Lack of access to reliable sources of finance has thwarted the growth of a large
section of the Indian population. Along with many government initiatives, a new class
of entrepreneurs are trying to meet this unmet demand by leveraging technology in
finance – FinTech.

Traditional problem of financial exclusion in India and its reasons:

• Indian households still use cash for about 80% of total transactions. 56% of household debt is unsecured (less than 15% in advanced countries).
• Pension and insurance together account for less than 5% of the household balance sheet (25% in advanced economies)
• Informal credit still constitutes more than 40% of total rural credit in India with about 75% of farmer loans borrowed at usurious rates of over 20%
• There is low trust in formal financial system and households lack access to credible, low-cost and high-quality financial advice.
• Bank’s products don’t account for complexity of Indians’ financial lives while non-institutional sources are more tailored to the typical Indian household.
• Small scale farmers have no collateral to show for taking up a loan from bank
• Low penetration of banks- There are 18.7 bank branches per 1 lakh adults in urban areas. In contrast, there are just 7.8 branches per 1 lakh adults in rural and semi-urban areas.

FinTech growth levers and the role played by stakeholders:

The FinTech service has an opportunity to serve the large unbanked sector currently using costly informal sources of finance. The demand for fintech services has been aided by the encouraging stance adopted by the major stakeholders and initiatives by the Government like UPI, Bharat Bill Payment System, Jan Dhan Yojana, Aadhar, India Stack, Startup India Program, and tax reforms. Other initiatives like the introduction of RuPay cards, easing of startup listing norms, proposed norms of crowdfunding by SEBI and of using e-commerce in the insurance space by IRDA have provided a fillip to this sector.

Fintech services currently offered:

India currently accounts for 3% of the global VC investments in fintech with an expected RoI of 29% (much higher than the global average of 20%). This has led to the proliferation of many firms offering the following major services

Payments: The adoption of smartphones and the launch of platforms such as UPI and BBPS are some of the factors promoting mobile payments in India.

Lending: Direct lending platforms by NBFCs, P2P lending, and crowdfunding are gaining traction with better offerings and easier application processes.

Wealth management: The rise of digital payments and ease of carrying out online transactions paves the way to a fully automated wealth management platform.

Blockchain: The transparency, authenticity, and traceability provided by blockchain technology has led to the funding for Bitcoin exchanges and growing adoption of Distributed Ledger Technology (DLT).

Recommendations:

Credit Scores – About 335 million Indians are excluded from obtaining formal financing every year due to the unavailability of credit scores. Data sources like transactional data on E-commerce sites, social media behavior, and payment of EMIs can be used to derive credit ratings for urban borrowers. Internet penetration in rural areas raises data sources such as utility and mobile bills and internet browsing patterns. For marginal enterprises far more sensitive to the cost of capital, data like social media reviews and company’s usage of logistics firms can be used. 

Feature phones – Feature phones still dominate the tier 2/3 cities, especially the low-income group. Exploiting the feature phone market thus becomes pivotal to attain the goal of financial inclusion and a few notable developments in this field are-

• The USSD & UPI facility allows transactions even with basic feature phones
• A wafer thin SIM sleeve enabled payments solutions was introduced by Yes Bank
• Sound-based proximity communication provider, ToneTag, introduced mobile payment facility on feature phones in December 2016

Raising capital through ICOs – Initial Coin Offerings (ICOs) is an alternative way of raising funds using cryptocurrencies in which organizations raise funds for their ideas from investors in exchange for tokens. Such token holders generally do not get voting rights that prevent equity dilution from the company’s perspective. The temporary nature of funds and fears of a bubble are some of the issues related to ICOs and thus regulatory bodies would have to play a pivotal role to safeguard the interest of all stakeholders.

Supply chain financing – Online platforms can take advantage of the buyers’ low credit risk to pay suppliers promptly, less a small discount, and later collect the entire amount from the buyer. The current atmosphere of low-interest rates, short periods of finance and using the credit risk of the buyer means unnoticeable discounts. This would help in freeing up working capital for both parties.

Regulatory sandboxes – The launch of a regulatory sandbox that temporarily relaxes some regulatory requirements to allow small-scale experiments on a control group can help assess the potential benefits and risks associated with such a product before launching it for all. After the prototype passes the initial test, it can be released to the mass market with all regulations.

Conclusion:

FinTech thus provides a low-cost and simple solution that can act as the behemoth of financial inclusion in India. Regulatory support, burgeoning start-ups, and a growing class of young digital literates are some of the factors that can boost investments and increase adoption of emerging technologies in this sector. A collaborative approach with all the stakeholders would help these players leverage authenticity and capital to expand their services and include the long left-out segments in the net of formal financial credit.