Financial Inclusion
November 19, 2020

Financial Inclusion | Insights from Charcha2020

Social protection for all

Social protection as a conversation to be addressed urgently is now gaining collective conscience. Covid-19 has forced a conversation on the relationship between the state and the citizen, to happen in a time period that already had large scale job losses due to artificial intelligence and related technologies on the horizon. In the new relationship, the state needs to guarantee access to health, housing and food to its most vulnerable citizens. 

Such protection also needs to be portable and move away from domicile requirements for entitlements. This will legitimize the presence of migrant workers in the cities, so that they get all the required benefits at the destination. Self-attestation as a way of targeting recipients needs to be looked at. Solutions lie in having representation from migrants and building solutions to have them have a say in urban governance. We need a structure for civil society organisations working in tandem with the administration to enable decentralized delivery of social protection services to effective last mile delivery of benefits. 

States must revisit their rural development and revival plans to develop employment opportunities for people to bring down the exodus of workers to other states. Tracking data of migrant workers at source and destination, and using this data to understand the types of migration is critical to address specific problems. 

Bridging the Gender gap

Organisations working in financial inclusion of women, and funding women-run businesses (cooperatives, NGOs, etc.) need to be supported during this period. In the absence of gendered approaches to products, solutions, and interventions, we stand to lose decades of work in bridging the gender gap in access to capital. This requires policy attention and financial support from the government and institutions like NABARD. Emphasis has to be supporting women to continue the business, earning incomes, livelihoods whether it is in emergency loans, credit lines, and providing them with advisory/ financial counselling on what would be best-suited products for them. There needs to be gender intentionality in these products.

Besides access to capital, we need to bridge the gender gap in ownership of assets and property. There is an acknowledgement that women who have been able to cultivate assets for themselves find it easier to pivot to some other non-perishable business, as they are considered more credit-worthy by lending institutions. However, the ability of women to secure their legal rights over land and property has been a point of vulnerability.

The Govt. needs to work with banking platforms/institutions to bring women borrowers into the fold so that government schemes reach these women borrowers. Bank accounts need to be reoperationalised and this can only happen with support from the centre. Digital and financial fluency are crucial, training has to be holistic; and capital/credit needs to be provided to women enterprises (e.g. a credit line for street vendors) for them to stay on their feet. Vernacular voice content can solve literacy gaps as well. Financial inclusion is only possible when it’s sustainable, and that comes from the creation of financial and functional literacy. 

Digital Financial Inclusion

In the last decade in the Indian financial sector, there has been a rapid digitisation of ‘back-end’ finance including our core banking system. However, we are confronted with a unique Indian conundrum, universal digital access has not directly converted into higher usage of financial services. The COVID reality has pushed the conversation aroundDigital Financial Inclusion to prioritize access to the currently excluded/unbanked.

Introduction of product innovations among rural customers has been majorly an afterthought rather than being a primary objective. Considering that there are varied socioeconomic backgrounds in the rural areas, customised or tailored financial schemes should be offered to target the different segments of the unbanked population, with regular interactions to generate awareness on the offerings and benefits that will provide them the right insights into leveraging their resources and churning them to better use.Communicating value proposition and building confidence of last mile users in digitally available financial instruments is important.

Impact investments

Though financial inclusion as a priority and focus has been around for a while, it is now clear that the time has come to look at moving to the next phase of financial inclusion as we know it. Financial inclusion as a concept began with the Self-Help Group (SHG) movement, where the social sector played a key role; then led to government involvement through changes in regulation, opening up for privatisation, etc. and eventually led to banks and NBFCs becoming important stakeholders in their involvement. The last decade has seen significant strides in terms of the development of financial infrastructure which has further empowered financial inclusion. Some of the game changers being the development of the JAM trinity (JanDhan-Aadhaar-Mobile) and the onset of Jio. Based on India’s current trends in tele-density, financial services & FinTech have been a focus of the investor segment. If the short-term pain can be overcome, the COVID scenario does have a silver lining— the sector is now forced to evaluate quicker technology adoption and rapidly changing consumer behaviour that in turn, can change the landscape of services that have been offered within the financial inclusion segment. 

Communities whose income is dependent on external factors beyond their control e.g. farmers and their dependence on climate, fertilizer prices, availability, etc.; need stability in terms of financing to ensure they have a good produce and that a value chain can be created where they get what they need. The MFI sector has done an exemplary job in keeping default rates low and that has come about from decades of ecosystem building— and users of these offerings are aware that this is the prime source of lending they can get. The recent government announcements of Rs. 30,000 crore liquid facility for NBFC housing finance companies and microfinance, will help create demand for securities by non-banking lenders but this might not be enough to bridge the overall gap. This gap has to be filled by capital market players. MFIs and NBFCs have to keep continuing that push towards capital markets. 

Challenges and the way ahead

A transmission of Rs. 3 lakh crore in terms of a collateral free government backed loans to MSMEs, will mostly follow through toNBFC sector and be refinanced with the banks. This will create a lot of liquidity on the NBFC balance sheet. It is estimated that 40 million migrants have been affected by the current crisis, and assuming even 50% return to their homelands and start businesses on their own, this will create an 8 billion dollars’ worth of microfinance loan demand. The capital market will play a big role in bridging the gap between the 30,000-crore liquid facility and the demand for loans. A Rs. 45,000 crore first loss guarantee will be provided byGovt. of India and will create a lot of liquidity. It is important to continue with usual business and tap into the capital market because all possibilities have not been exhausted. 

FinTech when looked at as a whole, represents payments and when looked at from a “beyond COVID perspective”, creating agility in FinTech payments, essentially means anyone with an establishment, will slowly and steadily go towards a “social distancing” value chain— particularly the QR route. We will now see more activity on the acceptance side of the value chain and not as much on the consumer side of payments where a large ecosystem already exists. The second activity from a FinTech standpoint will be on theB2B value chain, wherein more entities will be seen on supply chain, digitisation value chain, etc. 

The far-reaching impact of COVID-19 continues to evolve. Today, small businesses are grappling for stability given the halt in production and major slump in demand. As a crucial part of the Indian economy,MSMEs contribute to 30 percent of India’s GDP, about half of India’s exports and provide employment to over 120 million individuals. It has been estimated that close to 40% MSMEs are likely to discontinue business operations, and the revival of the sector is categorically urgent. 

The push for collateral-free bank loans is largely relevant for enterprises that have borrowed loans previously: The INR 3 lakh crore worth of collateral free loans are directed towards enterprises that are not first-time borrowers. This means that a large segment of informal micro-enterprises will continue to remain excluded. Additionally, while theGovernment has extended this support to banks and NBFCs, the institutions will still face business dilemmas in disbursing these loans.

Pressure points

  • Acute stress on financial systems in the short and medium term
  • Loss and delays in transmission of Central Government stimulus to grassroots
  • Digital divide resulting in a financial inclusion divide
  • Need for innovation for inclusion of Rural and tribal communities
  • Risk of widening the gender gap in financial inclusion, access to capital

Download the full Insight report on Charcha 2020, covering 16 events and 150+ hours of discussion.

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