A digital approach to financial inclusion

 Finance minister Nirmala Sitharaman wants to take financial services to every nook of the country using digital technologies. In her budget speech, she proposed the setting up of 75 digital banking units in 75 districts by scheduled commercial banks. This is a sound framework for improving financial inclusion (FI), which in the Reserve Bank of India’s (RBI) first and most recent FI Index was at 53.9. The budget proposal also ties in nicely with 75 years of India’s independence.

However, the finance minister could have embraced the Olympics motto and set targets that are faster, higher, and stronger. The whole idea of using digital technologies to promote financial services, as well as most other services, is that physicality is no hindrance at all; in fact, it is hardly relevant. Digital financial services have no specified service area. The entire world is a serviceable area for them. Uday Kotak, the head of Kotak Mahindra Bank, succinctly describes the impact of the technological revolution as: “Geography is history."

When it comes to touchpoints, digital financial services, which bring products and services to users’ mobile phones, are like instant messaging. 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 smartphones—adding 25 million more every quarter—and the highest monthly mobile data consumption rate in the world at 12 gigabytes per user per month.

So, 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 ecosystem—policymakers, regulators, and the new-age digital players—appreciates one another’s role and works towards a common goal. 

The start-up way: Financial inclusion is a priority on the agenda of governments around the world. If individuals and businesses have access to useful and affordable financial services and products, they provide a boost to economic activity and growth. It also improves the quality of everyday life by helping people plan for long-term well-being as well as short-term exigencies. That is why financial inclusion has been identified as an enabler for seven of the United Nations’ 17 Sustainable Development Goals, which provide a blueprint for a better and more sustainable future for all.

The first step to increasing financial inclusion is to provide people with access to banking. That is why the Government of India has pushed ahead with the Pradhan Mantri Jan Dhan Yojana, which has so far banked 445.8 million beneficiaries. The logical next step is to move the focus from access to usage, which is where digital technologies become crucial. 

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.

Branching out of branches: Several steps have been taken in that direction. More than six years ago, RBI modified the service area rules to give banks more leeway. Niti Aayog, the government’s think tank, has presented a roadmap for introduction of full-stack digital banks. 

However, physical branches remain the centerpiece of regulatory approach. That is driven by sound logic: when it comes to trusting someone with their money, consumers prefer those who have a wide network of physical establishments and people. But the benefits of innovative products and services enabled by digital technologies might soon match the assurance of physical infrastructure. This has been proven worldwide in the aftermath of the financial crisis that led to the emergence of technology-driven “challenger banks".

Neo banks, in particular, 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. 

As the Niti Aayog paper notes, neo banks can serve demographics that are “under-catered to by main street banks". This would include small businesses, paycheck-to-paycheck retail consumers, gig economy workers, and millennials. Migrant working population is another segment that will benefit from neo banks. As the recent past has shown, geography for them is already history.

Vibhore Goyal

Source: Mintepaper, 7/02/22

Women are key to financial inclusion

 The government’s focus on women and their inclusion in the financial sector can have a transformative impact in boosting household economic resilience. For a long time, financial service providers have focused on high net-worth individuals, salaried individuals and business owners to increase their profitability.

This is attributed mainly to two factors. One, a lot is known about these segments because they leave large financial footprints and rich data. This enables financial service providers to make accurate decisions, create targeted products and manage Know Your Customer (KYC) risks. Two, the cost of customer acquisition, maintenance and service costs in retail banking business is high.

However, digitisation is enabling inclusion of customer segments, which have been historically excluded from the financial service provider gamut. Effective implementation of Aadhaar-based eKYC collection and authentication lowered barriers of entry to the formal financial system. It has allowed the Jan Dhan-Aadhaar-Mobile (JAM) trinity to lay the foundation to bring 230 million unserved and underserved women into the formal financial services ecosystem. Women Jan Dhan customers constitute a cumulative ₹61,000-plus crores of deposits in these accounts.

