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Financial Inclusion: The Real Challenge of India

, March 24, 2014, 2 Comments

Financial-Inclusion-MarketExpressIt is proven fact that financial inclusion & financial literacy is an effective way for “Poverty Alleviation”. The objective of financial inclusion is to meet the expectation of the unbanked and excluded, yet silent mass of our population are untouched. Poverty and exclusion continue to dominate socio-economic and political discourse in India over the last six decades. The ongoing reforms attach great importance to poverty alleviation and to addressing the wide variations across states and rural-urban divide. Despite being one the fastest growing economies of the world, India is still a home to one-third of the world’s poor.

In addition we clearly identify that “financial inclusion” has the potential to enhance the socio-economic condition of the lowest deciles. Inclusive financing is to deliver financial services at affordable cost to low income segment of society in contrast to financial exclusion. Financial inclusion has twin aspect to be covered one is demand side that includes financial literacy credit counseling, credit absorption capacity, knowledge of products, and need for total products & services. Second are the supply sides which comprise financial markets, banks and financial services along with appropriate design of product and services.

Financial Inclusion is a Driver of Economic Growth and Poverty Alleviation:
Inclusive financial sector development makes two complementary contributions to poverty alleviation; firstly financial sector development is a driver of economic growth which indirectly reduces the poverty and inequality. Secondly an appropriate, affordable, financial service for poor people can improve their welfare. They are complementary because financial inclusion enables the previously excluded to connect to the formal economy and contribute to economic growth, while economic growth facilitates the inclusion of more people in the economy and in the financial system.

A crucial problem for poor people is that their flow of income is volatile, for farmers and others seasonal occupations, variations over a year can be greater. Poor people need to be able to manage this low, irregular and unreliable income to ensure regular cash flow and to accumulate sufficient amounts to cover lump sum payments. Lump sums are needed for: lifecycle events such as school expenses, marriages and funerals; economic opportunities e.g., buying inputs for businesses; and emergencies like illness or sudden unemployment.

For them money management is very crucial, however they lack in it. Poor people, like most people, need a range of appropriate and affordable financial services to address a range of financial needs, such as safe accessible savings, micro credit, and insurance. However in the absence of formal and semi-formal financial services, poor people use informal services.

If we consider our own banking (Indian) eco-system, it has about 95,000 branches, about equal number of ATMs across the country and 278 million debit cards. Yet a large proportion of our population remains financially excluded. Data indicates that only about 40 percent of the adult population in the country has a bank account; only 25,000 plus villages have a bank branch out of the 600,000 villages in the country. Only 13 percent of the people have a debit card and only two percent have a credit card. The same low level of penetration is seen for both life and non-life insurance products (H.R.Khan, 2012). As the Indian financial system is pre-dominantly led by banks, the financial inclusion policy orientation has naturally been biased towards the bank-led model. The non-bank entities, however, play an important role in providing necessary support to expand the reach particularly for the banks, crossing the proverbial last mile.

Microfinance Sector: Bridging Financial Inclusion Gaps:
Since 2006, the RBI has permitted banks to use the services of third parties as business correspondents (BCs) to help increase the outreach of banking services. BCs are a mechanism that allows banks to offer its clients micro-loans, micro savings, micro insurance and micro housing loan beyond its brick and mortar branches. There are five distinct players in the BCs model; banks, business correspondents, agent network managers, customer service points, technology service providers. However the critique of BCs model is like it is being driven by a supply push, with insufficient evidence of client demand.

One potentially viable channel that banks can collaborate with to reach the base of the pyramid market more economically is through Microfinance Institutions (MFI’s), which have experience in providing financial services to low income and rural populations. These institutions have a number of assets that they can bring to the table.

  • Ready Access to an established client base.
  • Experience in cash management.
  • Established internal audit and monitoring system.
  • Resources to help build an effective BC channel.
  • Client insight for new product development.
  • Client relationship management.

The Microfinance Institutions have a vital role to play in achieving the objective of financial inclusion. The Microfinance bill 2012 is a significant bill in achieving the agenda of financial inclusion as it provides detailed regulatory framework for microfinance sector. The promulgation of the Bill will be a key milestone in providing access to financial services to the poor in an affordable and convenient manner. Microfinance and organized retail, currently limited in reach, have demonstrated the multiplier effect of reaching directly to rural consumers and producers in lifting rural incomes and productivity.

