The budget proposal season is upon us. This summer, PTI government will present its first full-year budget. While sectoral wish-lists will be long, the finance minister will do well to shine some light on a fiscally-neglected area: the digital financial services (DFS). DFS is the central pillar of this government’s Enhanced National Financial Inclusion Strategy, which was published on December 24, 2018.
Thanks to efforts by successive government, DFS – or branchless banking – has expanded in the past decade. From a baseline of zero in June 2008, the DFS segment achieved a decent footprint of nearly 22 million active mobile accounts and over one lac active agents, as of June 2018. This system, targeted for the un-banked and under-banked folks, conducted over two million transactions daily, averaging Rs4233 (over $30). Encouragingly, customers are transacting more via m-wallets compared to over the counter.
Over time, the BB/DFS segment has lagged in certain areas, as pointed out by this column earlier, such as high level of inactivity in both mobile accounts and agent network, besides lack of attractive savings and credit products. The private-sector service providers would have done something about it by now if the status quo was hurting them. Government must nudge them on the path to greater financial inclusion.
While the SBP is looking after the regulatory regime for DFS – and there are some longstanding issues that still need some fixing, such as interoperability and optimum number of access points – it is time that the finance ministry played a more active role by looking at the fiscal side of things. There has been silence on this front, except for a WHT exemption on cash withdrawal for BB agents announced in FY18 finance bill.
The argument for tax incentives is merely to encourage adoption of DFS products by folks who have zero or limited exposure to formal financial services – and not to enrich the service providers. DFS can not only serve as an entry point for the financially-excluded folks; it also offers an opportunity to document tens of thousands of retailers that are out of the financial system, for fiscal or cultural or pragmatic reasons.
So far, the BB segment has disappointed when it comes to raising small deposits. Perhaps more disappointing is the absence of digital credit in a market where data on millions of daily payments could be mined to score creditworthiness of folks with zero credit history.
A fiscal break, for a specified period of time until this segment fully develops, may motivate the key players to focus on those areas and help in financial-mainstreaming of some three-fourth of adult population.
For instance, exempting the participating banks and telco’s specific earnings from DFS may motivate them to invest more in their human resource and technology base and to push DFS aggressively. Ordinary folks may take to saving through mobiles if the BB players offer good returns and if the government makes digital profits tax-exempt. A tax-free system that is free of taxman’s harassment may also motivate small- and medium-sized retailers to join the DFS platform and document the economy.
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