We worked with a leading public sector bank to look at ways of increasing savings adoption by Jan Dhan customers, and found that when engaged effectively, they are an important and economically valuable consumer segment for banks for the following set of reasons.

First, women are decision-makers for spending and savings in most low-income households. They are thus more committed and disciplined savers than men. In our pilot project, we found 32% of women who were committed to saving versus 25% of men. These women grew their balances by 36% during the project period of five months (versus 24% by men). This showed that when given the opportunity, women save and by doing so build financial resilience.

Two, women value relationships over deals, special offers and rates. As their interaction with the bank improves, women can be encouraged to avail overdraft loans and micro-insurance, which enable them to invest in their families and create revenue opportunities for financial services. Thus, the bank will see better cross-sell and larger lifetime value in serving women customers.Three, the Government of India sent ₹500 as direct benefit transfer (DBT), each month between April to June 2020, directly to women Jan Dhan accounts as Covid-19 relief. This has led to the activation of dormant women accounts and a spate of new accounts being opened by women. Families now want women to have and use their accounts, since they want to receive government benefits being sent to women. We saw a 15% increase in the number of women’s accounts since March 2020, compared to a 4% increase of men’s accounts in the same period.

Despite digital technologies and government initiatives, hurdles to serve women Jan Dhan customers have not been eliminated. A challenge in engaging women is the lack of gender-disaggregated data.Financial service providers need to deploy strategies that focus on the Jan Dhan women segment by using sex-disaggregated data. For instance, target and communicate with women and design products and processes to be women-centric. At a policy-level, collecting and analysing gender-disaggregated data is vital for the creation of products and services for low-income women.

Women’s engagement with financial institutions and their ability to access participation in work and credit from such institutions can increase their social capital. Thus, empowering 230 million women Jan Dhan customers financially leads to the potential upliftment of 920 million lives, at an average family of four. It is economically viable for banks to target women, while contributing to such social good. The second wave of the pandemic has intensified the need for economic support. Our research shows that the government’s continued focus on women and their inclusion in the financial sector can have a transformative impact in boosting household economic resilience, expanding women’s access to credit and work opportunities, aiding empowerment and equity.

Sriraman Jagannathan is executive vice president, Asia, and Bhargavi Ramadugu is specialist, advisory services, Women’s World Banking

Source: Hindustant Times, 24/04/21

Go for an“inclusive growth dividend” in India

We propose a more modest beginning towards using income transfers to mitigating extreme poverty in India. Specifically, we propose an “Inclusive Growth Dividend” (IGD) pegged at 1% of GDP/capita

India spends substantial amounts on welfare programmes but delivers them inefficiently. After accounting for administrative costs, leakage, and targeting errors, even official government documents estimate that a considerable fraction of fiscal outlays on government-implemented programmes do not reach the intended beneficiaries.

As a result, several leading economists have suggested that India should adopt a Universal Basic Income (UBI) as its main anti-poverty strategy, replacing existing welfare schemes with direct income transfers into bank accounts of beneficiaries (or their mothers, in the case of children). Such an approach, they argue, could yield a UBI worth between 3.5% and 10% of GDP, depending on which programs were replaced, and nearly eliminate extreme poverty in India.

This approach has several attractive features. It would eliminate targeting costs and errors of exclusion (since the programme is universal), reduce administrative costs and leakage, and directly reduce poverty. Several studies from around the world have shown that income transfers have yielded a variety of positive impacts in the lives of the poor with no evidence of increased spending on temptation goods like alcohol or tobacco. This idea of a UBI gained policy prominence in the 2017 Economic Survey, which discussed its merits extensively. Yet little has been done since to try it out in India. One reason is that it is very difficult politically to replace existing schemes – even the inefficient ones – leaving limited fiscal space for a UBI.

We propose a more modest beginning towards using income transfers to mitigating extreme poverty in India. Specifically, we propose an “Inclusive Growth Dividend” (IGD) pegged at one per cent of GDP/capita. At current income levels, this translates to Rs 100 a month per person. If we start with pilots in the 100 poorest blocks in India (covering ~2.5 crore people), the cost would be Rs 3,000 crores/year. This can easily be financed from the Rs 65,000 crores of savings reported by the Government from using Direct Benefit Transfer (DBT) in welfare programmes.

