The Indian government’s initiatives of the past few years namely the enrollment of over a billion people with the Unique Identification Authority of India for Aadhaar cards (the biometric identity card), rollout of the Jan Dhan banking scheme for social inclusion, smartphone penetration reaching over a billion, creation of the UPI backbone and the ‘Digital India’ policy focus have set the country walking ahead with stronger digital presence and usage.
India, with its younger demographics as its global-soft-power, has the responsibility of powering the economic aspirations and ensuring an inclusive social
development of the entire nation. For a stratified demographics as ours, divided Tfurther by terrain, languages, and other variables, one common theme is to “grow”.
One of the strengths and probably a unifier that the government has utilised is “technology”. The digital innovation that India has made so far is here to stay. It needs adoption into commercial application to deepen the financial inclusion net. This is probably the lowest per unit cost innovation globally. This can change our current status around ‘unbanked’ and ‘under-banked’.
India has made several strides in establishing her prominence on the world stage and to successfully deliver on the expectations of the economy in the times to come, the need to integrate technology into the fabric of our society will be more critical than ever. To power the economic engine, it is the financial services ecosystem which serves as the fuel. In that, “digital” is a catalyst that can fast-track Indian economic growth with inclusive-approach.
Financial services has traditionally been a distribution-led business with fixed-cost physical presence. High cost of fixed assets in traditional banking and licensing hurdles make entry into the sector a barrier. Digital finance firms carry no legacy cost and use data as gospel, the basis of ‘decisioning’ anyway. Combining data science with technology and their quick decisionmaking, fintechs are in a good position to disturb the status-quo and be meaningful players in the new economy as long as they carry frugality and consumer-focus in their DNA.
Banking the Unbanked
Fintech has brought in better product dissemination and ‘decisioning’ options with the help of technology, machine learning, intricate algorithms, and big data, which is gradually replacing the traditional financial practices. For years, the conventional Banking & Financial Services & Insurance (BFSI) sector has pumped in capital to grow their markets. Fintech has increased that pace now with digital adoption by the endconsumers.
From lending to making credit more accessible to fostering a less-cash environment and making banking accessible to the remotest parts of the country as well as those at the bottom of the economic pyramid, and in providing other financial products as varied as insurance products to savings products, technology is becoming a game-changer; from cost perspectives to increasing information availability for the consumers to make financial decisions, and to even transacting online (thus reducing layers of intermediation that added to complexity of product pricing and potential mis-selling).
Improved Credit Access
Access to credit has improved over the years, as some of the proactive banks / non-bank lenders and the digitallending platforms started using credit bureau data / technology including understanding credit modeling using borrowers’ digital footprint and other surrogate inputs to give “instant credit decisioning”.
For those immensely worried that Indians are spending their way to hell, take solace: India’s household debt as a percentage of GDP is just 11 per cent. The US has over 80 per cent and the nation that we want to compete with and win — China — has over 50 per cent. However, the data also indicates that in the past 5-6 years, the average Indian household debt (that covers all categories of loans) has doubled, as the cost of credit reduced.
Most of us will have anecdotes about unsolicited calls from a finance company agent offering to sell us an instant loan or credit card or insurance policy. But the reality is that most of us are urban-based with a credit history. The bulk of Indian consumers (or potential consumers) don’t have formal financial footprint.
Technology lately has stepped in to fill this gap. Startups across the board are using a range of artificial intelligence and machine learning techniques to better understand the eligibility of a consumer to access credit and their propensity to pay back. While this constitutes a formal system in and of itself, where it finds lacking at times is the exposure of unaware borrowers to rogue elements as we have been witness to in the recent past. Thus, the opportunity exists for technology to become a significant enabler in enrolling more people into the formal credit system of the country unlike in the years gone by where a person’s credit worthiness takes years to build and repair.
A healthy policy environment
The world — and India is not insulated from this — is constantly rebalancing the way it regulates newer technology, with the prime objective of consumer protection, and yet to grow the markets. The challenge is to strike a balance in fostering a system of innovation and creating an ecosystem that protects the interests of regulators, users, banks, and fintechs themselves. Creating regulatory sandboxes that allow for fintechs to freely experiment without exposing users and banks to systemic risks will be the need of the hour as technology and the ecosystem evolves to create solutions for India in India.
Access to Capital
Financial technology tools used to be the back-office support function for traditional banking players and traders. Venture capitalists very rarely invested in the fintech sector. Technology has been used by all the financial institutions for more than 50 years now. Since the last few years, technology started playing a more important and crucial role in the financial sector. Modern ways of banking or the current financial services would face a lot of difficulties in staying relevant without the implementation of technology. Over the last 10 years, private venture capital has started to invest in the fintech sector. Fintech has started increasing its share of attention in the financial economy.
As much as there is the need for access to credit for people in the country, one aspect that cannot be overlooked when it comes to developing a healthy financial ecosystem backed and led by technology is the access to capital. Today, a lot of public sector undertakings (PSU) are stressed owing to significantly large sums of non-performing assets (NPA). Where technology can help is to eliminate the bad actors from the system. However, the companies building technology need access to capital as well in order to scale operations to achieve unit economics quickly.
The Growth Mantra
The basics of financial inclusion is to make sure that the consumers have access and choice of products that suit their need. The brick and mortar distribution of conventional finance has not reached the nook and corner of the country. Digital channels have started making access to finance, especially credit, as easy as searching for something on Google — language no bar! We can further enable partnerships between various financial services firms and the new-age digital financial institutions to enable consumer acquisition and having consumer feedback in real-time to design suitable financial products for different consumer needs. Digital finance will also improve financial literacy and help expand the financing backbone into smaller markets across the country.
The Indian government bodies have made various initiatives and policies to facilitate digital empowerment for urban and rural India. One such initiative was the Bharat Net Project — a flagship mission of the government aimed at enhancing Internet services, e-banking, e-governance, e-education, etc. to the villages in India. With a target to connect each of the 2,50,000 gram panchayats and offer 100 Mbps connectivity, the project’s aim was to boost digital empowerment in rural areas of the country.
The Prime Minister’s Digital India programme is also a well-known concept which included initiatives which made all the government services digitally reach the citizens with high-speed Internet including the rural India population. The government’s financial inclusion scheme, the Pradhan Mantri Jan Dhyan Yojana (PMJDY) which was launched a few years back, facilitated online transactions with the help of RuPay Debit Card. It contributes to the digital and financial inclusion of rural India. The rural population of India holds a very important place in achieving the economic development of the country, and this is one of the reasons why a lot of fintech companies are focusing on financial inclusion, especially through rural India.
While 2020 was hit by the Covid-19 pandemic and it brought many surprises for the fintech players and other financial institutions of India, 2021 is expected to be growth year for the Indian fintech players to grow and innovate from their experiences of the past year and succeed in bringing digital transformation in the ‘new normal’ era.
Technology can power a lot of positive change in the financial system in the country. With the developmental agenda of the regulatory environment, backed by patient and long-term capital to effectively strengthen the financial ecosystem, India can be a pioneer in increasing its economic might, by using technology in this fourth industrial revolution.
Disclaimer: The views expressed in the article above are those of the authors’ and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.