Expanding India’s Financial Inclusion

By Tushar Madan —

Farmers work the fields in a rural area of Tamil Nadu, India. Source: VinothChandar’s flickr photostream, used under a creative commons license.

Prime Minister Narendra Modi’s administration has undertaken several schemes to increase levels of financial inclusion, but many fail to help all Indians. Instead, these plans often leave out marginalized parts of Indian society, such as rural residents and farmers. Before India can accomplish its ambitious financial inclusion agenda, New Delhi must do more to directly engage these underserved Indians. Otherwise, swaths of Indian society will remain a part of the informal economy, hurting India’s global economic ambitions, and the government’s financial initiatives will do little to better the lives of India’s most poor.

India has undertaken several different initiatives to increase financial inclusion throughout the country.

  • Prime Minister Modi invalidated 86 percent of India’s cash-currency, forcing the Indian banking sector to endorse a largely digital financial movement. New Delhi has touted demonetization as key to ameliorating major challenges, including corruption, terror-financing, and financial exclusion.
  • The Jan Dhan Yojana (JDY) program aims to open a bank account for every Indian. Following demonetization, 99 percent of Indian households have opened a bank account.
  • Private companies and the Government of India have all begun to launch digital wallets, giving Indian consumers access to electronic payments. Indians have embraced the idea of paying digitally, with 86 percent of Indians expecting to rely on mobile payments in the next year.
  • India is ensuring interoperability between its many different digital payment services through the Unified Payment Interface (UPI) platform. Now, government applications like BHIM and private wallets such as MobiKwik will be mutually compatible, giving Indians the freedom to make mobile transactions regardless of financial service provider.
  • India is also implementing Aadhaar, a sophisticated biometric identity experiment, which gives each registrant a Unique Identification Number for the purposes of banking, receiving subsidies, and enrolling in benefits programs.

Clearly, India has had success in building the foundation of a financially inclusive society. Unfortunately, these schemes are not accessible by all. A total of 68 percent of Indians reside in rural areas, and many rural areas lack the telecommunications infrastructure necessary to make use of digital banking and internet-based financial services. Though India is working to bridge this gap in the digital divide, there is still a significant amount of work to be done, as the Wadhwani Chair has previously explored.

Many rural residents are farmers who depend on loans to get them through the agricultural cycle. In fact, about 70 percent of India’s agricultural households spend more than they earn every month, leading to a cycle of debt that can have debilitating social impact. Indebtedness was listed as the primary reason for 55 percent of farmer suicides in 2015. The political power of the rural vote means that states periodically offer expensive loan waivers to farmers. But even this relief does not help the 40 percent of farmers who have borrowed from informal institutions, like family or local money lenders.

Despite longstanding efforts to extend credit to farmers, many continue to struggle to access formal credit. An inaccessible established financial system is causing many of these farmers to take loans informally from within their village, almost always at a usurious interest rate. Even attempting to find alternatives to borrowing from informal lenders, often the most powerful people in these rural communities, can be dangerous, leaving rural residents few options.

The government is not the only entity working to make India more financially inclusive, and new regulations may have less impact than new technologies. Innovative private corporations, like Lendingkart Finance, are standing up operations in areas where formal credit facilities are difficult to find.

Neither sector, however, can solve this problem on its own. There are several key areas that need attention that would increase financial inclusion and fiscal solvency for India’s rural residents and farmers.

  • Creating financial service applications that are compatible with feature phones. Despite growing numbers of smartphone users, more than 50 percent of the country, especially residents of small towns and rural areas, use feature phones. Financial service applications, such as BHIM or Paytm, are largely reliant on internet-enabled smartphones. Indian institutions are working to utilize feature phone technology that allows users to transfer funds via SMS, but, as of now, this practice is not widely used.
  • Greater enrollment of the Kisan Credit Card. Since 1998, India’s different governments have endorsed the Kisan scheme to help farmers get loans quickly from institutional sources and not from local money lenders. Unfortunately, in the past 20 years, Kisan Cards have not caught on; some banks have stopped offering them and others, such as the State Bank of India, have not made increasing card enrollment a priority. Innovations in financial tech could solve the inaccessibility issues surrounding the Kisan scheme, or potentially upgrade it, but will require strong support from private and public entities.
  • An increase in credit bundles. Currently, many farmers go through different methods to acquire insurance and credit. The credit bundling model, where credit to farmers is bundled with agriculture insurance, has a high level of outreach, due to loan demand, and increases access to credit for farmers. Having both insurance and access to loans is a better risk management strategy than relying solely on loans to stand in for lost crop income.

Financial inclusion in India will take many different forms and it is heartening to note the successes of the Indian government so far. Unfortunately, without greater collaboration between the public and private sectors, as well as a strong push from the Modi administration to ensure its schemes are including all Indians, India’s rural residents and farmers face an uphill battle in escaping financial exclusion.

Mr. Tushar Madan is a researcher with the Wadhwani Chair in U.S.-India Policy Studies at CSIS.

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