As an idea, financial inclusion seek to unify all segments of our population under a common financial services framework. Currently, it is estimated that only ~60% of Indian households avail banking services. While 40% of any demographic can be market defining, in the case of India where the number represents close to 500 million individuals, the room for growth is staggering.
Financial inclusion lies at the core of the economic reform agenda of the current NDA government. The Reserve Bank of India (‘RBI’), in its assessment of financial inclusion in India, states that a whopping 73% of farmer households in India do not have access to formal sources of credit. The government, through its regulatory institutions, has been introducing policy initiatives to speed up India’s journey towards an advanced economic framework on par with western economies. For instance, the RBI has advised all retail banks operating in India to allow for Basic Saving Bank Deposit (BSBD) Accounts which offer facilities like no minimum balance and simplified KYC norms. Further, banks have also been directed to allocate at least 25% of the total number of branches to be opened during the year in un-banked (Tier 5 and Tier 6) rural centres. India has added 15,291 new bank branches since 2014.
While opening bank branches in order to promote financial inclusion is a noble initiative, it requires significant investments in network expansion, technical infrastructure and employees, which given the low utilisation rates in Tier 5 and Tier 6 centres, may not provide a healthy return on investment. This is where the promise of FinTech shines. By leveraging technology, entrepreneurs are trying to bypass the need to set up physical branches altogether. However, this approach also has its own associated challenges, such as the target audience not being fully aware of how to use digital products, and broadband penetration rates in rural areas.
Interestingly, according to the First Advance Estimates of National Income, 2016-17 report released by the Central Statistics Office (CSO), India’s per capita net national income at current prices is estimated to register year-on-year growth of 10.4%, pointing towards healthy development on the back of the strong GDP growth reports. Thus as the country plans for increasing the reach of its financial systems, the average income levels are rising as well, pointing towards an increased need for formal banking services. However, how well the government can synchronise these developments remains to be seen.
India’s remarkable growth story brings a unique set of challenges as it moves slowly, but steadily towards a being a ‘developed’ state. As of now, financial inclusion seems to be the first bridge that needs to be built before other goals like increasing insurance penetration can take the main stage.