Modi’s financial inclusion push


Content from the Brookings Institution India Center is now archived. After seven years of an impactful partnership, as of September 11, 2020, Brookings India is now the Centre for Social and Economic Progress, an independent public policy institution based in India.

Financial inclusion is a high priority in India. Around 40 percent of people in the country lack access to bank accounts. The combination of widespread poverty and high financial fees keeps many individuals outside the financial system and turns them into “financial untouchables.”

During last year’s election campaign, candidate Narendra Modi emphasized the importance of bringing services to the “unbanked” and integrating the poor into business and commerce. Having the ability to pay bills and make transfer payments helps lift people out of poverty by giving them access to important financial tools.

Prime Minister Modi has proposed several steps to promote financial inclusion: providing basic accounts for those who currently do not have them, distributing RuPay debit cards to enable financial transactions, making regulatory changes that broaden the kinds of firms that offer financial services, and developing mobile money solutions for the dispossessed.

Now that he has been in office a year, it is important to see what progress has been made and what remains to be done. Significant progress has been made in providing accounts for the unbanked. It is estimated that 75 million new accounts have been opened, although many of them have a zero balance and are not actively being used.

The Prime Minister hopes to move towards a situation where there is universal access to financial accounts. By linking public subsidies to these accounts, government leaders plan to expand the usage of these accounts. One lever that government agencies have is the subsidies they provide for products such as kerosene, food, liquefied petroleum gas, pensions, and fertilizer. Funneling these payments through financial accounts creates incentives for usage and encourages people to make use of them.

More challenging, though, has been building new mobile money solutions. In a number of countries, non-traditional firms such as mobile phone operators have boosted financial inclusion by letting people pay bills and make transfer payments through cell phones. Kenya, for example, has made dramatic progress through its m-pesa system of mobile payments. Phone operators provide basic financial services and this has brought millions of Kenyans into the financial system.

Progress with non-traditional money services has been slow in India due to several issues. Established financial institutions are not keen to allow competitors into the financial services field. Spectrum limitations have made it difficult for mobile operators to develop advanced financial products. Some regulatory provisions discourage non-banks from marketing electronic financial services or using use SMS or Internet connectivity to make transfer payments.

A number of countries allow “branchless banking” as a way to encourage inclusion. Rather than emphasizing physical facilities where people can go for financial services, it is possible to move towards Internet banking or mobile systems that broaden access. That helps people in remote rural areas or other underserved regions gain access even if there are no financial institutions within an easy distance of where people live.

Microfinance firms furthermore can be helpful by operating as forms of business correspondents. They can lend money to people or provide a conduit for transfer payments. This increases the number of people with access to financial credit and gives them the means to pay bills electronically.

Some accounts also are being set up to provide accident insurance. This will broaden usage and provide incentives for people to open accounts. If people see value in formal accounts, they will be much more likely to make use of them.

In looking at the overall situation, it is clear that improvement in financial inclusion will yield many benefits. As Prime Minister Modi has emphasized, increasing the number of Indians with access to financial services would strengthen the economy, broaden social inclusion, and put India on a more sustainable path.

Financial accounts help people pay for education and give them access to training for much needed skills. When people have no financial accounts, it limits their ability to advance themselves economically, engage in commerce, and start new companies. That drags down the country and makes it more difficult to bring poor people into the 21st century economy.