It is time for India to change its financial inclusion policy approach, to desist from micro-managing banks and move to monitoring progress, rather than mandating targets.The 2017 Brookings Financial and Digital Inclusion Project Report has once again given India a 100% rating on the parameter, “Country Commitment” to financial inclusion; the rating on the “Regulatory Environment” parameter has increased from 94% to 100% over the year. However, before the government and RBI pat themselves on the back, we continue to score a low 44% on the crucial parameter,“Adoption of traditional and digital financial services”. India has been steadfastly following a bank-led model for financial inclusion for more than a decade now. Rather than leave it to the market, the RBI and the government have preferred mandating targets to banks for increasing coverage and number of basic or PMJDY accounts.

Of the 26 countries studied in the Brookings report, Kenya tops in adoption of traditional and digital financial services with a 78% rating, and it is not just mobile money. Contrary to popular belief that banks would be crushed by the M-PESA juggernaut, the number of bank accounts has now surpassed mobile money accounts. As pointed out by William Cook and Claudia McKay in a CGAP study, Banking in the M-PESA Age, banks have responded to M-PESA in three ways : a) Direct competition over a mobile channel, such as through Equity Bank’s mobile product Equitel, b) Collaboration with mobile money providers to offer banking services, such as through CBA’s M-Shwari and c) Industry coordination to create alternatives to existing mobile money products, such as the small-dollar interoperability scheme introduced by the Kenya Banker’s Association (KBA).

India should now allow the forces of competition, collaboration and coordination to play out under regulatory supervision. Adoption of formal financial services will then follow automatically.

Source: Cook, William, and Claudia McKay. 2017. “Banking in the M-PESA Age: Lessons from Kenya.” Working Paper. Washington, D.C.: CGAP

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