Abstract

Abstract

Moving on from the physical clearance of the cheques to the CTS technology, from brick
and mortar model of the banks to the internet banking and mobile banking, launch of
BHIM and UPI application, digitalization has become a buzz word in today’s era.
Information Technology today has a crucial role to play in an efficient banking system,
and Indian banks have placed a strong infrastructure to leverage its benefits by moving on
to contextual banking and open Application Programming Interface. Though riddled with
lot of risk, banking services have steadily moved forward with digitalization to offer
customer services at their fingertips and laptop screens. With Indian Banking Industry
competing the world class technology, the rural banking customers still face challenges in
embracing digital payments. The article attempts to present the opportunities and
challenges recently emerging in the rural banking sector with special emphasis on
digitalization and to analyze the importance of digital literacy in today’s banking scenario.
This study provides the insights of the digital technology and ways adopted by banks in
rural India and to understand the perception and behavior of rural customers toward these
services.

Keywords KeywordsDigitalization, rural banking, customer services, information

technology, payment systems

Introduction

With the advancement of technology, the initiation of digitization and e-banking has been
formulated in a global world. India is one of the developing countries that has significantly
initiated the revolution of digital payment system a lot faster by joining other countries,
specifically in the financial sector. In addition, as the revolution of digital payments has
been spread into rural areas, its impact is transformative in nature based on exploring the
opportunities in the technological era. Based on statistical terms, it has been analyzed that
around 86.6 per cent of payments were made through cash in India in the financial year
2012 and in the years 2012–2013 more than 7,600 crore of float was seen in the economy.
As per such statistics, the initiation of a cashless economy evolved among policymakers
leading to the digitalization of the economy (Ravi, 2017). As per the World Bank’s report,
‘India is the second largest telecommunication market. Despite 25 per cent of mobile users
in India, digital literacy is merely 6 per cent of India’s total mobile users’ population’.
 Although the government has declared zero balance accounts, people are not reciprocating
equivalently in terms of transactions or account usage.

Information technology (IT) is one of the key aspects of an efficient banking system, and
Indian banks are playing hard to explore the opportunities. However, there are significant
risks to security, based on online banking or digitization, but its effects are being
appreciated by Indians extensively. Mr Narendra Modi initiated the campaign for ‘Digital
India’, which forecasted that more than 12,000 rural post offices are being linked with
payment banking through digitization. In addition, the prime reason for initiating
digitization in India is to control the flow of black money (Venkatesh & Nandini, 2013).

Objectives of the Article

The Government of India has adopted the idea of Digital India. Under this campaign,
digitalization of the entire banking system is a key task of the whole campaign. The
government is looking to digitalize the entire banking infrastructure where digital
transactions will be promoted over other forms of conventional transactions such as
cheque, withdrawal, and so on. However, this campaign faces several issues, and among
them the two biggest issues are: First, the rural infrastructure of India is severely back
dated, and even the basic forms of internet are absent in most part of rural India, which is
the basic necessity of digital banking. Second, almost 65 per cent of mobile users’
population in India is smartphone users, and most of the users from rural areas even lack
the basic knowledge of operating smartphones and even ATMs, and still to this day they
rely only on basic banking instruments such as cheques, withdrawal, and so on (Bapat,
2012).

Digital Payment Procedure in Rural India

The job seekers in distinct rural schemes have attained a new target by integrating more
than half a million volunteers also called banking correspondents’ (BCs) number. The new
target is to enroll shops and people in e-economy by providing effective training based on
cashless transactions. However, an incentive of ₹100 is being offered to every village shop
for attaining any form of payment through digital platform, but it is an intimidating task
for the BCs across India. In addition, it has been analyzed that around 2.5 million people
in rural areas of India have enrolled themselves in cashless transactions and around 55,000
merchants have moved into a digital platform for payments (Purmal, Alam, & Zam Zam,
2013). However, these strategic changes have been evident after the Government of India
 initiated demonetization on 8th November. The two payment systems, namely UPI and
USSD, have been eased up by the National Payment Corporation of India. In addition,
people in villages are much more comfortable with fingerprints rather than other security
features. However, it would assist towards higher rates of enrollment.

