Gist of EPW September Week 1, 2021

1. Making Digital Financial Inclusion a Reality

Context

• The article discusses the eight high-level principles of G-20 ­nations that could accelerate digital financial inclusion in India.

Introduction

• Digital financial inclusion is defined as digital access to and the use of formal financial services by the unserved and underserved population at an affordable cost.

• The policy initiatives coupled with reforms such as demonetisation (2016) and goods and services tax (GST; 2018) helped to increase the use of digital solutions. 

• The COVID-19 pandemic has accelerated the adoption of digital financial solutions cutting across social segments but we still have potential to achieve. 

• Digital technologies have boosted growth, expanded opportunities, and improved service delivery. The Group of Twenty (G-20) nations and the World Bank advocated eight high-level principles to achieve digital financial inclusion (GPFI 2016).

Government Initiatives

• The GoI has been making concerted efforts to expand its digital infrastructure. 

• It enabled access to financial services through the Unique Identity-Aadhaar and the Digital India programme to deliver public services through digital channels and to connect rural areas with high-speed internet. 

• Promote a digital approach to financial inclusion: HLP 1

  • The access to data networks through electronic devices such as computers, laptops, smartphones has increased the promotion of digital financial services in India.

  • The number of internet users in India reached 624 million, with a penetration rate of 45% in January 2021.

  • Table 1 illustrates select indicators of payment systems in India during the last three years.

Table 1: Payment System Indicators

• The total digital payments registered a robust growth of 26.2% in terms of volume during 2020–21 as against 44.2% in 2019–20. The debit or credit card payments were enhanced in value terms; they witnessed a decline, in volume terms, from 61,769 lakh to 57,841 lakh during this period.

• In value terms, Immediate Payment Service transactions rose by 85%, BHIM Aadhaar pay transactions increased by 217%, credit transfers through Unified Payments Interface (UPI) increased by 368% during 2019–21, reflecting widespread adoption of digital channels in the small-value segment.

• Balance innovation and risk: HLP 2

  • The Jan Dhan–Aadhaar–mobile phone trinity provided a fertile ground for convergence of finance and techno­logy for the last-mile connectivity.

  • JAM brought a majority of the financially excluded into the mainstream banking domain.

• Provide an enabling legal environment to protect consumers: HLP 3

  • During the financial year 2016–17, the RBI instructed the banks to limit the liability of the cust­omers in fraudulent electronic banking transactions.

  • RBI also introduced an online dispute resolution mechanism, a complaint management system, and a grievance redressal framework related to failed payment transactions during FY 2020–21.

• Expand the digital financial infrastructure: HLP 4

  • The increasing customer demand during the COVID-19 period, electronic banking facilities like NEFT and RTGS, have been made available at free of cost to facilitate digital financial inclusion.

  • The GoI covered 319 central schemes under 54 ministries for making DBTs.

  • The total number of beneficiaries under 36 Aadhaar Enabled Payment Systems stood at 471.48 crore as of May 2021.

  • The introduction of the National Electronic Toll Collection system enables the customers to pay toll fares from a prepaid bank account to save on time and fuel.

  • As of 30 April 2021, the electronic National Agriculture Market covered 1.70 crore farmers from 1,852 farmer producer organisations (FPOs) in 21 states. This enables the farmers to connect to the markets, thereby achieving price discovery.

• Establish digital financial practices to protect consumers: HLP 5

  • Banking outlets in India received 3.09 lakh complaints during FY 2019–20 with a massive growth rate of 57.5%.

  • The majority of these fall under ATM or debit cards (22%), mobile or electronic banking (13.38%), and credit cards (9.3%) categories. As such, retail and poor customers, who are at the receiving end, need to be legally protected in this regard.

• Financial and digital literacy: HLP 6

  • The RBI has developed the National Strategy for financial inclusion to provide access to formal and affordable financial services by promoting financial literacy and consumer protection.

  • The RBI has developed financial education to create awareness and disseminate knowledge on financial inclusion to all the stakeholders and ­advised the states to incorporate modules on financial or digital literacy in the school curriculum.

  • The Securities and Exchange Board of India, Association of Mutual Funds in India, National Centre for Financial Education have been making concerted efforts to impart financial and digital literacy for all the citizens through electronic as well as print media.

• Focus on lives and livelihoods: HLP 7

  • As per the ILOSTAT database, the unemployment rate reached its peak level in India during the COVID-19 crisis.

  • Millions of micro and small enterprises face an existential threat as they do not have social security, access to quality healthcare, and income-generating operations during the pandemic season.

  • The GoI responded by increasing the allocation of resources by 137% and earmarked ₹2.24 lakh crore in its budget for FY 2021–22 towards the health and well-being of the populace.

• Review the progress: HLP 8

  • Digital financial transactions by micro, small and medium enterprises on Trade Receivables Discounting System witnessed huge growth during 2017–20.

  • MSMEs could partially solve their long-delayed receivables by participating in the TReDS platform with a success rate of above 85% in FY 2019–20.

Policy Implications

• The digital divide in India is too wide with challenges like last-mile connectivity, dormant accounts, non-availability of suitable financial products, lack of financial literacy or skills among the stakeholders to use digital services, infrastructural issues, and low-income clients who are not able to afford the technology required to access digital services.

• Digital technologies have proved to be cost-effective, act as barriers to corruption, and improve efficiency in the delivery of public services.

• There is a compelling need to build reliable and accessible connectivity in rural areas.

• Digital financial infrastructure should be leveraged by skilling and positively engaging the unbanked population to achieve the last-mile connectivity in financial inclusion.

• Resource allocation for the development of human capital in terms of education, healthcare, water, and sanitation would enhance the credit absorptive capacity of the weaker sections of the society and lead to digital financial inclusion in the long run. On the supply side, training, and capacity building of human resources of banks or financial institutions are crucial to leverage the technologies like artificial intelligence, blockchain, internet of thi­ngs, etc.

Overview

• COVID-19 has led to large losses in lives and livelihood especially among the poor.

• During the pandemic, the higher allocation of funds for healthcare and the creation of sustainable jobs will ensure that the poor will have sufficient money in their bank acc­ounts. This has been the first milestone in the journey of their digital financial inclusion.

• Banks need to embrace digitisation and cybersecurity norms to meet the changing customer preferences and business requirements.