Banking India's Underbanked
After having banked 80% of its adult population, India is readying to address the long standing challenge of chronic underbanking. EPISODE #192
Dear Reader,
A very happy Monday to you.
Last week India celebrated the 10th anniversary of its initiative to universalise banking through the Jan Dhan (or no frills bank account) scheme. A proud moment indeed: In 10 years India banked 500 million-plus people; something that would normally take any other country five decades to achieve. Take a bow India.
While this is laudable, the country is now training its sights on the next big challenge: solving for the problem of chronic underbanking.
According to the World Bank, 92% of small business do not have access to formal lines of credit. You can imagine the consequences.
This week I put the spotlight on new and existing initiatives seeking to solve for this challenge by leveraging the growing digitisation of all assets, hitting reset on the idea of credit.
Once again I lean on the brilliant eye of Rahul Sharma for this week’s cover picture.
Happy reading.
Jan Dhan @ 10
Last week India celebrated the 10th anniversary of Jan Dhan—no frills bank account. A proud moment indeed, as India was able to bank 500 million-plus people in the last decade.
Normally, this feat would take a country nearly five decades to achieve. India was able to do so by riding the power of Aadhaar, the country’s first Digital Public Good (DPG). I wrote about this achievement for the edit pages of Financial Express. Sharing the screen grab too.
Fittingly, just days ahead of the anniversary, Reserve Bank of India (RBI) governor Shaktikanta Das, signalled the country’s intent to set a new goal for itself—bank the underbanked.
The worst kept truth about the country is that while it now enjoys saturation in banking, it suffers from chronic underbanking whereby credit needs of millions remain unaddressed. Remember credit is a key mean to grow businesses and expand household budgets.
For example, the unmet credit needs for the cohort of micro, small and medium enterprises (MSME) is estimated a staggering $300 billion by the World Bank—only 8% of MSMEs have access to institutional credit. As a result, they are forced to turn to informal means of credit, which more often than not are on usurious terms.
It is remarkable then that despite this handicap, the MSME sector accounts for 30.1% of gross value added in India’s GDP and a 45.79% share in all India exports. Imagine their contribution if the MSME sector had access to formal credit.
A solution is on the horizon. According to the RBI governor, India will be rolling out the Universal Lending Interface (ULI) to solve for the country’s challenge of chronic underbanking.
Enter ULI
Delivering the inaugural address at the RBI@90 Global Conference on “Digital Public Infrastructure and Emerging Technologies”, Das said:
“Continuing on this journey of digitalisation of banking services, last year we launched the pilot of a technology platform which enables frictionless credit. From now on, we propose to call it ULI.
This platform facilitates seamless and consent-based flow of digital information, including even land records of various states, from multiple data service providers to lenders.
This cuts down the time taken for credit appraisal, especially for smaller and rural borrowers.”
The ULI is another DPG from India. Its architecture is very similar to the Account Aggregator (AA) framework, which is being used to service the credit needs of the MSME sector. By focusing on a firm’s cash flows, it is working around the challenge of banks who lend against collaterals to mitigate commercial risks. At present the AA framework has an estimated 90 million users.
Explaining the ULI model, the governor added:
“The ULI architecture has common and standardised APIs, designed for a 'plug and play' approach to ensure digital access to information from diverse sources. This reduces the complexity of multiple technical integrations. It enables borrowers to get the benefit of seamless delivery of credit, quicker turnaround time without requiring extensive documentation.
In sum, by digitising access to customer’s financial and non-financial data that otherwise resided in disparate silos, ULI is expected to cater to large unmet demand for credit across various sectors, particularly for agricultural and MSME borrowers.”
Once implemented, this will scale the AA model nationally. The governor then went on to commit to a nation-wide rollout:
“Based on our experience from the pilot project, a nation-wide launch of the ULI will be done in due course. Just like UPI transformed the payments ecosystem, we expect that ULI will play a similar role in transforming the lending space in India.
The ‘new trinity’ of JAM-UPI-ULI will be a revolutionary step forward in India’s digital infrastructure journey.”
The governor is alluding to the JAM (Jandhan-Aadhaar-Mobile) trinity, which solved for the challenge of minimising leakages in social welfare spending. By triangulating an individual the government effectively created an economic GPS, ensuring targeted delivery of social welfare.
Not only did this cut out the middlemen and thereby minimise corruption, it cumulatively saved the national exchequer nearly Rs 3 lakh crore.