Some critiques stated that around 34 per cent out of 1.1 million active workers have an
Aadhaar-linked bank account based on the center’s rural job scheme based on Mahatma
Gandhi National Rural Employment Guarantee Scheme (MGNREGA). In addition, a
review meeting conducted by the Kant panel identified that 35 per cent of ration shops had
hand machines out of the 160,000 to analyze biometrics of MGNREGA workers
(Pritchard, Rammohan, Parasuraman, Sekher, & Choithani, 2013). However, it has been
analyzed that rural youth are much more inclined to find ways to go cashless, which is
massive in the current scenario. Figure 1 depicts the rise of digitization in India, which is
significant. The figure also states that by the end of the financial year 2019, the number of
digital buyers in India would rise by 239.7 million, which critically depicts the
effectiveness of digital payment in the banking sector of India.

Figure 1. Number of Digital Buyers in India from 2014 to 2019 (in Millions)

Source: Chakravorti (2016).

Disclaimer: This figure is for representational purpose only. It might not appear clear
in print.
Figure 2. Usage Rate After Demonetization in Rural India

Source: Jaleel and Sharma (2017).

Disclaimer: This figure is for representational purpose only and might not appear clear
in print.

As stated by Rajagopalan and Prakash (2013), the effectiveness of cashless payment has
emerged after the initiation of demonetization, specifically in urban India. Figure 2 depicts
the lower usage rate of the digital payment procedure, namely, UPI in rural India with the
increased use of debit and credit cards. This, in turn, states that there is a huge requirement
of maintaining the effectiveness of digital transactions and formulating cashless economy
specifically in rural regions for maintaining standardization extensively and yield the
benefit of the cashless economy.

Figure 3 reveals that in the financial year 2018 from January to April, there is a significant
amount of decline in the digital transaction made in rural India. This kind of decline has
been due to the lower knowledge of the rural banking system and lack of awareness about
digitization and its effectiveness. The other reason could be the recapitalization which
happened during demonetization, and people had more cash and such people who even
were digitally literate started transacting with hard cash. With the technological
advancement, the digital banking was initiated, but lack of knowledge and lower ability to
handle such system led to such a decline in each following months resulting in
763,000,000 million (Chavan, 2013).
Figure 3. Decline in Digital Transactions in Rural India—January to April 2018

Source: Waghmare (2017).

Disclaimer: This figure is for representational purpose only and might not appear clear
in print.

As put forward by Zhang, Jiang, Qu, and Wang, (2013), rural sector holds critical
importance for the economic development of India. The initiation of demonetization was a
turning event in India that led to critical changes in market dynamics. Post-demonetization
has forecasted significant growth in the number of users using digital payment interface
and PoS, which was unlike pre-demonetization. Increasing the bandwidth to rural
locations and initiation of e-wallets as well as incentives based on UPI are transforming
the digital world (Soedarmono, Machrouh, & Tarazi, 2013; see Figure 4).
Figure 4. Pre- and Post-demonetization Impact

Source: Raj (2018).

Although there has been exponential growth in the usage rate of digitization in India, its
effectiveness in rural India has not been reached at such extent, which degrades the vitality
of digitization (Goutam, 2015). Several incentive schemes are being formulated by
policymakers to offer rural India zero account, but very few people are using such an
approach. As stated by Acharya, Khandwala, & Öncü, (2013), literacy and knowledge can
assist people to use innovative products and services that can contribute to enhancing the
economy as well as social aspects.

