Banking Finance March 2023

FINANCIAL INCLUSION- The Journey and road ahead

Financial inclusion is increasingly being recognized as a key driver of economic growth and poverty alleviation the world over.Access to formal finance can boost job creation, reduce vulnerability to economic shocks and increase investments in human capital.There has been growing evidence on how financial inclusion has a multiplier effect in boosting overall economic output, reducing poverty and income inequality at the national level. Financial inclusion of women is particularly important for gender equality and women’s economic empowerment. With greater control over their financial lives, women can help themselves and their families to come out of poverty; reduce their risk of falling into poverty; eliminate their exploitation from the informal sector; and increase their ability to fully engage in measurable and productive economic activities.An inclusive financial system supports stability, integrity, and equitable growth.

It is also noteworthy to state that, seven of the seventeen United Nations Sustainable Development Goals (SDG) of 2030 view financial inclusion as a key enabler for achieving sustainable development worldwide by improving the quality of lives of poor and marginalized sections of the society. (Home- Sustainable Development Goals, 2018).

Financial inclusion has always been an important policy imperative realising its importance in economic development and social well-being of the populace. We have come a long way in our pursuit for financial inclusion which started with promotion of cooperatives, nationalization of banks, institutionalisation of priority sector lending and lead bank scheme, implementation of BC model and more recently with Pradhan Mantri Jan Dhan Yojana (PMJDY).

In this journey, we have adjusted our strategies and policy focus factoring in the changing demographics, economic situation, and social needs. Given the wide geographical spread and the need to include large unbanked population, the policy thrust for a long time had been on providing access to basic financial services. It is quite rightly recognised that access to a bank and a bank account is the first step toward broader financial inclusion since it enables people to carry out basic banking functions such as remittances besides acting as a gateway to access other financial services. In this effort, RBI mandated banks to open branches in underbanked pockets which led to a considerable increase in bank branches and later Automated Teller Machines (ATMs) in the 1990s to early 2000s. A roadmap for having banking outlets in villages with population more than 2000 (in 2009) and less than 2000 (in 2012) was also prepared. Subsequently the banks were advised to open brick and mortar branches in villages with population of more than 5000. To strengthen financial inclusion, the branch authorisation guidelines were relaxed and Financial Inclusion Fund (FIF) with an initial corpus of ₹2000 crore was established to support adoption of technology and capacity building.

The policy focus is being repositioned from ‘access of financial services’ alone to ‘Usage’ and ‘Quality’ of financial services as well. The FI-Index constructed by RBI, which is an indicator of efforts in this direction, is based on the above three dimensions viz., ‘Access’, ‘Usage’ and ‘Quality’. The weights of the index are forward-looking with higher weights given to the deepening aspect of financial inclusion.

While the traditional brick and mortar structures have helped in taking basic banking services to the nook and corners of our country, the advent of digital innovations in the extension of financial services, have the potential to be an enabler for graduating to the next level of financial inclusion where the quality of inclusion takes precedence over just availability of financial services. India as a continental economy with multiple languages and cultures, different and sometimes even difficult terrains, large population, and low-income levels need to ensure inclusive growth. The focus is thus not only on opening the bank accounts but also making available a bouquet of financial services – transactions, payments, savings, insurance, and ensure easily accessible and affordable credit to the customers. Inclusive credit will have to be the bed rock of inclusive financial inclusion

Responsible and sustained financial inclusion requires balancing opportunity and innovation on both the supply and demand side. On the supply side, it includes steps to provide affordable and easy access to savings account and suite of appropriate financial products & services. On the demand side, it seeks to improve financial literacy and awareness which helps in increasing demand for financial products and services. These demand side and supply side measures should ideally complement each other. In emerging market economies like India, there is generally a disequilibrium amongst the demand and supply side factors.

As a first step in tackling supply side issues in the financial inclusion, new financial intermediaries have been introduced for provision of credit and to ensure financial services are available to the customer at ‘when and where basis’, thus translating into a truly ‘anywhere anytime banking’. This includes

P2P lending Platform: In first of such initiatives, RBI came out with P2P regulations at a time when the industry itself was at a nascent stage of development. A ‘Peer to Peer Lending Platform’ provides an online on-tap avenue to both borrowers to avail and investor to extend mostly small ticket loans. The regulations have been designed in a way to ensure that the framework does not impinge upon the innovative lending services, while at the same time, seeking to protect customer’s interests and minimising systemic concerns

