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Boost financial inclusion

ET Bureau Sep 23, 2010, 05.49am IST

Regulatory blindness to technology should not hold up extending the reach of formal finance to those who are forced to depend on moneylenders. Mohandas Pai points out (ET, Sept 21) that mass banking can be revolutionised with innovative use of information technology and telecom services.

Every banking activity from origination and transaction to fulfilment and settlement can be completed using a mobile phone. The New Pension System offers a model of low-cost electronic accounts that banks can adopt: one agency (or a few of them) could maintain accounts on a single electronic platform that different banks can access as per the account-holder's mandate, lowering costs. These accounts could be tied to the unique identity numbers being generated under Project Aadhar. Access to these accounts could be through mobile phones or widely distributed points of presence such as post offices.

Once this infrastructure is married to individual credit rating, the stage would be set for extension of formal finance at low cost to displace not only the moneylender but also microfinance institutions (MFIs).

The success of some MFIs has led to proliferation of such institutions, weakening the basic incentive for small borrowers to always repay their micro loans. Instead of the government asking banks to cap the lending rates of micro-loans enabled by their funding, the government and the RBI would do well to focus on deploying India's vaunted success in telecom and information technology to revolutionise inclusive banking.

Mobile phonemakers and service providers have done their bit to make handheld phones ubiquitous. The software industry has the capacity to create platforms that would enable the banks to provide services over mobile phone at low cost.

The demat accounts that hold shares worth India's GDP are proof of the viability and robustness of electronic accounts on a single platform accessible by multiple permitted users. It is only regulation that prevents the potential of technology from being realised for the sake of India's unbanked millions.