Cashless Economy with ‘Aadhaar Pay’ in Rural India

In order to motivate illiterate and poor people in the rural area of India, the government is
striving hard to promote Aadhaar Pay, which would assist users to make financial
transactions with fingerprints. In addition, it would become an alternative mode of the
card and online transactions where customers would use PIN and password for
transactions (Lal, Dwivedi, & Rana, 2015). Through this payment mode, a merchant
would require the Aadhaar number, the name of the bank, as well as the fingerprint of the
customer for formulating a cashless payment system. A report cited by the Times of
India about UIDAI stated that the application is highly compatible with android-based
phone irrespective of its price as it just requires finger biometric device attached to it
(Choudhury, 2013). In addition, this would ensure that the digital transactions are
validated; PIN-less as well as card-less transactions can enhance the security system as
well. Furthermore, it would not require any smartphone for transactions for the customers.
The Government of India has initiated state banks to enroll 30–40 merchants per branch to
formulate cashless payments for the customers. This has assisted to promote the concept
of Aadhaar Pay among merchants in rural India extensively focusing toward growth and
innovation. Syndicate Bank, Andhra Bank, State Bank of India, IDFC Bank as well as
Induslnd bank are the first five banks to initiate the live services offered by Aadhaar Pay
with the effective promotion (Kumar, 2013). On the contrary, few other banks are still in
the process of inducting pilots in the application. The main purpose of such a strategy is to
analyze the transactions made via the application for incentivizing merchants based on
scalability and long-term sustainability of the system.

In addition, the government is trying to reduce the cost of the biometric device, which
costs ₹2,000, by working on an incentive model which would encourage the merchants to
use (Goswami, 2016). Based on technological advancement, the increase in breaches has
also been increased due to malicious attackers or hackers that raise serious concerns
toward digital payment system. However, transactions made using Aadhaar Pay are highly
secured (in terms of processes and technology) as compared to another digital mode of
transactions. If any merchant misuses or exploits the fingerprints for personal use, he or
she will be immediately caught by the government because the location of the merchant
would be traceable through the application of Aadhaar Pay (Jain & Natarajan,
2011). Figure 5 significantly states the effectiveness of digital payments and an increase in
usage rate among customers from earlier periods. However, there are also other significant
aspects after demonetization that state the requirement of significant development in the
digital payment system in order to enhance its usability and security. The transition to ‘go
cashless’ has been much more accelerated after demonetization in November 2016 by the
Government of India (Kumar & Siddharthan, 2013). Altogether, these changes and shift
toward digital world have offered essential benefits to the customers, government,
regulators, as well as bankers extensively as it assists to enhance transparency as well as
expand the formal economy significantly. However, with such integration of ‘Aadhaar
Pay’ system in rural India, it has certain limitations as well. As the system highly requires
internet coverage for facilitating person-to-person transfer via a fingerprint scan, the
internet connectivity in rural areas is still a critical challenge. In addition, unreliable
connectivity of internet can degrade the entire system leading to failure of such an agenda
(Özkan-Günay, Günay, & Günay, 2013).
Figure 5. Impacting Factors of Digital Payments

Source: Shakir, Wasim, and Safiuddin (2017).

Disclaimer: This figure is for representational purpose only and might not appear clear
in print.

It has been identified that around 14 banks in India are integrated into Aadhar Pay system
that assists to enhance the economic structure of India extensively (Bonizzi, 2013). In
2009, the Government of India acknowledged the need of a central data depository where
the vast personal details and biometrics of the Indian citizens will be stored, and in return,
Indian citizens will receive a social security like number call Aadhaar Number. UIDAI
was formed to formulate and maintain this vast database. To encourage poor and illiterate
people in rural areas to make digital payments, the government is promoting Aadhaar Pay
which ensures financial transactions by just using fingerprint as every user’s unique
biometrics are recorded in the Aadhaar database. Aadhaar Pay is an app on the Android
platform that will enable merchants to conduct cashless transactions.

Paytm Approach in Rural India

For government and nationalized banks in India, the biggest challenge was to provide
affordable and accessible services to the rural population of India. India has around
640,868 villages with more than 800 million population belonging to the rural areas.
These places lack basic infrastructure such as proper transportation, education and internet
services.
 Paytm, which is India’s largest digital payments company, has used the demonetization to
its benefit and has launched their services in the rural India.

