Mobile Banking & Financial Inclusion in India

The World Bank’s Global Findex Report 2017 states that India accounts for an unbanked population of 190 million. Around 48% of bank accounts in India are unused following a formal registration. Given the ubiquity of mobile phones in India, leveraging mobile banking systems for increasing the solutions of financial inclusion in India stands vital. Mobile banking not only eliminates the physical travelling barriers to banks in rural (underserved) areas, it also offers various allied benefits. First and foremost, it is indeed more affordable as compared to branch-led banking and the business correspondent model. According to the Global Findex Report 2017, while there is 50% of the unbanked population in India, 66% of inactive account subscribers in India use a mobile phone. Despite 90% of Indians being digitally illiterate, the easy user interfaces and rising adoption make mobile banking a fitting mechanism to promote financial inclusion.

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AFI’s Global Policy Forum 2019 – The Inclusive Route for Women & Youth

The Alliance for Financial Inclusion (AFI) sponsored Global Policy Forum (GPF) is dubbed to be the world’s vital forum for financial inclusion (FI) policymakers. The annual flagship event is a comprehensive forum for regulatory institutions for sharing experiences, knowledge, and initiatives meant to mainstream into the financial services the 1.7 billion unbanked of the world.

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G20’s Financial Inclusion Action Plan

The G20 (Group of Twenty) Financial Inclusion Action Plan (FIAP) is considered to be the vital steering mechanism for financial inclusion (FI). The Global Partnership for Financial Inclusion (GPFI) with its 4 Subgroups (SME finance—with Germany and Turkey as co-chairs—, Regulation & Standard Setting Bodies—with India, Indonesia, and the United Kingdom as co-chairs—, Financial Consumer Protection and Financial Literacy (with China, United States, and Russia as co-chairs, and India a participating G20 country), and Markets and Payment Systems—with Australia and Mexico as co-chairs) performs its activities in respect to the G20 FIAP.

The latest such drafted guiding document is the 2017 G20 FIAP. Prior to this, the preceding editions were in 2010 and 2014. The G20 FIAP makes available the crucial recommendations for G20 nations and others in their endeavours to increase accessible, effective, and secured financial services to the over 2 billion people (excluded from formal financial system) globally.

Reflecting the dynamic priorities and propositions of the GPFI, the 2017 G20 FIAP has witnessed 193 countries at the UN adopt the and recognise the 2030 Agenda for Sustainable Development—an agreement acknowledging the central position of financial inclusion in meeting various objectives, viz. poverty reduction, gender biases, hunger, and developing economic growth.

With the focus set on strengthening the condition of the vulnerable (elderly population, forcibly displaced persons, and migrants) and the underserved (poor, youth, women, and population of remote rural areas) the 2017 G20 FIAP places in centrality resorting to financial services and using it as a tool to ensure sustainable inclusion.

The 2017 G20 FIAP has a continuous focus placed on digital innovation and has also emphasised on mainstreaming FI in the development agenda of the financial sector. The 2017 G20 FIAP has supported the implementation of the Sustainable Development Goals (SDGs) that are applicable to FI.


The UN, The NABARD Bank, & Financial Inclusion in India

The United Nations (UN) has poverty reduction as one of its foremost goals for ensuring international development. Uneasy access to Financial Services and lack of Financial Literacy have since long kept aloof a major part of the global population (particularly women—55% of the world’s unbanked—and farmers), leading to limited social inclusion. UN reports suggest that after a government initiative directed towards opening banks in rural areas, rural poverty reduced by up to 17%. The UN is committed to establishing a link between Financial Inclusion (FI) and development. It does so via the United Nations Development Programme (UNDP)—the United Nations’ global development network headquartered in New York City.

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The Development of Payment Systems in India

The payment system of India has evolved over the preceding 35 years as a ‘silent revolution,’ as dubbed by Mr. R. Gandhi, (Deputy Governor, Reserve Bank of India) during his speech at Banaras Hindu University (Varanasi) on 22 October 2016. The economic transactions of common persons and businesses initiated upon buying and selling goods and services require the value to be settled. This value needs to be settled via a payment of monetary consideration.

After the conventional barter system (involving exchange of goods for goods–rice for wheat), the precious metals–gold and silver–were used as money. Then, coins made of these precious metals were used as money. Then followed the advent of paper money as currency. This led people to manage their economic transactions by paying in currency notes and coins.

With the development of the banking system, an easy, safe and profiting alternative emerged for individuals to deposit money in a bank account. It became even more switt and safe to opt for the ‘transfer of money in bank accounts’ to initiate payments for the economic transactions (for large and low-value transactions). With this, the advent of cheques as payment (on instruction) instruments for the banks to initiate money transfer came into practice.

As developments in the information and communication technology (ICT) took place globally, various innovative payment instruments and systems evolved. Today, a strong retail payments framework is operational in the country. Different types of payment instruments are operational to satisfy the requirements of different users in different circumstances–bank accounts, cheques, debit and credit cards, prepaid payment instruments, etc.

