via mechanisms such as Aadhaar; citizens are more reliant on the formal banking system due to extensive information campaigns; the greater reach of business correspondents has augmented trust by in-person interaction; and technology has been leveraged to reduce transaction costs.
The journey started with the launch of Pradhan Mantri Jan-Dhan Yojana (PMJDY) in 2014. Powered by India Stack and the JAM trinity, today, nearly 400 million people benefit from it—with 63.6% account-holders in rural areas and 55.2% of them women. Its robust architecture made it the foundation of Covid relief. Direct benefit transfer (DBT) enabled the Centre to disburse over Rs 31,000 crore as financial assistance to more than 332 million people within a couple of weeks into the lockdown. This paradigm facilitated DBT of Rs 50 billion to 20 million construction workers; PM-KISAN transfers of Rs 6,000 annually, with the latest transfer on December 25, 2020, of Rs 18,000 crore to over 90 million farmers; transfer of increased wages from Rs 182 to Rs 202 per day under MGNREGA, benefitting 136 million families; and an ex gratia payment of Rs 1,000 each to 30 million poor senior citizens, widows and divyangs.
Impressively, Rs 30,705 crore was credited into the accounts of women PMJDY account holders between April–June 2020. Finally, the latest iteration leveraging this architecture is the Svanidhi scheme, with which 13,56,600 loans up to Rs 10,000 each have been disbursed to street vendors.
Unified Payment Interface (UPI), India’s biggest payment success story, pushed the transition from financial inclusion to integration. It is being adopted in many nations to enable real-time and secure payments. It is no coincidence then that the Inclusive Finance India Report 2020 highlighted the phenomenal rise of ICT-based transactions—from 827 million transactions worth Rs 1.6 trillion in 2016 to 3.2 trillion transactions worth Rs 8.7 trillion in 2020. Today, UPI-led innovations are clocking in an astounding 2 billion transactions a month.
Focusing on easing the operative ecosystem of financial inclusion, the government approved the use of e-signatures and e-KYC in 2019. This was followed by the introduction of DigiLocker, an exemplary digital storage mechanism for receiving, storing, self-attesting and sharing documents. A transformative intervention was the introduction of ‘video KYC’ in 2020, allowing banks to remotely verify customer identity on live video.
This mechanism is expected to facilitate 80% of the new-to-bank digital credit in 2021. Finally, Reserve Bank of India took a giant stride for easing banking operations by incentivizing greater use of the central KYC registry, wherein financial institutions, basis customer consent, can verify customers referring to the registry. Apart from reducing costs and duplicated efforts, this mechanism will allow for future unification of KYC data across financial services.
Indians have been rapidly accessing and adopting digital services in the last six years. The lower socio-economic strata is becoming data-wealthy before becoming economically wealthier. Small shop owners, farmers, traders, MSME entrepreneurs, rural self-help groups, and gig economy workers are increasingly generating a digital transaction history that could be used to inform and build trust with financial institutions. The next phase of financial inclusion will be driven by leveraging this data pool. Consent-based data-sharing would be the key enabler for effectively using this data. This will further integrate the marginalised, with access to a bouquet of formal financial products of credit, insurance, pension, etc.
NITI Aayog recently released the Data Empowerment and Protection Architecture (DEPA) report that makes the case for Indian citizens to share their financial data securely to help them access the optimum financial product. Together with other layers of India Stack, DEPA could do for India’s data ecosystem what the internet did for communication: a Cambrian explosion of novel products and services. Going forward, breaking data silos and monopolies holds the potential for indigenous fintech companies to compete on product design, analytics, and value creation.
India has before it an opportunity to build next-generation financial services and contribute $865 billion to the economy by 2030. Building on the heels of digital financial inclusion, a three As framework will help advance this movement to greater heights:
Adequacy: Adequate availability of financial services through the formal system, covering savings, credit, remittance, insurance, etc. will foster more inclusive growth in India.
Acceptability: Great products create unquestionable trust. Long lists of complex terms and conditions, arcane language disguising hidden fees and charges, confusing user interfaces, are all hindrances in gaining a customer’s trust. Consumer experience should lead to reuse and advocacy. To achieve that, we need to accelerate financial literacy. This is also critical to the success of the fintech experience. Digital products bring the benefit of measurement and predictability, enabling a fair, transparent, consistent and rewarding experience. This must be utilised.
Advocacy: With the government propelling fintech innovation via regulator sandboxes set up by RBI, SEBI, PFRDA and IRDAI, there is a growing emphasis on outcome-oriented advocacy. Fintech innovators should grab this opportunity and make best use of favourable innovation reforms.
A well-designed pool of financial products has been instrumental in bringing individuals out of poverty traps and into the umbrella of financial inclusion. It has enabled increased prosperity through savings and investment, greater security and resilience to income or health shocks through insurance, and propelled new aspirations through credit for entrepreneurship.
India is writing an unparalleled story of this age. The coming years will show how India scaled, sustained and specialised in building a financial inclusion architecture for one-seventh of humanity.
CEO, NITI Aayog
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