Jessica Perkins

Poor and Unbanked in India?: Why 12 digits could equal financial inclusion

India is the first nation aiming to achieve greater financial inclusion for its citizens by issuing biometrically verified personal ID numbers.

One major barrier for the world’s poor in obtaining financial services is a lack of credit history or documented personal information, like a card with the individual’s name on it. Lenders will often require more collateral or charge higher interest rates if they don’t think they have enough reliable information about the borrower in order to effectively evaluate risk. This leads banks to exclude even clients who would otherwise be suitable for loans or opening bank accounts.

Today, only 55 percent of Indians have deposit accounts, only 25 percent have health insurance and less than 20 percent have life insurance.

India’s government is harnessing new technology that will help those citizens who lack the most basic proof of identity. The Aadhaar (“foundation” in Hindi) program has already begun issuing 12-digit individual identification numbers that will soon let Indians verify their identity and address any time, anywhere within the country. Each Aadhaar ID number is connected to a citizen’s biometric data: photograph, iris scans and fingerprints. It’s the most technologically intricate national identification effort ever. Added benefits will allow individuals to document their credit history and link their ID number to electronic payments through an Aadhaar-connected bank account in order to receive automatic wage and welfare payments.

Such complex identity documentation will help curb India’s problem of identity fraud. Today up to 40 percent of government benefits reach the wrong people, many of whom have used fake identification papers.

While Aadhaar enrollment is voluntary, India has already linked more than 300 million of its citizens to the program since its start in 2010, with the larger goal of reaching the entire 1.2 billion population by 2018. Citizens only need to enroll once, free of cost, to receive their unique number, which will remain valid for life.

A universal ID number with with potential tracking tactics may seem like a threat to civil liberties, but perhaps making the process voluntary (for now) has eased the minds of Indians and made it more appealing than, for instance, when the UK proposed the idea of national IDs in 2006. And many Indians appear to want an official identity and the documents to prove it – something many people from affluent countries take for granted.

It is too soon to tell if the benefits of identification numbers will indeed outweigh any bad sentiments. But one advantage that cannot be ignored is how effective Aadhaar might be in reaching vast segments of the “unbanked” Indian population. Hundreds of millions of impoverished citizens may be connected to banking for the first time.

Once accomplished, India’s Aadhaar will be the world’s largest biometric database, though a similar project in Nigeria began early this year.

Will other developing countries follow suit? The world is watching, many with a critical eye, to see if these biometric projects end up causing more harm than good.

This article originally appeared in Global Envision, a blog focused on market-based solutions to poverty managed by Mercy Corps, a NextBillion content partner.

financial inclusion