A modest IGD can deliver several benefits. First, it minimises the risks to the poor by supplementing rather than substituting away existing benefits. Given implementation challenges that we have observed in our own research, we do not consider it prudent to replace existing welfare programs with DBT by fiat. The first goal of an IGD would simply be to demonstrate the government’s capacity to credibly and consistently deliver an income supplement to all citizens, even in the poorest areas.

Second, the amount is meaningful for the poorest households but too small to reduce incentives to work. While global evidence has consistently found that unconditional transfers do not reduce work, UBI critics in India continue to voice this concern. Indeed, we prefer the term IGD to UBI as “basic income” connotes an amount that is enough to live on. An IGD would instead be one component of people’s income which reaches all citizens and grows equally for all with the country’s growth. It would thus be a powerful practical and symbolic commitment to universally shared prosperity.

Third, global evidence suggests that an IGD can promote female empowerment. A mother with two children would receive Rs 300/month -- a considerable amount when the flagship national maternity benefits scheme provides Rs 500/month for only 12 months and for only the first pregnancy.

Fourth, an IGD would promote the government’s goal of universal effective financial inclusion. While millions of bank accounts have been created under the Paradhan Mantri Jan-Dhan Yajana and other schemes, a substantial fraction have no balances or are inactive. A regular monthly transfer can catalyse the use of these accounts as a vehicle for savings, build household comfort with interacting with the formal financial system, and improve supply-side incentives for creating last-mile cash access solutions.

Finally, and perhaps most importantly, building the infrastructure to deliver an IGD can improve the accountability of other government programs by making cash transfers an attainable benchmark against which they can be evaluated. The hypothetical question of “should we do a programme or simply give the money directly to intended program beneficiaries” would become a very real one. In many cases beneficiaries themselves can exercise this choice (as we discussed in our previous column on the PDS).

In other words, income transfers would become a low-implementation cost “index fund” for development spending and in-kind programmes and subsidies would need to demonstrate that their targeting, administrative and implementation costs deliver more value than their cost. Over time, programs that deliver less value than their cost could be replaced with income transfers while those that deliver more value can be retained.

The Jan-Dhan, Aadhar, Mobile (JAM) infrastructure is making it easier to deliver income support to Indians at scale, but this potential has not yet been realised. An IGD pilot (financed by central/state governments, foundations, or a combination) covering all citizens in some of India’s poorest blocks provides a fiscally and practically feasible way of testing this potential.

Karthik Muralidharan is Tata Chancellor’s Professor of Economics at UC San DiegoPaul Niehaus is Associate Professor of Economics at UC San DiegoSandip Sukhtankar is Associate Professor of Economics at the University of Virginia

Source: Hindustan Times, 6/11/2018

Her rightful place

Schemes to develop skills, provide financial inclusion and uphold dignity are ensuring that women become a part of the growth story

People living on the margins have been the core concern of the current government. Most such people live below the poverty level and a sizeable proportion amongst them are from the farming community. Women constitute a large chunk of the marginalised.

Farming has become non-profitable and a large number of farmers are debt-ridden. The participation of women in India’s workforce is only 27 per cent and their contribution to the country’s GDP is merely 17 per cent. The challenges before the government, therefore, were to increase the income of farmers and create conditions for the productive engagement of women. It was reckoned that if women’s participation increased to 50 per cent of the workforce, the Indian economy would see a staggering increase of $0.65 trillion.

These challenges were factored into the targets of the Ministry of Food Processing when I was assigned the task of working towards the goals of doubling farmers’ income and creating an environment conducive to the involvement of women in our economic growth. The food processing sector has emerged as a vibrant component of the overall manufacturing environment. It has attracted an investment commitment of nearly Rs 1 trillion. This year we expect 25 mega food parks to be completed. Another five such parks will be ready next year. The ministry is also creating a national cold chain grid. Several hundred projects will become operational this year. The Pradhan Mantri Kisan Sampada Yojana aims to create agro-processing clusters and backward and forward food processing linkages.

