Digital financial services appear to have impacted financial inclusion progress as reported by the Reserve Bank of India’s Financial Inclusion (FI) Index. It is worth noting that digital financial inclusion in payments has contributed to the FI index score more compared to credit, insurance, and investment services.

Studies show that while India has made considerable progress in traditional financial inclusion due to the implementation of PMJDY, the improvement in fintech-driven financial inclusion is, however, lower than the average of Asia-Pacific.

Furthermore, RBI’s “quality” financial inclusion subindex suggests that inequality and regional disparity in credit and deposit access are significantly high.

To improve and rationalise the FI Indexing, the contribution of (digital) agri-financial services in financial inclusion needs to be considered as there are about 14.5 crore farmers, among which PM Kisan beneficiaries are 8.56 crore as of July 31, 2023, and Kisan Credit Card holders are 7.35 crore. Therefore, about five crore farmers need to be brought into the fold of financial inclusion.

From the supply side, there is regional disparity in agri-finance distribution, with a global finance gap of $170 billion as of 2021-22.

So does fintech make financial services accessible and affordable to the unbanked, and if yes, then at what costs? Do digital financial service providers use and complement the existing bank network to reach the unbanked? How can digital financial services democratise finance access to farmers?

Digital agri-finance

Digital financial services in agriculture can support and deepen financial inclusion of farmers in emerging markets and developing economies.

* Digitalisation of savings groups helps mainstream the informal sector into the formal one.

* Digitalised credit processes reduce costs and risks for financial service providers to serve agri-value chain actors and farmers. A few NBFCs offer customised loan products through their private or quasi-cooperative digital platform, onboarding farmers and ag-tech start-ups.

* Digitalising value chain activities leverages farmer-buyer relationships, and data collected through digital procurement solutions can estimate production and credit risks.

* Embedded finance utilising Application Programming Interfaces can integrate financial services within the platform with other digital agricultural services, such as crop and weather advisories.

* Pay-as-you-go (PAYG) uses mobile money for asset access, such as irrigation pumps or solar panels, through frequent micro-installment and remote-locking technologies that allow service providers to interrupt the service remotely in case of default or dues.

Policy suggestions

First, financing gap assessment by on-boarding multiple users such as Farmer Producer Companies and Cooperatives on the digital platform is crucial to deepening financial inclusion of farmers.

Second, digital financial services can deepen financial inclusion, reducing information asymmetry in financial markets and transaction costs.

Third, investment in digital and financial literacy and telecommunication network coverage can deepen the penetration of digital financial services and help fintech and regional rural, and cooperative banks to co-exist.

Fourth, the Centre’s initiative in making data-driven agricultural financial services delivery including farmer data, loan disbursement specifics, interest subvention claims, and scheme utilisation progress is worth mentioning.

While per capita land availability is shrinking, and the new generation of farmers is losing interest in agriculture, digital financial solutions can engage tech-savvy farmers’ children.

The writer teaches at IIM Lucknow. Views expressed are personal.

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