India Can Lead The Way On How To Take The Bank To Every Home

In September 2008, just hours after Lehmann Brothers, one of Wall Street’s biggest investment banks, filed for bankruptcy, United States (US) Treasury Secretary Hank Paulson received a call from the chairman of General Electric, the world’s biggest manufacturing company at the time.

By allowing a private investment bank to fail, American authorities had apparently triggered panic across banks on Wall Street. This led to clients and investors withdrawing their money, and that resulted in the credit markets being frozen. The General Electric chairman told Paulson how the company, in an otherwise healthy financial state, was struggling to finance its day-to-day operations because of a lack of credit. No credit, no business. No business, no jobs.

For General Electric and thousands of other companies across the US and the world, a lack of credit resulted in disrupted businesses. This further led to the collapse of the economy and contributed to unemployment and a fall in the standards of living.

Eventually, credit markets were restored. However, 10 years later, the challenge before the world is not how to ensure the credits markets remain open, but how to enable credit access for everyone, including the ones at the bottom of the socio-economic pyramid.

The sixteenth sustainable development goal of the United Nations Development Programme (UNDP) warrants a legal identity for all by the year 2030. According to a UNDP report, one in five persons has no proof of existence. Thus, they cannot confirm their statehood and have no access to formal public or private services.

Imagine being without a birth certificate, voter ID, passport, or any government or private identification ID in the pre-Aadhaar era. Clearly, without any of these documents, one wouldn’t be able to vote or access banking, healthcare, education, and other civic amenities, and would be vulnerable in every form. That’s the state of over 1.5 billion people today, across the globe, for they are without any legal identity.

In a digitised world, a legal identity has to go beyond a few pieces of paper in some government locker. Having a framework for legal identity warrants the elimination of redundancy, exclusion, and fraud, thus making digitisation of the entire process inevitable.

A legal identity can be looked at in two ways. First, as a foundational identification system. This system is created to ensure general public identification and impart credentials to the population which are essential for them to avail necessary public (and in some cases, private) services.

For instance, Aadhaar has now taken the shape of a foundational identification system given that it can be used to avail an array of public services and even helps to access private services like opening a bank account, getting a SIM card, and so on.

Second, as a functional identification system. This system is only restricted to a specific duration, region, or service. For instance, if voting in India were only allowed through voter ID cards (in some cases, alternatives to voter cards are allowed), the voter ID would constitute as a functional identity system.

To facilitate both these systems in a digitised world, digital biometric identification (DBI) is essential. The purpose of DBI is two-fold. One, it should enable a one-to-one (1:1) matching of a live biometric sample against one stored in the system. This helps in authentication and verification while availing different services. Two, it should enable a one-to-many (1: N) matching mechanism to ensure the uniqueness of the ID. This can also be helpful while searching for a single ID from a set in the event of a criminal record search.

Thus, having a legal identity for all can help usher an array of services. To put things in perspective, a legal identity can serve as an operating system that supports many apps or, in this case, services like banking, education, and healthcare, to begin with.

This is where India can lead the world. Before getting started on education and healthcare, the world must focus on getting the bank to the people. As per the 2017 Global Findex Survey, absence of a legal identity led to the exclusion of over 25 per cent of individuals from the banking system in low-income countries.

Taking India’s rural population of almost 800 million people into account, the mere scale can encompass American population 2.6 times, Brazil, Pakistan, Nigeria, and Bangladesh four times, and other low-income countries like Rwanda, Zimbabwe, and South Sudan over a hundred times. Thus, whatever India has done to pursue the goal of financial inclusion for its rural population of 800 million people can serve as the Bhagwad Gita for aspiring nations across the globe.

According to the 2011 census of India, only 58.7 per cent of households (both rural and urban) had access to banking services. While the rise from 35.5 per cent in 2001 was dramatic for a few, it did little to enable financial inclusion on a nationwide level.

