The important socio-economic objective of enhancing “financial inclusion” in India has been pursued by various governments for many decades since independence. Many of these efforts have been successful, but as a country, the goal of achieving near-100% inclusion is still quite some distance away.
For a number of years, banking channels were the only organised means of driving financial inclusion in a country like India (more informal and less organized systems like moneylending and chit funds co-existed). While financial inclusion and access to various options is quite good in urban India, the same cannot be said of rural India. A large chunk of the unbanked population lives in rural areas, and even today, the formal banking system has been unable to adequately provide the necessary scale of coverage. Both public sector banks and private banks face certain structural constraints.
Reach: Establishing physical branches in rural areas does not generate adequate RoI, and it is fair to say that most banks open rural branches mainly to comply with RBI directives. In the last twenty years or so, with banking operations becoming fully computerised, banks had to ensure that in addition to trained staff, rural branches too had the necessary physical and computing/printing infrastructure and internet connectivity.
Working hours too posed a challenge because many rural customers worked in the fields or elsewhere through the day; this meant they had a relatively small window of time in which to conduct their banking work.
Financial literacy: Especially in rural India, financial literacy remains a challenge. Language barriers too sometimes impeded the communication necessary to help customers understand various options and to complete banking transactions. In some cases, the absence of even basic literacy has proved to be a hurdle.
New avenues are now available for digital financial inclusion
Over the past decade or so, four major shifts in India have contributed to the creation of a robust foundation for digital financial inclusion. Two of these were driven directly by the central government. The first was the introduction and rapid maturing of the Aadhar card and its use as a validation tool. The second was the mandate to open basic bank accounts to support Direct Benefit Transfer of cash under various government schemes. This has resulted in millions more citizens becoming a part of India’s formal banking system.
The third major shift was the development of the revolutionary Unified Payments Interface (UPI) infrastructure by the National Payments Corporation of India (NPCI) to facilitate inter-bank peer-to-peer (P2P) and person-to-merchant (P2M) payment transactions. What this has enabled is to ensure that personal data of users is not shared with private players and remains in India. The fourth trend is the growing penetration of affordable smartphones and internet access across India. This has encouraged many Big Tech and fintech players to launch various apps and solutions to enable sending/receiving payments. Google Pay, Amazon, PhonePe, Paytm etc. are all examples of platforms that run on the UPI in India, relying on bank accounts linked to Aadhar numbers and validated by OTPs and/or biometrics such as fingerprints.
The emergence of digital technologies and the consequent rise of digital banking and fintech innovations around mobile payments, pre-paid instruments/e-wallets etc. have fundamentally altered consumer behaviour. What is more important, though, is the far-reaching implications they have for rapidly enhancing financial inclusion in India. In addition to banks, NPCI, fintech players and Big Tech players, a new category of intermediaries is playing an increasingly important role as a bridge between service providers and end consumers. India is well-positioned to capitalize on these trends and accelerate not just financial inclusion but digitally-enabled financial inclusion, which is really the new objective.
How financial inclusion can be further accelerated: Tech, training and trust
A growing network of Banking/NBFC Correspondents now exists across India. Many of them are local kirana store-owners at villages or small towns. Being members of the local community, they know others and are in a position to enable customers to conduct banking transactions such as making deposits, withdrawing cash, availing loans etc.
Expand digital distribution network and its scope: This digital distribution network/infrastructure that exists in the form of Banking/NBFC Correspondents can be developed further to deliver a number of other financial inclusion products such as life/health/vehicle insurance- which are all increasingly necessary even for consumers in rural India. This will attract a larger number of people to become Banking Correspondents; also, because such relationships are exclusive to a bank/NBFC, increasing the number of such Correspondents will allow more banks to enter rural areas, thereby furthering opportunities for financial inclusion.
Scaling up the impact of State Rural Livelihood Missions (SRLMs): Several state governments have launched SRLMs to ensure that a larger number of women become part of the drive to increase financial inclusion. Known as “Bank Sakhis”, these women are trained in the basics of various financial products. Operating in small, self-help groups of 10-12, they are empowered to assist other women in the local community. Such micro-lending solutions have proven to be most effective and reduce the risk of exploitation. However, banks are not always in a position to directly train “sakhis” and equip them with the necessary product knowledge and/or devices. Financial inclusion intermediaries who already have relationships and are visible in local communities by way of their efforts to empower local Banking Correspondents can easily be used to build capacity in this new channel. This task too can be taken up by agencies with the requisite expertise, because in addition to technology and training, trust too is needed.
Activating Rural Extension Branches: The RBI has mandated private banks to develop Rural Extension Branches (REB) that, for all practical purposes, function like bank branches. In fact, it is necessary for private banks to open one such REB for every three branches it opens in urban locations. Here too, qualified, experience intermediaries will be needed to assist banks in establishing and running such REBs. Such REBs can virtually provide all banking solutions that rural customers typically need; besides, they will replicate the experience that branches provide.
Doorstep banking: In today’s world, “access” to banking is not just about a bank branch or Banking Correspondent centre nearby. A number of senior citizens and others with medical challenges may not be able to even visit these local branches. This is why the concept of doorstep banking needs to be given a push. This becomes even more critical during periods of extended lockdown, such as was triggered by the Covid pandemic.
All the above avenues can be outsourced to partners who possess not just the technical wherewithal, but also the human resources on the ground (in various locations) to train local people and support delivery. What digital technologies have done is to make BFSI enterprises look at financial inclusion as a validated business opportunity and not just a response to regulatory compliance. In an increasingly digital world, digital distribution networks, if built and curated well, can be used for delivering a bouquet of solutions that go beyond banking. Trained agents can easily be useful as a channel for business development for areas such as insurance, mutual funds, healthcare, entertainment etc. There is still a long journey ahead of us as a nation, but the first steps have surely been taken.
Views expressed in this article are the personal opinion of Kamaljeet Rastogi, Chief Executive Officer, Manipal Business Solutions.