The Significance
The political economy of India’s tryst with DPG is hugely significant. It is accelerating democratisation of access and this, trust me, is a huge tool of empowerment.
Aadhaar democratised identity. Today it is a way of life. At present, the average authentication of Aadhaar tops 8 crore every day!
Sharing a screen grab from the Aadhaar authentication dashboard below. (ASA is Authentication Services Agencies.)
Prior to the launch of Aadhaar, most Indians would struggle to prove their identity. We had to rush to gazetted officers to attest our forms, birth certificates and so on. If it was bad for us, imagine the plight of the less privileged, the so-called Aam Aadmi, who struggled to obtain even a birth certificate; or migrants without a permanent address.
Aadhaar did much more than solving for the challenge of identity. It set in motion India’s DPG story by enabling the creation of separate digital building blocks to solve for challenges like payments. The beauty of this framework is that these digital blocks can be combined in any permutation, combination to create a range of DPGs to solve for public good at staggering scale.
Accordingly, we have the Unified Payments Interface (UPI), which today is averaging 14 billion transactions.
After covid-19 struck, the vaccine was the only credible line of defence. India had two challenges: Provide for 2 billion with two rounds of vaccines and ensure a friction less rollout.
Enter CoWin, another DPG, which enabled ‘One Country, One Vaccine’. This made it possible, including for migrant workers, to take their vaccine anywhere, any place by registering on the CoWin portal.
If UPI democratised payments, then the AA framework, referred to earlier, is solving for access to credit. In doing so it is revolutionising the idea of credit in India by pivoting the lending criteria from one based on collaterals (which most of us lack) to one based on cash flows.
The launch of ULI is going to scale this idea to a national level. More importantly, to achieve this the central bank is digitising all assets. This will scale the velocity of transactions.
We have already seen the impact of digitising money through UPI. Not only did it dramatically grow the number of transactions, it also broad based them—nearly three out of four transactions on UPI are for sums less than Rs500.
Imagine what this does to the speed of financial transactions. The convergence of Artificial Intelligence (AI) and FinTech will only scale this by unprecedented proportions.
Now RBI is looking to extend this principle to all assets by digitising them. Yes, it will unleash frictionless and universal credit. More importantly, it will introduce unprecedented dynamism in the Indian economy. According to the Economic Survey, this is contributing as much as one percent to India’s GDP.
The only caveat though is that this size of a digital economy is built on the foundation of individual data. In a world of growing cyber crimes, ensuring privacy will be critical to sustain the progress of India’s rapidly evolving digital economy. In this, India’s efforts are still a work in progress.
Recommended Viewing
Sharing the latest episode of Capital Calculus.
This episode is a nice segue from today’s newsletter. It takes up from the RBI Governor’s statement about the imminent rollout of the Universal Lending Interface, a technology platform enabling frictionless credit for all.
As mentioned in the newsletter, this ambitious idea gives a big leg up for the Account Aggregator (AA) framework, which has over the last two years been connecting millions of underbanked Indians to formal credit sources. They do so by monetizing the data of individuals and firms to create the desired credit history to avail of a loan. AA just logged 100 million consents.
Coincidentally this development came about on the eve of the Global FinTech Fest in Mumbai last week. To put the spotlight on the third coming of Indian FinTech inspired by Artificial Intelligence, I spoke to Srinivas Jain, Chief of Strategy, Digital and Technology, SBI Mutual Fund. It segues very well with this week’s newsletter. Do watch.
Sharing the link below:
Till we meet again next week, stay safe.
Thank You!
Finally, a big shoutout to Balesh, Premasundaran, Atul and Gautam for your informed responses, kind appreciation and amplification of last week’s column. Once again, grateful for the conversation initiated by all readers. Gratitude to all those who responded on Twitter (X) and Linkedin.
Unfortunately, Twitter has disabled amplification of Substack links—perils of social media monopolies operating in a walled garden framework. I will be grateful therefore if you could spread the word. Nothing to beat the word of mouth.
Reader participation and amplification is key to growing this newsletter community. And, many thanks to readers who hit the like button😊.
Interesting developments in technology for providing finance to entrepreneurs. The business development is dependent on resources made available in a timely manner. Hence speed is critical for any business and authentic information available digitally will be a key factor for completing the process for rapid development. The new innovative practices will help to keep intact the India growth story. Thank you Anil for sharing this topical futuristic development.