The Future of Financial Inclusion and its Impact on Poverty Reduction in India.

• Author: Maripally, Anurag

INTRODUCTION

Financial inclusion is a 21st century phenomena enabled by digital technology to provide banking services and social benefits to low income citizens. Inspired by Kenya's extensive utilization of cell phones for banking transactions beginning in 2007, the developing world is on a path from informal cash based economies to official financial inclusion for most citizens. Over 90 developing countries have joined The Alliance for Financial Inclusion (AFI), a member owned organization, to promote and develop evidence-based policy solutions that improve the lives of the poor through the power of financial inclusion (Alliance for Financial Inclusion, 2016). Under its 2011 Maya Declaration, the AFI members commit to achieving concrete financial inclusion goals, implementing policy changes and sharing progress updates (AFI: Maya Declaration, 2016). In 2014, Prime Minister Narendra Modi advanced financial inclusion by offering free bank accounts and by attacking cash based transactions that seek to avoid government taxation. The 2016 demonetization of old 500 and 1000 rupee notes has potentially accelerated this process.

IMPACT OF INFORMATION TECHNOLOGY IN INDIA

The implementation of the Universal Biometric Identification by the former President of Infosys, Nandan Nilekani, has helped lay the foundation for financial inclusion in India. The Unique Identification Number is known in India as the Aadhar Card because in Hindi, Aadhar, translates to foundation. This ID system uses biometric and fingerprint data to create a unique ID for all registrants, enabling the government to provide social security, affordable credit and improve the subsidy leakage problem. The subsidy leakage problem occurs when government funds that are intended for the poorer sections of the society do not reach the recipients due to corruption or bureaucratic obstacles. Finance Minister Arun Jaitley claims that the Indian database of 1.2 billion bank accounts when linked with 900 million mobile phones and a billion Aadhaar numbers would ensure that government subsidies flow effectively to those who actually need them (Mathew, 2016).

Another important stride India has taken was a program launched by the Indian Prime Minister Narendra Modi in August 2014 to provide free bank accounts--Pradhan Mantri Jan-Dhan Yojana (PMJDY) (Gupta, 2015). It required relatively little documentary requirements by account holders and any Indian citizen could open an account at any business correspondent outlet. This account comes with multiple benefits, including direct benefit transfer from the government, interest on deposits, accident insurance, access to overdrafts and pensions and other insurance products. The account can be opened with a zero balance and the form to open such an account is available in both English and Hindi (Pradhan Mantri Jan Dhan Yojana, 2016). This program has had multiple major challenges, as the adult literacy rate in India between 2008 to 2012 was only 62.8% (UNICEF: India, 2016). To mitigate this, the Department of Financial Services has established Financial Literacy Centers across the states. This program has focused on keeping these accounts alive and used by the citizens. Financial literacy is central to achieving this objective, as consumers will understand better the benefits of such accounts (Reserve Bank of India, 2016).

India has also recently granted in-principle approval to eleven payments banks under the Guidelines for Licensing of Payments Banks (Reserve Bank of India, 2015). Payments banks are a new model of banks developed by the Reserve Bank of India where a company, be it a telephone company, a supermarket company or cooperative can set up a payments bank whose scope is limited to accepting deposits, payments, remittances and providing mutual funds and insurance products. One of the larger restrictions in this case is that payments banks cannot undertake lending activities and that deposit balances should be invested in either government treasury bills or time/fixed deposits from commercial banks. This is done to avoid unnecessary risks by the payments banks. The eleven payments banks include communication companies, such as Airtel, Reliance and Vodafone, and more importantly India Post, which is the department of postal services (Mankotia, 2016). Bharti Airtel was the first to launch its mobile commerce arm, Airtel Payments Bank, in April 2017. It has already brought about 1000 villages under its initiative. It began using its 250,000 retail stores as banking points (higher than the total number of ATMs in India) and aims to grow to 600,000 over the next few years (Airtel Payments Bank, 2017 and Kurup, 2017). IPPB (India Post Payments Bank) was established as a public limited company on the 17th of August, 2016 and commenced operation in India in January, 2017 (Reserve Bank of India, 2017). IPPB will provide demand deposits, digitally enabled payments and remittance services of all kinds between businesses and individuals. The...