Digital Only NBFCs: Second, RBI came out with registration guidelines for Digital-Only NBFCs, as the name suggests, is an NBFC running solely on a digital platform without any brick-and-mortar presence (except for administrative purpose). RBI enabled healthy innovation in credit intermediation by permitting the setting up an NBFC over a digital platform in 2018. Though not a new category of NBFC, their licensing conditions mandates on them to provide their products only in a digital mode. Here too, protection of consumers has been kept paramount and the entities are required to maintain audit trails by putting in place required IT infrastructure with adequate safeguards on unauthorised access, alteration, and destruction of data, if any. Regulatory features such as explicit consent for data sharing, domestic location of servers, maintaining audit trails, information security audit, etc. are progressive and at the same time pre-emptive in nature

Digital Banking Unit: With digital banking emerging as the preferred mode of delivery along with ‘brick and mortar’ banking outlets, the concept of Digital Banking Units was announced in the Union Budget 2022-23 and the guidelines for operationalising these units were issued by RBI earlier this year. Scheduled Commercial Banks have been authorised to set up digital banking units which are intended as specialised fixed point business units housing certain minimum digital infrastructure for delivering digital banking products & services as well as servicing existing financial products digitally, in both self-service and assisted mode. It is expected that such units would enable customers to have cost-effective, convenient, and enhanced digital experience of such products and services in an efficient, paperless, secured, and connected environment with most services being available in self-service mode at any time

Creating market infrastructure for inclusive credit

India has made significant strides in creating enabling digital infrastructure in financial services space. UPI, GSTN, TReDS, JAM Trinity and Account Aggregators (AA) to cite a few. This strong ensemble of digital infrastructure has stabilised and as it matures, would pave way for expansion of credit in a seamless and timely manner which could be made digitally available in an almost paperless environment. AA’s capability to aggregate financial data spread across different financial service providers and to leverage this data to build analytics and insights to help consumers in their financial planning would allow financial service providers to offer customized products to their customers. The AA framework also has an important element of ‘electronic consent architecture’ which is an improvement upon the open banking regimes of many developed countries

As UPI transformed the way people pay, the Account Aggregator has potential to transform credit by making it more seamless and accessible for everyone using digital infrastructure. The JAM trinity has done wonders for FI. The next trinity consisting of UPI, e-KYC and AA is expected to enable the next revolution in banking in the provision of customised and inclusive credit services

In earlier times people used to talk of the 3-6-3 rule in banking alluding to the banking practices in 1950s right down to the 1970s because of the simplistic and non-competitive conditions in the industry. The rule was to raise deposits at 3%, lend at 6% and play golf after 3 PM. However, FinTech revolution has transformed this into a 2-1-0 formula – 2 minutes to decide, 1 minute to transfer the money with zero human to human contact. This change in the banking business model with supportive technological transformations has expanded the realm of what’s possible.

The digital lending landscape has seen a rapid rise in innovative models for product delivery including Point of Sale (PoS) transactions-based lending, Bank-FinTech partnership models, marketplace lending and bank-led digital models. However, most of the digital lending is being enabled by bank/NBFC – FinTech partnerships where FinTech’s are acting as Lending Service Providers (LSPs) for banks/ NBFCs.

The deepening and widening of financial inclusion will drive the growth in financialization of savings in India. Increasing adoption of digital modes, GSTN, online shopping, P2P payments, QR code deployment and everything else together will generate reams of customer data. This data could be potentially utilised to chart customer needs, behaviour and repayment capacity and help in digital inclusion. One specific area where digital lending has the potential to be a catalyst for economic growth is cash-flow based lending to MSMEs. MSMEs are an important engine of growth for the Indian economy as they contribute around 45% of exports and provide employment opportunities to more than 11.1 crore people. The provision of appropriate credit for MSMEs through seamless and digital cash-flow based lending will provide them with the much-needed impetus. It would enable lenders to leverage real time cashflow data to reimagine end-to-end lending process and “sachetisation” of products.

Role of Banks in Financial Inclusion:

Customize offerings to raise relevance and broaden the reach of account adoption

While regulators in certain markets have required banks to offer basic accounts, simplify onerous documentation or allow correspondent banking (e.g., by post or phone). Banks must structure highly relevant and possibly simplified financial solutions that meet specific customer needs at an affordable cost. They can do this by developing deeper customer understanding and offering a compelling value proposition. With the right mix of innovative products and services, institutions can earn the loyalty of new customers and drive cross- and up-sell opportunities.

Innovate channels to reach more customers at lower cost

Digital channels have been instrumental in helping providers overcome challenges related to infrastructure and geography in many developing countries    .