In 2014, under the leadership of Narendra Modi, the government launched the Pradhan Mantri Jan Dhan Yojana (PMJDY) scheme with a focus on providing every household in the country with a bank account. However, the PMJDY goes beyond the linear socialist mentality of merely creating infrastructure, for it ensures its intelligent use.

The policy document of the PMJDY emphasises six pillars:

1) To enable universal access to banking for every household in the country

2) Overdraft facility and a debit card for all accounts to facilitate transactions

3) A financial literacy programme to reach out to a significant number of people

4) Creation of a credit guarantee fund to cover the overdraft facility

5) To offer micro-insurance to eligible account holders

6) To integrate the accounts with other government schemes like pension funds

To facilitate the opening of accounts, the Reserve Bank of India allowed for an e-KYC (Know Your Customer) process to be established. Using biometric authentication to validate their Aadhaar data for e-KYC, applicants could get access to formal banking facilities. Paperless in nature, the process was inculcated by all the banks under the PMJDY scheme. Within the same framework, other components like the Bharat Interface for Money (BHIM) were introduced to facilitate easier transactions among beneficiaries. Thus, an entire financial framework was created on the foundation of a legal identity.

Today, the PMJDY scheme encompasses over 300 million people across India. Thus, it is safe to assume that almost every household has a member with access to a formal banking facility. The deposits in these PMJDY accounts exceed Rs 80,000 crore till August 2018. Over 175 million women have been helped with bank accounts under the PMJDY, thus overcoming one of the most significant barriers to financial exclusion.

So, with PMJDY, the government can ensure direct payments to relevant beneficiaries under many schemes. Already, government savings through direct benefit transfers (DBT) are pegged at Rs 83,000 crore. The framework also provides for the transfer of subsidies in the wake of a humanitarian crisis. However, the biggest boost from the PMJDY has to come in the form of credit growth, expansion, and sustainability.

The presence of a legal ID in the form of Aadhaar along with a bank account allow credit agencies in India to profile eligible applicants. Credit reporting systems must have the consent of the user before processing their data to build a profile, going forward. Already, there are digital platforms that connect urban users to banks who offer loans if the terms are met.

Not everyone seeking credit aims to run a General Electric. For a rural entrepreneur, the requirement of credit might be to run a masala dosa restaurant in New Delhi or have a chola bhatura stall in Bengaluru. The loans, unlike those made to the corporates, may be made only for a week, or even a day.

For instance, a loan made to this entrepreneur might be of Rs 1,000 for a day to procure the necessary raw materials. Let’s say, with an interest on the loan, after 24 hours, the entrepreneur would have to pay back Rs 1,030, which could be done via auto-debit. Assuming the business runs well with profits, the entrepreneur will be in a position to expand the company over a period. The timely payments made to the bank shall reflect in the credit score, which would enable greater loans. Such loans made on a daily, weekly, or monthly basis could lead to credit growth that facilitates the growth of micro, small, and medium enterprises (MSME) across India.

However, reckless credit growth must be avoided. During the US housing crisis of 2008, many applicants were given loans simply because there was not enough credit history available. Eventually, there were defaults on those loans, and the rest is history. In India, where there will be 400-800 million citizens with negligible credit profile, banks must carry out initial groundwork before a loan is made. Also, big data and analytics must be inculcated to understand trends and credit fault lines.

The groundwork will be essential if credit is to be sustained. Without credit, in the long run, not many MSMEs can thrive. Thus, carefully orchestrated credit growth must precede calculated credit expansion for consistent credit sustainability.

For long, the narrative around financial exclusion has been restricted to infrastructure. To lead the world in financial inclusion, India must look at the number of bank facilities, accounts, or deposits, and focus mainly on credit expansion in the coming years. Creation of MSMEs could be critical in absorbing the rural workforce, would enable skill development, and encourage self-reliance for a country obsessed with doctors and engineers. Why not have credit availability for bakers, for instance?

The world in the 2020s will have a lot to learn from India. Already, the nation has made the right start with Aadhaar. Now, it is time to go big in the realm of financial inclusion, followed by healthcare, education, and other civic services to lead the world to a better place.