Spotlight
New
Delhi, 6 October 2018
Financial Inclusion
TOUGH, BUT WILL BE A REALITY
By Moin Qazi
India is on the cusp of a vibrant financial
revolution and is poised to making full financial inclusion a reality. But it
will require bold innovation, hard timelines, practical policy reorientations
and fundamental shifts in business models to make the financial lives of the
poor simple and fulfilling.
Recently, Union Finance Minister Arun
Jaitley launched the Financial Inclusion Index Department of Financial
Services (DFS), wherein the Ministry will release an Annual Financial Inclusion
Index (FII) which will be a measure of access and usage of a basket of formal
financial products and services that includes savings, remittances, credit,
insurance and pension products. The index will have three measurement
dimensions--Access to financial services; Usage of financial services and
Quality.
The single composite index gives a snap shot
of level of financial inclusion that would guide Macro Policy perspective. The
first such Index will be released in January, 2019.
Financial services are like clean water,
electricity, transport and communication -- essential to leading a better life. In fact, these provide an
enabling infrastructure for other development goals -- from clean water to
quality education to affordable healthcare to gender equality. As a corollary,
ideal financial societies are those that provide ways that enable people to
navigate their daily financial lives.
Low income people need contextualised and
customised services on account of the peculiarities of their financial lives,
particularly their irregular/volatile income streams and expenditure patterns.
The process of initiating the poor into formal financial systems is known as
financial inclusion. Financial inclusion has three key
elements -- broadening of financial services to those people and enterprises which
do not have access to financial services,
deepening of financial services and greater financial literacy and consumer
protection.
Poor
people operate almost entirely in the cash economy, particularly in the
developing world. They use cash, physical assets (such as jewellery and
livestock), or informal providers (such as money lenders and payment couriers)
to meet their financial needs. However, these informal mechanisms can be
insecure, expensive and complicated to use. Moreover, they offer limited
recourse when a major problem arises, such as a serious illness in the family
or a poor harvest.
When more people have access to affordable and
high-quality financial services, they have more opportunities to thrive. This
is especially true for women, who are often under-served by traditional
financial institutions. In all societies, howsoever oppressed or illiterate their
women are, they remain the stewards of household savings.
They require financial products and services that appreciate their experience
and perspective.
Financial inclusion of women
enhances their self-confidence and places financial decision-making power in
their hands
resulting in large development payoffs. New
kinds of financial products and services can be developed that are aimed
expressly at women. Access to microfinance loans provides resources to women to
undertake home-based work, thereby augmenting family income. Product design should give adeequate
consideration to pricing, quantum, seasonality, duration and risk the customer
needs and demand-side requitements should be prime consideratins in the design.
Financial inclusion focuses on removing
obstacles to the use of these services, whether the obstacles are price or non-price
barriers. Financial market imperfections, such as information asymmetries and
transaction costs, are likely to be highly imposing on the talented poor and on
micro and small enterprises that lack collateral and documented financial
histories which may lead to self-exclusion.
With
billions of people already using mobile phones, and the rapidly
falling prices of smartphones, the means to
introduce people to formal banking and financial services are now available. Technology
can rapidly scale financial services where these are needed most. Mobile phone penetration is growing far more quickly than
access to financial services. Mobile network operators can now
immediately connect villages that are half
a day away from bank branches and unreachable by road,
giving real-time connectivity and access to people.
The JAM trinity (Jan Dhan
accounts, the Aadhaar ID system and mobile technology) can allow us to design
completely new business models that offer highly efficient, scalable and
reliable support.
There are now a variety of devices and
non-conventional methods that involve lower processing costs, provision of
home-grown customised systems such as the low cost, multi-lingual ATM -- all of
which enable banks to provide financial services closer to the consumer at
relatively low cost. There are also other innovations that include the use of
smart cards combined with a point-of-sale or point-of-transaction device,
banking correspondents and mobile money agents.
Banks can further deepen their financial
inclusion initiatives by creating products that are simple, intuitive and
tailored to meet the needs of those at the bottom-of-the-pyramid. Transactions
are processed in a matter of seconds, thanks to the “micro-ATM” which is a
lightweight device comprising a Chinese-made touchscreen and a fingerprint
scanner, which she uses to verify the
customers’ identities through the government’s new biometric ID
system. Moreover, institutions can
use new models which have data-driven templates so that bank staff is saved the
intensive legwork.
However, the importance of physical and human
interface should not be trivialised. The last mile customer integration has to
be friendly, close and intensive to generate trust and confidence in consumers.
The human touch is particularly important for
low-income customers, where faith in the individual is greater than that in an institution.
Financial analysts have now developed several
useful metrics for measuring financial inclusion so that it can be monitored by
implementing agencies. These are:
Branch
Penetration -- it
is measured as number of bank branches per one lakh population. This refers to
the penetration of commercial bank branches and ATMs for the provision of
maximum formal financial services to the rural population.
Credit
Penetration
– it takes the average of the three measures: number of loan accounts per one lakh
population, number of small borrower loan accounts per one lakh population and
number of agriculture advances per one lakh population.
Deposit
Penetration
- it is measured as the number of saving deposit accounts per one lakh
population.
Insurance Penetration - it is measured as the
ratio of premium underwritten in a particular year to the GDP.
One of the most evolutionary recent
developments in the financial inclusion space is the entry of two categories of
small and nimble financial institutions. Designed to offer financial services
to the underserved, small finance banks (SFBs) and payments banks began their
operations in 2017. It’s still early days to assess the impact of these
entities on financial inclusion. But these can complement the efforts of
mainstream banks in expanding the footprint in the financial inclusion space.
A number of government agencies are also
actively involved in efforts to deepen financial inclusion. Most of these are reaching previously grossly neglected groups, such as
women. Their contribution has been quite significant and noteworthy.
Meaningful financial
inclusion is very challenging and tough, involving a complex interplay of
factors, viable business models and significant behavior change by new account
holders. For certain segments, regulatory frameworks, legal and cultural norms
and distance represent significant barriers. We have to be realistic about how
long it will take to fully address these challenges. We now have a whole slew
of providers that are beginning to find firm roots. Progress will happen, but
certainly just not according to our wishful time frames. ---INFA
(Copyright,
India News & Feature Alliance)
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