Inclusive Credit: The Next Milestone1
(Remarks delivered by Shri M. Rajeshwar Rao, Deputy Governor, Reserve
Bank of India - on September 08, 2022 - at ASSOCHAM's 17th Annual Summit &
Awards on Banking & Financial Sector Lending in Mumbai)
Ladies and Gentlemen,
I thank ASSOCHAM for inviting me to deliver this talk here today. The theme of
this summit - "Financial Inclusion & Future of Financial Services in India - Vision
2030" is indeed contextual and relevant given the challenges we face at this
juncture. The discussions around the issue at this summit should generate
invigorating discussions and productive outcomes during the course of the day.
Financial inclusion has always been an important policy imperative realising its
importance in economic development and social well-being of the populace. We
have come a long way in our pursuit for financial inclusion which started with
promotion of cooperatives, nationalization of banks, institutionalisation of
priority sector lending and lead bank scheme, implementation of BC model and
more recently with Pradhan Mantri Jan Dhan Yojana (PMJDY).
In this journey, we have adjusted our strategies and policy focus factoring in the
changing demographics, economic situation, and social needs. Given the wide
geographical spread and the need to include large unbanked population, the
policy thrust for a long time had been on providing access to basic financial
services. It is quite rightly recognised that access to a bank and a bank account
is the first step toward broader financial inclusion since it enables people to
carry out basic banking functions such as remittances besides acting as a
gateway to access other financial services. In this effort, RBI mandated banks
to open branches in underbanked pockets which led to a considerable increase
in bank branches and later Automated Teller Machines (ATMs) in the 1990s to
early 2000s. A roadmap for having banking outlets in villages with population
more than 2000 (in 2009) and less than 2000 (in 2012) was also prepared.
Subsequently the banks were advised to open brick and mortar branches in
villages with population of more than 5000. To strengthen financial inclusion,
the branch authorisation guidelines were relaxed and Financial Inclusion Fund
(FIF) with an initial corpus of ₹2000 crore was established to support adoption
of technology and capacity building.
Financial inclusion was also a one of the consideration for issue of differentiated
banking license for Small Finance Banks (SFBs) and Payments Banks (PBs) in
2015. The SFBs were setup to further financial inclusion through tailored
deposit products and for providing credit to small business units, small and
marginal farmers, micro and small industries, and other unorganized sector
entities through technology led low-cost operations. Payments Banks were also
set up to provide small savings accounts and payments/ remittance services to
migrant labour workforce, low-income households, small businesses, and other
unorganised sector entities / other users.
The Pradhan Mantri Jan Dhan Yojana (PMJDY) and National Strategy for
Financial Inclusion (NSFI) 2019-2024 has given a further fillip to these efforts.
The NSFI defines the vision and key objectives of the financial inclusion policies
in India to help expand and sustain the financial inclusion process at the national
level through a broad convergence of action involving all the stakeholders in the
financial sector. The strategy aims to provide access to formal financial services
in an affordable manner, broadening & deepening financial inclusion and
promoting financial literacy & consumer protection while the reach of the banks
amongst the ranks of the underserved got a boost through the PMJDY.
Some data would help us get a perspective. Under PMJDY, 46.40 Crore
beneficiary accounts have been opened so far with outstanding balance of
₹1.73 Lakh Crore in these accounts2. As of June 2022, there are 1.59 Lakh
branches operated by SCBs with a total deposit of more than 170 lakh crore
rupees3, which translates to close to approximately 15 branches per 1 lakh of
population. This is further complemented by a network of 2.17 lakh ATMs4, out
of which 47% are in rural and semi-urban areas and there are close to 32 lakh
Business Correspondents engaged by banks5. As per data from World Bank's
Global Findex Database, as of 2021, 78% of Indian adults (population with 15
years or more of age) had a bank account as compared to 53% in 2014. We
have been able to provide banking access to almost every village within a 5 km
radius in 25 states and 7 UTs covering 99.94% of identified villages.
