The Path to Creating Financial Inclusion in India

India’s fintech industry has grown phenomenally in recent years. We are the third largest fintech ecosystem globally, after the US and the UK. Today, New Age fintech startups are known for offering innovative solutions, and there has been an increase in strategic partnerships between the government and fintech companies, the launch of new digital products and government intervention in creating policies conducive to the growth of fintech- actors.

Despite two waves of the Covid-19 pandemic, the total value of investments in the global fintech space increased significantly between 2019 and 2021, led by the payments segment. In fact, according to a study by Boston Consulting Group and FICCI, India’s fintech companies are poised to grow to a value of USD 150-160 billion by 2025.

It is clear that we are moving in the direction of a financial revolution, led by the fintech industry. But is this an indicator that India’s financial inclusion agenda is also moving in the right direction? Are fintech companies capable of shouldering the responsibility of bridging the country’s financial inclusion gap?

Understand the existing digital divide in financial inclusion
There is no doubt that fintech has brought about a change in the financial sector. Still, there are a few hurdles fintech companies and governments continue to deal with when it comes to providing access.

The launch of the Pradhan Mantri Jan Dhan Yojana (PMJDY) by the Government of India led to the opening of millions of new bank accounts. But today, as much as a quarter of these accounts are out of business. This indicates that we may have facilitated access to financial services to some extent, but allowing citizens, especially the rural population, to actively use them continues to be challenging. On the one hand, it remains a challenge to get a certain segment of retail customers to access financial services, while the demand for credit in the micro, small and medium enterprises (MSME) segment is higher than the supply.

A report by the International Finance Corporation (IFC) highlights that the total credit gap in the Indian MSME sector is INR 25.8 trillion. The addressable market demand, on the other hand, is INR 37 trillion. Of this, only INR 10 trillion is funded by NBFCs, commercial banks, regional rural banks and urban cooperative banks. These figures point to the large gap between demand and supply in the country. But looking at the lending market scenario, the formal financial sector alone will not be able to meet this demand satisfactorily. The fintech industry is proving its ability to enable financial services for unbanked and underbanked households.

Fintech’s role in accelerating financial inclusion

The degree of financial inclusion is measured in three dimensions: access to financial services, use of financial services and the quality of the services offered. Here, fintech companies have the capacity to increase access and speed, thus facilitating more tailored solutions that are easily scalable. Through consumer-friendly processes, fintech companies can promote financial inclusion and credit coverage in an industry that has been dominated by traditional players.

Looking at the trend, this growth is likely to be driven by the small ticket size unsecured segment and the high ticket size secured collateralized market. Ultimately, co-lending will emerge as the most important operating model in India, and this will push traditional lenders to partner with fintech companies to gain greater expertise. Already, fintech has managed and continues to differentiate the financial sector in a way that is economically feasible even at a smaller scale of operations.

Several fintech companies are using a combination of technology and local partnerships to reach customers in smaller cities in India. These efforts help to increase financial inclusion and provide access to credit to those who may have been excluded from traditional banking services. For example, (1) payment companies have partnered with local merchants and small shops to market their financial services. These merchants act as agents and help customers in smaller towns open digital savings accounts, apply for loans and make digital payments using the mobile app. (2) Digital lending platforms have developed a mobile app and a WhatsApp Chatbot that allow customers to apply for loans and track their applications from their smartphones. These companies also use alternative data like Account Aggregator, Prosperity Score etc. to cater to tier 2, 3 and 4 cities in India and help customers in smaller cities who are new to credit to get various loans.

No wonder there has been an increase in borrowers from Tier-2, 3 and 4 cities and most customers prefer NBFCs due to their simplified borrowing experience. Both NBFCs and incumbents are trying to educate users, build awareness around sound financial management, provide better pricing and services on loan products and strengthen relationships, instead of only making money on a transaction-based model.

Today, fintech players are enabling financial inclusion in their own small ways and have solutions to drive change on the ground. With the right use of technology and support from the ecosystem, fintech players can further increase financial inclusion, improve access to finance and help expand the offer of financial products for different customer segments.

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