A personal finance revolution

In the Reserve Bank of India (RBI) we have one of the better-managed central banks in emerging markets. A tentative start by the RBI towards including more people in India’s financial system has now been given a big push by the Modi administration.

At the micro level, this push for financial inclusion by the Government is starting to see great progress. In just one year, almost 190 million new bank accounts were opened in India; almost 40% of these accounts are now linked to the Aadhaar card. In a bid to reduce the significant losses that were routine in subsidy payments to Indian citizens (some reports suggested 65% of subsidies for food and energy did not reach the intended recipients), the energy-related subsidy is now credited directly to recipients’ bank accounts. Additionally, these newly-opened bank account holders are given a RuPay debit card. By October 2015, two million transactions, with an average transaction size of Rs2000 (US$3), were being conducted. The Government has also linked an accident insurance scheme to these accounts, with annual premiums of just Rs30 (US$0.50). A large unbanked, cash-oriented population is now incentivised to become part of the formal financial system.

Concurrently, micro finance lending is gaining traction. Several medium-sized firms who survived the last crisis are now well-capitalised, extremely well-organised and regulated. We went to visit one of them, Ujjivan, at its branch/outlet in Surat, a small city in Gujarat. We witnessed a live disbursal to a group of five women, each of them borrowing Rs40,000 (US$615). The impressive part was the number of times the staff touched upon the process with checks and counter-checks as the critical point around which the processes were built. Not surprisingly, non-performing loan (NPL) ratios were less than 1%. This financial outreach is starting to empower mainly poorer women, but also small and medium-sized enterprises (SME) across the country.

Currently too small to make any dent in the credit statistics, this trend will, however, build over time. Recently, the RBI approved, in principle, 10 microfinance institutions to become Small Finance Banks (SBF), whose main objective is to provide a savings vehicle for the unserved portion of the population and supply credit to SMEs using technology where possible.

Financial inclusion comes at a very opportune time: the rural economy is slowing after years of rapid growth. This slowdown is policy-induced in the most part. Under the previous government, schemes to provide employment guarantee payments to casual farm labourers, as well as double-digit increases in minimum support prices, meant that farm incomes were rising at 15-18% p.a. But this government has modified and reduced the employment scheme and increased farm goods prices by only 3.5% this year.