But we cannot remain content with this, and efforts are continuing to achieve
universal access to financial services and products. At the same time the policy
focus is being repositioned from 'access of financial services' alone to 'Usage'
and 'Quality' of financial services as well. The FI-Index constructed by RBI,
which is an indicator of our efforts in this direction, is based on the above three
dimensions viz., 'Access', 'Usage' and 'Quality'. The weights of the index are
forward-looking with higher weights given to the deepening aspect of financial
inclusion ('Usage' and 'Quality').
Responsible and sustained financial inclusion requires balancing opportunity
and innovation on both the supply and demand side. On the supply side, it
includes steps to provide affordable and easy access to savings account and
suite of appropriate financial products & services. On the demand side, it seeks
to improve financial literacy and awareness which helps in increasing demand
for financial products and services. These demand side and supply side
measures should ideally complement each other. In emerging market
economies like India, there is generally a disequilibrium amongst the demand
and supply side factors.
While the traditional brick and mortar structures have helped in taking basic
banking services to the nook and corners of our country, the advent of digital
innovations in the extension of financial services, have the potential to be an
enabler for graduating to the next level of financial inclusion where the quality
of inclusion takes precedence over just availability of financial services. India as
a continental economy with multiple languages and cultures, different and
sometimes even difficult terrains, large population and low-income levels need
to ensure inclusive growth. The focus is thus not only on opening the bank
accounts but also making available a bouquet of financial services -
transactions, payments, savings, insurance, and ensure easily accessible and
affordable credit to the customers. Inclusive credit will have to be the bed rock
of inclusive financial inclusion.
The Committee on Financial Inclusion (Chairman: Dr. C. Rangarajan, RBI,
2008) explicitly included 'timely and adequate credit at an affordable cost' for
vulnerable groups in the definition of the financial inclusion. The Committee on
Medium-Term Path to Financial Inclusion (Chairman: Shri Deepak Mohanty,
RBI, 2015) also emphasized on increasing the access of small and marginal
enterprises to formal finance. Thus, access to credit has always been an
integral part of RBI's efforts towards furthering the financial inclusion. let me
dwell a little bit on provision of inclusive credit.
Importance of inclusive credit
Access to credit acts as a force multiplier if utilized optimally by individuals as
well as firms. For individuals, it helps to meet their financial and enterprising
needs and also where required, reduce their vulnerability to economic shocks
whereas for firms, it enables normal business operations besides allowing them
to plan for investments in newer and more productive technologies. Business
diversification and expansion helps them grow thereby leading to increase in
job opportunities and in general promote economic development. Without
adequate, timely and affordable access to formal credit, the customers are
dependent upon either own equity or informal sources of credit, both of which
are not only costly but perhaps unsustainable on a long-term basis.
However, a challenge in our financial inclusion journey is to enhance the level
of activity and utilisation of diverse financial products and services following
opening of a bank account. In this background, going digital way seems to be a
solution for all the obstacles. However, this is easier said than done.
RBI and inclusive credit
In this endeavour RBI has adopted a three-pronged strategy which involves:
• Setting up of financial intermediaries for extending digital credit or
facilitating digital loans,
• Nurturing technological infrastructure to ensure safe and seamless credit
disbursal and adopting a,
• Customer-first regulatory approach
Let me share a perspective on each of these three focus areas.
Setting up of financial intermediaries for extending credit
As a first step in tackling supply side issues in the financial inclusion, new
financial intermediaries have been introduced for provision of credit and to
ensure financial services are available to the customer at 'when and where
basis', thus translating into a truly 'anywhere anytime banking'. This includes -
P2P lending Platform: In first of such initiatives, RBI came out with P2P
regulations at a time when the industry itself was at a nascent stage of
development. A 'Peer to Peer Lending Platform' provides an online on-tap
avenue to both borrowers to avail and investor to extend mostly small ticket
loans. The regulations have been designed in a way to ensure that the
framework does not impinge upon the innovative lending services, while at the
same time, seeking to protect customer's interests and minimising systemic
concerns.
