VDBS for financial inclusion in India

It is well understood that India continues to have acute challenges around financial inclusion. Only 40 per cent of the adults in the country have formal bank accounts, despite the country having 150 domestic commercial banks and over 2,700 co-operative sector banks operating in the country.

The Indian government and the Reserve Bank of India (RBI – India’s central bank) are in overdrive to ensure that this long standing challenge to India’s economy is plugged with utmost urgency. The Jan Dhan Yojana (involving opening of bank accounts for the unbanked), the Suraksha Bima Yojana (for insuring the uninsured) and the Mudra Yojana (for easy credit to Small and Medium enterprises) are a few of the slew of measures that the Government has coordinated in the past two years.

Interestingly, RBI, once considered to be lackadaisical and wanting in measures for ensuring financial inclusion, has actively started looking at various means to promote the same. The recent issuance of licenses to payments banks is one such example. This is in line with the recommendations of the Committee on ‘Comprehensive Financial Services for Small Businesses and Low-Income Households’.

The Committee had advocated a two pronged system for financial inclusion in the country. These included the Horizontally Differentiated Banking System (HDBS) and Vertically Differentiated Banking System (VDBS) differently focused on the three building blocks of banking system: payments, credit and deposits. The HDBS was expected to be a full fledged bank with all the three building blocks under a single roof while the VDBS was expected to see niche or specialized banks focused on one or two of the building blocks of the banking system. While the HDBS was expected to continue to do more of the same and thus contribute to the inclusion agenda through more branches in unbanked areas, the VDBS was designed to be the mainstay of the financial inclusion program.

Through the VDBS banking system is expected to attain a degree of flexibility, hitherto missing, in designing products and services in a meaningful and sustainable way focusing on the poorer sections of the society in non-urban centers. These VDBS players are expected to be unhindered by the legacy systems that influence performance of the HDBS on the financial inclusion front. Specialization driven by expertise and rooted in sustainable business models will be key for making the VDBS providers agents for financial inclusion in the country.