How digital revolution can push financial inclusion

A digital revolution is under way in India, which is the spread and use of mobile phones. At the moment, the country has about 1 billion mobile phone subscribers -- and even after accounting for multiple connections for some -- the number of people using mobile phones is substantially larger than the number of people who have bank accounts. Simultaneously the National Payments Corporation (NPCI), is putting across through the country a digital network which will eventually very soon enable a lot of payments to be made on the digital platform. The Reserve Bank (RBI) and the telcom regulator are working to ensure that financial inclusion is one of the key goals that is achieved by both these regulatory bodies and the roadblocks for them are removed with alacrity. The Bill and Melinda Gates Foundation has also been working towards this end and NASSCOM is providing a zillion software and apps to ensure greater financial inclusion.In a panel interview with CNBC-TV18's Latha Venkatesh, Minister of Finance Jayant Sinha, Bill Gates, RBI Deputy Governor SS Mundra, TRAI's RS Sharma and NASSCOM chief R Chandrashekhar came together to discuss what India is and can do to push financial inclusion through the digital revolution.Q: What is the government's position on how it is hoping to marry both digital and financial inclusion in India?Sinha: This is a unique moment in India's history. A profoundly important moment in India's history because under the able leadership of the Hon'ble Prime Minister and the Hon'ble Finance Minister, we are putting together a unique social security platform. Now of course we are talking about financial inclusion and digital financial inclusion, but I want to tell you all that we have moved beyond just financial inclusion and because we have an extraordinary goal, which is to ensure that 100 percent of Indian families in a 100 days had a bank account and of course because of all the work that has been done by the mobile operators, virtually all Indians now have access to mobile phones as well and of course with Aadhaar we are getting close to saturation on biometric identity as well, we have the building blocks of a social security platform. What we are doing with social security is, we are solving three problems at once. There is the first the problem of inclusion. Which is what Jan-Dhan has done by ensuring that we have saturation on bank accounts. There is a second problem which is that of access. That is, solving the last mile problem and ensuring that everybody who has a bank account can actually go to an ATM or go to a post office or go to a kirana store, and do cash-in cash-out. That is what we are doing with the payment banks, 11 of which have been licensed by the RBI. So, we have solved the inclusion problems with Jan-Dhan Yojna, we are solving the access problem, with what we are doing with payment banks and so on and as I will just pause here for a quick second and tell you that our post offices being licensed as a payment bank, the post office today has a 155,000 post offices around India, which is more than the number of bank branches cumulatively. So the post office is going to become a payment bank and post offices, most of them, are within a few kilometres of virtually every single of India's more than 600,000 villages. That is the access problem, the last mile problem that we are solving with the social security architecture that we are putting together.Then finally, you might have a platform, but as Bill Gates knows very well, you have got to get usage, you have got to get liquidity and you need a killer app to get the platform to take off. And the killer app of course are direct benefits, which is what the government is doing by putting payments through the social security platform. And we have done that very successfully with the 12 crore PAHAL accounts for gas cylinders, but we are doing that NREGA, which is the right to work program, and in NREGA today already 90 percent of NREGA payments are going to peoples bank accounts. Either literally in their bank account or into their post office savings account. So we have a whole host of government benefits, which is the liquidity that we are putting into the social security platform to ensure the platform starts to get utilised. And once we have the inclusion, the access and the liquidity problem solved, we can now load a whole host of other apps on top of the platform that we are building, and one of the apps that we are thinking about right now is health insurance, then we have got National crop insurance that we are working on as well. So there is a variety of other applications that can be put on this platform.Final point, the platform that we have, is a plug and play platform for these apps. And the central government is loading all these apps, loading all of these benefits onto the platform. We have worked out what the payment should be for a cash-out and so on. But because it is a plug and play architecture, it enables the states as well. So if a state has a benefit program that it would like to be able to load onto this platform and utilise the underlying infrastructure services to be able to deliver a benefits program, we can enable the states to do that as well. And that is what ladies and gentlemen we are working towards.Q: Your vision of what you have seen so far in India and since you have seen the payment banks and financial inclusion work elsewhere, what would be your initial thoughts on where India is and where it can go?Gates: If people refer to the Gates Foundation, they probably associate us with our health work and that is by far, our biggest set of programmes globally and here in India. Not as many people know about our work in financial inclusion. So, it was about eight years ago, we started that group. Our early activities were around microfinance and really driving that and looking at certain types