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Aurko Bhattacharya

Aurko Bhattacharya is the co-founder of ePayLater. He has 10 + years banking experience dealing with structured investment solutions across Equity, Interest Rates and FX in ICICI Bank, Barclays.

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Demonetization: Completing the Financial Inclusion

Speaking about technology infrastructure, the ubiquitous presence of mobile phones has often been talked about. The mobile phones apart from acting as delivery mechanism for financial services (m-pesa in Kenya being a case in point) can also act as tools for identification (otp based verification being a case in point).

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More than a month since India embarked on arguably the most definitive journey in its post-independence era to become a cashless economy, the melee of views and counterviews still holds nation’s attention firmly under its grip. Economy is the new Cricket people love to analyse and discuss and payment solutions are the new favourites. The impact of this move on everyone’s life has led to wide awareness about digital payments and it is likely that digital payment methods will continue to see exponential growth as India changes the way it manages its monies.

What seems to be really happening, is that Banks are getting more and more deposits leading to an increase in the liquidity in the Banking system. At the same time, there is a temporary squeeze on the actual cash in the hands of the people due to the restrictions on withdrawals.

As we look at the scenario unfolding before us, we cannot help but try and connect the dots.

Dot 1:
The Banks will now find themselves having excess liquidity. How will they deploy this cash? Their primary business is lending. If there is a slowdown in the economy because of the temporary cash squeeze in the hands of public, there will be a slowdown in the credit demand as well. Having said that we need to also consider that our formal financial systems do not cater to the credit demand of a large part of the “informal” economy. India has a credit card penetration of around 2%, while it is near 25% for China. In case of MSMEs, the formal supply of credit accounts for only about 22% of the overall finance demand. India is the land of SMEs with around 51 million such entities contributing 37% of the GDP. If credit can potentially help MSMEs multiply their sales, accessibility to formal credit will lift the whole GDP northwards. Do the banks need newer ways of looking at credit and lending? Do they need to look at new sets of customers? Do they need to start looking at alternate data? Banks have the reach and they have the trust of its customers.

Dot 2: The sudden move is now forcing the informal economy to transform. Whether black money will get caught or not is not the question any more. The question is that the paradigm is shifting and will the large cash dependent informal economy of India move towards becoming a formal economy? With most of their business income now forced to be recorded in bank systems, will the small businesses find it more beneficial to adopt the formal methods of financing and payments? Today any small enterprise (including retailers) can still carry on its business smoothly if it could pay the suppliers (including labour) digitally and if it could accept payments digitally.

Dot 3: There is a huge impetus by Government on creating a more inclusive and transparent financial system that has information as its bedrock. Early initiatives such as Jan Dhan Yojana, Kisan Rupay cards, payments bank licenses, small finance banks helped bring more citizens under the formal banking setup. And the government continues to push cashless transactions in various forms.

Dot 4: There is a booming startup ecosystem in India. There are numerous startups in the country in the fintech space who are working on various facets of providing financial services. Most relevant would be the fintech startups involved in providing payment solutions and the ones involved in enabling credit through technology.

Speaking about technology infrastructure, the ubiquitous presence of mobile phones has often been talked about. The mobile phones apart from acting as delivery mechanism for financial services (m-pesa in Kenya being a case in point) can also act as tools for identification (otp based verification being a case in point).

When you connect these dots one by one many possibilities open up. In this digital transformation, banks can easily help by collaborating with fintech startups especially in the fields of payments and credit. Banks have the reach and the trust of the customers while the fintech startups have the nimbleness to provide access to end customers and their data through technology.

As more and more data is generated it will help banks do a better assessment and deploy the excess liquidity in the form of credit to the individuals and small businesses. The credit could be digitally delivered. The small businesses could use the credit to give flexible payment terms to their buyers as well. The small businesses could also adjust to accept digital payments to complete the circle. In a nutshell, consumption gets a boost and in-turn, so does the overall economy!

This article is contributed by ePayLater's Founders - Aurko Bhattacharya, Uday Somayajula and Akshat Saxena.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house



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