Financial inclusion key to inclusive growth

The hype over the RBI cutting the repo rate to boost economy and markets notwithstanding, the Modi government’s highly ambitious financial inclusion plan – the Pradhan Mantri Dhan Yojana (PMDY) – seems to have lost its sheen after the initial euphoria.

Under the government diktat, the banks worked at a frenzied pace to chase targets and opened a record number of accounts. But the very objective of opening these accounts has been lost as the majority of these have not seen any transactions.

The extent of financial exclusion remains staggering. Out of 6,00,000 villages in the country, only about 30,000 have a commercial bank branch. Till recently, more than 50% of India’s population did not have any bank account and more than half of the total farmer households did not seek credit from either institutional or non-institutional sources of any kind.

Access to finance is critical for a country’s development – it is as much a part of a country’s basic infrastructure as access to roads, or electricity, or the Internet. Without access to good formal services, the poor must rely on the less reliable and often far more expensive informal sector.

India serves as an ideal case study with over 60% of the adult population operating outside of formal financial services, according to the World Bank. India has 6,00,000 villages, of which only 74,000 have access to banks.

Financial inclusion efforts by the government focus on trying to increase the number of brick-and-mortar banks, creating a massive network of banking correspondents to target rural areas, and installing more ATM branches – one within 15 minutes walking distance of every Indian by January 2016.

Financial services usually available to the poor are limited in terms of cost, risk, and convenience, requiring the poor to, on occasion, tap into other assets, such as livestock, building materials, and ‘cash under the mattress’, when the need arises. Cash under the mattress can be stolen or lose value as a result of inflation.

A cow cannot be divided and sold in parcels to meet small cash needs. Certain types of credit, particularly those from moneylenders, are extremely expensive. By financial inclusion we mean the provision of affordable financial services, viz., access to payments and remittance facilities, savings, loans and insurance services by the formal financial system to those who tend to be excluded.

There are five factors which reflect the need of financial inclusion in rural India. These are: Inability to access financial services; Lack of access to safe and formal saving avenues like banks; Lack of credit products in which investment can be made; Lack of remittance products which makes money transfer a cumbersome affair; Lack of insurance products which makes risk management a distant dream for poor.

Financial inclusion enables poor people to save and to responsibly borrow – allowing them to build their assets, to invest in education and entrepreneurial ventures and to improve their livelihoods. Poor people save, borrow, and make payments throughout their lives, but to use these services to their full potential, to protect their families and improve their lives, they need products well-suited to their needs.

The real challenge is to encourage poor people to actively use a variety of formal banking services (including savings, credit and remittance) so that their dependence on costly informal channels such as moneylenders is greatly reduced. What is needed is a holistic framework and infrastructure support focused on four core dimensions of universal financial inclusion – affordable products; viable and reliable delivery models; diverse customer needs; and multilingual financial education programmes.

By Moin Qazi