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 28th
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)
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