The Digital Divine Avatar in Rural

The Indian payments market has historically been dominated by cash. According to an RBI publication, about 72% of financial transactions in India take place in cash (2018–19). Assuming about 7–8% of the remaining transactions taking place through paper-based instruments like cheques, we are currently at a low base of 20% digital transactions in India.

And cash is still king in rural India where access has not translated to utility as one might have hoped. Less than 5% of the total 20% digital transactions hail from rural India.

While fintech, built on a core of digital payments, remains one of the hottest sectors for startups, we dug deeper to understand if digital financial services were seeing any adoption in Tier 4/5 towns and rural India. In addition to undertaking secondary research, we spoke to a cross-section of players with significant touch points with this segment of the population. These included Samir Shah of Dvara Trust, which seeds and supports enterprises that work on bringing the population into the country’s formal financial system, Mr Brahmanand Hegde of Vistaar Financial Services, which provides loans to small businesses and Mr N Venkatesh of Samasta Microfinance, a leading MFI with operations in 17 states. We also spoke to Dhyanesh Bhatt of Gramcover, a composite insurance broking firm focused on insurance product design and tech enabled distribution for rural India and Sateesh Nakula of BigHaat, India’s largest Agri Inputs Marketplace Platform. We picked up some interesting trends and insights :

• On access — while the internet may seem ubiquitous in the metros, internet penetration in rural India falls below 30% in most States. Of those that own smartphones, only 60% use data services. Less than 10% of these people use their phones for any kind of financial transactions.
• Thanks to initiatives such as Pradhan Mantri Jan Dhan Yojna (PMJDY) and the government’s direct benefit transfer (DBT) approach for delivery of subsidies directly into these bank accounts, rural customers have also gotten exposed/comfortable with digital transactions. The need for contactless payments, brought on by the Covid pandemic, has spurred usage of these accounts; while 40% of such accounts were inoperative in Mar-17, this ratio is now much lower, at 18%. However, the pandemic has also led to a marked reduction in lenders’ risk appetite towards these customer segments and small businesses.
• During the lockdown phase, digital collections which had previously been virtually zero, rose to anywhere between 5–20% depending on the region. Notwithstanding the major disruption in the regular collection mechanisms, borrowers found ways to honour their obligations; apparently, more than 50% of transactions in the MFI segment were done via third-party bank accounts, with Mr Venkatesh highlighting that many of the women got together to pay their periodic obligations through the account of a member of the group that had a functioning account. While the trend towards normalization of activities has been accompanied by a return to the use of cash, there has been some stickiness in digital payments with this accounting for 5–7% across geographies.
• Overall, rural borrowers performed better than their urban counterparts and were not hurt drastically by lockdowns. This can be attributed to two primary reasons — a) lockdowns were less strict than in urban areas and, b) sources of income for them, being predominantly agrarian or other areas deemed to be ‘essential businesses’, were not much disrupted by the lockdown, unlike businesses in urban India.
• Collection figures for Vistaar were low from March to May, picked up from June through July to get to 80% and, by October, were at over 98%. The better than average performance of Vistaar can be partly attributed to its presence in rural India and a higher share of secured lending, but the company’s approach to building deeper relationships with its customers also played a big role. The team worked hard to reach out and understand the customer’s specific situation; by educating customers that the moratorium was a deferment (rather than a waiver) and would incur interest, they were able to ensure good repayment behaviour though some of this appears to have come from leveraging gold assets. To enable collections, many financial institutions used feet on the street to accept cash and digitally pay the loan.
• On adoption of technologies such as Zoom — Gramcover sells insurance products specially created for farmers ranging from livestock to parametric crop insurance. Interestingly, they are all sold digitally through field executives who collect cash from farmers and deposit digitally. Due to the movement restrictions imposed during lockdown, Dhyanesh trained his field agents to conduct meetings on Zoom. After an initial week or two of technical discomfort, his agents and villagers regularly attended meetings online, many with over 200 participants per call.

The regulatory and ecosystem-level initiatives that have been playing out have helped drive digital payments across India at a compound annual growth rate (CAGR) of 55.1% over the past five years. However, there is a long way to go for significant adoption by the mass of the population, especially beyond the major urban areas; Some imperatives for acceleration in this trend are:

• Access to high quality connectivity — Execution of the government’s plan to set up broadband connectivity portals at 2.5 lakh gram panchayats over the next couple of years as part of its BharatNet projects will be key.
• Institutionalizing digital income transfer — the key driver for rural MFIs being able to effect digital collections during the lockdown phase was the fact that most villagers received subsidy benefits digitally through direct benefit transfer (DBT). In urban India, many employers started making payments digitally, but post easing in lockdown restrictions, they have resorted to paying salaries/wages in cash. Nudging/incentivizing employer behaviour will be essential to making digital the dominant format for payments.
• Incentivizing the customer to seed adoption — Margins in most businesses catering to the rural world are small. But incentives, no matter how small, always work. Sateesh at BigHaat has touch points to over 3mm farmers who trust them for agri inputs, crop advisory, disease diagnosis. Thousands of orders are placed daily either digitally or over a toll free number. He has seen his business grow 5x in the last 24 months and notes that everytime he offers small incentives such as cashbacks on digital transactions, sales numbers shoot up by 2 or 3x for the duration of that offer. All the experts we spoke to affirmed that once the rural customer awakens to the value of a new product, she remains loyal to it.
• Education and trust building — This is key to establish lasting change in customer behaviour. Companies building digital financial solutions for this segment will need to build in context and content in the relevant regional language. Reducing error rates and ensuring security for digital transactions will need priority; Mr Shah of Dvara highlighted the high 50% error rates faced by them for the digital solutions developed for rural communities, which required significant co-ordination and effort with banks and NPCI to get to an acceptable level.
• Innovative hybrid solutions — For consumers in the rural milieu, a move to 100% digital over cash looks unrealistic; even in some developed economies like Japan, use of cash remains at >80%. innovative solutions for taking the bank to the underbanked may actually accelerate the move to digital as customers get to experience elements of digital banking in a more familiar physical format that engender higher levels of trust; mobile vans with mini ATMs, bill payments kiosks are low cost yet secure ways of bringing digital banking to areas where ATMs are scarce and present a challenge with regard to economic viability.

The government’s announcement of earmarking INR 1,500 crore to further boost digital transactions is a positive for fintechs working in this space, even if the alignment in use of funds with the points mentioned above is not fully clear.

(We encourage people innovating in this space to write to us at info@ankurcapital.com)

* https://www.rbi.org.in/Scripts/PublicationsView.aspx?id=19417