Context: Greater flexibility in financial products will lead to greater inclusion of nano-enterprises, a segment which is critical to the growth of our rural economy.

• There are 63.4 million MSMEs in India and 99 per cent of which are micro-enterprises with less than Rs 10 lakh in investment. Financial inclusion and integration is key to bring these businesses into the formal economy.

What is the present situation wrt formalization of nano-enterprises?

• If we assess our progress against the definition of “financial inclusion” i.e. accessibility of banking and availability of credit, we have made significant progress.
• However, if we question the adequacy of the financial products that they find access to, we fall short. Financial inclusion is not the same as financial integration.
• The journey from inclusion to integration is not only about making products available and accessible, but also about making them relevant, applicable, and acceptable.

Demand size challenges
1) Gap between demand and supply of capital

• Due to a limited risk appetite, low or thin-file data on customers and challenging regulatory oversight, capital remains a constraint in designing bespoke products.
• Way forward: For India to overcome these challenges, the existing infrastructure must be adapted to our new purpose, providing easy-to-use, customer-centric experiences.

2) Accessibility

• Greater accessibility has major benefits for not only the customer but also the supplier.
• For example, in rural India, people tend to save in the post office, because of village postal agents collect their savings from their doorstep.

3) Intelligent product design and delivery

• Products must be designed and delivered intelligently to meet the customer where they are, and by keeping in mind that they use products to reach their goals.
• This involves tailoring the products to the needs and income profile of the customer, including being cognisant of their environment, geography, and demography.

4) Lowering the operating costs

• In the traditional financial system, the design and distribution cost on financial products at sachet size is high.
• Financial service providers are consequently dissuaded from attempting to reach rural, financially excluded groups.
• By using the power of machine learning and cloud infrastructure, we can significantly lower operating costs while offering customers affordable, bespoke financial products.

5) Demand-side issues: Financial literacy and technology readiness

• Financial literacy and technology readiness are two critical issues on the demand size.
• Financial education assists people in making sound financial decisions.

Road Ahead

• First, tailoring the products to the needs and income profile of the customer, including being cognisant of their environment, geography, and demography.
• Second, use the power of machine learning and cloud infrastructure to lower operating costs while offering customers affordable, bespoke financial products that help them reach their goals.
• It is our responsibility to create an ecosystem for them to deploy this capital of courage.

By: Shubham Tiwari