of savings and insurance constructs and it was through that work that we came to believe that digital transactions would really be the key to inclusions. Because what we kept running into is that whenever you had a system where you have face-to-face activities, the regulatory cost of having that training and the IT system and the security simply meant that the transaction fee for somebody dealing with small amounts of money would just be too large.So, if it was a loan, the interest would be very large, and even in microfinance where you get a lot of volunteer activity through the self-help groups, even there, the interest rates are large enough so they did not have as big an impact as everybody wanted to see.So, that is why we are very involved in India trying to help the government come up with policies that will drive this breakthrough financial inclusion. We are very excited about the work that is going on. Aadhaar is a great foundational project. The aggressive goals for bank accounts is fantastic. The re-elation around the payment banks, we think is the final piece that the government has placed and. And so, our view is that next year, if these payment bank offerings rollout that we are going to see something very exciting. We think that the payment banks, you should be able to do your direct benefit transfer into the payment bank. We think the user should be able to pick whether it is a mobile phone account or ATM where you use your Aadhaar identification on a plastic card. We are hopeful that the payments amounts are strong enough that these agent networks are in all the rural areas and there the payments may need to be a little bit higher to get that.But once the system gets to critical mass, it is pretty magical. We have seen in various countries, in Africa, where that has happened. Obviously, when it happens here in India, it will be far bigger, it will move a lot faster. In fact, I think India will take the lead in this as the payment bank concept really rolls out and the volume gets behind it. And then, once you have that enablement with the very low fee structure, we can move our focus from the digital rails into the question of is it really benefitting the poorest, are the right applications there, the fee is right, is the training right, are there enough agents in the different areas where they are, did they feel comfortable with the product and those services where you ultimately can get huge benefits for the poorest.Q: Although bank accounts have been opened as I discovered when I was reading more about this, 43 percent of the accounts are still dormant. However all mobile phones are being used. May be in a month or two or may be in a quarter, the payment banks will start opening, most of them are telecos or many of the large ones are telecos. How difficult will it be for a teleco holder, a telecom subscriber to become a bank holder? Is it that telecom companies simply sends an SMS and says do you want to open a bank account and he says yes and you will allow him? Will it be as easy as that to open a bank account for a telecom company?Mundra: Whether we will allow or not is a very small issue in the whole gamut of things which we are discussing. When this whole Jan Dhan started 80 percent of the accounts were not operated, today it has come down to 40 percent. We are talking in terms of last one year. However the point which I would like to emphasize here, I would be quite wary about coining a new term digital financial inclusion. My belief is financial inclusion is one, that is the goal, digital is only a mean. So, let us not try to create new sub categories in that. Whenever we talk about financial inclusion generally we are talking about the opening of account, direct benefit transfer and then we move to the pension, insurance, investment. DBT to my mind is not a additional cash flow to the person. He was getting that advantage one way or the other. What is achieved by DBT is, transmission is more efficient, probably there is less transmission loss and may be some of the people who were getting deprived are now getting their rightful thing.My point is, I call it as a missing middle. I mean you have accounts, you have DBT which makes the account little bit operational but when do you do the pension, investment, insurance? When you have surplus. So, that missing middle is productive credit, how productive credit can be given using the digital channel efficiently.To my mind whatever digital strategy you are talking about in context of financial inclusion and as with many other things in our country there have to be two clear and differentiated strategies, one for Bharat and one for India. To give you a sense when I talk about Bharat we have 85 percent of the farmers who are small and marginal farmers, who have a land holding of less than 1.15 hectares. 11 crore people are employed in MSME sector, 94.94 percent of them are micro credit and 92 percent of them don't get any institutional credit. So, I would say any digital strategy apart from the payment and the opening of the account which can address the issue of providing productive credits so that people generate surplus, when they generate surplus then they do the saving, they do the investment, they do insurance, they do pension everything.As far as the payment banks are concerned and teleco clients are there, today we have one situation, we have 900 million Aadhaar cards, we have 900 million mobile subscribers. Aadhaar platform now provides the facility of e-KYC. It means for anyone who is a telecom subscriber and now who becomes a client of payment bank there is a automatic process whereby the KYC is available. So, it will not be a challenge.Q: How are you seeing the telecom infrastructure evolving? Will we ultimately see the point of sale (POS) disappearing and being replaced by the mobile? At the moment that is the problem. Every merchant has to have a POS terminal.Sharma: Well let