Moreover we have to understand that financial inclusion (FI) by itself is a multi-faceted concept; we can identify some of the lenses through which FI can be defined. Firstly “access” which is primarily concerned with the ability to use available financial services and product from financial institution. Secondly “quality”, it is a relevance of the financial service to need of the consumer. Thirdly determining “usage” requires more detail about the regularity, frequency and duration of use over time. Last but not the least welfare, the most difficult outcome to measure is the impact that a financial devise has had on the lives of consumers, including changes in consumption, business activity, credit facility and wellness.

According to nation-wide survey carried out by IISS (India Incomes and Savings Survey, 2007), 97% of all household do not have any health insurance and 61% do not have any life insurance. On the other hand, according to NSSO surveys, roughly 25% of households get into chronic indebtedness because of health related emergencies. Since financial services are provided by market, both supply (financial inclusion) and demand (financial literacy) side consideration are important.

When does financial exclusion make huge differences? Firstly, household with no bank account are forced to borrow from money lenders making their situation much worse. Secondly, the capacity to borrow, and hence the actual borrowing, is significantly less if a household does not have a bank account. However microfinance institution and SHG’s continue to be of lesser significance than money lenders or banks.

Much of the problem is in the fact that more than 90% of the employment in India is in the unorganized sector. This means that much of the insurance and pension services are not being provided through the employer. One thing is clear, financial exclusion is a classic case of “missing markets”. The poor take credit, face the negative consequences of unforeseen shocks, want to set aside money for old age but the existing services are either too costly, or ineffective to meet their specific needs. However banks claims that they are providing “no frills saving account”, but the problem lies in the way banks provide these services and the charges on it. For example service charges for collecting an outstation cheque is around INR 50 for a cheque of value above INR 501.

A migrant worker transacting INR 501 in this fashion will have to pay 10% in handling charges; that is too large. On the other hand, the cost of transferring money using electronic medium like mobile and net is often free of cost. Although these services are free of cost, the customer still has to bear some other cost. For which the opportunity cost for it might be very high. This has often led to the observation that there is not enough mobile penetration and hence, any solution to financial exclusion that uses mobile phones will not be very successful.

Thence firstly we need to identify the objective of financial inclusive and then we have to see that the services we are providing has to alien with our objective. Several countries across the globe now look at financial  inclusion as the means to more comprehensive growth, wherein each citizen of the country is able to use earnings as a financial resources that can be put to work to improve the future financial status and adding to the nation’s progress. Initiatives for financial inclusion have come from financial regulators, governments and the banking industry. Many countries have taken legislative initiative for financial inclusion. For example, in US, the community reinvestment Act (1997) requires banks to offer credit throughout their entire area of operation and prohibits them from targeting only the rich neighbourhoods. In France, the law on exclusion (1998) emphasizes an individual’s right to have a bank account. However a G-20 (Group of twenty) Financial Inclusion Experts Group has been launched. The Principles for Innovative Financial Inclusion serve as a guide for policy and regulatory approaches with the objectives of fostering safe and sound adoption of innovative, adequate, low-cost financial delivery models, helping provide conditions for fair competition and a framework of incentives for the various banking, insurance, and non-banking entities involved and delivery of the full range of affordable and quality financial services.

Microfinance is not a panacea to all problems. Moreover, it is considered as a vital tool to break the vicious circle of poverty that characterized by low income, low savings and low investment. According to a empirical study done by Naveen.K.Shetty (Research Scholar, ISCE), where he clearly asserted that credit plus services of microfinance has positively correlating with the improving in household expenditure, income, assets and employment. Microfinance has contributed in improving the access to credit for consumption and productive purposes.

Most (formal) institutions regarded low-income households as “too poor to save”. But microfinance programme nullify the argument and showed that even vulnerable poor can save if he/she having the accessibility and reward from it. In addition life of poor is often hindered by many contingencies or risk. Insuring these risks makes people to bear the large uncertain losses with certainty of small and regular payments. Besides microfinance, a micro-insurance service reduces the vulnerability of the poor.  Accordingly micro credit plus services of microfinance has tried to bring out the poor (women in particular) from below poverty line and fight against the poverty though deploying the financial and non-financial services. Hence, easily accessible and affordable “credit plus services” should be provided through microfinance Institution to the vulnerable poorest who are excluded socially and economically for a long period of time.






  • P V Rajeev

    Mobile banking is an important way whereby we can achieve financial inclusion.. Less educated people are incapable of using internet banking but they may be able to handle mobile banking which is much simpler

    • Afzal

      Dear Sir,
      As you rightly stated above, but there are other challenges which the lowest decile of rural region go through.. First if we forgo the opportunity cost of the mobile, the issue of connectivity will be there, given the condition that they mobile savvy.