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How to Boost Financial Inclusion

Introduction:

Financial inclusion broadens the resource base of the financial system by developing a culture of savings among large segments of the rural population and plays its own role in the process of economic development.

Further, by bringing low-income groups within the perimeter of the formal banking sector; financial inclusion protects their financial wealth and other resources in exigent circumstances.

Financial inclusion also mitigates the exploitation of vulnerable sections by the usurious money lenders by facilitating easy access to formal credit.

Definition of Financial Inclusion:

1. Financial inclusion may be defined as the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low-income groups at an affordable cost.
2. According to the world bank, financial inclusion means that individuals and businesses have access to affordable financial products and services that meet their needs.
3. Accessibility, affordability and availability of financial services are 3 pillars of financial inclusion. It is a method of offering banking and financial solutions and services to every individual in the society without any form of discrimination.
4. Since independence, the combined efforts of successive governments, regulatory institutions, and the civil society have helped in increasing the financial-inclusion net in the country.
5. In a diverse country like India, financial inclusion is a critical part of the development process.
6. Thus, there exists both a great need and the potential to tap into the unbanked population and bring them into the financial net.

Unbanked population: Case study of a vegetable seller:

1. Parvati sells vegetables in the weekly market in Maharashtra. She has a savings account with the Mann Deshi Sahakari Bank. But whenever she needs money, she takes a loan from the local moneylender.
2. One day, while buying vegetables at the weekly market, I struck up a conversation and asked her why. She responded, “Yes, I know I am paying Rs 10 interest per day on every Rs 100 I borrow from the moneylender, which is exorbitant.
3. But I do not want to take a loan from your bank because I require a loan in the morning and want to repay it in the evening or maybe next week. I also would like to take the second loan immediately. And all this flexibility is given to me by the moneylender and not by your bank.”
4. Parvati’s situation is not unique. Her business is one of the 63.4 million MSMEs in India, 99 per cent of which are micro enterprises with less than Rs 10 lakh in investment.
5. These tiny businesses are run by nano-entrepreneurs, a burgeoning segment that is absolutely critical to the growth of our rural economy.
6. Parvati’s case became an inspiration for the Mann Deshi Bank to design and launch a cash credit product for women. Since its launch, hundreds of women vendors in the area have benefited from the product.
7. In the traditional financial system, the design and distribution cost on financial products at sachet size is high.
8. Expensive technology development and brick-and-mortar infrastructure all contribute to an impractical model.

Present challenges in Financial Inclusion in India: supply side issues:

1. The first challenge in making products broadly available is bridging the gap between supply and demand of capital.
2. In a financially integrated world, capital is agile. Yet owing to a limited risk appetite, low or thin-file data on customers and challenging regulatory oversight, capital remains a constraint in designing bespoke products.
3. For India to overcome these challenges, the existing infrastructure must be adapted to our new purpose, providing easy-to-use, customer-centric experiences.
4. Bankers and private financial institutions erroneously believe that a poor person takes a microcredit loan because she cannot save.
5. In reality, if you go to any remote area in India and ask any woman how much she has saved in the post office, you will find huge numbers.
6. They are able to save because of village postal agents who collect their savings from their doorstep.
7. Greater accessibility has major benefits for not only the customer but also the supplier.
8. It is also critical we recognise that the conventional method of one-size-fits-all is no longer viable.
9. Products must be designed and delivered intelligently to meet the customer where they are, and by keeping in mind that they use products to reach their goals.
10. This involves tailoring the products to the needs and income profile of the customer, including being cognisant of their environment, geography, and demography.
11. Financial service providers are consequently dissuaded from attempting to reach rural, financially excluded groups, and the availability of financial services, therefore, remains an urban privilege.

Demand side challenges:

While the above are supply side issues, the demand side has its own set of challenges.

1. At present, only about 5% of India’s 6 lakh villages have bank branches. There are 296 under-banked districts in states with below-par banking services. Thus, bank reach is poor in rural areas leading to financial exclusion.
2. Financial literacy and technology readiness are two critical issues. Financial education assists people in making sound financial decisions. These are not just challenges of the Indian market, but other economies too.
3. The key driver of financial inclusion is the proliferation of stable and reliable Information and Communication Technology (ICT).
4. The lack of infrastructure and cost effective technology for facilitating transactions at the doorstep is a hindrance to financial inclusion.
5. By using the power of machine learning and cloud infrastructure, we can significantly lower operating costs while offering customers affordable, bespoke financial products that help them reach their goals.
6. To enhance the Financial Inclusion, the Reserve Bank of India has undertaken a project titled “Project Financial Literacy”.
7. The Objective of the project is to disseminate information regarding the central bank and general banking concepts to various target groups, including, school and college going children, women, rural and urban poor, defence personnel and senior citizens.

Conclusion:

Financial sectors need to take the responsibility as financial service providers to create an ecosystem for them to deploy this capital of courage.

The state of financial inclusion has improved considerably over time. However, the financial inclusion hasn’t reached the poorest of the poor and there exist many bottlenecks and challenges which need immediate attention.

For the success of financial inclusion in India, there has to be a multidimensional approach through which existing digital platforms, infrastructure, human resources, and policy frameworks are strengthened and new technological innovations should be promoted.

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