India has the second largest population and the second largest number of unbanked individuals in the world. Over the past decade, the Indian government has sought to address the problem of exclusion through a number of initiatives – and on the surface, these have had the desired effect: the number of people with bank accounts grew from 35 percent in 2014 to 80 percent in 2017.
The renewed focus on financial inclusion in India began in 2005 when the Reserve Bank of India (RBI) emphasized its importance in its annual policy statement of 2005- 06.
In the statement, RBI urged banks to expand their services and strategies to accommodate efforts at enhancing financial inclusion; it had identified that access to finance for poor and disadvantaged people is a prerequisite for poverty alleviation and social prosperity.
In 2012, the Finance Ministry directed all banks to provide banking facilities in places with a population of over 2000 people, by using branchless banking.
The banks were further directed to allocate at least 25% of the total number of banks to be opened during the year in unbanked rural areas. This model proved problematic as banks due to the high cost of training agents and developing infrastructure.
Not unlike Nigeria, one of the barriers to inclusion in India was the onerous requirement for identification, and many citizens inability to meet these requirements exempted them from being included.
Thus, the banks worked to simplify the process of opening bank accounts by reducing the requirements needed for identification. The introduction of the Aadhar Card by the government – a social security identity, which contains a unique identification number, was used as proof of both identity and address, and can be used to access all social services.
Though the use of the Aadhar for banking was met with concerns around data security and privacy, under the scheme, the number of bank accounts grew by 240 million within the first few months.
The demonetisation of the two highest denominations of the India Rupees also led to an increased number of bank accounts and even more so, an increased usage of digital banking platforms such as ATMs, USSD codes and mobile wallets.
In 2014, during Prime Minister Narenda Modi’s tenure, the government introduced the Pradhan Mantri Jan-Dhan Yojana (PMJDY) Scheme, which was designed to expand access to financial services by providing no-frills bank accounts to individuals.
Some of the features of the account were interest on deposit, accidental insurance cover, life insurance, and overdraft facilities, which acted as incentives to enhance the appeal and participation.
National Identity Numbers and a Direct Benefit Transfer system – which provides subsidies and benefits to citizens living below the poverty line – were also linked to bank accounts. In the first week of launch, 15 million bank accounts were opened.
Each of these schemes and initiatives has evidently helped to pull more excluded individuals into the system, but other factors have shown that the country may not necessarily have improved financial inclusion. According to the World Bank’s 2017 Global Findex Database report, between 2014 and 2017, about 48 percent of these bank accounts in India have remained inactive, with no transaction made.
Payment Banking in India has presented a potential solution to this problem – with telecommunications, FMCG and retail organisations offering financial services to customers in the areas where they are located. In 2015, RBI issued licenses to Bharti Airtel, Vodafone India and nine other companies to establish payments banks.
Despite high adoption rates, this model has faced challenges in India of over-competition, and the inability of payment banks to lend money has limited the extents to which it is able to driving inclusion and enhance wealth building.
The Indian experience presents evidence of a viable solution for the problem of inclusion, and as Nigeria proceeds to adopt the PSB model, the limitations and challenges experienced must serve as lessons for our environment.
If effectively implemented, enabling these non-banking institutions to leverage all the resources at their disposal to provide financial services to the unbanked will no doubt bring us much closer to achieving – and potentially exceeding – our goal of 80 percent financial inclusion by 2020.
However, effective implementation also requires ensuring that PSBs are empowered to provide a full bouquet of financial services to customers, in order to truly include them. Another lesson that India’s efforts and initiatives have illustrated is how social programs can potentially be leveraged.
Nigeria’s Conditional Cash Transfer initiative, which provides stipends to the poorest households, would encourage more people to open bank accounts if the government digitized the process.
The most critical driver for ensuring the success of our efforts will involve identifying existing opportunities that can be leveraged, taking advantages of available resources, and moreover, constantly monitoring the impact and effects of these efforts, in order to continuously re-strategise where necessary.
Usoro Usoro is the General Manager of Mobile Financial Services at MTN Nigeria.
Tags: financial inclusion