While digital channels may have the lowest operational costs, effective financial inclusion will likely require a” bricks and clicks” distribution model that includes physical branches to build trust and confidence, perhaps supplemented by correspondent agents (such as post offices and supermarkets). Such a model can still operate efficiently if automation is employed effectively with no-frills mini-branches, kiosks and correspondent agents offering standard products

Creatively mitigate risk to address absence of credit histories

Many financially excluded individuals and MSMEs lack the financial track record that banks traditionally rely on to support lending decisions. Nor do they necessarily have access to proven identity, address, and security, which cuts off their access to bank credit. Creative credit profiling and credit scoring analytics could help bridge this lending gap. Some nonbanks use digital footprints related to e-commerce, social media, biometrics, and their customers’ feedback on product and service credibility as data sources to evaluate business viability and creditworthiness


Achieving the objective of financial inclusion requires a combination of organisational innovation and technology application. Many of the ingredients for this are in place, including the requirement that individual banks articulate their strategy for achieving the objective. However, financial inclusion initiatives will be unsustainable unless it is commercially viable for all stakeholders – banks themselves and the entities they use as BCs to increase penetration. The diversity of conditions across the country makes it difficult to visualize a single approach to ensure viability. General regulatory principles would have to combine with adequate flexibilities to allow viable models to emerge in each region. In this context, the suggestion from some quarters is to allow banks to use corporates, including telecom companies, NBFCs etc as BCs. The BC model may evolve into two distinct patterns, viz. (a) banks could enter into a separate agreements with corporates for using their retail network with specific responsibilities and functions to be performed by the corporate for a fee while the retail outlet is directly appointed as agent of the bank (b) banks could make the corporate itself as the BC with no direct privity of contract between the retail outlet and the bank – in this model the retail outlet is a sub agent of the corporate BC. Under both models’ banks have to be responsible for all acts of the retail agent as it is the point of contact for the customer where banking transactions take place. Over years, these companies have developed efficient systems of monitoring and control over the retail outlets/franchises, including cash management, which could be used to advantage. These outlets are already dealing with the local population and are familiar with them. The shopkeepers and other retail agents of the large corporates may be more comfortable dealing with the company that they are already used to and familiar with, rather than with the bank

Role of Government

Government bodies have been quite active in the financial inclusion programs, and several schemes such as Pradhan Mantri Jan Dhan Yojana, Atal Pension Yojana, Stand Up India Scheme, Pradhan Mantri Mudra Yojana, Pradhan Mantri Suraksha Bima Yojana, and Sukanya Samriddhi Yojana were launched for the financially challenged sections of the society.

However, government bodies need to address the current challenge of providing better infrastructure to enhance acceptance infrastructure across the country, encourage innovation in digital payments methods, increasing the spectrum of social schemes, and better regulatory frameworks. Improving awareness on digital means of payments and ensuring customer grievances are addressed seamlessly in time-bound manner, will help build confidence among those sections of society who are excluded, and reluctant in accepting digital modes of payments


Role of Fintech

India has an 87% fintech adoption rate. This is higher than the world’s average adoption rate of 64%. There is no denying that fintech is working towards next-generation financial solutions. They will also without a doubt contribute to financial inclusion.

Fintech companies innovate to enable secure digital payments. With AI, they have been successful in creating instant digital payments that allow transfers, verification, cashless buying and selling, and more.  They are all about convenience and flexibility. They are also easy to use. From booking LPG cylinders online to paying utility bills has all become clicks.

Traditional banks typically require a lot of paperwork. Fintech companies, on the other hand, require minimal paperwork. They also use AI for risk assessment on indicators such as income and spending patterns. This is greatly useful for local businesses for micro-financing services and capital investment. Fintech companies also use various tools to educate their audiences. Financial literacy is the way to go forward. Awareness about qualifying for loans and fulfilling credit requirements helps users as well as fintech.

Compliances such as identity verification are fewer for fintech companies. Moreover, the RBI has allowed eAadhaar verification and video KYC to promote digitisation and reduce customer acquisition costs. All this works in favour of fintech companies and they can innovate and roll out new features and products faster, while also adhering to government regulations.

Internet usage has drastically increased in the country. In areas where physical banks cannot be set up, fintech companies have a massive advantage. They can provide access to basic products and services and help unbanked users save and grow their money. Fintech companies can help uneducated and semi-educated users with easy onboarding. They can also provide customer-friendly services with the integration of AI and ML with Big data

Role of Regulator in FI

The challenge for the regulator in a fast-developing economy like ours is to keep pace with the market innovations and strive to strike a balance between ensuring safety without stifling innovation which is never an easy task. Responsible financial innovation requires balancing innovative products with necessary safeguards for ensuring financial system stability and customer protection. Therefore, while appreciating and recognising the benefits emanating from digital credit, we need to take cognizance of the attendant risks such as data privacy, disruptive business models, aggressive recovery methods, and exorbitant interest rates. We must remember that financial inclusion is not just a goal but also a means to an end as an enabler for sustainable economic growth, reduction of inequality and eliminating poverty


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