Digital Only NBFCs: Second, RBI came out with registration guidelines for
Digital-Only NBFCs, as the name suggests, is an NBFC running solely on a
digital platform without any brick-and-mortar presence (except for
administrative purpose). RBI enabled healthy innovation in credit intermediation
by permitting the setting up an NBFC over a digital platform in 2018. Though
not a new category of NBFC, their licensing conditions mandates on them to
provide their products only in a digital mode. Here too, protection of consumers
have been kept paramount and the entities are required to maintain audit trails
by putting in place required IT infrastructure with adequate safeguards on
unauthorised access, alteration and destruction of data, if any. Regulatory
features such as explicit consent for data sharing, domestic location of servers,
maintaining audit trails, information security audit, etc. are progressive and at
the same time pre-emptive in nature.
Digital Banking Unit: With digital banking emerging as the preferred mode of
delivery along with 'brick and mortar' banking outlets, the concept of Digital
Banking Units was announced in the Union Budget 2022-23 and the guidelines
for operationalising these units were issued by RBI earlier this year. Scheduled
Commercial Banks have been authorised to set up digital banking units which
are intended as specialised fixed point business units housing certain minimum
digital infrastructure for delivering digital banking products & services as well as
servicing existing financial products digitally, in both self-service and assisted
mode. It is expected that such units would enable customers to have cost-
effective, convenient and enhanced digital experience of such products and
services in an efficient, paperless, secured, and connected environment with
most services being available in self-service mode at any time.
Creating market infrastructure for inclusive credit
India has made significant strides in creating enabling digital infrastructure in
financial services space. UPI, GSTN, TReDS, JAM Trinity and Account
Aggregators (AA) to cite a few. This strong ensemble of digital infrastructure
has stabilised and as it matures, would pave way for expansion of credit in a
seamless and timely manner which could be made digitally available in an
almost paperless environment. AA's capability to aggregate financial data
spread across different financial service providers and to leverage this data to
build analytics and insights to help consumers in their financial planning would
allow financial service providers to offer customized products to their customers.
The AA framework also has an important element of 'electronic consent
architecture' which is an improvement upon the open banking regimes of many
developed countries.
As UPI transformed the way people pay, the Account Aggregator has potential
to transform credit by making it more seamless and accessible for everyone
using digital infrastructure. The JAM trinity has done wonders for FI. The next
trinity consisting of UPI, e-KYC and AA is expected to enable the next revolution
in banking in the provision of customised and inclusive credit services.
Customer-first regulatory approach
A paradigm shift in digital lending was noticed during the pandemic. Post
outbreak of Covid-19 there was a spurt of online lending platforms / mobile
lending apps with a study6 estimating that downloads of lending apps increased
by 21% during the Covid pandemic.
In earlier times people used to talk of the 3-6-3 rule in banking alluding to the
banking practices in 1950s right down to the 1970s as a result of the simplistic
and non-competitive conditions in the industry. The rule was to raise deposits
at 3%, lend at 6% and play golf after 3 PM. However, FinTech revolution has
transformed this into a 2-1-0 formula - 2 minutes to decide, 1 minute to transfer
the money with zero human to human contact. This change in the banking
business model with supportive technological transformations has expanded
the realm of what's possible.
The Working Group on Digital Lending set up last year by the RBI noted that
lending through digital mode relative to physical mode is still at a nascent stage
in the case of banks (₹1.12 lakh crore via digital mode7 vis-à-vis ₹53.08 lakh
crore via physical mode), for NBFCs, a higher proportion of lending (₹0.23 lakh
crore via digital mode vis-à-vis ₹1.93 lakh crore via physical mode) is being
routed through digital mode8. However, if we observe the growth in overall
volume of disbursement through digital mode, it has exhibited a massive twelve-
fold growth between 2017 and 2020. The digital lending landscape has seen a
rapid rise in innovative models for product delivery including Point of Sale (PoS)
transactions-based lending, Bank-FinTech partnership models, marketplace
lending and bank-led digital models. However, most of the digital lending is
being enabled by bank/NBFC - FinTech partnerships where FinTechs are
acting as Lending Service Providers (LSPs) for banks/ NBFCs.
