The growth of financial services in India has largely been steered by the banks. Public Sector Banks, in particular, are at the forefront of the implementation of the policies of the Government from time to time including Financial Inclusion. In most cases, the requirement will be immediate with minimal reaction time – which mandates the usage of Technology for compliance. The regulators and the banks have contributed to the initial thrust, development, and support of digital payments infrastructure and systems. Fintechs and Non-banks have entered the market and expanded the range of payment services available to the Indian consumer backed by their strength in technology and customer-centric innovation. Banks and non-banks are partnering to offer a mixture of trust and innovation to the Indian consumer. This approach has resulted in the recent growth in the number of digital payments offering convenience and ease of use to the consumers.
Digital payments have gradually become a significant mode for the inflow to the Indian consumer through Government benefit payments and salaries in the organized sector. However, cash is still the principal mode for the outflow for Indian consumers because of the indifference towards the acceptance of the digital payment ecosystem. In addition, the unorganized sector continues to depend on cash for both the inflow and outflow.
In India, financial inclusion has been implemented through a process of access to banking (basic bank account opening, and operations through an agent network), as well as many other local institutions. RBI has also provided specialized licenses to banks, such as Payment Banks, and Small Finance Banks, who are mandated to provide services to customers with low-value accounts. In addition, the Micro Finance Companies provide a bulk of the loans to these users, and banking access is available more through a business correspondent agent than a bank branch or an ATM.
Financial Inclusion in India
Financial Inclusion is considered to be the central objective of many developing nations like India as there is a direct link between financial exclusion and the poverty prevailing in developing nations. Poor people need to be customized and tailor-made financial products at low transaction cost both in rural and urban areas. For a long, informal and orthodox savings methods are being used throughout our country because of the huge costs and limited access to formal financial services.
Also, in the absence of an adequate number of bank branches, several informal intermediaries have spread fast, acting as a proxy to the banks. These unregulated entities provide only credit products to the underprivileged and illiterate section of the society, at very high-interest rates. This has resulted in huge indebtedness amongst the poor people. Financial inclusion is, however, not just draw of payments received by direct benefit transfer (DBT), but to educate the clients and provide services to all financial products. This section of the society relies on an assisted mode of operation of products and relies on the representative of a Bank, or an agent to provide education.
Another significant issue that must be tackled is that of financial literacy. Many of the customers, who are new to banking, need to understand financial products better. They will have to depend on the assisted mode of operation for a long time if this is not accelerated. The active participation of all public sector banks and new payment banks coming into the picture will provide an opportunity to energize financial inclusion. This opportunity has to be properly put into action to have a new method of financial delivery where an agent goes to each customer’s house till complete literacy is achieved.
Fintech for Financial Inclusion
The promise of Financial Inclusion is one of the main potential advantages of fintech. Many individuals and firms are outside the financial system and cannot access formal financing. Some of the key obstacles in financial inclusion can be partially or fully overcome by using fintech innovations.
For instance, one of the key obstacles in accessing formal finance is often the lack of credit scores of the individual.
In the absence of credit scores, financial institutions are cautious of lending. In the agriculture sector, lack of credit scores or ratings forces the farmer to access funding
through informal channels at high rates of interest. Fintech applications could potentially resolve some of the aforementioned issues and lead to greater inclusion.
Fintech for Lending
A major proportion of agricultural households and MSMEs significantly rely on non-institutional sources of funding. There is an opportunity for fintech to improve the funding landscape for such segments in India. Fintech firms and technology-led Non-Banking Financial Companies (NBFCs) are starting to play a crucial role in providing access to finance for small and marginal farmers. The following are the key areas where fintech firms are innovating and putting up efficient systems in place.
- Customer discovery and onboarding
- Credit underwriting models
It has been often noted that information pertaining to individuals is scattered across different databases. This makes it difficult to ascertain the risk factor behind lending to an individual as the said individual could have borrowed money from multiple sources. The creation of credit bureaus has been advanced as a solution to the above issue. Innovations in the fintech sphere could drive the creation of such credit bureaus where the risk profiles of individuals can be better documented. For instance, it has been noted that mobile phone call data records were useful in determining default behavior in Rwanda.
Similarly, fintech companies are increasingly relying on alternative data sources to allocate credit scores or ratings to individuals with little or no formal credit history. Transaction records, satellite imagery of the farms, weather forecasts and records, agronomic surveys, and demographic features are among some of the alternative data sources that could be used by fintech companies. For example, Farm Drive, a Kenyan fintech start-up uses
local economic, agronomic, and satellite data along with information furnished by farmers to generate credit scores.
Similarly, in Nongfenqi, a Chinese agricultural fintech company, credit scores are generated using interactions with customers’ business associates, fellow customers, and villagers. The results of such a model of credit score generation are impressive as the default rate witnessed was negligible.
In India, many fintech firms are active in providing technology solutions to drive financial inclusion. The solutions offered range from, among others, providing information on commodity prices, weather, and crop data. However, it has been noted that fintech firms in the agricultural sector have focused on reducing farmers’ costs of operations. Activities pertaining to financial inclusion are limited and the reason for the same is understood to be the lack of sufficient customer data. Most of the data pertaining to the farming sector are scattered across banks, cooperatives, and other small lending institutions. Assembling this data into a centralized database would enable fintech firms to assist financial institutions, including cooperatives, in better credit disbursal.
Financial Inclusion has always been the focus of both the Government and all the Financial Institutions, particularly Public Sector Banks. The problem with traditional banking is improper or non-availability of historical data to offer credit facilities to all the eligible FI customers. This problem can be overcome with effective partnerships with the fintech companies in the FI space providing not only services but also collating the data from various sources like never before by using the latest available technologies like Artificial Intelligence, Big Data, Internet of Things, Machine Learning, etc. Considerable innovations are happening in the start-ups and new entrants into the industry. So, it is very important and inevitable for the established players in the industry to partner and collaborates with them for bringing out varied and useful products for the consumers in the financial inclusion space. The limitations they have in terms of technology, innovation, and resources in bringing up the required products can be overcome by partnerships with these service providers.
A strategy to develop digital financial infrastructure rests on the availability of communications infrastructure and offers the greatest potential in countries with high smartphone penetration rates and inefficient financial systems. While financial inclusion remains a challenge in many countries even today, the cost of smartphones is decreasing swiftly and the setting up of supporting infrastructure is happening at a rapid pace. The combination of communications infrastructure with access to a mobile or particularly a smartphone but without financial access is ideal for creating opportunities for the under-banked.