Budget 2023: How to improve financial inclusion and the digital ecosystem

In order to expand the usage of banking and financial services further, the government announced 75 digital banking units in the last Budget. (Representative image)

This government has been cued into financial inclusion, digitalisation and social welfare schemes from the very beginning of its term in office starting May 2014, with good results on the ground. Significant strides were made in improving access to banking as the Pradhan Mantri Jan-Dhan Yojna (PMJDY) accounts reached more than 400 million. This was complemented by the dramatic push in the adoption of retail digital payments, especially with the Unified Payments Interface (UPI) scaling record of over 74 billion transactions worth Rs 125.94 trillion in the calendar year 2022. The entire ecosystem has been transformed with the ongoing digitalisation, and the year ahead will see more changes as the account aggregator framework of the Open Network for Digital Commerce (ONDC) and the Open Credit Enablement Network (OCEN) kick in and initiatives from the National Payments Corporation of India (NPCI) enable payments on feature phones and offline mode to overcome connectivity challenges.

In order to expand the usage of banking and financial services further, the government announced 75 digital banking units in the last Budget. The service was dedicated to the nation on October 16, 2022. While this initiative will be taken forward this year too, there is a lot more that we are looking towards.

Digital Payments

First, digital payments lay a strong foundation for financial inclusion but have a long way to go to achieve greater penetration among the masses, especially in rural India. But on the retail digital payments front, the issue of subsidy and charges which remains to be resolved may constrain universal access and adoption.  On UPI specifically, while the Finance Ministry’s stand has been that UPI is a public good and must be free, the incentive given by the government is limited to RuPay debit cards and low-value BHIM-UPI person-to-merchant transactions. Earlier in January, the government had doubled budgetary support for the incentive scheme to Rs 2,600 crore from the outlay provided in 2021-22.

Meanwhile, for card transactions, the Reserve Bank of India (RBI) is opposed to a zero/low merchant discount rate (MDR) as it adversely impacts the ecosystem. The payments industry has asked for Rs 8,000 crore for the year ahead to cover the investment costs for all digital payments infrastructure, which includes expenses on technological upgrades at the backend as well as outreach and onboarding small merchants, educating customers and implementing a robust grievance redressal system. In the interest of healthy sustainable and viable growth, the Ministry should institute a costing exercise to estimate and ensure adequate financial support and a mechanism of charges such that all players in the value chain are adequately compensated, either through the market mechanism or through reimbursement.

Empowering Women

Secondly, while much has been done for the empowerment of women through multiple schemes, one fact stands out in the recent Global Findex Data – the gender gap in ownership of accounts has been closed by India. We have a very high 12 percentage-point difference between women with inactive accounts (42 percent) and men (30 percent). Given the social contexts in which large swathes of India operate, the government has aimed at increasing the number of women business correspondents in villages under the National Rural Livelihoods Mission (NRLM) “One Gram Panchayat-One BC Sakhi” programme. This has already brought in good results, with more than a lakh women trained and certified as BC Sakhi, and about 88,000 operating in rural areas. The government gives a stipend for the first six months and extending this for the full first year will help support the new BC Sakhi till transactions stabilise towards a certain income.

Banking Correspondents

Thirdly, significant expenses on training a BC Sakhi by the NRLM are an indication of the level of investment required to set up BCs in rural areas. The issue of the viability of the BC network is another area that begs for resolution. Here, the government can encourage higher payouts in specific remote locations, where economic activity and population density do not make for a viable BC. Also, the government should nudge public sector banks (PSBs) towards sharing more products and services through the BC channel and monitor the activity at the BC level through a dashboard that can inform the Department of Financial Services (DFS) of the penetration and adoption of various financial services across the country. Such granular information is now key to ensuring that the financial inclusion programme is targeted effectively at specific locations and customer segments that still stay excluded.

Data Dissemination
Finally, the Budget should set a data dissemination policy such that financial inclusion metrics are tracked at a granular level by the Finance Ministry and district-level data are released in the public domain. Here gender-disaggregated data across all financial inclusion parameters will be key in filling the gaps in access and usage of financial services for women. With better quality information and metrics, the industry can serve specific geographies or customer segments, and the regulator and the government can target policies more effectively. Holding the G20 Presidency this year, the Budget would be a good time to make a statement that India is taking the lead in providing granular data towards financial inclusion and empowerment of women.

Sumita Kale is with the Indicus Centre for Financial Inclusion. Views are personal and do not represent the stand of this publication.