Budget Expectations: Fostering Financial Inclusion Via Secured Credit Card Access
India is gearing up for the union budget, the last significant financial exercise before the General elections. Finance Minister Nirmala Sitharaman is slated to present the union budget on 1 February 2024. Policy watchers, fintech founders and industry executives are waiting with bated breath for crucial announcements in the financial services space and their impact on the broader sector. For India to realise its dream of a USD 5 trillion economy, access to formal credit channels for its vast population is critical. As the final touches are given on the budget document, we hope the government will take steps to tackle some of the financial challenges a large section of the populace faces.
Despite great strides in the expansion of unified payment interface (UPI) and Adhaar enabled payment services (AePS ) and the success of the banking correspondent model, many Indians continue to be excluded from formal credit channels. The absence of a verifiable credit history or a good credit score pushes them into the clutches of unofficial lenders/moneylenders who charge exorbitant interest rates. It is the typical chicken vs egg situation, in essence, one cannot get formal credit without a good credit score and one can’t build a credit score without formal credit.
It is imperative for the government, the Reserve Bank of India (RBI), and financial institutions to work together and undertake strategic initiatives, both in the budget and outside, that can aid in increasing the blanket of financial inclusion and empower more individuals to access formal credit instruments. In this context, three key areas deserve attention in the upcoming budget.
Educational campaigns and secured credit cards
A crucial hurdle in financial inclusion is a lack of awareness about the importance of credit scores and their role in accessing formal credit. To break this cycle, the union government, in collaboration with the RBI and banks, should launch extensive educational campaigns similar to the 'Mutual Fund Sahi Hai' initiative, focusing on the significance of a good credit score.
The government can also focus on educational campaigns encouraging the use of secured credit cards as a solid credit builder product. Secured credit cards require users to make a security deposit, typically equal to or slightly more than the card's credit limit. The disciplined use of a secured credit card can help individuals build or improve their credit history. The government should encourage the adoption of secured credit cards by awareness and introducing supportive policies or incentives for banks offering these cards. By enabling citizens to create a positive credit history, the government can set them on the path to financial freedom.
Wider acceptance of credit cards by merchants
Credit card acceptance in India needs to be more widespread, especially among merchants and shopkeepers running small-scale businesses. To boost adoption, especially in transactions conducted through UPI, the government can consider implementing policy measures in the union budget that incentivise small merchants to embrace card payments.
One viable approach to this end is to reduce the overall Goods and Services Tax (GST) rate on Merchant Discount Rates (MDRs). MDR is the fee paid by merchants to banks for accepting card payments. By lowering the GST rates on MDRs, the government can effectively help reduce the overall MDRs, making it more economically feasible for merchants to accept credit cards. It would benefit merchants and encourage consumers to utilise credit cards for their transactions, driving the broader adoption of digital payments.
As the government prepares to present the annual budget, it must prioritise initiatives that foster financial inclusion and empower individuals to break free from the shackles of informal credit channels.
By taking these steps, the government can lay the groundwork for a more financially inclusive and technologically advanced India. As citizens access formal credit, they become active economic participants, contributing to growth and prosperity.
