Towards a financial inclusion revolution in India with new technologies ?

India has been a fertile ground for many emerging market innovations. These innovations have permitted to provide low-cost housing, access to sustainable energy through specialized programs, cashless public health insurance for poor families or financial services.

These, coupled with evolving business cases and public policy have brought a positive development of economic indicators.
But despite of these successes, it is difficult to ignore the complex problems that India faces for many years as financial exclusion of its population, for example.

Indeed, according to the World Bank, nearly 65% of Indians aged over 15 years do not have access to a formal bank account. Public funds to the poor through social protection systems and subsidies have increased, but the large-scale financial exclusion acts as a barrier to achieving the policy objectives in India. In a word, the Indian taxpayer money cannot create a lot of "bang for the buck", because the structural challenges lead to economic inefficiencies of public finances.

One of the main objectives of government policy in India was to enable financial inclusion through the reduction of poverty by interventionist public policies. To achieve this, the nationalization of the Indian banking system was implemented in 1969. The only purpose of the nationalization of the bank was to enable financial inclusion and meet the credit needs of a largely agrarian society.

Despite the efforts and actions leading in this sense the following years, public agencies have not managed to find the ideal solution to enable financial inclusion for all rural people.

In this context, in 2007, the southern state of Andhra Pradesh has launched an experiment in two districts to disburse government benefits to final beneficiaries. The benefits were paid by business correspondents (third-party non-bank entities contracted by financial institutions) who were able to identify and verify the beneficiaries through the use of new technologies such as biometric smart cards and pocket service terminals.

This innovation in the delivery system of traditional payments, recognized for its potential and known as Electronic Benefit Transfer (EBT) has extended rapidly to small villages through the distribution of biometric smart cards.

Since 2007, the Electronic Benefit Transfer has evolved and now consists mainly of social security pensions and disbursement of salaries, distributed through a national network of more than 221,000 business correspondents.
This model has become even more crucial for financial inclusion of this emerging country and it is very promising for the future.
Financial inclusion in India depends largely on factors such as how banks are able to use their infrastructure and the individual identification number to 12 digits as proof of identity. Both are essential pillars to make such direct cash transfers in India.
This payment system will permit, for example, financial transactions through ATMs in rural and semi-urban areas.

Despite of the challenges, this country of more than 1 billion people is on the verge of a financial inclusion revolution shaped by convergences of innovations in payment systems and doorstep delivery models. If it succeeds, India can offer to the world another example of how innovation and forward-thinking public policy can help transform emerging economies.

Discover also how financial inclusion can lead to social inclusion, with the example of Sierra Sur program in Peru.

Sources : Next Billion

Tags : India, emerging country, microfinance, innovation, new technologies, financial inclusion, Microworld, Electronic Benefit Transfer