Varied systems are in place to meet the remittance requirements of users pertaining to their time criticality and cost sensitivity–National Electronic Funds Transfer (NEFT), Immediate Payment Service (IMPS), Aadhaar Enabled Payment System (AEPS), and Unified Payments Interface. Bulk and repetitive payments are done by Electronic Clearing Service (ECS), National Automated Clearing House (NACH) and Aadhaar Payment Bridge System (APBS). Various committees were formed such as Rangarajan Committee I & II, Saraf Committee, Patil Committee, Burwan Working Group, etc. to assist in using ICT for banking and payment systems.

Since 1998, the Reserve Bank of India has been publishing a Payment System Vision Document for every 3 years, depicting the implementation plan. The cheque clearing systems developed to being MICR (Magnetic Ink Character Recognition) clearing systems in the 1980s bringing automation in cheque clearing process apart from standardising the cheque in terms of its physical dimensions.

This evolved manual clearing system to MICR (Magnetic Ink Character Recognition) clearing systems in the 1980s, ushering automation in the cheque clearing process. The cheque truncation system (CTS) was first used in New Delhi in 2008.

Later followed the T+1 cheque clearing identically to ‘local’ cheques. Then the Electronic Clearing Service (ECS) was introduced in the 1990s to facilitate payments to multiple recipients from one source–viz. dividend, salary, interest payments, etc.

The operationalisation of the National Automated Clearing House (NACH) by National Payments Corporation of India (NPCI) brought in the forefront the pan-India system for processing bulk and regular payments with the ECS gradually becoming NACH. Following the NEFT, the Immediate Payment Service (IMPS) and Real Time Gross Settlement System (RTGS) came into practice for funds transfer needs of users.

Later we witnessed the advent of the Aadhaar Payments Bridge System, further enabling the advent of Aadhaar Enabled Payments System (AEPS). Following the introduction of Unified Payments Interface (UPI), convenient operations for customers and merchant ‘pull’ payments were introduced. The massive scale advent of Aadhaar biometric identification and its rising acceptance in government payments (G2P) also encouraged its usage as a potential tool for payment authentication.

So, it can be concluded that large scale coverage of Aadhaar biometric identification and its increasing use in government payments (G2P). This has also led to its usage as a potential tool for payment authentication. Some concerns that arise are: uniformity in treatment towards the bank and nonbank entities, frauds, consumer protection and awareness.

Financial Inclusion & Innovation – Growth for Emerging Markets

Financial Inclusion (FI) is defined as the provision of inexpensive, accessible and pertinent financial products to persons and businesses that were so far underserved by these products. The financially excluded people living in the emerging markets of the world have historically not been the target audience for banks until now. Banks did not view these recipients much capable of delivering a profitable segment of their customer base. Nevertheless, the promising technological advancements have resulted in minimising considerably the serving costs for these people of the society belonging to the marginalised segment of emerging markets.

The banks now perceive these underserved people as opportune recipients of inclusion into the mainstream financial services framework. Experts suggest that increasing the reach of financial inclusion will, apart from providing economic benefits such as strong GDP (Gross Domestic Product) growth, will also result in growing revenue numbers of banks. Innovative strategies such as offering customised solutions, using efficient risk mitigation and credit assessment procedures could considerably ease the efforts directed towards serving the financially excluded people.

The logic behind the vitality of inclusion is that by it the income-cycle runs evenly, protection against the unforeseen and disastrous events becomes possible, and also, an avenue is created for these people to save enough money for family celebrations and events—wedding, birthdays, etc. Some of the causes for their financial exclusion are: lack of education, geographical (transport) issues, unavailability of any credit records and identity documents for KYC formalities, and unaffordable prices of financial products.

EY—a consulting firm—states that, according to the World Bank’s “MSME: Finance opportunities and creating jobs,” report, among a total of 1.6 billion of the unbanked population, 200+ million are micro, small, and medium enterprises (MSMEs) having no banking services’ access. EY analysis for India further shows that, 3% of individuals fall in credit value gap (CVG) to GDP ratio to generate US$162billion worth of additional loans. The World Bank Group research states that of all the financially excluded people globally, 20.6% are in India, 11.6% in China, 3.7% in Bangladesh, 1.5% in Myanmar, 2.4% in Vietnam, 2.2% in Philippines, 2.6% in Mexico, 2.4% in Brazil, and 5.6% in Indonesia. The EY analysis also shows that India ranks high on financial inclusion revenue potential, with the size of opportunity being US$27,031 million by 2020.

On the technology-led advancement front, the following measures are crucial for sparking FI innovation: a). strong penetration of digital payments and smartphones. b). national digital identity verification system, e.g. the Aadhaar slack. c). credit record registries framework. d.) easy access to digital (social and behavioural) data. e.) digitalisation (virtualisation) of currency.

The policy level initiatives required for enabling innovation in FI include the following: i. customer-friendly (ethical and unaggressive) sales and credit collection practices for fragile (vulnerable) consumers. ii. organised insolvency (bankruptcy) procedures for safeguarding the lenders and optimistically giving credit access to MSMEs. iii. simplified banking regulations for no-frills account on-boarding. iv. a wider ecosystem of financial services providers including ecommerce companies, FinTech firms, retailers and mobile communication companies. v. interoperable and collaborative financial systems involving government, financial sector, and telecom (digital payment) solutions.

Similarly, availability of startup funds to capital seeking nascent entrepreneurs and the provision of digital finance can also together increase revenues and make finance and investments reachable to the communities of lower incomes group.