Such grass roots schemes mean more livelihood opportunities for women. For example, 14 women entrepreneurs have taken up projects in nine mega food parks, while 60 promoters of the cold chain projects are women. The government has tried to ensure that women have the skills to leverage such opportunities. The academic-cum-research institutes, National Institute of Food Technology and Entrepreneurship Technology (NIFTEM) and Indian Institute of Food Processing Technology (IIFPT), have stepped up their intake of women students. The government has also made sure that women benefit from the village adoption and training programmes.

World Food India 2017, the country’s first ever mega global food processing event of its size and scale, has delivered remarkable results and opened up new avenues for the Indian food sector globally. Projects worth $11 billion have already been auctioned by more than 30 companies. Organised retail companies and food majors of the world have scaled up their engagement in India’s food sector, setting up warehouses, collection centres and large-format stores.

While this is a source of satisfaction, I realise the potential is far greater. Women are today largely employed for sorting, grading, washing and packing in the food processing industry. In other words, illiteracy is not an impediment in their desire for financial independence. I am fortunate to be a member of Team Modi whose leader Prime Minister Narendra Modi not only recognises the potential of women but also works tirelessly to help them realise their potential. The PM has spearheaded some of the most revolutionary schemes to transform the lives of crores of women. This has ensured the increased participation of women in India’s growth story.

The government has a three-pronged strategy to empower women. First, it has focused on building their capacity for productive engagement through schemes like Beti Padhao Beti Bachao. A number of programmes have been launched to provide them access to skills and financial resources through the Pradhan Mantri Mudra Yojana. Initiatives have also been taken to provide them decent housing, sanitation and LPG connections. Third, the government is committed to framing strong legal deterrence in order to provide a secure environment to women — these include death penalty for rapists of minor girls and the Triple Talaq Bill.

The Pradhan Mantri Jan Dhan Yojana enabled 18 crore women to became part of its financial inclusion programme. Seventy-six per cent of the benefits under the Mudra Yojana have accrued to six crore women. The yojana has enabled them to avail loans and become self-reliant.

The more than 7 crore toilets and 1 crore houses constructed by the government are also means to ensure the dignity of women. The Ujjwala Yojana has lit up the lives of 5.5 crore women through LPG connections. The scheme has also given them the right to good health.

My own mission over the past 10 years in Punjab has involved improving the state’s child sex ratio. Nanhi Chhaan, an NGO I run, has trained 10,000 women, who have been given sewing machines. These women are changing the mindset of their families who would earlier consider them a liability. Nanhi Chhaan has, in fact, become a people’s movement in Punjab. For example, the Lohri of a girl child is now celebrated with as much gusto as that of male child. Saplings are distributed in social functions and bhogs as a mark of respect for environment.

The prime minister has worked tirelessly to transform, empower and enable the women of India to play a pivotal role in our country’s march towards becoming a global economic super power. I am grateful to him for making me part of this journey.

Source: Indian Express, 27/08/2018

Financial inclusion: Indian women have something to bank on

For the first time, the majority of Indian women have been financially included. Fresh data show that the proportion of Indian women with individual accounts in formal financial institutions (primarily banks) reached 61% in 2015, a sharp increase from 48% in 2014, lagging men by only eight percentage points. A close look at these numbers reveals opportunities and challenges to build on this quiet, and important, victory.