Under their pilot scheme, Paytm offered merchants to transact using their gateway and app
for transferring money to the farmers’ bank accounts when the farmer is selling their
produce. Paytm also partnered with several agro companies to incorporate their payment
structure with their own platform. Paytm also offered several credit schemes for the rural
population to boost the adoption of their services. These schemes are generally for farmers
and can be used to procure new tractors, fertilizers, seeds, and so on. These loans are
generally provided without any collateral to encourage digital flow of cash and are
protected under the Mudra scheme of the government, and the entire documentation and
disbursement are done digitally. The eligibility for these loans depends on the total
amount of transactions done by an individual on their platform. Payment options can also
be altered according to the earning pattern of the borrower and varies from quarterly
payments to daily payments (Rangaswamy & Arora, 2016).

Paytm also have been able to penetrate in those areas where internet services are not
available. It was made possible by a new innovative method where a customer can dial a
toll-free number of Paytm and enter the amount and phone number of the receiver, and the
amount will be transferred provided the customer has registered his Paytm account with
his or her mobile number. This provided a framework for digital banking to operate in the
most rural areas of India, and this concept was later adopted by the Aadhaar Pay app by
the National Payments Corporation of India (NPCI).

Challenges of Digital Payment Faced by Rural India

The recent demonetization has nudged the entire country toward cashless or at least less-
cash economy. However, there is huge disparity between ‘Bharat’ (rural India) and ‘India’
(urban India). Rural areas have multiple challenges in its transition to cashless/less-cash
economy, multi-pronged approach needed to overcome these challenges. Integration of
rural economy with formal economy is long due, and it is high time to do that (Paul,
2007).

Various Challenges in Rural Areas Which are Posing as Roadblocks for Digital
Banking
1. Financial literacy and not literacy alone: Being a part of the formal financial system is
a costly affair—for the minimum requirement, it demands financial literacy which is
far more taxing than literacy. Given that most individuals tend to grapple while filling
up cheque and bank forms, even with literate, the transaction is a cost in rural areas.
2. Digital illiteracy: The rural population is less aware of digital world and
computer/smartphone. They even lack the basic knowledge of operating a smartphone
or a computer. Poor internet connection is also making the scenario worse.
3. Vulnerable system and the mistrust: The misnomer is that if money has been parked
in a bank, they can be cheated or refrained from withdrawing money, making them
even more wary to a digital transaction. Further, the frauds that happen make the
things worse.
4. Selective to nonacceptance of digital payments: As there are limited entities to
commit transaction in rural areas, non-acceptance by any of such limited entitities
may soon result in non-digital payment mode, despite the willingness to pay or so.
5. Limited number of transactions: Higher number of transactions with the same
merchant may push an individual to redirect toward ease of payment. However, in
rural areas, there are limited number of transactions, and that too at the end of the
month, people might be less willing to undertake transactions through the digital
mode.
6. Merchant sale: Adoption of the merchant sales via PoS is very slow despite the
service provider’s effort by providing various schemes and discounts.
7. Inadequate infrastructure: Smartphone penetrations, internet connectivity, electricity,
banking services are not adequate. Even the biggest nationalized banks of India are
finding it difficult to provide the basic banking services to the rural population.
Although the Jan Dhan Yojana boosted financial inclusion, but most of the accounts
made under the scheme are dormant and less or no transactions are done in them.
8. Nature of rural economy: Most of the needs of rural people depend on cash
transactions, and to introduce the concept of digital payments is a very daunting task.
Cash serves better than digital transaction because rural economy is mostly informal
or unorganized.
9. Poor economy: The rural population of India is still poor, and the per capita income is
considerably less than the national one. This makes even the basic necessities
unaffordable for the rural population.

