Financial Inclusion: An Overview
As long as you’re going to be thinking anyway, think big." Donald Trump.
The logical next step from Donald Trump’s statement is that as long as you’re free to choose, choose only to be the world’s best. Not much point for a free country, for example, to aspire only to poverty alleviation. Let us choose to become the world’s richest country, ever. That should at least fix the minor inconvenience of poverty.
Financial inclusion or inclusive financing is the delivery of financial services at affordable costs to sections of disadvantaged and low income segments of society. Unrestrained access to public goods and services is the sine qua non of an open and efficient society. It is argued that as banking services are in the nature of public good, the availability of banking and payment services to the entire population without discrimination is the prime objective of this public policy. The term "financial inclusion" has gained importance since the early 2000s, and is a result of findings about financial exclusion and its direct correlation to poverty. Financial inclusion is now a common objective for many central banks among the developing nations.
The key focus of Financial Inclusion includes four products: A pure savings product with inbuilt overdraft facility. A Recurring Deposit product. A Remittance product and. Entrepreneurship credit in the form of KCC/ GCC.
The key objectives of Financial Inclusion
Extending formal banking system among less privileged in urban & rural India. Weaning them away from unorganized money markets and moneylenders. Equipping them with the confidence to make informed financial decisions.
The Key Industry Initiatives towards Financial Inclusion
Relaxation of Know Your Customer (KYC) guideline for No−Frill accounts. Introduction of Business Correspondent (BC) Model for service delivery in remote areas Adoption of Information & Communication Technology ( ICT) based model for enhancing outreach. Integration of Electronic Benefit Transfer (EBT) for disbursement of Government Grants. Reorganization of Aadhar Number under KYC norms. Financial inclusion can make little headway without efforts to further financial literacy. India’s small towns are making their presence felt in the nation’s economic landscape. It is not just the FMCG or consumer durable companies or car makers who are rushing to India’s hinterland, but also a slew of banking and financial services companies that are ramping up their operations. Over the last couple of years, these small cities and towns have shown an increasing appetite for financial products. But can financial inclusion ever succeed without financial literacy? If people are not aware about basic financial planning and lack the skills to save and invest, can they mitigate economic hardship and shocks that may come their way? Will this look not impact the long−term strategy of companies to develop rural markets?
Financial literacy must be the centerpiece of financial inclusion. A survey was conducted recently to gauge the strengths and weaknesses of financial education worldwide, and to find solutions to challenges that exist. Among 28 countries surveyed across the world, India stands at 22nd spot, clearly indicating the work that lies ahead. While urban areas are perceived to be high on financial literacy, this may not necessarily be the case. Financial literacy is also dependent on spread of the banking network. Only 40 per cent of India’s total population has access to formal banking channels, and the problem is acute when one looks at the villages, where only 5 per cent have a brick−and−mortar branch. This explains why financial literacy levels in rural India are poor.
ISSUES IN FINANCIAL LITERACY
The Government and the RBI have been working towards bringing the country’s hitherto unbanked regions and population into the fold of formal banking system. While improving penetration is one pillar of this strategy, the other key component is making India financially literate. And while progress has been made, there is more to be done. The principal reason for improving financial literacy is the impact it has on financial inclusion and stability. You can establish a brick−and−mortar branch with all the financial offerings, but you can’t bring a customer on board unless you educate him. Higher degree of awareness and understanding about banking and financial products is the first step towards creating demand and increasing adoption. Financial literacy requires an understanding of the information gap across consumer segments, banked and unbanked, and crafting communication strategies that address the unique needs of specific segments. It would be wrong to assume that a consumer living in a metropolitan city is financially literate because he is surrounded by a variety of financial institutions offering a plethora of choices. Maybe he invests in traditional banking instruments like savings and fixed deposits, but can be educated on managing his consumption better or investing in equity markets. Indians are known to be great savers, something that is reflected in the overall domestic savings rate which stands at a healthy 31 per cent. However, this figure has dropped over the last couple of years, which is in part due to higher consumption expenditure by households, especially in urban areas. Also, our study reveals that Indians do not have more than three months of savings, in case they face an emergency.
At the other end of the spectrum are those who haven’t had any exposure to formal banking. An RBI study of financial literacy and credit counseling centers reveals low awareness levels about existence of such centers. The content distributed at these centers goes little beyond the bank’s publicity material. So while at one end there is an urgent need to spread the network to educate citizens, it is equally important to ensure that the information shared by such centers is neutral and in a language that the average person can understand. This brings us back to target consumer segmentation, and the need to match skills to be imparted with the population category. We need to create an army of financial literacy trainers, well equipped to educate people on money management. There is also a greater understanding in India as well as around the globe of weaving financial planning skills in school education. Our survey reveals that the worldwide average age of introducing financial literacy to children is 11.3 years. It is heartening to note that the central bank is engaging with school boards to introduce these concepts in the curriculum.
Going forward, technology will play a key role in promoting financial inclusion and
financial literacy. According to research by Sumit Aggarwal, senior financial economist with the Federal Reserve Bank of Chicago and a visiting professor at the Indian School of Business, Internet−savvy Indians are 20 per cent more financially literate than Americans and on par with Europeans. Real time information, updates on products and norms, better financial management and investment decision making can be enabled through safe and secure technology platforms. The choices made by a financially aware consumer will help develop products that are relevant and lead to financial innovation. We need to develop a scalable and multi− pronged approach towards financial literacy. This requires time, planning and collaboration among various stakeholders.
