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Editorial Articles

Issue no 33, 12 - 18 November 2022

Financial Inclusion Moving towards a Digital Orbit

Manjula Wadhwa

During the course of celebrating 75 years of India's independence, Prime Minister Shri Narendra Modi on 16th October 2022, launched 75 Digital Banking Units (DBUs) in 75 locations across the country. The DBUs are part of an ecosystem devised by the government to improve financial inclusion in the country which is crucial for wider, inclusive and sustainable growth. Eleven public sector banks, 12 private sector banks and one small finance bank are participating in the endeavour (DBUs), which aims to spread digital financial literacy and raise awareness of cyber-security risks and safeguards.The DBUs are equipped with tablets and internet services to help individuals and small businesses open savings accounts; check their balances; transfer funds; apply for loans and pay bills and taxes. The self service mode will be available 24x7x365. It is definitely, a big step towards "ease of living", by providing maximum services from minimum digital infrastructure. It will also simplify the banking procedure while providing a robust and secure banking system. In a village or a small town, when a person takes the services of a digital banking unit, everything from sending money to taking loans online will become easy - Does this not substantiate that financial inclusion in India is moving towards a new realm- the tech orbit? Unquestionably, financial inclusion is the cornerstone of not only a fair, equitable society but also a thriving economy. Boosting inclusive growth and access to finance can make crucial contribution to economic development, enabling social mobility and also ensuring that the largest number of people can participate fully and effectively in economic life. It helps to solve a number of societal issues, such as economic growth, employment, poverty and income equality in both developed and developing countries. However, the issues and challenges of fostering financial inclusion are particularly salient in the developing India. Since 2008, with the constitution of Dr Rangarajan Committee on Financial Inclusion, there has been so much discourse on the concept that it has become somewhat cliché. Nonetheless, with the realization of the need for a novel approach, the exercise of financial inclusion has transitioned from finding solutions for general problems to addressing specific needs of distinct communities. The focus of the financial inclusion agenda today is on developing a strong financial technology (fintech) ecosystem which can effectively further the goal of making financial services more accessible to an increasing number of people. At 87%, India had the highest fintech adoption rate in the world in 2021. The market opportunity for fintech products is estimated to reach $1.3 trillion by 2025, growing at a CAGR (compound annual growth rate) of 31% from 2021 onwards. Out of this, the lending tech will account for 47%, while digital payments will occupy 16% of the slice. This is an ever-evolving landscape. Each year we encounter new technologies that make our lives better.

The Pradhan Mantri Jan Dhan Yojana (PMJDY): The success of Pradhan Mantri Jan Dhan Yojana (PMJDY ) can be reflected in terms of the opening of over 46 crore bank accounts with deposit balance of Rs 1.74 lakh crore; an expanded coverage to 67 per cent rural or semi-urban areas; and that 56 per cent of Jan Dhan account holders are women. These facts are more than enough for motivating the Government to continue the programme, ofcourse, with a marked shift in approach to meet the challenges and requirements of the emerging FI landscape in the country.

DBT & RuPay: Of late, there has been a shift in focus from 'every household' to 'every adult', with added emphasis on usage of accounts by enhancing Direct Benefit Transfer (DBT) flows through these accounts, promoting digital payments through the use of RuPay cards etc. The underlying pillars of PMJDY - namely, 'banking the unbanked,' 'securing the unsecured' and 'funding the unfunded' - has made it possible to adopt multi-stakeholders' collaborative approach while leveraging technology for serving the unserved and underserved areas as well.

JAM: The Jan Dhan-AadharMobile (JAM) pipeline created through account holders' consent-based linking of bank accounts with Aadhar and mobile numbers, which is one of the important pillars of the financial inclusion ecosystem, has enabled instant DBT under various government welfare schemes to the eligible beneficiaries. The advantage of the architecture created under FI ecosystem came handy during the COVID-19 pandemic when it facilitated direct income support to farmers under PM-KISAN and transfer of ex-gratia payment to women Jan-Dhan account holders under PM Garib Kalyan Package in a seamless and timebound manner. Undoubtedly, PMJDY has been one of the most far reaching initiatives towards financial inclusion not only in India but the world.

Jan Dhan Accounts & Micro Insurance: The Finance Ministry has been endeavouring to ensure coverage of PMJDY account holders under micro insurance schemes. Eligible Jan-Dhan account holders will be covered under Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY) and Pradhan Mantri Suraksha Bima Yojana (PMSBY). Banks have already been communicated about the same.

