One Global Approach Cannot Be Seen as a Solution For All Developing Countries

Financial inclusion is the process of ensuring access to financial services and timely and adequate credit where needed by low income groups at an affordable cost. What do you think are the challenges for India in achieving this?

The first challenge that I see in achieving total financial inclusion is the understanding that we have of the term itself, which, as a country is very confined. While we tend to view financial inclusion as a bare minimum access of banking services to the unbanked and under-banked population, internationally there are multiple levels of inclusion. We only look at it as a savings bank account from where an individual can deposit and withdraw cash. In reality, when all banking benefits including credit can be extended to all individuals, can we then be called a truly included system?

Having said this, banks are also constrained to give credit because of low credit worthiness, even for the individuals who have a bank account because we do not have a habit of keeping money in our accounts. This leads to lack of data with the banks. In India, more than 40% of the bank accounts opened by individuals are dormant accounts which hinder the basic services that can be availed from the bank: keeping money and extending credit.

This leads me to the third and the most critical challenge that we face: Lack of awareness within the country of financial inclusion and more specifically how credit can, and will create more consumption power, and economic growth. If we study the developed markets, we realize that the lending rate is much lower than in India, because credit worthiness of each individual is high. In such a scenario, it’s easy, more economical and beneficial for any individual to take credit from the bank to take a house loan, create business, expand their business and create more jobs. It’s a cycle that ultimately leads to national development. In India, the low literacy rates among the masses make them susceptible to false or incorrect information. In order to counter that, we need to have a strong and focused communication with our people through different formats such as door-to-door campaigns, street plays etc. to increase financial literacy. This initiative and the corresponding investment need to be taken up by the banks as the financial pillars of the country.

The change of behavior, from withdrawing to keeping, and banking digitally is going to ensure banks have appropriate data to give credit to all individuals seeking monetary assistance. A big step in this area is when SBI announced that all individuals with a deposit of more than 20,000 INR would be eligible for a credit card.

Studies also show that general notion of credit is different from what it is meant to be. Indians view credit as a liability that needs to be finished. However, its credit that will ensure a financial lifeline and easy payments at low rates. These challenges lead me to the conclusion that its education, that is the key for achieving financial inclusion in a country like ours.

How would you compare India with other countries in South East Asia in terms of financial inclusion? Are there interesting models that can replicted in India? Or, does India have any interesting approaches that can be implemented elsewhere.

The evolution of the card market is driven by the interplay of various stakeholders as markets and technologies change. As innovations, such as a card on a mobile phone and multi-currency payment facilities become available, it becomes easier and more convenient for cardholders to make purchases. As a result, cardholders are able to spend more frequently. The result is an increase in market liquidity which in turn helps the banks and the card schemes and facilitates the successful delivery of these innovations at an affordable cost.

Essentially, as the consumption goes up, the interchange rates come down, which benefits the consumers and the merchants. Developed markets have low interchange rates which are driven primarily through banks and institutions via digital platforms. In countries like Indonesia, Bangladesh, and Pakistan, mass credit at low rates is provided to the community, something that we haven’t been able to implement yet.

Key efforts in educating the under-banked and un-banked population in Bangladesh has led to Mobile money usage going up by 9% in the last year, while in India, it was just 1%. 17% of Bangladeshi’s exclusively use mobile money. Use of Non-Bank financial institutions also went up by 24% in Bangladesh compared to only 9% in India.

This again brings us to the most critical aspect of financial inclusion: Education. As soon as we strengthen our communication to the market and make the shift from just ‘opening a bank account’ to ‘benefits of opening a bank account’, there is going to be a series of linked positive changes that I explained above, helping our economy and our financial inclusion status rise up.

Taking about Indonesia in particular, since India and Indonesia have robust economies (although India’s is much larger than Indonesia’s, and has grown faster on average over the last decade), favorable savings levels, investment rates, and demographics are likely to keep both countries’ growth stronger than most peer countries.

Although Indonesia scores lower on institutional strength, both India and Indonesia face common challenges such as regulatory complexity and weak social and physical infrastructure compared to peers. The evolution of each sovereign’s credit profile will hinge on whether its leaders are able to implement policies that facilitate infrastructure development and strengthen the private sector’s operating environment.

However, we also need to realize that each region has its own challenges; in terms of the regulations, market mindset, and individual priorities. Hence one global approach cannot be seen as a solution for all developing countries. Focused approach based on region’s market analysis needs to be adopted for fighting the inclusion challenge.

How important is digital inclusion for achieving financial inclusion? What needs to be done to achieve significant gains? Is this a policy issue or can individual banks assist in this?

The market for smart phones has increased significantly over the past few years and now has a reach to most rural parts of the country. These services do not differentiate between the rich and the poor, and hence access of information is not limited to certain sections of the society. We need to promote digital inclusion because it’s an inexpensive way of banking and is direct in its approach. Hence, it plays an important role in driving financial inclusion but is not the sole criteria for an included nation.

Individual banks need to drive digital inclusion and make people aware of the benefits included in digital banking. ‘Banking at your doorstep’ has been achieved by the government and the banks, but its acceptance remains the key. We are putting in a lot of efforts in that space, and demonetization has indirectly made us take a huge leap into this direction, since now nearly everyone is aware of a system that works on digital platforms which is similar to visiting an actual bank. The trust levels invested in these digital platforms have gone up. However, the prices need to come down further, which is possible only if more people start utilizing these services.

Banks can now tie up with platforms which can further their reach to people and is also a significant step towards inclusion, since now the banks can focus on their core while the networks ensure relevant information flow at the appropriate times to the population and assist them in coming onboard.

In conversation with Mr. Rajib Saha, President and CEO of Indepay Networks. (Original Post)