Today, the global financial inclusion celebrity (and Prime Minister of India) Narendra Modi visits with United States President Barack Obama. The pair will discuss the deepening U.S.-India relationship, including progress on climate change and clean energy partnerships, security and defense cooperation, and economic growth priorities. As a reader of our blog, you’re likely aware of Prime Minister Modi and India’s commitment to advancing financial inclusion in the country. Indeed, at the close of 2015, we named India our Financial Inclusion Country of the Year. In honor of Prime Minister Modi’s visit today, we wanted to take a moment to spotlight some of the strides that India has taken to bank the unbanked. After a brief review of the broad initiatives, we identify some highlights from recent months.
In early 2014, and based on the leadership of its governor, Raghuram Rajan, the Reserve Bank of India (RBI) set the stage for progress with the report of the Committee on Comprehensive Financial Services for Small Businesses and Low Income Households (the “Nachiket Mor Committee” Report), which outlined a vision for financial inclusion in the country across areas including universal electronic bank accounts, ubiquitous access to payment services and deposit products, sufficient access to affordable formal credit, and universal access to a range of insurance and risk management products. After carefully considering the report, in 2015 the RBI implemented a number of its recommendations.
Last year Modi announced his flagship financial inclusion program, Pradhan Mantri Jan Dan Yojana (PMJDY), which has reportedly succeeded in enabling all but every household in the country to have a bank account, in partnership with the Aadhaar national biometric identification scheme. Towards the end of 2015, according to the Finance Ministry, 60 percent of the accounts opened under the program had been used and had a balance. The financial services under PMJDY include savings and deposits, remittances, credit, insurance, and pensions.
Also last year, for the first time since 2004, RBI granted new banking licenses. The RBI awarded universal bank licenses to two institutions, IDFC (an infrastructure-focused lender) and Bandhan (a microfinance institution). The RBI also introduced two new categories of banks with lower institutional requirements – “payment banks” and “small finance banks” – and awarded 11 payment bank licenses and 10 small finance bank licenses. A few months ago the RBI put forth draft guidelines on licensing universal banks, further enabling the issue of future universal bank licenses.
The Global Microscope 2015 identified India as a standout performer in enabling financial inclusion. It improved its year-on-year score more than any country. The Microscope measures the quality of the policy, regulation, and institution environment for financial inclusion.
And the progress continues. Here is a snapshot of recent activity:
- The government launched its Unified Payment Interface (UPI), a mobile phone-based payment system that allows users to send money to one another regardless of which bank they have. The system was created by the National Payments Corporation of India (NPCI), an umbrella organization under the RBI.
- The Aadhaar system recently reached its milestone of registering 1 billion people, encompassing more than 80 percent of the country’s population. Along with supporting UPI, the system authenticates identity as Indians obtain social services and also makes satisfying financial institutions’ Know-Your-Customer requirements for opening accounts much easier and faster.
- The RBI released rules for public comment on peer to peer (P2P) lending. Just this year, 20 P2P online lending companies have been launched in India, according to data analytics company Tracxn.
- The fintech software and services market in India is worth approximately $8 billion at present and is forecasted to grow by 1.7 times by 2020, according to a report by Nasscom.
- India Post, which already offers limited financial services, was granted approval last week to become a payments bank. By September 2017, 650 branches will support payment services, expanding much needed financial access to semi-urban and rural areas.
- The initial public offerings of Equitas Holdings Ltd. and Ujjivan Financial Services Ltd. were very successful and introduce a wide range of investors to the Indian financial inclusion sector.
- The fourth quarter 2015 aggregate loan portfolio for the Indian microfinance industry grew by 85 percent as compared to the same quarter of the previous year. Some observers worry that at this rate a new crisis may be around the corner.
- Prime Minister Modi launched the “Stand Up India” program to promote financial inclusion of women. The program aims to create 250,000 women entrepreneurs by tapping banks to offer a range of loans without collateral for setting up new enterprises.
- Announced last week, Swarna Pragati Housing Microfinance Co. won The Wall Street Journal’s competition on achievements in financial inclusion. The company adopts an innovative loan collateral system in its work with local village governments to recognize land ownership for people without formal titles and use the properties as loan guarantees.
This dynamism is taking place with the backdrop of a poorly performing mainstream financial sector. India’s banks are thinly capitalized, and at the same time they are holding an enormous portfolio of non-performing loans – $44 billion in such loans were declared in the last two quarters, according to The Economist. In other words, many of India’s banks are verging on insolvent, and it is likely that the tab will ultimately be picked up by the government budget. This is a distressingly recurring story in the Indian financial sector. The Economist notes that up to $30 to $50 million in new capital will be required to shore up the public sector banks. These banks account for 70 percent of the sector’s loans and the overwhelming majority of its bad loans.
Much of the excitement and growth in India’s financial inclusion sector is generated by the private sector. When Indian regulators move to allow the private sector to grow in a responsible manner, they see a multitude of initiatives like the ones we just listed. A reformer like Rajan must contend with the very real burden, including the strong political burden, that keeps financial sector policy shackled to the public sector behemoths. When Prime Minister Modi and President Obama meet today, perhaps Mr. Obama can provide him with some lessons on stabilizing the mainstream financial sector, while Mr. Modi can bring some of the innovations in the financial inclusion sector to the attention of Mr. Obama.
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