Driving Financial Inclusion through Technology

As Published in FORBES INDIA

As I was wrapping up my job as the “Head of Technology” for Aadhaar at the UID technology center we had set up in Bangalore, Nandan Nilekani asked me a question:

“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 centers with trained bankers, resulting in high cost of rents and salaries. Moreover the move to computerization in the 80s and 90s to a ‘Core Banking System’ (CBS) had also been relatively expensive with the need to set up computer infrastructure in each branch, networking of these branches and expensive CBS software systems. While the RBI (Reserve Bank of India) was pushing for financial inclusion, the cost structure did not allow banks to actively seek rural customers with likely small deposits. 

All that changed in the last 10 years. The task of creating bank accounts for 80% of the population would have taken 46yrs to achieve, instead we achieved it in 6yrs. [Source: BIS Paper by D'Silva, Filkova, Frank,]

What 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 forward in terms of banking services:

  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: Aadhaar enrolled 99% of the 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 an 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, has crossed 10 billion transactions/month in Aug 2023 marking a major shift in India from cash to digital payments. Even the humble fruit vendor on the street has a QR code to accept payments from customers.

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 India scale and helped make considerable progress in financial inclusion - a goal that had eluded us for seven decades. 

The Digital Public Infrastructure (DPI) approach of delivering public goods which combines  well designed policies of the appropriate ministries and regulators (Finance Ministry, RBI, TRAI etc),  with open digital protocols, implemented through ‘Informational Utilities’ like UIDAI and NPCI  has shown remarkable success. 

While we can be happy at the progress made, our goal of financial inclusion is far from achieved. Providing basic banking services to all is commendable but not sufficient; we need to provide credit to small fledgeling businesses as well. 

A 2023 report on MSME lending [Ref: Avendus Lending Report] estimates that MSMEs (micro, small and medium enterprises) need an estimated Rs 68 Lakh Crores ($819 billion) in credit, while Rs. 24 Lakh Crores ($289 billion) is the demand fulfilled, leading to a credit gap of Rs 44 Lakh Crores ($530 billion) in the MSME sector in India. 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 laid out across the country. Can we combine the data exhaust of India’s DPI engines with 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 in a safe and secure way. 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, collection agencies can facilitate ‘flow based lending’ using various data sources such as GST information and bank statements in conjunction with the “Account Aggregator'' framework for implementing data privacy. This approach can help credit rate MSMEs, and lend to credible MSMEs thus bridging the lending gap.

Last but not the least, can Indian banking speak the multitude of languages that Bharat speaks? Can we simply ‘talk’ to our banks as opposed to filling out complex english forms 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 type of AI model with language capabilities that can help with a conversational interface in 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. 

Products like Trustt GPT (from Trustt Inc) have used the power of generative AI to offer conversational UI tools where the customer can just ‘talk’ to the bank through his/her smartphone in local language to seek banking services. Product discovery (Eg. “Can I get a loan for purchasing a buffalo, from your bank”) to Product Origination (talking forms and KYC) to Customer Support (“My loan repayment failed, please help”) can all be addressed using generative AI technologies. 

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 providing basic banking services, ensuring wider reach. However, the challenge ahead 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.