India is a land of contrasts. From having one of the most sophisticated and advanced payment infrastructure and systems and 14.1 bank branches for every 1,00,000 adults, which is higher than the global average, to 19% of the population still unbanked. Though this unbanked population witnessed a sharp fall of around 58% between 2011 and 2015, out of which 56% happened in 2014 thanks to the Pradhan Mantri Jan Dhan Yojana, but 19% in a country of 1.32 billion adds upto to a huge number. To put this into perspective, world’s fifth most populated country Brazil’s total population is lower than the unbanked population of India.
The financial inclusion problem has been a priority for successive governments as well as RBI. While the government has followed the approach of mandates like PMJDY, Mudra scheme, RBI has focussed more on creation of an enabling environment like allowing correspondent banking, issuing differentiated banking licenses. Though decades of focus on expansion of credit through Priority Sector lending norms etc helped in giving credit access to a section of the marginalized society, it couldn’t yield effective results to improve overall financial inclusion. But in the recent years the new financial inclusion paradigm has been about setting up the ecosystem, expanding savings vehicles, easing payment and remittances and then focussing on credit. PMJDY, Direct benefit transfer and India stack have been game changers in setting up this new ecosystem. The Jan Dhan and DBT ensured that people have a no frills account and get used to the basic savings instrument. RBI easing the KYC norms for basic financial services was a step in the right direction.
Unless the customer lying at the base of the pyramid is seen attractive by the Banks and Financial Institutions, it would be difficult to provide them financial products and services. The last decade saw many new age financial service providers entering the space which has traditionally maintained high barriers of entry to new players. These companies powered by the technological revolution have sensed an opportunity to tap into the huge unbanked population and solve the country’s financial inclusion problem. The growing importance of these players can be sensed from the fact that fintech has found a constant mention in last three union budgets. While 2016 focussed on digitization which helped mobile wallets grow in prominence, 2017 budget gave boost to PoS terminal providers post the demonetization and 2018 witnessed the natural progression towards fintechs in financing space.
While everyone pins their hope on these Fintech players to play an important role in changing the landscape, let us look at two prominent categories which can bring about financial inclusion in the true sense –
Payments: Though demonetization brings polarized views, but it did force people to move towards digital payments. The wallet companies and PoS terminal providers stepped in during the drive and increased their customer base. People who were technology savvy and were not new to banking/digital banking easily adopted wallets. But a lot of small grassroots business in tier 2 cities and beyond found difficulty in adjusting to this change because of the challenges like interoperability of wallets and lack of adoption in their supply chain. In the near future UPI will play the critical role in addressing these issues.
Lending: Lending has always been a highly competitive space. With the slowing down of credit growth in corporate and infrastructure projects and the retail and consumer lending already being highly competitive, the focus has shifted towards MSMEs. MSMEs are the bedrock of Indian economy and generate the 2nd largest employment after the agrarian, but still, have been traditionally ignored by banks. To bring real impact on the financial inclusion agenda, the unorganized micro and small enterprises which comprises more than 95% of the total enterprises need to be brought under the formal financial credit system.
With a $3 trillion credit deficit in the ‘missing middle’, the last decade witnessed the entry of new age NBFCs and online lending companies to serve the sector. These finance companies have focused on innovative products and technology to reduce sourcing and servicing costs. India Stack and a strong payment system has additionally provided them an idle ecosystem helping bring efficiency to their entire process.
Traditionally the key problems in making formal and affordable credit accessible to these enterprises had been high cost of servicing, lack of business documentation and credit history required for underwriting and last mile issues. Just the way technology and automation has solved the first problem, newer credit assessment methods focussing on data analytics, customer profiling and behavioural science has helped assess the credit worthiness of even the first time borrower. But with internet penetration standing at 64.84% in urban India and a dismal 20.26% in rural, the last mile connect problem can only be solved with a strong branch network in tier II cities and beyond rather than online sourcing platforms.
Though the payment companies are helping solve the problem of financial inclusion by easing payments, but with many non-payment companies adding UPI to their existing applications this value proposition might not remain exclusive to them. However, the fintech companies with fin-touch lending models will not only make credit accessible to the average technology shy micro or small entrepreneur, it would also have the power to hand hold them to adapt to newer trends and make them part of the digital revolution.
– Sovan Satyaprakash