While wrapping up my job as the Head of Technology for Aadhaar at the UID technology centre we had set up in Bengaluru, Nandan Nilekani asked me: "Can you create a bank for a billion people using one hundred people?"
As always with Nandan, beneath the seemingly simple question was a deeply insightful and relevant financial inclusion quest. It was demanding automation to such an extent that the cost of banking would be driven so low that we could deliver banking services to all—even the poorest Indian.
Historically, banking was designed for the middle class and higher sections of society, whose sizable deposits would pay for the high cost of delivering banking services. Traditional banking relied on a large branch network in key urban centres with trained bankers, resulting in high costs of rent and salaries, respectively.
Moreover, the move to computerisation in the 80s and 90s to a 'Core Banking System' (CBS) had also been relatively expensive. It required setting up computer infrastructure in each branch, networking these branches, and the expensive CBS software systems.
While the RBI (Reserve Bank of India) pushed for financial inclusion, the cost structure did not allow banks to seek rural customers with likely small deposits actively.
All that has changed in the last ten years. The task of creating bank accounts for 80 percent of the population would have taken 46 years to achieve; instead, it was completed in six years, according to a World Bank Report on Financial Inclusion Action Plan.
What has changed? What were the factors responsible for this transformational change? Is there a single underlying cause for much of this progress?
The four ‘JAMP’ factors are likely candidates for this leap:
1) Jan Dhan Yojana: In 2014, Prime Minister Narendra Modi launched the financial inclusion scheme to provide affordable access to financial services such as bank accounts, remittances, credit, insurance, and pensions.
2) Aadhaar enrolled 99 percent of adults in the country and reduced the cost of Bank KYC ('know your customer' verification) from Rs 500 to Rs 3. APB (Aadhaar Payment Bridge) provided easy means of delivering DBT (direct benefit transfer), and AEPS (Aadhaar-enabled payment system) allowed for cash withdrawal without needing ATMs and debit cards.
3) Mobile: The number of internet-connected mobile phones in the country rose from 177 million in 2010 to over a billion by 2020, with India delivering the lowest cost of data globally over the internet at Rs7/Gb.
4) UPI: The Universal Payments Interface crossed 10 billion transactions/month in Aug 2023, marking a major shift for India from cash to digital payments. Even the humble fruit vendor on the street has a QR code to accept customer payments.
The underlying common thread of the above factors is technology or digital transformation that has addressed identity (Aadhaar), communication (Mobile), and payments (UPI) at a massive scale and helped make considerable progress in financial inclusion in India—a goal that had eluded us for seven decades.
The Digital Public Infrastructure (DPI) approach to delivering public goods combines well-designed policies from appropriate ministries and regulators (Finance Ministry, RBI, TRAI, and so on) with open digital protocols implemented through 'Informational Utilities' like UIDAI and NPCI. It has shown remarkable success.
While we can be happy with the progress made, our goal of financial inclusion is far from achieved. Providing essential banking services to all is commendable but not sufficient; we need to provide credit to small fledgling businesses as well.
A 2023 report on MSME lending [Ref: Avendus Lending Report] estimates that MSMEs (micro, small and medium enterprises) need an estimated Rs68 lakh crore ($819 billion) in credit, while only about Rs24 lakh crore ($289 billion) is fulfilled, leading to a credit gap of Rs44 lakh crore ($530 billion).
Can technology and DPI play a role in closing this gap? Let me elaborate.
India is fast becoming a data-rich nation thanks to the Digital Public Infrastructure landscape. Can we combine the data of India's DPI engines with the implementation of PDP (Privacy and Data Protection) laws recently enacted to protect the privacy of individuals and data, and use the data to create economic value safely and securely?
I believe this is not only possible but also happening slowly but surely. The Open Credit Enablement Network (OCEN a framework of application programming interfaces APIs) for interaction between lenders, loan agents, and collection agencies, can facilitate 'flow-based lending'. It would use various data sources such as GST information and bank statements in conjunction with the "Account Aggregator" framework to implement data privacy. This approach can help credit rate MSMEs and lend to credible MSMEs, thus bridging the lending gap.
Last but not least, can Indian banking speak the multitude of languages that Bharat speaks? Can we simply 'talk' to our banks instead of filling out complex forms in English to avail of various banking products and services? Can we offer conversational banking in all the 15 languages enshrined on our currency note?
In the last two years, Generative AI has taken the world by storm. ChatGPT-like tools have shown us the power of this new AI model with language capabilities that can help with a conversational interface in the local language. This can help address the literacy inequities of the population and ensure we don't deny financial services to a large number of people with literacy challenges.
In summary, the journey toward financial inclusion in India has been propelled by technology, underpinned by the ‘JAMP’ framework—Jan Dhan Yojana, Aadhaar, Mobile, and UPI. These digital public infrastructures have significantly reduced the cost of basic banking services, ensuring wider reach. However, the challenge lies in bridging the credit gap for the under-served sector.
As India becomes a data-rich nation, technologies like the Open Credit Enablement Network (OCEN) and advancements in generative AI for conversational banking in local languages offer promising avenues.
Leveraging these technologies can not only fill existing gaps but also bring financial services within reach of every Indian, irrespective of their socio-economic status, linguistic diversity, or literacy level. The future of financial inclusion in India is not just promising; it's imminently achievable.
The writer is the founder CTO of Aadhaar, and co-founder and chairman of Trustt.
The thoughts and opinions shared here are of the author.
Check out our end of season subscription discounts with a Moneycontrol pro subscription absolutely free. Use code EOSO2021. Click here for details.