The Intermedia India Financial Inclusion Insights (FII), an annual, nationally representative survey, confirms that both individuals and households show growth in bank registration, largely driven by the government’s Pradhan Mantri Jan Dhan Yojana (PMJDY) and its emphasis on individual accounts (rather than household). By capturing demand-side data from individual citizens, the FII survey found that overall individual bank account ownership in India increased from 52% in mid-2014 to 63% in mid-2015. While the survey shows growth in financial inclusion for all adults, the gains were the highest in rural areas and for individuals below the poverty line, and, most of all, women. These encouraging numbers suggest financial inclusion is widening to reach the most vulnerable adults in India. Additionally the gender gap has decreased, as Indian men experienced an increase of nine percentage points, from 60% to 69% in the same period. These data mirror other recent studies such as Anjini Kochar’s finding that business correspondents (BCs) have increased the savings of both landowning and landless households in India; with the savings of the landless increasing more than those of landowning households. She explains this difference in terms of the fact that access to a BC increased the wage income and hours of work of landless households, particularly those of women, a likely consequence of the tie-up between the financial system and the MGNREGA.

This remarkable achievement for women should now be extended to the remaining 39% of them. This will require commitment to implementation, quality of service, and a willingness to look beyond one-size-fits-all solutions in addressing the diversity of women’s financial needs. For women, some of the features valued most in formal accounts are trust, privacy, and security from theft and harassment. When providers do not treat their customers in a fair manner — particularly low-income customers and women — trust in financial services is eroded. Experience has shown that efforts such as the “no-frill accounts” were abandoned by clients when payments were not received in time, and customers lost confidence in their financial providers. In the FII data, PMJDY holders reported experiencing issues with transactions and account terms. Specifically, they were more likely to complain about banks deducting fees without informing them, and a decrease in available account funds due to mishandling or fraudulent activities. A commitment to customer protection in implementation, and thinking through women’s needs at all stages, are one way to ensure sustainable growth and outreach.

In addition, while technology and digital finance offer a promising solution to some of the traditional physical and other access barriers to extending financial inclusion to all of India’s women, women face a stark “digital divide”. To date only 44% of women — compared to 75% of men — own an individual mobile phone, and the simple difference between owning a phone and being able to “borrow one” plays a significant role in women’s technological skills development and privacy in financial transactions.

Ensuring that first-time users learn that banking is an experience of convenience and trust, and recognising the diversity of needs of Indian women in accessing financial services are the only ways to continue the remarkable trajectory of financial inclusion for women. We must build on this success to extend the gains to other important financial services such as insurance and credit. In this same FII survey, only 15% of women reported having a financial plan for unexpected events. Inability to deal with these events can be devastating for women and their families.

Bindu Ananth is Chair of the IFMR Finance Foundation and Amy Jensen Mowl is its Financial Inclusion Specialist

Source: Hindustan Times, 1-10-2016

Sense on Financial Inclusion from RBI





The Mohanty committee offers good advice

The RBI committee on financial inclusion headed by Deepak Mohanty has done well to take a systemic approach, instead of confining itself to banking channels.This, of course, runs the risk of converting the report into a broad narrative of needed reform across the real economy , and being added, with nods of weighty approv al, to the shelf of expert reports that need to be acted on sometime this century . But it has the benefit of bringing out the interconnectedness of popular access to formal finance with institutions and practices relating to the real economy , whether land records and agricultural subsidy or the tax treatment of securitisation vehicles. The Supreme Court stands to gain much clarity on the utility of Aadhaar as it ponders the legitimacy of its use in assorted government schemes, if it were to glance through just the summary recommendations of the panel.While the report deserves broad endorsement, some specific recommendations stand out. The panel wants to remove the eight-percentage-point maximum mark-up on the interest rate charged to the end-borrower by financial intermediaries over their cost of borrowing from a bank. This would encourage inclusion of remote areas and communities. The recom mendation to liberalise the norms for banking correspondents, while streamlining their regulation, and use mobile technology to cover the last mile, instead of asking banks to open yet more unviable rural branches, is hugely welcome. The focus should be on smartphones and their applications, as these will replace feature phones even in rural areas with remarkable speed not anticipated by the committee.
The committee does well to endorse direct cash transfers to administer subsidies. The use of Aadhaar to tag bank accounts of the beneficiaries will help reform the country's subsidy administration and cut graft. The panel's recommendation to link Aadhaar to each individual credit account and share the information with credit rating agencies makes sense. However, India must enact a robust privacy law to prevent any abuse of Aadhaar.

