Disruption, Sustainability and Financial Inclusion: India’s demonetization policy and the need of smart solutions

Delber Lage, CEO, SalaryFits UK

Promoting financial inclusion is key for the sustainable development of any nation. The current figures surrounding financial exclusion are shocking, with two billion individuals around the world without any access to the most basic financial services. Although many countries have progressed in the past few years, there are still many challenges to overcome if we want to live in a more equal and prosperous society. It is estimated that the unmet deposit demand of the un(der)banked population is at least US$360 billion and that more than 200 million businesses lack adequate financing. As pointed out by Mitsuhiro Furusawa, IMF Deputy Managing Director, we are “running the development race weighted down by exclusion”. This issue is indeed at the center of the agenda in emerging countries like India: the nation still has about 21% of the worlds’ unbanked population.”

In this context, India has decided to foster changes to unleash prosperity by transforming its economy into a digital one. Recent actions, such as Narendra Modi’s demonetization policies enacted in November 2016 indicate how committed the country is with this agenda and how challenging this transition might be. The government policies aim to fight corruption and black money, which is seen as the biggest hindrance in the fight against poverty and a more equal society.

This demonetization policy consists of the ban of 500- and 1,000- rupee notes. In its announcement, Prime Minister Narenda Modi declared that the use of the banknotes would be invalid after midnight on December 30th. He also announced that the old notes would be replaced by the issuance of new 2000 and 500 rupee notes.

This measure is probably the most critical economic change in India since the liberalisation in 1991. The distress caused by the new policy will probably remain for a good while, but as mentioned by Nilekani, “the extent of digitisation that will happen over the next three months now, would have normally taken place in a three-year time frame”.

One of the main causes of the significant number of underserved individuals is that financial institutions struggle to offer affordable financial products to those that are not in the high-income level group. This happens because of lack or asymmetry of information and high transactions and enforcement/monitoring costs, associated with the huge bureaucracies that have been preventing big banks to promote innovative solutions within this landscape. India, in this sense, needs to support business models that can deliver scale of technologies focused on engaging not only the top 15% of the Indian market, but that can also be accessible to those at its bottom.

That is precisely the work that some companies have been doing. Salaryfits, a mature business intelligence and software company, has been very successfully promoting innovation in markets such as Brazil and Mexico. Its proposition is based on a really simple yet strong concept, which aims to make sustainable credit a reality and empower individuals through their salaries.

The solution helps to support those members of society that are either unbanked or underbanked. Yet, due to its effectiveness, SalaryFits can also provide better financial options for those who already have access to financial products. In India, the company is partnering up with mobile wallets in order to offer a low cost alternative to bank accounts, and offering the first set of financial products to individuals who would only transact in cash until recently.

It is clear that changing this landscape is not an easy task, and that it requires more than just a smart idea or the work of a single company. The challenge is that digital business models that are created within such transitions need to be capable of reaching a larger audience while at the same time making the services more affordable to any individual. Solutions and projects like these are definitely redefining the paradigms of service delivery and accessibility as they are provoking inclusive growth through high quality technologies and low cost solutions.

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