The shift to a digital economy and the growth of digital banking in India has been monumental in recent years. The Government of India launched its ambitious initiative, Digital India, in July 2015 which opened a whole new world of opportunities for the country’s citizens and businesses to access financial services and products. From simple banking to investments, loans, and insurance, individuals and businesses are now able to access a range of financial services right from their fingertips.
India’s digital revolution has also been a key driver of financial inclusion. By providing access to financial services to the unbanked, underbanked, and underserved, the country is helping to bridge the gap between the rich and the poor and ensure that everyone has the same access to basic financial services. This is one of the key elements of the grand story called Digital India.
The Journey to Financial Inclusion
Financial inclusion is essential in providing financial services to individuals who lacked such opportunities, especially those who migrated from rural to urban or semi-urban areas. This fosters economic development and enhances their quality of life and business prospects.
In 2014, the Government of India launched the Pradhan Mantri Jan Dhan Yojana (PMJDY), aimed at granting banking services access to the unbanked population. The RBI (Reserve Bank of India) authorised payments banks, such as us, to provide basic banking services & products such as zero-balance savings accounts, remittances, withdrawals, and debit cards thus bridging the gap between the banked and the financially excluded.
Subsequently, the Pradhan Mantri Mudra Yojana (PMMY) was introduced to provide loans to small businesses and entrepreneurs, while the Unified Payments Interface (UPI) facilitated swift and secure money transfers.
In India, the growth of financial inclusion has been very evident. The RBI’s financial inclusion index (FI-Index) reached 56.4 in March 2022, reflecting significant growth in financial inclusion across India. From Mobile banking, Digital wallets, Aadhaar-Enabled Payment System (AePS), Micro ATMs, BBPS, The Open Banking – Account Aggregator (AA) to BHIM-UPI the country has made great strides in these regards.
Interestingly, the COVID-19 pandemic, despite causing widespread disruptions, paradoxically accelerated financial inclusion in India through rapid digitalisation. This acceleration resulted in a tremendous surge in digital payment transactions over the past six fiscal years, from 2071 transactions in FY17-18 to 9192 transactions in FY22-23.
Benefits of Financial Inclusion
India’s digital journey vividly illustrates the vast advantages of financial inclusion across its economy and society. Payment banks, the center of financial inclusion, provide affordable basic banking services to underserved areas and lower-income populations via accessible mobile and digital platforms. They facilitate direct benefit transfers, encourage financial literacy, and assist the establishment of Small and Medium Enterprises (SMEs), all of which contribute to the country’s financial empowerment.
By extending access to vital financial products and services, particularly among marginalised populations, fosters economic empowerment and stability. Notably, it has significantly narrowed the gender gap. Female ownership of bank accounts rose from 26% to 77% within a six-year period. Small businesses have also flourished, benefiting from improved access to credit and banking services, driving their contribution to the nation’s economic growth.
Moreover, digital financial inclusion has streamlined government assistance like DBT, boosted digital literacy, formalised the economy, and encouraged widespread savings and investments, contributing to individual financial security and macroeconomic stability.
Despite these substantial benefits, addressing challenges such as low digital and financial literacy, technological disparities, and infrastructure limitations remains crucial to fully harness the potential of financial inclusion’s transformative power.
The Challenges Ahead
Achieving successful digital financial inclusion requires addressing various challenges hindering its widespread adoption. The digital divide remains a prominent obstacle, particularly for rural and older populations with limited access to technology and digital literacy. Not only just digital literacy, but India’s low levels of financial literacy too impede effective use of financial services.
Another crucial obstacle is the state of infrastructure, particularly in remote or under-resourced regions. Moreover, there is a risk of exclusion errors in the distribution of social benefits. Some households may lack sufficient access to digital tools, or the digital literacy required to use them, leading to the exclusion of deserving beneficiaries. Additionally, limited adaptation to modern technologies can hinder digital financial inclusion. To overcome this obstacle, continuous investment in improving digital literacy and skills among the population is necessary.
The Way Forward
Empowering individuals with the infrastructure, knowledge, and confidence to embrace technologies will contribute to a more inclusive and digitally empowered society. This requires a comprehensive approach involving several strategies.
- Promoting bank payments through government initiatives, and regulatory changes by institutions such as increased deposit limits or expanded financial services like credit and loans. These steps could help us serve customers better.
- Promoting digital literacy initiatives like Electronic Banking Awareness, organizing financial literacy camps, eBAAT (electronic banking awareness and training) and introducing IIBF (Indian Institute of Banking and Finance) courses for last mile agents. This can empower a broader segment of the population to effectively use digital financial tools.
- Leveraging mobile banking and smartphone technology, while also developing solutions like voice-based payments and offline infrastructures, can enhance accessibility.
- Ensuring widespread digital infrastructure, both hardware and software, is accessible across the country, especially in rural and underserved areas.
- Implementing strong data protection measures and consumer awareness about data security, exemplified by the Account Aggregator framework, is vital.
- Regular policy and regulation updates that accommodate technological advancements are essential.
- Introducing women business correspondent agents to bridge gender gap in the financial inclusion sector. This will not only improve livelihood but also empower women and in turn boost gender inclusivity.
Business Head-Financial Inclusion
NSDL Payments Bank
Furthermore, encouraging innovation and investment in technologies like AI (Artificial Intelligence) and machine learning can address challenges and improve user experiences. Leveraging public-private partnerships with established payment solutions providers can boost adoption rates. Additionally, continued usage of digital platforms for disbursing social benefits promotes financial inclusion. The goal is to create an inclusive digital economy, where everyone, regardless of their socio-economic status, can benefit from the opportunities afforded by digital financial services.
