Spotlight
New
Delhi, 20 June 2023
Financial Inclusion
INDIA MAKES STRIDES
By
Moin Qazi
India has recently witnessed profound changes in its financial inclusion ecosystem.
While financial inclusion is a point of entry to lift people out of poverty,
the higher use of the full range of financial services can alone serve as a
path to prosperity. Financial institutions are now engaged in a vigorous battle
to enlist the low-income households as their clients, not just for their
business but also to open a window for the poor which allows the global
development winds to touch their lives. This movement to bring the unbanked
into the folds of formal finance is popularly known as financial inclusion.
Financial
inclusion, in its broader market conceptualization is the belief that all
people, including the very poor and marginal, should gain access to and be able to regularly use financial services;
an idea that the World Bank promotes as part of building “inclusive economies,”
It enables people to have safe place to
save money, affordable and appropriately designed and affordably priced credit
and trusted risk management services, a state managed pension to gain better control over their own lives and that of
their families.
Enhancing financial inclusion can improve resistance to
shocks, boost productivity of business, facilitate empowerment of marginalized
groups, such as women and rural residents, and help reduce povertyLife is one
long risk for them as they are just a tragic event away from a financial
catastrophe.
India’s flagship financial inclusion
programme- Pradhan Mantri Jan
Dhan Yojana (PMJDY) — launched in 2015 with a mission to provide a basic
account toevery adult— has significantly
changed the demographics.
The Aadhaar biometric identification system and the JAM (Jan Dhan Yojana, Aadhaar and Mobile number)
trinity is reshaping the financial landscape and has enabled India to surge to
new heights. The take-off of digital financial services has largely driven this
strong growth. It has also enabled one of the biggest pieces of reform ever
attempted in India — direct subsidy transfers. Several state governments
have adopted the default savings options by mandatorily delivering all wages to
participants of government schemes and programmes through formal saving
accounts.
However,Financial inclusion will remain meaningful so long
as it does not end with just opening accounts. The customer must make the
account his financial diary and conduct transactions to build a financial
history. Or else all these accounts would remain a drag on financial
institutions.Being able to have access to a transaction account is a first step
toward broader financial inclusion. A transaction account then acts as a means
of fulfilling these needs. Further, by becoming account holders, people are
more likely to utilize other financial services like credit, investment and
insurance, which can improve the overall quality of their lives. Operating
an account or using credit can also deepen consumers’ financial skills.
Thus the mantra for financial inclusion should be: access counts, but
usage matters.
Accounts should basically serve as
stepping stones to savings or credit. If there is little forward movement in
them the entire efforts are a waste. What needs to be done is getting the customers increasing the
frequency of transactions, slowly getting into the habit of saving, moving
further to using formal channels for the remittance of money and then finally
using them for niche products like insurance and pension. The state diktats
which foist targets for opening accounts are big eyewash.
As part of government fiats, banks are forced to meet humongous
targets for opening accounts to bring the unbanked population into the fold of
the financial system. There is always promise that they would become a source
of revenue. However, when many of them remain dormant (accounts without any
transactions) and inevitably become an economic deadweight. The banks cannot
afford to lose money servicing them. Services are sustainable so long as
intuitions can cover the cost of their delivery. There has to be a
business case for every financial service to remain sustainable. Banks have to perforce levy
penalties and ultimately shut these accounts; sending them out of the financial
system to where they had come from, the unbanked. Thus, a counter revolution
sets in.
In the end, customers are back to where they began their financial
journey. Such poorly thought out policies and programs demoralize all the
actors in the ecosystem-the customers, bankers, economic observers, media,
academics and the NGOs working for the financial empowerment of ordinary
citizens. Moreover, it dissipates the enthusiasm of those who propel the entire
effort. Finally, it reinforces the prevailing myth, that the banks are
anti-poor. We must all
understand the limits of the financial inclusion revolution, and we must make
sure it doesn’t turn into a rough and tumble gold rush that ultimately hurts
consumers and financial institutions alike. It is true that banks must be
cognizant of the social dimension of financial incusing but sourcing accounts
and processing them involves time and costs which pinches the revenues.
Financial services should be provided on
the simple principle of a physician: diagnose the ailment and prescribe the
appropriate medicine. we must know what customers
need, and then suggest the products that would help them. Lack of a proper understanding can
lead to a person borrowing money while all that she needs may be an insurance
product or a savings account. This can set off a vicious cycle of indebtedness.
In his book The Paradox of Choice,
sociology professor Barry Schwartz talks about how excessive choice contributes to consumer
misery. Too many similar-looking options actually confuse consumers making them
adopt status quo to rather than taking
any proactive decision. Every financial product has a cost embedded into
it and we require some insight to unravel the costs and understand the risk
post-cost return.
Today both financial and non financial markets are flooded
with agents hawking a bewildering array of products with highly aggressive sales
pitch. These are not backed by cutting edge consumer protection systems. Innovators
are highly impatient with regulation and oversight but they must understand
that lessons of the past cannot be ignored. Far too many lives have been ruined
in the name of innovation and entrepreneurism.
The challenge of financial inclusion
is to understand what is best about all the different ways of reaching
underserved customers. It is about understanding what works and building on it.
The rapid spread of mobile phones is the game changer that can make the
economic benefits of digital finance possible. Fortunately, mobile phone
penetration is growing far more quickly than access to financial services.---INFA
(Copyright, India News & Feature Alliance)
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