Source: Economic Times, 31-12-2015

Recommendations of Deepak Mohanty Committee on Medium-term Path on Financial Inclusion

The Reserve Bank of India (RBI) has released the Report on Medium-term Path on Financial Inclusion submitted by 14-member committee headed by RBI Executive Director Deepak Mohanty. RBI had constituted the committee in July 2015 to examine the existing policy regarding financial inclusion and the form a five-year (medium term) action plan. It was tasked to suggest plan on several components with regard to payments, deposits, credit, social security transfers, pension and insurance. Key recommendations Augment the government social cash transfer in order to increase the personal disposable income of the poor. It would put the economy on a medium-term sustainable inclusion path. Sukanya Shiksha Scheme: Banks should make special efforts to step up account opening for females belonging to lower income group under this scheme for social cash transfer as a welfare measure. Aadhaar linked credit account: Aadhaar should be linked to each individual credit account as a unique biometric identifier which can be shared with Credit information bureau to enhance the stability of the credit system and improve access. Mobile Technology: Bank’s traditional business model should be changed with greater reliance on mobile technology to improve ‘last mile’ service delivery. Digitisation of land records: It should be implemented in order to increase formal credit supply to all agrarian segments through Aadhaar-linked mechanism for Credit Eligibility Certificates (CEC). Nurturing self-help groups (SHGs): Corporates should be encouraged to nurture SHGs as part of Corporate Social Responsibility (CSR) initiative. Subsidies: Government should replace current agricultural input subsidies on fertilizers, irrigation and power by a direct income transfer scheme as a part of second generation reforms. Agricultural interest subvention Scheme: It should be phased out. Crop Insurance: Government should introduce universal crop insurance scheme covering all crops starting with small and marginal farmers with monetary ceiling of Rs. 2 lakhs. Multiple Guarantee Agencies: Should be encouraged to provide credit guarantees in niche areas for micro and small enterprises (MSEs). It would also explore possibilities for counter guarantee and re-insurance. Unique identification of MSME: It should be introduced for all MSME borrowers and information from it should be shared with credit bureaus.

Small Banks Mark Big Step for Inclusion





The RBI must iron out regulatory wrinkles

With the licensing -in principle, as yet -of 10 small banks, in addition to 11 payment banks last month, the RBI is finally beginning to walk the talk on financial inclusion. India can do with many more such banks and the RBI should issue yet more licences without waiting to assess the experience of the entities already licensed. The only prerequisite is proportionate beefing up of the central bank's own regulatory capacity . The immediate focus must be on ironing out regulatory wrinkles that are bound to come up as the new banks get going.The guidelines demand that the new banks meet cash reserve and statutory liquidity ratio norms from the word go. Similarly , all RBI norms on setting interest rates that apply to commercial banks will apply to the small banks. However, given the distributed nature and small ticket size of their loans, the small banks' costs will be higher than commercial banks'. Granted, the ability to raise deposits will lower their cost of funds, as compared to the cost when they were microfinance entities, but the operational costs remain unchanged. Small banks cannot be expected to maintain the same gap between their base rate and their top lending rate as banks do. To demand such things is to make these banks unviable. The present RBI norms on sharing bank ATMs work against new entrants: their customers will use other banks' ATMs far more than those banks' customers will use the new entrants' ATMs, forcing the small banks to make hefty net payments to the big ones, even as the big banks' payout and receipts from one another cancel each other out. A huge expansion of white-labelled ATMs is called for.
Given the desperate need of the global venture fund industry to find profitable deployment, the small banks could, with their near-perfect recovery rates as microfinance entities, attract huge dollops of cheap money . It would be a shame if regulatory restrictions on foreign funding prevents global capital from reaching the country's poor even as it is allowed to subsidise middle-class consumption through assorted investee startups.
Source: Economic Times, 18.09.2015