![]() ![]() The program’s goal is to expand financial inclusion, but its initial strategy targets the provision of convenient payment products to attract India’s unbanked and, more importantly, get them to use their new accounts. Shortly after taking power in mid-2014, the government of Prime Minister Narendra Modi announced the National Mission for Financial Inclusion ( Pradhan Mantri Jan-Dhan Yojana, or PMJDY) and instructed banks to leverage Aadhaar cards to provide unbanked citizens with new accounts and link them directly to welfare benefit payments. Having established a more robust national payment infrastructure, the Indian government and RBI have initiated policies to attract unbanked citizens to the financial system through payment-focused accounts. Online verification of Aadhaar universal identification cardsīringing the Unbanked into the Financial System through Payments Immediate Payments Service for mobile payments Table 1: Recent Developments in India’s Payment System Date Implemented ![]() This not only makes it easier for financial institutions to comply with “Know Your Customer” regulations, but also allows the payment system to support the government’s financial inclusion efforts. Meanwhile, the government’s rollout of universal identification cards-popularly known as Aadhaar cards and held by one billion Indians-lets any holder be authenticated by the Unique Identification Authority of India (UIDAI) and NPCI. Since then, the NCPI has initiated multiple reforms, including a national automated clearing house system for payments, the RuPay electronic payment card scheme, the Immediate Payment Service (IMPS) for mobile transactions, national check truncation, and a continuously operational system for remittances (see Table 1). In 2008 the Reserve Bank of India (RBI) established the National Payments Corporation of India (NPCI) to consolidate India’s complicated retail payment systems into a standardized, coherent national network to make transactions easier and cheaper. India’s policymakers have taken steps to address these payment issues. The availability of convenient, reliable, secure, and affordable payments can also introduce the unbanked to formal financial products like loans and insurance, creating synergies with broader financial inclusion goals. ![]() These systems provide benefits to a country’s poor citizens across a number of indicators, lowering the cost of transactions and increasing the return on savings. One way to reduce cash-related economic inefficiencies is to create inclusive non-cash payment systems. Source: BIS Committee on Payments and Market Structure, end-2014 data. Additionally, people operating exclusively in cash and without a bank account often face tougher borrowing conditions.įigure 1: Cash and coins in circulation outside banks (% of GDP) It also means their savings are unavailable to fund broader economic activity, as banks can’t lend cash held at home. This cash reliance makes households vulnerable not only to theft but also inflation, which erodes the value of cash not earning interest in a formal account. Meanwhile, as of 2014, India’s ratio of currency in circulation outside of banks to GDP was 11.1 percent, higher than other emerging economies like Russia, Mexico, and Brazil (see Figure 1). Only an estimated 10-15 percent of the population has ever used any kind of non-cash payment instrument, compared to 40 percent of people in countries like Brazil and China. Most Indians rely exclusively on cash in daily transactions. Non-cash Payments can Improve Economic Welfare and Financial Inclusion These combined policies could have a major impact on economic welfare and financial inclusion in the coming years. In response to this problem, the government has introduced policies to promote non-cash payments, provide hundreds of millions of new payment-capable accounts to the unbanked, and encourage new technology and innovation throughout the banking sector. India’s heavy reliance on cash has wasted resources and limited financial inclusion, leaving nearly half the population without a bank account. Pacific Exchange Blog How Modernizing India’s Payment System can Drive Financial Inclusion ![]()
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