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Financial inclusion – the road ahead

Rashesh Shah | Updated on April 03, 2018 Published on April 03, 2018

Jan Dhan Banking for the unbanked

Democratisation of credit and financialisation of savings are critical for a financially inclusive India

Financial inclusion has been recognised as a key building block which will form the foundation for achieving several of UN’s Sustainable Development Goals.

As a construct, it provides much more than access to financial services. In a country like India, till a few years ago, a bank account was a source of pride. In a way, while such a mind-set did help make it easier to convince people to open bank accounts, it also reflected poorly on our ability to provide easy access to banking to the vast majority of our population. Clearly, the first step towards achieving financial inclusion had to begin with providing a bank account to a majority of our population.

This was enabled through the Jan Dhan Yojana under which the government has opened over 30 crore accounts with almost 60 per cent being in rural areas. Importantly, the zero balance accounts amongst these have declined from 77 per cent in 2014 to 20 per cent nowshowing that the government has been successful in getting unbanked people to actively use it. Part of this has been driven through the linking of Aadhaar and doing Direct Benefit Transfer (DBT) to these Jan Dhan accounts.

The next step was to create an infrastructure which could handle all aspects of servicing such a large segment of the population. A multitude of solutions, be it UPI, BHIM, NeSL and BBPS amongst others have been created.

All these changes have started showing results. About a month ago, Crisil disclosed the findings of its Inclusix financial inclusion index for FY2016 reporting an improvement in the overall score for India. While the index is obviously not all-encompassing and looks primarily at credit, deposit, insurance and branch penetration, it still gives us a rough indicator of how we have accelerated the path to financial inclusion in the last few years.

The score has moved from 50 in FY2013 to 58 in FY2016 and would have been much higher at 62 this year, were it not for the re-basing and inclusion of insurance data. Despite the improvement, credit penetration remains low at 56 per cent compared with 78 per cent deposit penetration. Clearly, a lot needs to be done.

By providing bank accounts and establishing the requisite infrastructure, the government has created a strong foundation and ensured the availability of the bare minimum. . It now needs to gear up for the next stage in this evolution.

Democratisation of credit: Availability of credit remains a major roadblock for a vast majority of the population. The problem is exponentially greater for the unbanked segments of our society. The biggest deterrent to resolving this has been the lack of tangible data points, which can help the credit bureaus put together better underwriting models for these unbanked customers. This problem is now slowly being resolved as these bank accounts are linked to Aadhaar providing a consistent flow of payments data, an increasingly important parameter whilst underwriting individual credit.

The proliferation of unique credit models backed by increasing data availability for traditional agencies like CIBIL is establishing a new paradigm for lenders. Increasingly, we are seeing more number of unique borrowers. By some estimates, the number of unique borrowers in the industry has nearly doubled in the last five years. A large part of the incremental credit is now going to individuals rather than corporate houses, which form the bulk of the outstanding credit today. We are now seeing what we call democratisation of credit.

Financialisation of savings: The last couple of years have seen intensive flows into investment avenues like mutual funds, where the AUM today stands at nearly ₹25 trillion. This has been possible thanks to an enabling ecosystem created by the regulators along with a concerted government push towards financialisation of savings. The challenge will now be to translate this model to the bottom of the pyramid. However, a one-size-fits-all approach will not work here. With the investible surplus being much lower for this segment, innovation will hold the key in designing products which are suitable for this segment while at the same time, being value accretive for the service providers.

A Financially Inclusive India

Overlaying both these phases will be the need for increasingly enhancing financial literacy across society. This needs to be achieved across all age groups, for the younger populace through school education and through special programmes for the adult population. A financially literate society makes the job of financial inclusion that much easier.

We have already done the hard work in creating widespread access and the infrastructure backbone. The next steps, while not easy, are definitely doable through concerted efforts, not just by the government but equally importantly by the regulators and the financial services participants.

The writer is the President of FICCI

Published on April 03, 2018
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