Innovation for Financial Inclusion

Posted on February 05, 2018 by Sumita Kale

Since the Pradhan Mantri Jan Dhan Yojana launch in 2014, the objective of universal access and coverage of banking services is close to being achieved. The focus is now shifting to enabling usage. While so far top down policy actions have helped catalyse universal access and coverage,  the character of policies associated with financial inclusion is now changing towards empowering ground-up innovation. This in turn, requires a different class of policy action as the policy objective now is to enable traditional and new financial sector stakeholders to innovate without being hindered by unnecessary rules and procedures.

The latest Indicus Policy Brief looks at precisely this aspect of creating an ecosystem where innovation and experimentation can occur at low cost and by diverse service providers in the banking and payments sectors. In the process, it identifies the key tasks ahead under three main categories:

  1. Enabling Open Access and Interoperability:
    1. To enable easy access and interoperability, a comprehensive time bound road map can be evolved and shared with the industry. Innovation and new product launch is a lengthy process and policy uncertainty or ambiguity tends to hinder it. The road map would lay out the government position on major recommendations of the Report of the Watal Committee on Digital Payments (Ministry of Finance, 2016), including currently grey or indeterminate areas if any. The ideal, of course, is for all major payment systems including RTGS, NEFT, IMPS and UPI to operate on a non-exclusive and non-discriminatory basis for both banks and non-banks.
    2. The recommendation from the Watal Committee to declare the National Payments Corporation of India (NPCI) as a critical payments infrastructure should be examined by the RBI. For improving access and participation from non-banks, diffusing the shareholding structure of NPCI and allowing for non-bank participation, as well as independent members will reduce the current large bank orientation and incentivize greater openness to other stakeholder views.
    3. The Business Correspondent outlet is often the sole access point to formal banking in a cluster of villages. Without interoperability at the BC level, the choice of rural poor is limited, footfall at the banking outlet is reduced and opportunities for innovative solutions are blocked. Standardised guidelines for a White Label BC framework should be issued by the RBI; this will allow access to innovative solutions for the rural poor, who are currently under-served by single or few banking outlets.
  2. Data sharing, protection and privacy: The Committee of Experts on a Data Protection Framework for India has released a comprehensive White Paper on these issues and public feedback has been invited. The critical tasks for India this year are to build a framework that will:
    1. Set up data sharing protocols amongst banks and non-banks
    2. Set up rules for data standardization that will allow for cross-platform usage
    3. Define appropriate data privacy rules, and ensure their enforceability
    4. Ensure that the consent architecture is effective, particularly for low income customers.
  3. Comprehensive reporting and monitoring:
    1. An analytics and monitoring unit, potentially within the RBI and coordinating with the Ministry of Finance, is critical now to monitor transaction and pricing activity, identify transactional hurdles and gaps as they emerge and resolve them through regulatory/policy action.
    2. Aggregated, generic results of the analysis must be shared publicly to create a more informed environment for new entrants and for course correction by existing players.
    3. An institutional mechanism set up for inter-regulatory coordination, including Telecom Regulatory Authority of India and the Competition Commission of India would help circumvent many hurdles in a timely manner.

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