In 2011, just over 3 out of 10 Indians had bank accounts. This number was, according to the Bank of International Settlements’ analysis, in line with that of other countries with a similar GDP per capita. By 2018, more than 8 out of 10 Indians had bank accounts and around 330 million people had been brought into the formal financial system. This rate of progress in GDP would normally take about half a century, as per the BIS; India managed it in just under 8 years. In the talk embedded below, I explain what made this progress possible.
The last two decades have brought to life the power of technology platforms in reshaping economies. Amazon, Google, Facebook, and Uber have changed the game for e-commerce, information access, communication, and private transport. But what many miss is that most of these innovative platforms rely on shared digital infrastructure often invisible to the end consumer. For example, look at the TCP/IP protocol that powers the Internet, the GPS signals that allow navigation, or the SMTP protocol that makes all email interoperable. While visionary entrepreneurs are adored and admonished prominently, it is this class of silent public technology investment that made their innovations possible.
India embarked on a journey to solve for the challenges faced by a typical micro-enterprise owner. Let’s call her Nandini. In the process, the country built a series of digital public infrastructure over the course of a decade that addressed the many layers of bottlenecks she faces. For instance, Nandini’s first verifiable digital ID allowed her to more easily open a bank account, where KYC regulations and gender barriers held her back previously.
Possibly her biggest impediment is a lack of access to loans that could keep her business afloat. Her receivables tend to come in with significant delays, leading to short-term working capital shortages. Yet, less than 8% of MSMEs like hers have access to formal credit, and these figures have been on the decline. Share of credit to MSMEs of total bank lending dropped from 17.3% in 2010 to 13.6% by 2018, leading to a current estimated credit shortfall of about ₹26 trillion.
India recently kicked off the Data Empowerment architecture, a framework for consented data sharing across the financial sector. This allows Nandini to share data on her business’ regular invoices or GST payments seamlessly and securely. Any bank or NBFC can now offer a regular stream of small-ticket working capital loans based on her demonstrated ability to repay. This is in sharp contrast to the status quo, where banks typically offer only larger loans backed by collateral. Using cash flows rather than collateral as the basis for credit is known as Flow-Based lending. Because producing collateral is a roadblock for the poorest Indians, Flow-Based lending may be their only opportunity to access the credit they sorely need for growth.
Our work is not yet done. But I’m confident that with continued political will, proactive regulators, and further innovation, India will continue to surprise the world with its solutions.