Negligible Inoperative Jan Dhan Accounts: Much is said and talked about the efficacy of PMJDY accounts. As per extant RBI guidelines, a PMJDY account is treated as inoperative if there are no customer induced transactions in the account for over a period of two years. The latest data reveals, out of total 46.25 crore PMJDY accounts, 37.57 crore (81.2 per cent) are operative. Only 8.2 per cent accounts are zero balance accounts, while the average deposit per account is Rs 3,761. Total RuPay cards issued so far to PMJDY account holders stood at 31.94 crore. The number of RuPay cards and their usage has increased over time.

Innovations in Fintech: Over the last few years, technology has given wings to our ambitious programmes of financial inclusion and financial literacy. Innovations in the Fintech space are compelling traditional businesses to rethink their business models. Better telecom connectivity, economical mobile devices and innovative business models are the key factors that are responsible for increased focus on rural economy. For example, the Government (Central and State), the private sector, NGOs, MFIs (Micro Finance Institutions) and other stakeholders have joined hands for delivering some unique financial solutions to the people who were left at the mercy of exploitative moneylenders. A key differentiator for financial inclusion is a business model that works on a principle of 'low value and high volumes' business strategy to make it a lucrative opportunity. The Business Correspondent model along with innovative costefficient tech solutions are enabling various companies to thrive profitably while fulfilling the financial needs of the unbanked. India has been widely hailed for the development and adoption of financial technologies or fintech. This year's budget seeks to leverage this further, as it lists promotion of digital economy and fintech as one of the goals for Amrit Kaal, which the finance minister termed as futuristic and inclusive. Her task would be easier and faster if we start to think like digital start-ups in trying to provide more and more people with access to fruitful financial services. The upcoming technologies that are at the forefront for bringing the financially disadvantaged strata of our society into the formal economy by providing Banking, Credit and other Insurance associated services, are the following:-

Distribution Tech

·         Mobile-Based Financial Platforms-Vernacular

·         Micro, Mobile, and Biometric ATMs

·         Smart Cards and POS Terminals

·         Biometric Devices

Credit Tech

·         Neobanks

·         Card-Based Credit Facilities Kisan Credit Cards

·         P2P(Peer to Peer) Lending Model

·         Microcredit Platforms-B2B (MSMES) & B2C (Farmers, Rural Workforce)

Banking Tech

·         No Frills Bank A/c-Digital Banks

Payment Solutions

While looking at the future of financial inclusion in digital mode, we find the number of active internet users in India is expected to increase by 45 per cent in the next five years and touch the stellar figure of 900 million by 2025 from around 622 million in 2020. The numbers seem to indicate that companies will have more of a digital presence compared to a physical one in the near future and many of them have already started providing services digitally, helping them to reduce cost and improve efficiency while amplifying the reach. For potential, look no further than WhatsApp's 2 billion active users worldwide, of which nearly half a billion are in India. The country has 600 million smartphonesadding 25 million more every quarter-and the highest monthly mobile data consumption rate in the world at 12 gigabytes per user per month

Central Bank Digital Currency: The Reserve Bank of India on 1st November 2022 launched a pilot project on Central Bank Digital Currency (CBDC). The platform is called NDS-OM CBDC. Nine prominent banks namely - State Bank of India, Bank of Baroda, Union Bank of India, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Yes Bank, IDFC Bank and HSBC have been identified for participation in the pilot. The CBDC made a steady and glitch-free debut in the world of real-time trades with several banks using the virtual money to settle nearly 50 government bond transactions cumulatively worth about Rs 275 crore on the first day. With the launch of the CBDC, banks no longer need to rely absolutely on a physical presence; they can provide all their services online with the help of Fintech companies or by developing their own in-house platforms. Digitalization helps customers by enabling direct transactions, access to credit, utility payments etc. without the need for thirdparty intervention or going to a physical branch or outlet.

Buy Now Pay Later (BNPL): BNPL has emerged as a highly popular cashless credit avenue for digital-savvy young consumers. At its core, lie the principles of transparency, costefficiency and customercentricity. BNPL companies like LazyPay are well-poised to address the huge gap in credit card usage in the country. Most people cannot apply for credit cards without credit histories and many remain reluctant due to the huge fees involved. Fintech organisations utilise scalable technology and can access alternative data for assessing buyers' creditworthiness and enable faster on boarding. This has led to easy access to credit for many young Indians. With consumer shopping habits experiencing a drastic shift towards e-commerce since the pandemic, BNPL will continue to remain in traction. There will always be times when people are cash-strapped and yet have to make necessary small and big-ticket purchases. The fact that BNPL offerings can be availed in offline stores through PoS (Point of Sale) devices means that small businesses will leverage this technology to increase sales and remain relevant. India's buy Now Pay Later market is expected to grow to $45-50 billion by 2026, from $3.5 billion in 2021.