me put it this way. The basic question which you are asking about is the inclusive payment system, the meat is cost. Cost of transaction. For mobiles; initially when we started the cost per minute of the mobile was Rs 8.40 for outgoing and incoming calls. It was limited to only a few thousands. Today the cost is 50 paisa per minute. Every person in this country is using mobile. You have 1 billion plus connections. So therefore, technology is not a problem with India. If 1 billion people can use mobiles, technology is not really a barrier to them. Whatever the barrier however is currently the cost of transaction. You must understand that this transactions to go to the bottom of the pyramid; the characteristics of these transactions are, they are very low value transactions, but they are large volumes. A poor person in this country, even if he earns Rs 100, he also wants to save Rs 10 out of that for a rainy day. And where does he keep this Rs 10? Suppose he keeps these Rs 10 in a bank account and he goes to ATM, where cost per transaction is Rs 20, that is unsustainable.Therefore what you need to have is essentially a system, where cost of transaction whose value is Rs 100, is not more than Rs 2-3. Then it becomes inclusive for him and it should also be easily accessible. So essentially what we are looking for is, if you want to have a digital banking, first part is that it has to be a digital transaction. You cannot have a physical kind of transaction in such value. Cash transactions are not possible. Secondly, you are looking at a frugal digital transaction. Because frugal nature of this market, if you want to access the bottom, we will have to be kindled. And what Mr Sinha is saying, this is essentially the architecture which has been put in place now. India today has all the pieces of the puzzle in place. India has a digital identity infrastructure which is now possessed by 930 million people of this country. And what do you need in a transaction? You need to A] establish your identity, that you are the person authorised to do transaction and thereafter a digital transaction is credit in one account and debit in another one. Which is basically just entry into two records of a database. So essentially this whole thing should become as easy as making a phone call. I want to transfer Rs 100 to you, I just type your name and that is about all. And the National Payments Corporation of India (NPCI) at the back end the core banking system must take care of this situation. And it is possible that in this digital way you will be able to reduce the cost of the transactions and more and more transactions will start happening cashless. A poor person will start paying to his kirana shop fellow through a mobile phone.So therefore I see a great future because you have 1 billion plus mobile, you have smart phone population in this going at the rate of 25 million per quarter, and actually even your maid, believe me technology is not a barrier, she knows how to make a phone call and if you make the digital transaction also to be as easy, she will be able to do that believe me. So therefore I feel, what is required is actually millions of these touch points where you can do digital peer-to-peer transfers.Do you know what is the top-up value of a mobile recharge? The average is Rs 10. If telecos can do a Rs 10 transaction which is completely digital and make it sustainable, obviously is possible to make a Rs 10 banking transaction also sustainable.Q: As the representative of the techies in the country, do you think that regulation is in anyway becoming a barrier? What do you want Mr Sharma to change? What rules do you want Mr Mundra to change? What rules do you want or what habits do you want Mr Sinha to change?Chandrashekhar: First of all, I would like to say that we have today, financial tech companies as a very important part of the whole start-up and innovation ecosystem in the country. We have more than Fin-tech companies, we have more than 30 percent of the companies which have come up since 2010 have been in financial technology and clearly, we are in a position to become a hub for financial technologies. Why I am mentioning this is because India is a highly price sensitive country and as Mr Sharma was mentioning, the cost of the transaction is a very important element of deciding what would be the values for which people would be willing to transact and to what extent people are able to actually use these methodologies.The statistics today are that while we have a billion phones and rejoice in that fact, and I would too, both of us have been associated with that sector, less than two percent of them actively use the mobile phone for financial transactions. That is the reality today, less than two percent.So, one is the aspect of convenience which you had brought out, but the other is the aspect of cost. The third is given the pace at which the start-up ecosystem is generating new solutions and technologies, we should be ensured that the regulatory system is not creating unwittingly a bias in favour of some older or less efficient technologies. For example, we have all seen that we have dabbled for a long time in banking correspondence, brick and mortar banks and all that and today, by and large, a lot of them are known to be very expensive options. Now, we have been through ATMs and credit cards, but we know that they are no competition when it comes to a mobile phone and the kind of costs involved. So, I think the regulatory system is important in the sense that it should enable the continuous evolution of these products. I was delighted to hear the minister say the platform will allow all kinds of applications to come in and this will allow continuous to happen. It is not enough for India to apply technologies as they exist. It is important for us to innovate and bring the costs down even further. That is what we are, I think the whole ecosystem is ready to do.