edge of having lower cost of funds in comparison with NBFCs. MFIs that have turned into SFBs are now diversifying
their advances mix, and focusing on other retail and corporate lending business.

Key growth drivers
India has the world’s second largest population

India’s population was approximately 1.2 billion, comprising almost 246 million households. The population, which grew
at approximately 1.8% every year between 2001 and 2010, is expected to increase by around 1% every year between
2010 and 2024, to reach approximately 1.44 billion. As of 2020, India has one of the largest young populations in the
world, with a median age of 28 years. About 90% of Indians will still be below the age of 60 by calendar 2020.

Financial penetration to rise with increase in awareness of financial products

With increasing financial literacy, mobile penetration, awareness and the Prime Minister’s Jan Dhan Yojana (PMJDY)
bank accounts (scheme aimed at bringing the unbanked under the formal banking system), there has been a rise in the
participation of individuals from non-metro cities in banking. With more people attached to formal banking sector, the
demand for financial products in smaller cities has seen a major increase in recent years.

Going forward, CRISIL Research expects financial penetration to increase on account of increasing financial literacy.
Technology is expected to play an important role by progressively reducing the cost of reaching out to smaller markets.
India has seen a tremendous rise in fintech adoption in the last few years, and among them, Unified Payments Interface
(UPI) is playing a pivotal role towards financial inclusion. It provides a single click digital interface across all system for
smartphones linked to bank accounts and facilitates easy P2P transactions using simple authentication method. The
volume of digital transactions has also seen a surge in the past few years driven by increased adoption of UPI.

Financial inclusion and key developments

The COVID-19 lockdown in India of nearly 1.3 billion people and a large number of businesses is leading to disruption
and dislocation. To provide some relief to the customers, the RBI has introduced measures that allows lending institutions
to allow a moratorium of six months on repayment of instalments for term loans outstanding as on March 1, 2020. Lending
institutions are permitted to defer interest payments on working capital facilities outstanding as on March 1, 2020, by a
period of six months until August 31, 2020. However, banks are instructed to provide 10% additional provisioning for
availing of this benefit, which could be later adjusted against the provisioning requirements for actual slippage. These
measures are required to boost confidence in the economy.

In India, banks are required to maintain a capital adequacy ratio, which is higher (by 1%) than the mandatory requirement
of Basel III norms. SFBs are required to maintain 15% capital adequacy ratio under Basel II norms. According to the
RBI, this is done to make the financial sector resilient towards any shocks. The central bank believes that credit growth
higher than nominal GDP expansion due to supply push could result into a sharp rise in bad loans. In addition, given the
insolvency regime in the country that is still not matured, lower capital norms will create a notion of banks being strong
and hence it is necessary to guard against any such vulnerability that could put stress on the financial system.

In these times of crisis, financial inclusion becomes more crucial than before for vulnerable households and businesses
to navigate the crises and recover after the pandemic. In terms of the credit to non-financial sector, India has a low credit
penetration compared with other developing countries, such as China and Brazil, indicating that the existing gap needs to
be bridged.

India’s performance for financial inclusion is improving in comparison with other emerging economies; however, a
large section of the population is still unbanked.

According to the World Bank’s Global Findex Database 2017, the global average of adult population with an account
(with a bank, financial institution, or mobile money providers) was about 69% in 2017. India’s financial inclusion has
improved significantly in the past three years, with the adult population with bank accounts rising from 53% (as per
Global Findex Database 2014) to 80% (2017) with concentrated efforts from the government and the rise of various
supporting institutions. Although the rise in the number of bank accounts has not translated into a corresponding increase
in the number of transactions.

To tackle financial exclusion, the Indian government introduced the PMJDY, a scheme that facilitates opening bank
accounts by the unbanked. However, the effective use of these new accounts and availability of credit remain key
challenges, which need to be effectively addressed as borrowings from the formal source still remains low.

113
