FinTechs in Bridging Urban-Rural Financial Divide


At around 10,300, India is home to the world’s third-largest number of FinTechs. The Jan Dhan Yojna, Aadhaar and mobile number (JAM trinity), along with the Unified Payment Interface (UPI) have acted as the key enablers for FinTechs’ rapid growth.

The Fintech ecosystem in India has tremendously improved, with the adoption rate of FinTech in India rising to 87 per cent which is well above the global average of 67 per cent. India’s Fintech market is projected to reach USD 150 billion by 2025, a significant leap from USD 50 billion in 2021.

According to experts, digital payment and digital lending have emerged as the most preferred fintech investment sectors in India. The RBI has projected that FinTech lending is projected to exceed traditional bank lending by 2030, which was unthinkable a few years ago.

In this digital age, financial inclusion can happen only through FinTechs, which are cost-efficient. It would not be wrong to say that FinTechs are born to bridge the urban-rural divide in India as the majority of its population resides in rural areas.

Traditional banking relies on face-to-face interactions and requires significant investment in physical infrastructure, which increases costs and is unviable in rural areas.

FinTech lenders rely on alternate sources of digital information and can deliver services at significantly lower costs, enabling the financial inclusion of hitherto unserved households in rural areas. FinTech lenders have also leveraged digitalization to provide superior customer experience by reducing the turnaround time for credit applications. As the digital divide narrows across regions, these lenders can increasingly help reduce geographic disparities in credit disbursement.

The introduction of the India Stack, a unified software platform, brings together identity, data, and payments nationwide under one umbrella and plays an essential role in heralding the population into the digital age. India’s fintech industry has truly transformed how people do business, especially during the Covid-19 pandemic.

Given the vast potential for FinTechs, the sector’s success could be the next big driver of economic growth for the country.

According to the government, India’s rapidly growing FinTech industry would likely cross a market valuation of USD 1 trillion by 2030 from USD 31 billion in 2021.  The key fintech sectors in India include digital lending, digital payment, wealthtech and insurtech.

The ecosystem developed in India provides a fertile ground for FinTech growth. FinTech has widened the range of products available to customers and expanded its distribution channels. While smartphones were the initial catalysts for the growth in digitalization, many digital apps can now be downloaded on feature-based phones, further expanding FinTech lenders’ reach. A case in point is UPI for feature phones introduced by the Reserve Bank, benefitting nearly 400 million users. These finance apps can often work with slow data connections and limited storage, allowing access even in remote rural areas.

Simplified incorporation of companies, regulatory sandbox, repository and self-regulatory organisation (SRO) framework have facilitated the Fintech growth story as well.

The government and the Reserve Bank of India have been supportive of the FinTech sector. At the same time, the interest of customers and financial stability was of utmost importance to them. So, a balance is required, FinTechs can’t disagree on this. At the same time, the policymakers should address FinTechs’ concerns on a real-time basis.

The government and the financial sector regulators have to formulate a strategy to simplify and digitalise the KYC process in the financial sector.   Similarly, there is a need to skill investigative agencies for a better understanding of cyber frauds to avoid meting out harassment to the start-ups.

Similarly, simplification of taxation on foreign investment in start-ups/fintech as well as facilitation of foreign listed start-ups in India and reduction in time taken for patents would do wonders for the sector.

Between 2014 and 2019, approximately 45 per cent of the new internet subscribers came from states whose per capita GDP was lower than India’s average GDP per capita. However, there still existed a rural-urban divide in digital payments since cash was still prevalent in rural areas. Despite the success of UPI, it has been mostly limited to urban centres. The digital divide between urban and rural India is approximately 18 per cent. However, the digital divide in India has been narrowing fast as the growth in UPI of the less affluent states exceeds that of their more affluent counterparts.

By 2030, India will add 140 million middle-income and 21 million high-income households which would drive the demand and growth of Indian FinTechs.

Financial inclusion programmes such as Pradhan Mantri Jan-Dhan Yojana (PMJDY), Direct Benefit Transfer (DBT), and Atal Pension Yojana among others have accelerated the digital revolution and brought more citizens, especially in rural areas, within the ambit of digital financial services.

Since 2013-24 (when the DBT scheme was launched), benefits worth Rs 35.5 trillion have been transferred to the beneficiaries till now. Over 53% of this was paid in cash through their bank accounts and the balance as in-kind benefits.

The PMJDY laid the foundations of financial inclusion by ensuring that close to 52 crore Indians have a bank account. The total balance in these accounts stood at Rs 2,34,997 crore compared with Rs 1,98,844 crore a year ago.

The beneficiaries are also automatically eligible for a MUDRA loan, making them eligible to receive loans up to Rs 10 lakh. This scheme helps rural households that face high credit demand but have been historically underbanked, get access to formal credit. 

Artificial Intelligence (AI) have helped make existing mechanisms like credit scoring — especially for FinTech and digital lenders — more accurate, while also providing new innovative markers of borrower creditworthiness. Finally, big data analytics and cloud computing have enabled the storage, and processing of large and granular data, allowing firms, businesses, and individuals to uncover insightful patterns, with better accuracy. While these methods can be used across lenders, they have been increasingly used by the nimbler FinTech lenders.

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