The key solutions, according to the Government of India, through which digital inclusion
can be solved are as follows:
 1. Improvement in infrastructure: Low-cost smartphone is especially designed for rural
areas with regional languages. Smooth and speedy implementation of the Bharat Net
Project ensured supply of electricity, better and cheap internet connectivity by
creating hotspots and rationing of free data as proposed by TRAI on monthly basis,
improvement in banking services especially online services. Reformation and better
implementation of PURAs are extremely essential.
2. Digital literacy: Digital literacy is one of the biggest hurdles in transition toward
cashless economy. Common Service Center (CSC) under the aegis of Digital India
program should be fast tracked, computer education in schools promoted, self-help
groups (SHGs) should be trained and encouraged to spread digital literacy.
3. Trust building: Though trust building takes time, suitable advertisement strategies and
promotion of cashless economy can help. Incentives such as ‘Lucky Grahak Yojana’
and ‘Digi-Dhan Vyapar Yojana’ are steps in right direction.
4. Revamping of rural economy: Rural economy should be formalized to the extent
possible. This can be done by easy availability of loans in formal sector, incentives for
adopting digital economy, digitization of land records, better implementation of JAM,
and so on.

Customer Perspective Towards Digital System

Ratan Watal, former Finance Secretary, stated that digital payment systems grew 55.8 per
cent by overall size in India due to demonetization, and 25 per cent growth was observed
in 2016–2017. According to the Reserve Bank of India (RBI), the adoption rate of digital
payments had accelerated following demonetization in the last financial year but has
slowed in recent months of 2017. Total digital transactions in April 2017 of ₹109.58
trillion are 26.78 lower from ₹149.58 trillion in March 2017. The mass capacity of digital
transactions has witnessed an unexceptional growth in the adoption rate of digital
payments. According to the report of credit card database, the number of card selling is
increased that influence point of sale (PoS) of banking sector. In other words, people of
India started making payments by a debit or credit card over cash withdrawal from ATM
for making a cash transaction. Accordingly, the total number of debit card-related
transactions has increased to 1.2 billion from 818 million in the financial year of 2016.
Besides, ATM transactions are almost the same at 700 million, the transactions at PoS
terminal have increased three times from 108 million in the financial year 2016 to 329
million in January 2017.
 The technological innovation has unlocked numerous methods of digital payments by
which the consumers could make transactions in a convenient and acceptable manner. The
factors such as apparent comfort of use, soulfulness and adoption of digital wallet as
payment method helped a lot. These critical influences are designated as architects that
play critical part in adoption process of digital payment solution. The usage of digital
wallet among youth in Punjab was found to be associated with societal influence and
usefulness, controllability and security, and need for performance enhancement. However,
the adaptation of digital payment covers few drawbacks such as a lack of critical mass,
complexity, premium pricing and apparent dangers. ‘Payment Mode Influencing
Consumer Purchase Model’ was proposed by Braga and Mazzon. This model considered
factors such as temporal orientation and separation, self-control of people and payment
paradigms for making a digital wallet as an original compensation manner. Consumer
perspective of mobile payments and mobile payment technologies are two most important
factors of mobile payments research. Mallat studied consumer adoption of mobile
payments in Finland. The study found that mobile payment adoption depends on lack of
other payment methods and certain situational factors, as it is vigorous and constantly
changing.

Problems of IT that Restricted Digitalization in Rural India

More than 70 per cent of the population of India lives in the rural areas. After the
demonetization of 2016, the government emphasized on using digital payment services
through usage of e-wallets, online gateways, and PoS portals, and several companies such
as Freecharge and Paytm launched their services in rural India, and also the government
launched services like BHIM app. To do so, an individual needs access to working
smartphone with internet connection and also an active bank account along with either
debit card or credit card. So, it can be identified that the IT infrastructure is a huge
roadblock in the path of the Digital India campaign. According to a recent report by TRAI,
more than 50 per cent of mobile users in India do not have an active internet connection,
which restricts them from using these digital solutions.

Technological Advancement

According to the World Bank’s report, more than 290 million people in India lack the
access to electricity, which is a necessary ingredient for technological advancement.
According to TRAI, India had more than 1 billion active mobile subscriptions in 2016, but
 all the subscriptions are not unique users and are only an indication of the amount of sim
cards sold by the telecom operations, and around 25 per cent of them remain dormant.
Also, around 50 per cent of these subscriptions do not have an active internet connection
and are offline. Recent schemes from the telecom operators in India are showing a rise in
mobile usage in rural India, but majority of them are used for only calls and lack basic
internet connectivity.

