Southern Development Agendas versus Northern Angst

India is on a Financial Inclusion roll. In the last couple of months alone, the Government has decided on several policy and regulatory changes that have the potential to significantly accelerate financial access to the more than half of Indian households who remain financially excluded. In the meantime, the private sector continues with a range of promising experiments to better understand client needs and provide a broader range of services at lower costs.

In the budget for the new Indian fiscal year that started this week on April 1, the Ministry of Finance announced an accelerated shift of Government social transfer payments from cash or in-kind to direct deposits through the financial system. The primary aim is to ensure more targeted and leakage-proof distribution of the more than $40 billion worth of subsidies, but from a financial inclusion perspective this provides for many poor families for the first time an access point to the formal system. The Government is also shifting more of its pension and salary payments to electronic distribution.

One of the related, most promising infrastructure initiatives is the effort to provide Indians with unique biometric identities (UID). The new budget provides for additional funding to enroll 400 million more people to meet the extended 600-million mandate. The UID has the potential to significantly reduce customer acquisition and transaction costs for all financial services players. To facilitate G2P payments, the Reserve Bank of India (RBI) issued a circular on the interoperability of banking services at the agent/retail outlet level just prior to the budget announcements. This is a continuation of the long-standing effort by RBI to foster lower-cost, alternative banking correspondent (BC) channels that increase the reach of the deposit-taking formal banking system in particular in rural areas.

In the meantime, the private sector continues to experiment, partly in response to the policy stimulus, partly because it realizes that it needs to reach beyond the urban affluent if it wants to thrive in a country where more than 90 percent of the estimated 400-million strong labor force is in the informal economy. FINO, for example, which is a technology platform and BC, has now 46+ million customers. The LeapFrog fund made a $15 million investment in Sriram Capital with the objective to significantly ramp up provision of micro-insurance services.

The KGFS is experimenting with a “wealth management for the poor” model that is probably unique in the world. I was on a field trip with a senior former Indian banker, now on the KGFS Board. He told me that no financial services company in India, across the entire income spectrum, has a similarly well-thought through approach of understanding customers needs, model their financial obligations and aspirations, and provide product-agnostic advice.

I lived in India 2005-2009 and worked on some of these issues, so I admit to being partial. But it’s hard not to be excited about the range of new initiatives and the dynamism of the market. Upon return, it’s also hard not to notice something of a disconnect between the purposeful financial inclusion agendas in the global South, in countries like India, and the somewhat dated angst (“hype of microcredit”) and advice years-after-the-fact (“move beyond microcredit”) in the blogosphere of the North.

Policymakers and regulators in the South know that the majority of their citizens live and work in the informal economy. They know that poor households typically are multi-occupational and multi-generational, and therefore as producers and consumers need access to the broad range of financial services to generate income, build assets, smooth consumption, and manage risks. If the formal financial sector doesn’t reach them, poor families have to turn to the age-old informal mechanisms of rotating savings clubs, capital accumulation in the form of vulnerable livestock, pawn-brokers for liquidity, and money-lenders for credit, which tend to be unreliable and more expensive.

For a large number of Southern policymakers and regulators, including India, financial inclusion is an imperative. Regulatory and policymaking bodies from more than 80 Southern countries have come together in the global Alliance for Financial Inclusion, and by now 20 countries have made explicit, public commitments towards sustained, responsible market development efforts covering a broad array of providers and the full range of financial services.