Digital Financial Inclusion in India

India’s commitment to financial inclusion goes back several decades and has been led by the Reserve Bank of India (RBI) and the Indian government. In the last decade, the RBI and the Indian government have introduced several policies that seek aggressively expand access to formal financial services, especially banking services, for low-income, rural residents. Though a variety of entities such as mobile phone companies, retailers and cooperatives have entered the financial services market in India, the government and the RBI have primarily directed financial inclusion through policies and directives to private and public banks. India’s financial markets have been historically bank-led.

In recent years, banks have been directed to increase rural access to physical branches, provide basic savings bank accounts (BSBA) to rural, poor citizens and increase lending quotas to rural sectors such as agriculture and other allied activities. In recent years, both central and state governments in India have sought to drive bank account use among the poor by directly depositing social welfare payments into beneficiaries’ bank accounts. Banks have also been linked to saving and credit groups known as self-help groups (SHGs) and microfinance institutions (MFIs), so that they can broaden and deepen the financial services they provide to their customers. The SHG-bank linkage model helps SHG groups open “group savings accounts” where members can jointly save as well as access credit over a period of time.

In 2006, the RBI passed regulation for branchless banking through the business correspondent (BC) model to provide a range of banking services through technology or distribution partners, including mobile phone companies, when a physical bank branch is not available. The digital financial services (DFS) market in strongly linked to the BC model. Mobile network operators (MNOs) act as BCs to banks to offer mobile money products. This allows banks to take advantage of their partners’ extensive retail network to acquire customers and drive transactions in rural areas. But MNOs must partner with banks as to offer customers full-service mobile money bank accounts that allow for cash withdrawals. They can provide semi-closed accounts on their own.

Improving access to finance for India’s rural poor presents a great challenge, both due to its size and diversity. Despite sustained efforts and positive policies over the last decade, the spread of financial inclusion is slow and uneven. The Financial Inclusion Insights (FII) India tracker survey of 45,000 Indians, shows the push to open new bank accounts has garnered results with 47 percent Indians holding bank accounts. But about half of these accounts have been completely inactive for three months or more. Poor and rural Indians, and especially women among them, are even less likely to be active bank account users. In fact sending and receiving remittances, and receiving wages for a primary job are mostly done using cash.

Low awareness about financial services and digital technologies is also an impediment. Over 75 percent of Indians have access to a phone (theirs or somebody else’s) across all states of India, but owning a mobile phone is not as common, which makes the regular use of digital financial services less likely. Personal mobile phone ownership is gendered, with 68% of men and 31% of women owning a phone nationally. Within the northern states in particular, there are significant differences in mobile phone ownership between men and women. In Haryana and Uttar Pradesh for instance, men are three times more likely than women to personally own a phone.

Levels of awareness about mobile money, is at 6 percent, and only 0.3 percent have ever used this service. Similarly, very few bank account holders are aware of BCs or banking agents and less than 0.1 percent access their accounts through BCs or via digital banking. Many do not trust BCs and prefer to bank at a physical branch to ensure the safety and security of their transactions. Levels of trust in private institutions (private banks, foreign banks), the BC model and mobile money is low.

But the past year has seen many policy changes that could provide a new thrust to financial inclusion in India, particularly through the use of digital financial services. Dr. Raghuram Rajan took office as Governor of the RBI governor on September 4, 2013, and appointed a Committee on Comprehensive Financial Services for Small Businesses and Low-Income Households, popularly referred to as the “Committee on Financial Inclusion”. The committee submitted its report late December last year and its main recommendations included:

  • Ensuring a bank account for every Indian above 18 years of age by 2016 that is linked to the 12 digit Unique ID, popularly known as Aadhaar ID.
  • Facilitating greater convergence between banks and mobile phone companies, non-banking financial institutions (NBFCs) such as MFIs so that they can play a larger role in financial inclusion.
  • Creating a vertically differentiated banking system with the setting up “payments banks” for deposits, remittances and payments and “wholesale banks” for credit outreach, with few entry barriers.

Many of these recommendations have been adopted or are in the process of being adopted. First, RBI authorized NBFCs to act as banking agents/BCs, thus allowing MFIs to leverage their local networks and level of engagement and work as agents to banks. Then in July 2014, the RBI announced draft regulation for payments banks, which if finalized, will allow financial institutions, mobile phone companies, retailers, cooperatives, and others to provide remittance, payments, and deposit and withdrawal services through small saving accounts, especially aimed at migrant labor workforce, low income households and small businesses. This regulation would ensure that mobile money companies could independently provide full-service mobile money products that included cash-out facilities for its customers.

Finally, the new central government in India, which recently assumed office in May 2014, announced its intention to launch a financial inclusion mission on August 15, 2014, India’s Independence Day. Through this mission, 150 million new bank accounts will be opened in the next year, granting all account holders overdraft facility of 5,000 INR and a debit card with inbuilt accident insurance cover. The mission will offer accounts to two members in the family, one of which will be offered to a woman, ensuring gender equitable financial inclusion. This government has also indicated its plans to continue, and perhaps even expand, the previous governments direct benefit transfer (DBT) scheme that aims to drive bank account use by directly depositing social welfare payments into beneficiaries’ bank accounts.

The last few months have seen a noticeable momentum within the government to expand financial inclusion, and the policies presented have the potential to achieve decisive results. But they must be accompanied by sound execution on the ground and regular communication and awareness-building among a potential customer-base that has been previously ignored or underserved. Non-governmental stakeholders such as banks, MNOs, BCs, banking agents and other such private entities must have the appropriate incentives to move beyond “financial inclusion” quotas prescribed by the government and actually create products and services for this customer-base that are customized to their needs and current financial behavior.


IFC Mobile Money Scoping report 2013

Reserve Bank of India

“Microfinance India- State of the Sector Report 2013” \