Technological Infrastructure

The infrastructure of rural India is also worrying. The next example shows the current
scenario of technological infrastructure in rural India. For example, photocopy is a basic
necessity, and it has been observed that in many areas of rural India, there is lack of even a
photocopy service and people end up traveling long distances to obtain one. As a result, a
photocopy which is supposed to cost ₹2 ends up costing more than ₹100 and sometimes
the distance is so far that the individual has to skip work for this, thus costing him or her
that day’s income. The Government of India has acknowledged the fact that the internet
services are scarce in rural India and launched a scheme called National Optical Fibre
Network, which is aimed at providing the internet connectivity to the rural villages of
India by enabling the local panchayats with high speed internet. A budget of around Rs
700,000 billion has been approved for this ambitious project, and the government claims
that it has provided internet connection to more than 60,000 panchayats, but in reality, the
number is a little more than 7,000.

Illiteracy

Illiteracy and superstition are also one of the major roadblocks in the upgradation of
technological infrastructure in India. There have been reports that local religious bodies
and even panchayats have banned the use of mobile phones in a particular area. They also
restrict children and women from accessing the internet and gaining basic education.
According to the 2016 report by GSMA, they found out that more than 70 per cent of
Indian women lack the access to internet. They also concluded that less than 38 per cent of
women in urban areas and a little more than 10 per cent women in rural areas have access
to the internet.

Recommendations and Conclusion

 This is critical for India to enable active innovation in digital payment and connect this
innovation to drive the financial presence. The Indian government should make the
regulation of digital payment sovereign from the roles of the central banking. In this way,
this law allows that payment regulation is free of central banking. The function of digital
payment should be independent of central banking utility of RBI. The primary objective of
digitalization on rural banking consists of customer protection in the payment market. In
other words, the customer should not be responsible for loss arising out of the illegal
transaction or the system malfunctions. Additionally, the SHGs could support the persons
in the campaign of digital banking system within the rural area. Self-help Groups would
execute the duties of Bank Mitras in order to serve post offices as well as banks for the
propagation of digital wave. In this way, rural social infrastructures, for example, Mahila
Mandals, Youth Club as well as Panchayati Raj Institutions, ought to increase for the
spread of economy of digital rural. However, the line department representatives such as
school teachers, village development officers and health workers would teach the local
residence about digital economy and the financial inclusion.

There are enormous possibilities that rural economy could become the cashless economy
in India. Another way is by creating awareness about digital transactions and financial
literacy among rural people by partnering with different educational organizations and
NGOs. It can also provide multilingual online payment platforms, that is, mobile apps in
regional languages for ease of transactions.

However, the digital payment can lead to new potential developments as well as
supporting in upgraded condition of the digital payment dispensation in rural sector.

Declaration of Conflicting Interests

The authors declared no potential conflicts of interest with respect to the research,
authorship, and/or publication of this article.

Funding

The authors received no financial support for the research, authorship, and/or publication
of this article.
During FY2017-18, the number of adults with bank accounts in India grew to
80per cent, marking a significant rise in the number of individuals with
access to banking services. The development was primarily driven by the
government’s push for greater financial inclusion through initiatives like the
Pradhan Mantri Jan Dhan Yojna, Aadhaar-enabled biometrics, and mobile
phone – collectively termed as JAM.

Mobile Phone Usage and Aadhar

India ranks second in the world for mobile phone usage after China with
more than a billion connections, while a quarter of these comprises of
smartphone users. This user base is estimated to double to over half a billion
by 2020. Further, with more than 1.17 billion Indians being given a unique
biometrics-based identification, Aadhaar has given a great fillip to the cause
of financial inclusion, creating a much-needed bridge between financial
institutions and consumers. Furthermore, nearly two-thirds of the country’s
population uses mobile phones, a trend which has enabled consumers to
access core banking services like payments, remittances and fund transfers,
particularly in the rural areas where banks’ branch coverage is low.

