Seeing a sea change

Unless the confidence in digital forms of payment spreads, India would lag behind, says Mr. Ajay Srinivasan, Chief Executive, Financial Services, Aditya Birla Group

The very thought of attempting to predict the future of something as dynamic as finance is fraught with more risk than Brexit. Nonetheless, let me hazard my guesses on how the financial landscape would pan out in about three and half decades from now. Given what I see around today is not something I could envisage about 30 years ago and given change is accelerating, I am likely to be off the mark. We heralded, for instance, the ATM as a great innovation not so long ago and we have already come a long way from there.

But, India is not just a hot bed for e-money but also a country where 41 per cent of the total population is unbanked. In rural areas, this number is as high as 61 per cent. So, 2050, I hope shouldn't be just about some electronic wallet replacing my leather one or an ATM card becoming what a landline telephone today is, but about improved access to our masses to banking. As of today, only 27 per cent of Indian villages have a bank within 5 km, while you and I enjoy 24x7 banking at our doorstep.

Let me talk about three key areas that I think will see a sea change over the next three decades, starting with the overarching concept of financial inclusion, which entails a larger proportion of the masses having access to formal finance not just from the traditional sources but through other intermediaries as well. Today, we still have a bank dominated financial sector and commercial banks account for over 60 per cent of the total assets of the financial system.

Pension provision covers only 12 per cent of the working population that too when it consists of a compulsory scheme for formal private sector employees. So, in 2050, not only would these percentages be higher, but the breadth would increase as well. I think this precisely has been the motivation behind moving away from traditional banks to go to NBFCs, MFIs and soon payment banks.

The biggest enabler here I think will be the pivotal role that will be played by telecom and technology: the fact that mobile penetration is higher than road penetration in this country gives us a huge opportunity to use this as a medium to access finance at a reasonable price. As inclusion increases, so will the penetration of all the financial services products in this country.

The next area I would like to discuss is with respect to the saving habits of the millennials, which will manifest itself in the deepening of the market for financial instruments. The traditional form of saving money in India has been term deposits as 47 per cent of total financial assets of a household are parked there. My sense is this trend too will change, as more and more people become aware of the difference between the stock market and mutual funds and the concept of real returns finds more takers. This should lead to a shift in the composition of financial assets, along with an expansion of the total pie. This would go a long way in deepening the financial market, a widely discussed topic today.

The third area I would like to discuss and is also likely to be the game changer, which is this whole move to digital currency. While digital payments are on the rise in metros, they make up only 5 per cent of total transactions in the country. The cash to GDP ratio for India at 12.4 per cent is much higher than the 9.5 per cent for China. In our move towards a cashless society, there is one issue to resolve around the supporting digital infrastructure and the other around security. The reason many people still prefer cash to plastic money and plastic money to e-money is that there is still a lack of confidence in the security of the digital world. Unless this infrastructure and confidence in digital forms of payment spreads through the masses, India would continue to lag behind this revolution.

The pace and dedication with which the government is working towards JAM speaks of their understanding of this change. The other outcome that one can expect from this move to a less-cash India is the unveiling of the underreported economy. This move would mean better tax revenue, more financial inclusion and of course convenience to the users. By launching the National Payments Corporation of India (NPCI), the RBI and the government have taken a major step in facilitating this, whereby an individual will be able to transact across banks on a smartphone using his Aadhaar number, mobile number and a virtual payment address.

As these forces evolve, our financial system will become more formal, more structured and will cover many more Indians. Of course, there is every chance that the world in 2050 will prove me wrong which won't be surprising since I still wonder what Snapchat is!