Time Magazine has just named Angela Merkel Person of the Year. In this post I hereby make CFI’s own designation: India is CFI’s “Financial Inclusion Country of the Year.” In the recently released Global Microscope 2015, India was the star performer. It improved its benchmarking score by more than any country (10 points on our scale of 1-100), rising in the ranking to fourth place overall.
The Microscope measures the quality of the policy, regulation, and institutional environment for financial inclusion, scoring 55 countries on 12 indicators, and then ranking them. The 2015 Microscope Benchmarking Model takes the report deeper, and shows year-over-year changes for individual countries (see table). While India is not the top scoring country (that honor has been held by Peru, Colombia, and the Philippines for several years), it is the country that has shown the most dramatic positive change, particularly in five areas: regulatory and supervisory capacity for financial inclusion, prudential regulation, regulation and supervision of credit portfolios, regulation of electronic payments, and market conduct rules.
Global Microscope 2015 Scores for India
For more information see the 2015 Microscope Benchmarking Model.
What did India do that increased its score in 2015? Building on important groundwork laid in 2013 and 2014, the Reserve Bank of India (RBI), the Prime Minister of India, and the financial sector worked together to implement important reforms.
Setting the Stage: The “Nachiket Mor Committee” Report
In early 2014, the RBI released the report of the Committee on Comprehensive Financial Services for Small Businesses and Low Income Households headed by Nachiket Mor. The report outlined six vision statements for financial inclusion in India’s financial sector including:
- A universal electronic bank account
- Ubiquitous access to payment services and deposit products at reasonable charges
- Sufficient access to affordable formal credit
- Universal access to a range of deposit and investment products at reasonable charges
- Universal access to a range of insurance and risk management products at reasonable charges
- The right to suitability
In 2014, the RBI considered these six vision statements carefully, and in 2015 implemented a number of recommendations from the report.
Expanding the Definition of “Bank”
India has often been called a “bank-led” model of financial inclusion, with microfinance institutions and non-bank financial institutions having a secondary role. This year, however, the definition of “bank” became more inclusive.
For the first time since 2004, the RBI granted new banking licenses. As early steps it conferred permission to start on the journey to become full banks to two institutions, IDFC and Bandhan, a process that both institutions worked hard to complete. Bandhan’s rise to bank status was particularly notable, as it started as a credit-only microfinance institution. As of August 2015, Bandhan had begun its operations as a bank, with 501 branches across the country and ambitious plans for continued expansion.
Then the major opening was introduced: the RBI created two new categories of banks—small finance banks and payment banks. In August, from 41 applicants for the payment bank licenses, India awarded licenses to 11 institutions that ranged from mobile network operators to start-ups to government departments. The payment banks have 18 months to fulfill the requirements set out by the RBI. Once operational, these institutions will make payments within India significantly easier and cheaper for low-income customers.
The small finance banks licenses were announced in September of this year, with 10 microfinance institutions (out of 72 applicants) given permission to begin the process of converting to full-service banks, albeit at a smaller scale with smaller loan sizes and lower-income and rural customers. Both the payment banks and the small finance banks have lower capitalization requirements and should be serving populations that large banks have not reached with services large banks have not provided.
Leveraging Biometric Technology
As of the end of November 2015, about three-quarters of India was covered by a biometric identification that serves as proof of address and identity anywhere in India. Right now, the government is adding participants at a rate of 1 million per day, and expects to reach 1 billion people by March 2016. The system not only authenticates identity as Indians obtain social services, but also makes verifying identity much faster under Know Your Customer (KYC) regulations when customers go to open a bank account. In fact, the time it takes for a financial institution to verify a person’s identity is less than two seconds.
The identification system is the very first in the world to separate identity and eligibility. In other words, the identification is not a voter registration, proof of citizenship, driver’s license, or social security card. It is purely a proof of identity, designed so that any program, service, or additional eligibility can be built on top of it. The identity also does not include factors upon which people could be discriminated against like caste or religion.
The system is especially notable in its leveraging of low-cost technology. With an inexpensive (200 INR or U.S. $3) iPhone or iPad retina scan attachment, and using the built in “thumbprint verification” on such devices, government employees sign people up in the most rural areas in India. It only costs about $1 for each person added into the system. The program came just in time to leverage low-cost and ubiquitous technology to move to scale.
Building on PMJDY
Last year, Prime Minister Modi announced his flagship financial inclusion program, Pradhan Mantri Jan Dan Yojana (PMJDY), designed to put a bank account in every household in India. This year, the program scaled up. If the program’s progress report is to be believed, PMJDY has reached its goal of 100 percent of households covered (of course, this number is an average of all accounts divided by all households. There is probably significant double counting of households with multiple accounts).
At the beginning of this year, we were skeptical about the program. Friends working in the financial system in the country joked that India would be famous for having the highest number of dormant accounts in the world. In 2015, however, the PMJDY program started to show significant promise. As of mid-October, over 60 percent of the accounts opened under the program had a balance, according to a statement from the Finance Ministry. The accounts have a long way to go before they are regularly accessed by users, but the fact that the majority are not sitting empty is a great first step.
Creating a Safer Environment for Microfinance Clients
Finally, there is fantastic industry-level work happening in India as large microfinance institutions move along the process toward Smart Certification. This year, the Smart Campaign certified five Indian financial institutions, bringing the total number of certified institutions in the country to nine. The institutions certified this year are Arohan, Grameen Koota, Janalakshmi, Sonata, and Utkarsh. Together they reach about 2 million clients, bringing the total number of Indian microfinance clients protected through Smart Certification to 15 million, about half of the total microfinance sector.
We are still waiting to see whether the self-regulation experiment, with MFIN and Sa-Dhan serving as Self-Regulatory Organizations for the microfinance industry, will be a long-term solution to full industry participation in positive market conduct. In the meantime, however, the increased awareness of and movement toward client protection from industry voices is encouraging.
Congratulations, India, on a phenomenally successful year for financial inclusion. We will be watching closely as you continue on this path, especially as the impact of these changes on the lives of individuals emerges. In the meantime, however, enjoy your status as “Financial Inclusion Country of the Year.”
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