Illustration: Jayachandran/Mint
Illustration: Jayachandran/Mint

Getting financial inclusion back on track

The agenda of financial inclusion will benefit from a clarion call from Modi, melding banks, non-banks and govts into an integrated vision

Narendra Modi’s campaign pitch on “development" resonated enough for the masses to vote him to power. Given the common sense that “financial inclusion" is key to stimulate growth and rural development, control inflation, and enhance efficiency and transparency in public services, it should be an important item on the government agenda. Regrettably, it has remained stalled due to lack of consensus and clarity on a delivery model that industry, policymakers and regulators can agree upon and consumers can find useful.

Can the new Modi government get financial inclusion back on track? Yes.

How? By invoking the skills of Ben Hur, using the charioteer’s approach to rein in the footloose horses. Given that many problems of the past were the result of egos unwilling to interact with each other, the Modi regime may just achieve the elusive, by building on the significant but disjointed progress in these past years and stringing together the various pieces into a comprehensive, integrated whole.

Let’s look at the footloose horses individually.

The biggest and most fundamental challenge remains: effective banking access in the under-banked areas and sections of population. The business correspondent (BC) networks (with its variants) rolled out by banks (somewhat reluctantly and pushed from the top) has spread nationally but remains fraught with supply as well as demand challenges. BCs remain unviable and vulnerable financially, constrained by operational scope, high-cost-low-margin transactions, and a trust deficit with customers and banks. These can only be addressed through policy changes prescribing interoperability protocols, robust BC selection/licensing; viability gap funding; and customer campaigns for financial and mobile literacy to increase usage.

Much has been debated and eventually achieved in the realm of m-banking and instant payment transfers using mobile phones. The debate on customer liability and transaction tariffs for telecom USSD (unstructured supplementary service data) channels has been finally settled. However, m-banking only facilitates the more advanced among the “banked" population, and does not bring the “unbanked" population into the folds, thus limiting its potential severely. The role of payment institutions outside the banking system has been much debated around the definition of “deposits" which is a “strictly banks only" activity. The Nachiket Mor committee report clarifies the way forward through the concept of payments banks.

The principal consumer and systemic risk concerns over electronic money transfers relate to the onus of identity, the know-your-customer (KYC) norms. Multiple and non-harmonized KYC regimes in banks, telcos and others add to costs, operate in closed loops and impede mutual accountability. Standardization, interoperability and singular/unitary responsibility of issue and online and instant verification of identity—eKYC (Aadhaar or whatever the new regime may want to christen it) are critical for further evolution in financial inclusion, with banks and non-banks playing their parts efficiently. This is best possible by conferring constitutional/statutory validation of one National Identity Institution, equidistant from all users of personal identity as proof. The merger of Aadhaar and National Population Register is a first step in this regard.

Banks will need partnerships to roll out a nationwide retail payments infrastructure, with a clear blueprint of the architecture, licensing (payment institutions), and the commercial model (who pays how much to deposit/withdraw cash). It is useful to reiterate the fundamentals: while banking is an anchor economic sector with fiduciary liability, payments are essentially technology-based systems and processes. The nature of risk and mitigation differs much between the two. The first results from the Aadhaar-based cashout pilot will be known soon and will go a long way in determining the architecture. The definition of payment institutions—presently subsumed under “banks"—needs to become more “inclusive" to foster technology-based innovation, with equidistant and scope-appropriate control and supervision by the Reserve Bank of India (RBI). Once again, scale, ownership of channels, and interoperability need to be clarified, besides appropriate jurisdiction within the RBI—DPSS (department of payment and settlement systems) or DBOD (department of banking operations and development).

The big carrot driving payments is the 3 trillion G2P (government to people payments) corpus. However, its effective disbursement is critically dependent on the seeding of beneficiaries under each scheme, de-duplication of records, an effective cash withdrawal/transfer mechanism for beneficiaries, and payment of the remittance charges (the magic 3.14%). Gray clouds of confusion loom over these.

In all of this, the leadership of the department of financial services (DFS) will become even more important. As the leading influence on the shape of financial inclusion, DFS will need to be more pro active, inclusive and accessible to stakeholders.

Bottom line, much has happened towards financial inclusion, but in a fragmented manner, with lack of due leadership. What is really needed is to string and rein the horses to trot in-step with a common unifying yoke. Perhaps, the agenda of financial inclusion will benefit much from a clarion call from Modi, melding banks, non-banks and governments into a well-articulated, integrated vision, and executed with the flair and efficiency, which has been his legacy at the state level.

S.V. Divvaakar is with the Indicus Centre for Financial Inclusion.

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