Aadhaar, Demonetization, and the Future of Finance in India

My Discussion with Vijay Mahajan

By Michael Schlein

Vijay Mahajan and Mchael Schlein discuss financial inclusion in IndiaVijay Mahajan is a hero of mine. A graduate of both the Indian Institutes of Technology and the Indian Institutes of Management, social entrepreneur, and the founder-CEO of the BASIX Social Enterprise Group, he’s been at the forefront of India’s financial inclusion movement for decades.

Recently, Vijay joined me for a fireside chat at an Accion staff retreat in Hyderabad, India. During our wide-ranging conversation, we discussed India’s financial inclusion landscape, Aadhaar, demonetization, the future of digital currency in the country, the Andhra Pradesh microfinance crisis, and much more.

The following is a condensed version of that conversation:

Michael Schlein: What does India’s financial inclusion landscape look like today?

Vijay Mahajan: There’s so much to celebrate. When India gained independence in 1947, life expectancy was 32 years. Today, life expectancy is more than 68 years, on average. That didn’t happen by accident. What kind of value can we put on a country that adds more than 30 years to its people’s lives over seven decades?

For financial inclusion specifically: there are more than a billion mobile phones in India and more than 350 million bank accounts today. Access to financial services continues to increase — and that’s an important first step. But productive credit is not significantly increasing — in most cases, the available credit is consumer credit by another name.

Other services such as savings, payments, government benefit transfers, life and health insurance have started to become more available but still have a long way to go.

We also have to focus more on promoting India’s financial education. If we don’t create consumers who have both access and a sophisticated understanding of what they’re getting in to, then they’re going to get in trouble. We’ll get in trouble next, either on our balance sheets or with regulators.

Aadhaar is an audacious program. But user information for more than 1 billion Aadhaar users has been hacked and is available online. What do you think of Aadhaar?

On the whole I think Aadhaar is very good. It gives people an identity. Formal identification should be a basic human right.

When it comes to data privacy and protection — that’s more generic than just Aadhaar. Mark Zuckerberg just testified before Congress about Facebook’s data collection practices and whether individual users have control over their data.

We have to decide whether we’re going to see data as a private or public good. And if it is a public good, we have to have a discussion about what that ‘good’ is. Because data could create a Big Brother-like nightmare that George Orwell could not have imagined.

I am encouraged by what Aadhaar has done to secure customer data, including allowing some account holders to use 16-digit virtual ID numbersrather than share their actual Aadhaar PIN. .

That’s one more layer that needs to be hacked — but it’s one more layer that can be hacked.

There’s no end to security issues. But we can decide if data is a public or private good, and how that data can be used.

Demonetization was a government-led initiative to reduce the amount of cash in circulation; it also removed some bank notes altogether. The program intended on cutting corruption, boosting financial inclusion, and pushing India’s economy to digitize. How do you feel about the program?

From a financial inclusion standpoint, there’s been almost no gain. I say this with regret: it was a daring initiative.

The government erred in removing the 500-rupee note. That alone caused a lot of hardship, especially for smallholder farmers, small businesses, and rural communities. Removing that note from circulation would not reduce corruption significantly — it would be like trying to cure corruption in the U.S. by removing the $10 bill.

With demonetization and new know-your-customer guidelines, millions were locked-out of their accounts. Many couldn’t even access money in their bank account, including me.

What are your thoughts on India creating a national digital currency?

We should do it. I’m convinced that India has the mathematical might and the technical capability to be the world’s first nation to completely do away with pre-twenty-first century currencies.

I’m not talking about cryptocurrencies: I still believe currency should be a state function.

We have all the pieces in place already. There are 550 million smartphones in India; the younger generation is growing up on smartphones alone, even in the rural areas. Mobile reception is getting better in rural communities, too.

We could do it in five to ten years — just eliminate paper currency altogether.

You’ve been there for India’s financial inclusion highs and lows. You and your organization, BASIX, were even on the front lines of the Andhra Pradesh microfinance crisis. What was that experience like? How have we learned from it?

When I think about Andhra Pradesh, I think about the overall crisis and then my own personal experience.

For the overall crisis: the entire industry brought it down on ourselves. The ecosystem was headed toward a crisis: international social investors expected market-rate returns; microfinance institution staff were incentivized to grow and remain profitable; farmer-borrowers were incentivized to take out loans because all they’d experienced up until that point was a shortage of credit.

The whole system was aligned toward accelerating — without any brakes. In Andhra Pradesh, it became typical for a client to have multiple loans, and times even up to four or five loans out simultaneously. It wasn’t sustainable, and we brought it down on ourselves.

At BASIX, we had borrowers who we had known and loved, working with some families for up to 15 years before the crisis hit. I’d seen some of them go from real poverty to gaining some measure of security and well-being. It wasn’t unusual to have the BASIX logo stuck next to the pictures of the gods in our borrowers’ homes.

To go from that to not having our loans repaid was very difficult. I’m sad that it collapsed. But when we started, there wasn’t even $10 million in credit available for India’s poor. Today, billions of dollars are available to them.

In the end, we launched an industry but we lost an enterprise — and that’s fine.

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