Online Transactions and Data Security: Recently, the RBI has introduced Card Tokenisation. As per the guidelines, online platforms need to erase our stored debit or credit card details and replace them with a token to secure our data. In 2022 and beyond, we expect this to be implemented across apps and platforms. Tokenisation refers to replacing your card details with a code or "token", which would be unique to you and the device. This makes your transactions safer as the actual card details will not be shared with merchants during processing. So, you will no longer need to key in the 16-digit card number, expiry date, and CVV each time you order online

Artificial Intelligence and Machine Learning in Fintech: Now, let us discuss the scope of promoting financial inclusion in view of the latest and upcoming technology, which has been gradually gaining ground. Artificial Intelligence algorithms are maturing day by day and investments in this technology are increasing. It is transforming the consumer financial services market as well as consumers' interaction with the financial services ecosystem. AI helps the companies to use raw data, analyse it and provide recommended solutions which help financial insitutions make informed decisions and stay ahead of the competition. Further, Machine Learning algorithms can calculate credit scores which will improve the financial institutions' ability to lend to customers with light credit history. AI can also predict frauds by observing behavioural patterns which will increase confidence among lenders while dealing with this thin file customer segment.

Scope of Blockchain Technology: Another novel technology that can lead to success in achieving the goal of financial inclusivity is the Blockchain. The term Blockchain refers to distributed digital ledgers. These ledgers employ consensus protocols to create a single version of the truth. Recorded entries cannot be altered due to encryption protocols, rendering the digital ledger immutable. These characteristics make Blockchain an attractive technology for providing transactions for parties with different interests such as lenders or borrowers. Increasing mobile banking among rural populations enables companies to deliver financial services through Blockchain technology. It further provides the credit history of the borrower to the lender, helping the lender monitor creditworthiness of the customers.

Robotic Automation in Financial Institutions: One of the most emerging technologies in the digital world is Robotic Process Automation (RPA) which helps financial institutions reduce cost and further the cause of financial exclusion in many ways. RPA enables banks to generate compliance reports automatically and track or identify fraudulent transactions. It is also used in customer onboarding by capturing data from KYC (Know Your Customer) documents using Optical Character Recognition (OCR) technology. RPA is also being used for account opening, making the process far more efficient compared to the manual one because it eliminates data transcript errors between the system and the customer. It also allows companies to automate the mortgage lending process which includes loan initiation, financial status analysis, documentation, automated customer service etc. Thus RPA helps the banks in terms of saving cost, time and productivity which is a major challenge for financial inclusion.

Role of Neo Banks: Neo Banks take the front-end of financial services to a much higher level by increasing the speed of services and reducing friction. They improve returns and transparency for customers while lowering the customer acquisition cost for their partner banks. Thus, they are serving the demographies that are "under-catered to by main street banks"

Bottlenecks to Effective Financial Inclusion: Financial organizations, governments, and authorities are constantly promoting financial inclusion through digital media. However, despite these wide promoting initiatives, digital financial inclusion is not progressing as predicted or as it should be on account of the following:-

·         Consumer ideology is one of the major roadblocks to the achievement of an ecommerce enabled economy or financial inclusion. It is more difficult for emerging, private institutions to construct a degree of loyalty and confidence that will enhance customer ideology to shift their cash into digital account because of the legacies of governmentowned banks.

·         Digital finance supplier companies expanding to relatively low income regions are challenged by low literacy and the capacity of consumers to interpret the principles and implication of utilizing digital financial products. Consumers prefer cash, and sellers also transact in cash, staying in a cash system.

·         Some shopkeepers and merchants feel that transitioning from a cashbased economy to a digital one will push small enterprises and people to pay taxes that are so far, not paying taxes.

·         Many people living in remote and rural areas still do not have access to the network and digital infrastructure that is needed to foster confidence and frequent use of digital services.

·         High pricing of data is also a challenge connecting rural folks to digital financial inclusion.

·         The majority of digital financial products are available in English whereas rural folks prefer them in their local languages.

·         The lack of relevant financial products is one of the most common obstacles to digital financial inclusion.

Towards the accomplishment of the above vision, when we think about taking digital financial services to every corner of India, we can easily think of taking it to 75 million people or 750 million, instead of 75 districts. In fact, we can stop thinking of absolute numbers and set a target of giving 100% of the eligible population access to formal financial channels. It is possible if everyone in the ecosystempolicymakers, regulators, and the new-age digital players, appreciate one another's role and work towards a common goal. David Brear, CEO of 11:FS has aptly said:- "Technological innovations will be the heart and blood of the banking industry for many years to come and if big banks do not make the most of it, the new players from Fintech and large technology companies, surely will."

(The author is working as Deputy General Manager in NABARD. She can be reached at manjula.jaipur@ gmail.com) Views expressed are personal.