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​Mobile Payments and Inclusive Credit: A Silver Lining in India's Cash Crisis?

Development Challenge

Beginning in November 2016, the Indian government eliminated the use of existing large denomination Rupee notes, comprising over 80% of the currency in circulation. This policy was implemented in an effort to curb corruption and tax evasion associated with holding stores of illicit “black money” in cash [1].  Following the demonetization, there has been a significant push by the government of India to promote the use of digital finance. This has resulted in a promising landscape for the promotion of digital credit, hypothesized to be particularly useful for small merchants who lack access to formal credit markets and require timely access to working capital.  Researchers sought to leverage this context to explore the effect of digital payment adoption and digital loans on small merchants’ business and welfare outcomes.

Evaluation Strategy

In order to explore the effect of these digital loans, researchers first carried out several pilot activities to gauge the feasibility of a future full-scale study testing the impact of digital credit on merchants in the context of Jaipur, Rajasthan. During Summer 2017, PhD student Carly Trachtman traveled to Jaipur to conduct informal interviews with approximately 15-20 merchants in various markets serving individuals of different economic classes. Carly, in partnership Catalyst [2] staff, asked questions focusing on the main business characteristics, credit needs, and digital payment adoption status for each merchant [3]. 

In addition to conducting informal interviews with small merchants, PRICE (an independent survey firm contracted by Catalyst) conducted a listing exercise that administered a brief survey to 6,011 fixed store merchants in various markets around Jaipur. The survey questions focused on basic characteristics of merchants’ businesses, technology usage and digital readiness, loan use, and digital payment technology use. 

Results and Policy Implications

Through informal interviews, researchers learned that many merchants would like to access credit in order to expand their businesses. However, they do not find much ease getting loans from bank, where there are prohibitive amounts of paperwork. Additionally, getting bank loans often take too long according to merchants, as it takes around 3 weeks between applying for the loan and receiving the money. Due to this constraint, merchants sometimes turn to informal lending. An interview with one informal moneylender revealed that rates charged are often much higher than formal banks, and loan decisions are highly based on relational contracting rather than a set of standard criteria. The listing exercise found that only 3% of firms have a formal bank loan and only 0.4% have an informal loan (although there may be slight underreporting on the latter measure). Clearly, there is a potential demand for a reasonably priced loan product that is instant, automated, and remote. Digital credit loans could possibly serve this need.

In order to provide loans to consumers, some lenders require businesses to have a bank account (to transfer the money to) and that they adopt a digital payment solution (which allows them to accept credit cards and mobile money wallet payments). The listing data suggests that 96% of merchants in the sample have at least either a current or savings account. Also, while the listing data reveals that only about 14% of stores in the sample accept debit cards, only 10% percent accept credit cards, and only 17% accept some form of mobile money wallet, 97% of the store owners own cell phones and 79% of merchants own smart phones. These numbers are encouraging because some digital payment devices require little fixed infrastructure costs if the merchant already has a cell phone. These findings also suggests a high level of digital literacy which would allow merchants to use digital payment and digital credit technologies. 

Anecdotal evidence from the interviews also suggested that some merchants who had not yet adopted digital payments solutions may be willing to do so. They see a digital loan as a reasonable incentive to adopt, especially if they’re serving lower middle income consumers, who might like to pay for goods using digital payment technologies.

Although digital credit has not had high levels of proliferation yet in the Indian context, there may be sectors within the country (and specifically small-scale merchants) that may be good candidates for offering digital credit.  The research team learned that credit may serve as a hook for the adoption of digital payment technologies. Further tests need to be conducted on the benefits of digital credit in the face of India’s transition to a cashless economy. This aligns with the Indian government’s objectives to increase financial inclusion and decrease corruption by promoting more digital transactions and less cash transactions.


April - November, 2017

 [1] See the Economic Survey of India 2016-17 (Government of India) for a detailed analysis of the policy and its stated goals.
 [2] Catalyst, the research team’s principal local partner, is an NGO whose mission is the development of inclusive cash payments in India ( 
 [3] This data was not formally collected and recorded for privacy reasons. 

Photo Credit: Carly Trachtman