Events & Issues

New Delhi, 10 February 2016 

Towards Financial Inclusion

BANKS MUST MOBILISE POOR

By Moin Qazi

When the Jan Dhan programme was launched on 28^th August 2014 many regarded it as ‘an experiment that would fail.’ True, it might not have measured up to the claims of its proponents, but evidence shows it has some positive impacts.

The scheme envisaged making every Indian a bank account holder. Undoubtedly, similar attempts had been made earlier but the programmes were not attractive enough to yield results. As only 30 per cent Indians who could read and write numerically qualified as being financially literate.

Notably, out of 1.3 billion plus people about 200 million bank accounts have been opened, of which 46.25 per cent are zero-balance, which means the account holders withdrew the entire amount on the same day it was deposited. Underscoring, financial illiteracy had exiled the poor from financial institutions, despite the modern banking system being over two centuries old.

Pertinently, for decades, balancing one’s cheque-book has been the cornerstone of personal finance for conscientious adults in the developed world. Yours truly, remembers when I opened my first account during college and received the ubiquitous passbook which detailed every deposit and withdrawal. One learnt that keeping track of bank balance was akin to finance’s personal hygiene like brushing financial teeth.

The implicit message, a bank account was the locus of money management wherein every financial transaction would pass through the account which would serve as a running financial statement, showing not only income and expenses but also personal solvency.

Notably, this philosophy of ‘financial inclusion’ has been the cornerstone of personal finance for adults in the developed world and is now the key focus of Governments in developing countries. Financial institutions are now engaged in a vigorous battle to enlist the poor as their clients, not just for their business but to open a window for the deprived and allow the global development winds to touch their lives.

Importantly, financial inclusion read access to financial services which implies absence of obstacles, price or non-price barriers. Consequently, it is vital to distinguish between access to and actual use of financial services. Remember, exclusion could be voluntary wherein a person or business has access to services but does not need them or involuntary whereby price barriers or discrimination bar access.

Additionally, failure to make this distinction could complicate efforts to define and measure access. Especially financial market imperfections, such as information asymmetries and transaction costs, are likely to be binding on the talented poor and on micro and small enterprises which lack collateral, credit histories and connections.

Indeed, without inclusive financial systems these individuals and enterprises with promising opportunities are limited to their own savings and earnings. Alas, this access dimension of financial development has often been overlooked, mainly because of serious data gaps on who has access to which financial services and a lack of systematic information on the barriers to broader access.

Besides, financial inclusion enables poor people to save and to responsibly borrow, thereby allowing them to build assets, invest in education, improve their livelihoods and entrepreneurial ventures. Underprivileged people save, borrow and make payments throughout their lives but to use these services to their full potential, to protect their families and improve ones lives, they need products well suited to their needs.

Significantly, this requires attention to human and institutional issues, such as quality of access, affordability of products, sustainability for the provider of these services and outreach to the most deprived and excluded populace.

There is no gainsaying, that financial inclusion literature in developing countries resort to informal services as they have no other option. Compounded by irregular and low income along-with often distant location make low-income adults in emerging markets unviable clients for formal providers. They poor, thus, often prefer informal services due to their enhanced value which locally delivered financial services provide that formal services cannot.

Furthermore, the poor have four financial needs: Life cycle which consists of events that impose financial burdens namely, births, deaths, marriages, education, home-making, widowhood, old age, and the need to leave something behind for one’s heirs. 

Two, emergencies, impersonal ones caused by floods, cyclones fires etc and personal exigencies which include illnesses, accidents, bereavement, desertion and divorce.  Three, financial and life-style opportunities which could require large sums of money for starting or running businesses, acquiring productive assets (including land and housing), buying life enhancing consumer durables (fans, radios etc).

Last, access to financial services which implies absence of obstacles to the user of these services as also whether the impediments are price or non-price barriers to finance. Thus, it is important to distinguish between access to, possibility of utilization and actual use of financial services.

There are five factors which reflect the need of financial inclusion in rural India. Primarily, inability to access financial services; lack of access to safe and formal saving avenues like banks; not have credit products in which investment can be made; lack of remittance products which makes money transfer a cumbersome affair and short of insurance products which makes risk management a distant dream for poor.

While the Government has made financial inclusion a major priority, many of these initiatives reflect a collaborative effort on the part of several individuals and institutions. The External Advisory Committee (EAC) under Chairman Nachiket Mor, Director Central Board RBI has been working on it and its report has passed through several committees.

In fact, the new efforts at financial inclusion are close to Prime Minister’s thrust on financial addition wherein the foundations of these efforts have been painstakingly and consistently laid over the years. It is systematic progress through the influential Mor Committee which submitted its report before elections 2014.

Undoubtedly, financial inclusion could emerge as a profitable opportunity only if banks are able to mobilise savings. A popular misconception is that the poor do not save though field evidence indicates the opposite. The poor are borrowing as well as saving.

Alas, huge amounts of poor savings are mobilised by fly-by-night operators and are vulnerable to loss. Banks need to woo the low-income customers who have taken to mobile phones in a big way. But they need appropriate products that can be easily understood and accessed with little documentation.  ----INFA

(Copyright, India News and Feature Alliance)