However, with the expansion of digital lending, various concerns have also
emerged. These primarily relate to the unbridled engagement of third parties,
mis-selling, breach of data privacy, unfair business conduct, exorbitant interest
rates, and unethical recovery practices. As a pre-emptive measure, RBI came
out with a circular on digital lending on June 24, 2020, wherein it was advised
that digital lending platforms shall disclose the name of bank/ NBFC upfront on
whose behalf they are providing credit, ensure that sanction letter is on the
letterhead of the bank/ NBFC concerned and banks/ NBFCs in turn will ensure
adequate oversight over the digital lending platforms engaged by them.
The Working Group on Digital Lending delved deeper into the concerns arising
out of digital lending ecosystem. The recently announced regulatory framework
for digital lending encapsulates RBI's approach of customer-first regulations.
The framework is designed to strike a balance between the need for an
innovative and inclusive system while at the same time ensuring that regulatory
arbitrage is not exploited to the detriment of the customer's interest. Another
underlying theme of this regulatory framework is that the onus of complying with
the regulatory guidelines rests with the regulated entities and they will have to
ensure that the loan service facilitators and digital lending Apps with which they
have outsourcing tie ups functions within the regulatory ecosystem, not just in
letter but also in spirit.
Looking Ahead
The deepening and widening of financial inclusion will drive the growth in
financialization of savings in India. Increasing adoption of digital modes, GSTN,
online shopping, P2P payments, QR code deployment and everything else
together will generate reams of customer data. This data could be potentially
utilised to chart customer needs, behaviour and repayment capacity and help
in digital inclusion. One specific area where digital lending has the potential to
be a catalyst for economic growth is cash-flow based lending to MSMEs.
MSMEs are an important engine of growth for the Indian economy as they
contribute around 45% of exports and provide employment opportunities to
more than 11.1 crore people. The provision of appropriate credit for MSMEs
through seamless and digital cash-flow based lending will provide them with the
much-needed impetus. It would enable lenders to leverage real time cashflow
data to reimagine end-to-end lending process and "sachetisation" of products.
On the other hand, additional measures recommended by the Working Group
on Digital Lending, viz., establishment of Digital India Trust Agency (DIGITA),
a Self-Regulatory Organisation (SRO) and the recommended / proposed
legislative interventions like restricting balance sheet lending through digital
mode to authorized entities only by framing a legislation styled as Banning of
Unregulated Lending Activities (BULA) Act on the lines of Banning of
Unregulated Deposit Schemes (BUDS) Act, 2019 would go a long way in
creating a digital lending ecosystem which is safe and sound.
Conclusion
The challenge for the regulator in a fast-developing economy like ours is to keep
pace with the market innovations and strive to strike a balance between
ensuring safety without stifling innovation which is never an easy task.
Responsible financial innovation requires balancing innovative products with
necessary safeguards for ensuring financial system stability and customer
protection. Therefore, while appreciating and recognising the benefits
emanating from digital credit, we need to take cognizance of the attendant risks
such as data privacy, disruptive business models, aggressive recovery
methods, and exorbitant interest rates. As a regulator, we have been following
a nuanced approach for industry/ market development and this is reflected in
bringing out an appropriate regulatory framework for digital lending.
By empowering individuals and firms to cultivate economic opportunities, digital
credit can be a powerful agent for a sustainable and inclusive growth. We must
remember that financial inclusion is not just a goal but also a means to an end
as an enabler for sustainable economic growth, reduction of inequality and
eliminating poverty. Financial inclusion has been identified by the United
Nations as an enabler for 7 of the 17 Sustainable Development Goals. At its
best, digital credit need to be responsible, inclusive, and affordable, which is
something every financial institution should strive for. As always, we, at the RBI,
would continue with our efforts to create an enabling regulatory ecosystem for
financial innovation, protection of customers interest and strengthening of the
financial infrastructure.
Thank you.