FINANCIAL INCLUSION IN INDIA
The Reserve Bank of India (RBI) set up the Khan Commission in 2004 to look into financial inclusion and the recommendations of the commission were incorporated into the mid− term review of the policy (2005−06). In the report RBI exhorted the banks with a view of achieving greater financial inclusion to make available a basic " no−frills" banking account. In India, financial inclusion first featured in 2005, when it was introduced by K C Chakraborthy, the chairman of Indian Bank. Mangalam Village became the first village in India where all households were provided banking facilities. Norms were relaxed for people intending to open accounts with annual deposits of less than Rs. 50,000. General credit cards (GCCs) were issued to the poor and the disadvantaged with a view to help them access easy credit. In January 2006, the Reserve Bank permitted commercial banks to make use of the services of non−governmental organizations (NGOs/ SHGs), micro−finance institutions, and other civil society organizations as intermediaries for providing financial and banking services. These intermediaries could be used as business facilitators or business correspondents by commercial banks. The bank asked the commercial banks in different regions to start a 100% financial inclusion campaign on a pilot basis. As a result of the campaign states or UTs like Pondicherry, Himachal Pradesh and Kerala announced 100% financial inclusion in all of their districts. Reserve Bank of India’s vision for 2020 is to open nearly 600 million new customers’ accounts and service them through a variety of channels by leveraging on IT. However, illiteracy and the low income savings and lack of bank branches in rural areas continue to be a roadblock to financial inclusion in many states and there is inadequate legal and financial structure. The first−ever Index of Financial Inclusion to find out the extent of reach of banking services among 100 countries, India has been ranked 50. Only 34% of Indian individuals have access to or receive banking services. Self Help Groups are playing a very important role in the process of financial inclusion. SHGs are usually groups of women who get together and pool money from their savings and lend money among them. Usually they are working with the support of an NGO. The SHG is given loans against the group members’ guarantee. Peer pressure within the group helps in improving recoveries. Through SHGs nearly 40 million households are linking with the banks. Micro finance is another tool which links low income groups to the banks.
Yet, banks are fighting to fulfill the Financial Inclusion dream. The main reason is that the products designed by the banks are not satisfying the low income families. The provision of uncomplicated, small, affordable products will help to bring the low income families into the formal financial sector. Banks have limitations to reach directly to the low income consumers. Correspondents can be considered to be an excellent channel which banks can use to distribute their product information. Educating the consumers about the financial benefits and products of banks which are beneficial to low income groups will be a great step to tap their potential.
Banks are now using new technologies like mobile phones to reach low income consumers. It is possible that the telephone providers themselves will start basic banking services like savings and payments. Indian telecom
consumers have few links to financial institutions. So without much difficulty telecom providers can win the battle with banks. Banks should therefore be proactive about transferring this technology into an opportunity.
The Indian Government has a long history of working to expand financial inclusion. Nationalization of the major private sector banks in 1969 was a big step. In 1975 GOI established RRBs with the same aim. It encouraged branch expansion of bank branches especially in rural areas. The RBI guidelines to banks show that 40% of their net bank credit should be lent to the priority sector. This mainly consists of agriculture, small scale industries, retail trade etc. More than 80% of our population depends directly or indirectly on agriculture. So 18% of net bank credit should go to agricultural lending. Recent simplification of KYC norms is another milestone.
Financial inclusion in India is often closely connected to the aggressive micro credit policies that were introduced without the appropriate regulations oversight or consumer education policies. The result was consumers becoming quickly over−indebted to the point of committing suicide. Lending institutions saw repayment rates collapse after politicians in one of the country’s largest states called on borrowers to stop paying back their loans, threatening the existence of the entire 4 billion−a−year Indian micro credit industry. This crisis has often been compared to the mortgage lending crisis in the US.
The challenge for those working in the financial inclusion field has been to separate micro−credit as only one aspect of the larger financial inclusion efforts and use the Indian crisis as an example of the importance of having the appropriate regulatory and educational policy framework in place.
AREAS OF CONCERN BY BANKS
The banking industry has shown tremendous growth in volume and complexity during the last few decades. Despite making significant improvements in all the areas relating to financial viability, profitability and competitiveness, there are concerns that banks have not been able to reach and bring vast segment of the population, especially the underprivileged sections of the society, into the fold of basic banking services. Internationally also efforts are being made to study the causes of financial exclusion and design strategies to ensure financial inclusion of the poor and disadvantaged. The reasons may vary from country to country and so also the strategy but all out efforts are needed as financial inclusion can truly lift the standard of life of the poor and the disadvantaged.
As our former President Dr.Abdul Kalam mentioned small aim is a crime. Ignoring the poor, downtrodden is not correct. Banking facility has to reach the underprivileged so that the habit of savings can be inculcated in everybody’s mind. Let us all make the villagers in India to understand this concept fully and develop the nation in a remarkable way.
1. Commemorative Lecture by Shri V.Leeladhar, Dy. Governor, Reserve Bank of India on ’Financial Inclusion’ at the Fedbank Hormis Memorial Foundation at Ernakulam on December 2, 2005.
2. Inaugural address by Smt. Usha Thorat, Dy.Governor, RBI at the Financial Planning Congress 2006 on "Establishing Consumer Centric Financial Services Delivery Infrastructure" organized by the Financial Planning Standards Boards of India on May 29, 2006 at New Delhi.
3. Press Note dated 16.5.2006 on Report and Draft Bill on Social Security for Unorganised Workers − Government of India, National Commission for Enterprises in the Unorganised Sector under Chairmanship of Dr. Arjun Sengupta.
4. Report of the Committee on Informal Financial Sector Statistics (Summary) under Chairmanship of Dr.C.Rangarajan.
5. Role of Financial Intermediation Services in the Informal Sector.
6. Financial Inclusion Taskforce: Report on progress towards the shared goal.