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This budget had digital written all over it. The Honorable Finance Minister carried with her an iPad instead of a traditional paper file, while highlighting the word "digital" many times during her speech, and this clearly communicated the government’s thinking on promoting fintechs, startups, digital banking, digital payments and blockchain. It was almost like listening to a digital evangelist who is not just optimistic about the possibilities that digital offers but also a very confident investor who is willing to bet resources on digital. The following milestone announcements are likely to pave the way for large scale digital transformation in the Indian financial services industry.
1. Digital Banking Units – To boost the economy and to mark the 75th anniversary of Indian Independence, it was announced that 75 digital banking units are to be set up by scheduled commercial banks across rural districts in India, to act as centres of excellence promoting digital financial inclusion. This will further accelerate the roll out of more digital initiatives driven by marketplace demand. While 75 digital banking units may not sound big enough to cover the width of the Indian rural market, these units are expected to establish successful proof of concepts and build scalable profitable operating models that can be replicated across the country.
2. Central Bank Digital Currency – Digital Yuan and other foreign digital currencies are already proving to be game changers in their respective markets. Given the complexity and scale of the Indian economy, the Central Bank Digital Currency (CBDC) will bring in not just transparency and accountability to monetary transactions but will also provide consumers with a safe, secure and regulated alternative to physical cash. The CBDC from RBI is not only expected to reduce the cost of currency circulation but also fast track the transition into a cashless economy and fully establish itself on the global stage as a digital economy.
3. Core banking across post offices – 1.5 Lakh Post office centres, across the country, going the core banking way will create the necessary infrastructure for digital banking adoption. This will enable the issuance of several million digital savings accounts and the roll out of digital payment services. The presence of post offices in the remotest parts of the country will ensure last mile digital banking connectivity.
With mobility and feet on the street network, the postal banks of India will be a catalyst for accomplishing financial inclusion targets and there is a significant synergy to be tapped through potential alliances and partnerships with cooperatives and microfinance institutions. Due to the geographic breadth of Post Office centres across the country, such alliances between these institutions will help deliver credit to rural regions in a significantly more efficient manner and stimulate financial inclusion and economic growth at the grass-root level.
4. Continued support on digital payments – Continuance of incentive schemes to promote digital payments has been a big booster for the transition to a cashless economy. While there are benefits in terms of cost savings, better accounting etc. arising out of the adoption of digital payments, these benefits are yet to be realised by most participants in the ecosystem. As the rate of adoption increases and the volume of digital payments becomes large enough to subsidise the cost of payments, till such point in time offsetting this cost for banks is a much-needed supporting initiative from the government.
5. Encouragement for fintechs – Fintechs have played a crucial role in India’s financial inclusion story and have been the primary driver of economic digitization in India. During the recently concluded budget announcement, the honourable finance minister has made it very clear that the government is focused on enabling further innovations in the fintech space. Tax breaks for startups and a supportive framework that will enable fintechs to work with large public sector banks are great enablers.
6. e-Bill implementation – Implementation of the e-Bill mechanism for government procurements will provide room for better supply chain finance models. This will in particular be very helpful for the many Small to Medium sized enterprises that form part of these supply chains. Apart from providing faster and better access to credit, the e-Bill mechanism will also facilitate faster clearances of invoices and will hopefully avoid unreasonable delays in funding. The TReDS bill discounting platform, which is already in existence, coupled with the OCEN framework will further complement the evolution of an end-to-end digital operating model.
The beauty of all aforementioned six rollouts is that they complement each other and together act as the pillars of a very well thought out strategic framework for digital financial inclusion. As the scale of digital adoption increases in the line with internet and smartphone adoption, India will no doubt achieve its financial inclusion targets faster than previously envisaged. Considering the soon to be announced digital only banking licenses for fintechs, this budget has laid out the fundamental architecture for digital only banking operating models.
It is also worthwhile to note that these propositions are customer facing and that the back-end infrastructure required to make these propositions work will create several additional job opportunities and startup opportunities across cloud, risk management, hardware, network and data. Furthermore, the landmark announcements introduced by the government during Budget 2022 have been made with a long-term growth standpoint and will positively impact India’s endeavours to achieve its financial inclusion targets.
This article was originally published on The Times of India.