• Tue. May 28th, 2024

Digital financial inclusion and its relevance for financial inclusion – Banking & Finance News

– By Prabhat Labh

11 billion transactions took place on the Unified Payments Interface (UPI) platform in a single month in October 2023, making India a global leader in digital payments. 500 million bank accounts were opened in less than ten years since the launch of Pradhan Matri Jan Dhan Yojana. Over 723 million beneficiaries received direct benefit transfers (DBT) in their bank accounts last year. Cumulatively, 32 trillion rupees has been transferred using the DBT system, which also enabled savings of over Rs. 2.7 trillion rupees. These numbers are staggering. While it took over sixty years since Independence for the bank account ownership to reach 35%, from there, it more than doubled in less than 10 years, making bank account ownership near universal, and eliminating gender gap in account ownership.

Years of foundational work has gone into building the core digital infrastructure for rolling out unique identity, bank accounts, digital payments, direct benefit transfer etc. For the financial institutions, availability of digital public infrastructure has enabled them to serve a much larger segment of the population in a viable manner with new products and solutions.

Completing the ‘Know Your Customer’ (KYC) process digitally, significantly brought down the cost of opening and maintaining an account, which was crucial for large scale roll out of the PMJDY scheme. Besides a zero-balance account, PMJDY provides a host of other benefits like health & accidental insurance and overdraft facility, making it a comprehensive financial inclusion product.

Impact of this transformation can be seen across all segments. For the smallholder farmers, access to digital finance means that they can get paid for their produce instantly, directly into their bank accounts, giving them an opportunity to come out of the shackles of the middlemen. Whether a mango grower in Ratnagiri, or an apple grower in Kinnaur or a grape farmer in Nashik, or a fisherman in Tamil Nadu or a honey producer in Madhya Pradesh, or a dairy farmer in Gujarat, the life of each one of them stands to be transformed with access digital finance, enabling convenient access to inputs and markets.

For the 63 million micro and small enterprises, which employ over 110 million people and contribute nearly 30 percent to India’s GDP, digital financial services hold a transformative potential. Accessing digital payments is often the first step towards formalization of a micro enterprise and brings visibility to their cash flows. By accessing data on their transactions, sales, customer, raw material etc. which is increasingly available in digitized format, a financial institution can design and offer customized financing solutions, enabling them to grow faster.

Digital public infrastructure like ONDC (Open Network for Digital Commerce) is democratizing access to e-commerce for every micro enterprise. The end-to-end solution offered by ONDC not only allows a micro entrepreneur to expand her market, it also brings other ecosystem partners for logistics, payments and financing etc. enabling seamless order fulfilment. Digital lending is enabling the small businesses to quickly and conveniently access working capital. Availability of digital loans for the consumers and ‘Buy Now – Pay Later’ (BNPL) options also help the businesses in expanding their customer base.

Using the consent-based data sharing enabled by the Open Credit Enablement Network (OCEN), lenders can service customers in different geographies, without being physically present. An originating financial institution manages the client verification, documentation, loan monitoring, while other lenders can extend financing to the enterprise. Besides risk sharing and portfolio diversification, it also increases operational efficiency for the lenders.

The power of digital platforms became evident when during the COVID-19 pandemic, 200 million women, Jan Dhan account holders, and over 100 million farmers received benefits under the PM Garib Kalyan Yojna and PM Kisan Nidhi respectively in a matter of days, something that was simply unimaginable without these digital platforms. In the middle of lockdowns, over 3 million business correspondents provided essential banking services across the length and breadth of the country. 

Yet, we are only scratching the surface when we look at the possibilities. Improved targeting of beneficiaries and efficiency in administering the benefits, is enabling the government to save trillions of rupees. The savings thus accrued can then be deployed for increasing the quantum of benefits to the beneficiaries.

However, two critical imperatives require urgent attention. First is, reducing and resolving frauds. Convenience associated with digital finance has also brought with it increased instances of frauds and cybercrimes, causing loss of billions of rupees. It is surprising that in digital finance, which leaves a data trail for every single transaction, why recovery rates continue to be so low. Fraud prevention is even more important than resolving a financial fraud after it happens. Increased investment in digital financial literacy is the second critical imperative, so that the masses could use and benefit from the power of digital finance. India has demonstrated to the world how to design and innovate for the masses, and it is time now to enable replication of these models in the rest of the world as well.

(Prabhat Labh is the partner and managing director at 3F Advisors, and a contributor to the Inclusive Finance India Report 2023.)

(Disclaimer: Views expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproducing this content without permission is prohibited.)


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