Fintech

Digital financial technologies, or fintech, have spurred a host of mobile

applications built to solve specific problems for those segments of the
population among which literacy levels and awareness regarding financial
services is low. One of the most significant of these is UPI (Unified
Payments Interface), an application that allows one to conduct online
payments from smartphones through a unique virtual address, not unlike a
phone number or email address. The transaction can be carried out as easily
as sending an SMS or email, wherein no other details like bank name,
account number, or branch codes are required. Moreover, this facility also
does not require a smartphone. Rather, one can even transact using a feature
phone, through a messaging service called USSD which can be accessed with
the help of one’s Aadhaar number. One simply needs to visit the banking
correspondent in their town or village. The banking correspondent provides
the necessary banking service using a micro-ATM which authenticates the
individual’s identity by scanning their biometrics corresponding to the
Aadhaar number. Along with the general banking industry, the microfinance
sector, in particular, seems to be fast catching up to these changing
paradigms.
Digital Transformation in the Microfinance Sector

The demonetization drive in 2016 led to the microfinance sector facing

considerable turbulence with lower liquidity levels and disruption in cash
flows. As a result, several small and mid-sized microfinance institutions
across the country who had to rethink their cash-driven lending methods
started looking towards emerging digital payments technologies to lessen
their dependence on cash. Since then, digital payment methods are bringing a
much-needed technology-enabled transformation in the microfinance sector
and aiding microfinance institutions (MFIs) to simplify the disbursement of
loans to rural consumers.

Financial Data

According to Microfinance Institutions Network (MFIN), a body of NBFC-

MFIs, around 87 per cent of the loans disbursed during the first quarter of
FY2019 were done through cashless means. Around INR 11,404 crore was
disbursed to over 42 lakh accounts. Further, MFIN also reported that out of
42 members in the body, 28 MFIs disbursed 90 per cent of total loans during
FY 2018 through digital methods, while 25 MFIs disbursed all of their loans
digitally.

As a result, cashless microcredit disbursements rose to 55 per cent during the

second quarter of FY2018 and grew further to as much as 73 per cent during
the fourth quarter of the same financial year. On the other hand, this also
played a significant role in aiding the recovery of the microfinance sector in
India. As on June 30 2018, MFIs in the country recorded an aggregate gross
loan portfolio (GLP) of INR 51,878 crore, marking a growth of a massive 53
per cent from the previous financial year.

The adoption of digital modes of payment to deliver credit to clients enables

greater operating efficiency for MFIs, both in the short term as well as the
long term. But more importantly, it can also be an extremely reliable solution
to overcome risks such as frauds and thefts. Further, sustained use of digital
payment methods, in the long run, could be useful tools in ensuring greater
convenience to consumers in accessing funds, while at the same time,
allowing MFIs to leverage data analytics to better understand customer
behaviour. In addition, the process of credit underwriting is a particularly
complex one for MFIs, wherein determining the creditworthiness of a
particular borrower requires considerable documentation and groundwork.
Here, digital technologies such as analytics can play a critical role by
simplifying the credit underwriting process as well as reducing the time it
takes to process loans. Further, with digital records created for each
borrower, be it individuals or MSMEs, these clients can build their credit
histories and profiles to help them access institutional credit in the future.

The demonetization drive and the subsequent campaigns by the government

to create awareness regarding cashless and digital payment methods have
undeniably given a boost to financial inclusion. In India, fintech has further
introduced more ways to ensure financial inclusion of the masses by taking
digitization beyond simply payments to the process of underwriting and
providing credit. While there are few MFIs in the country that are truly
leveraging fintech and digitization, the majority of the sector still needs to
seriously reconsider its existing business models and make way for
technology on a larger scale. The faster that happens, the sooner will the
country’s masses truly be financially included in its growth story.