Financial Inclusion

What is Financial Inclusion?

Financial inclusion is where individuals and businesses have access to useful and affordable financial products and services that meet their needs that are delivered in a responsible and sustainable way. Financial inclusion is defined as the availability and equality of opportunities to access financial services.

Financial Inclusion in India:

The Government of India and the Reserve Bank of India have been making concerted efforts to promote financial inclusion as one of the important national objectives of the country. The core objective of all these initiatives is to reach the large sections of the financially excluded, i.e., lower and weaker income groups Indian population.

 

According to RBI (Reserve Bank of India), 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 minor sections and low income groups at an affordable cost.

 

Financial Inclusion, broadly defined, refers to universal access to a wide range of financial services at a reasonable cost. These include not only banking products but also other financial services such as insurance and equity products.

 

Why does India require Financial Inclusion?

 

1. Financial inclusion broadens the resource base of the financial system by developing a culture of savings among large segment of rural population.
2. It plays its own role in the process of economic development.
3. By bringing low income groups within the perimeter of formal banking sector; financial inclusion protects their financial wealth and other resources in exigent circumstances.
4. Financial inclusion also mitigates the exploitation of vulnerable sections by the usurious money lenders by facilitating easy access to formal credit.

 

Steps taken to promote Financial Inclusion:

 

1. RBI has adopted a bank-led model for achieving financial inclusion and removed all regulatory bottle-necks in achieving greater financial inclusion in the country. Further, for achieving the targeted goals, RBI has created conducive regulatory environment and provided institutional support for banks in accelerating their financial inclusion efforts.
2. Licensing of New Banks: The present round of licensing new banks is essentially aimed at giving further fillip to financial inclusion efforts in our country. Innovative business models aimed at furthering financial inclusion efforts would be looked into closely in processing applications for banking license.
3. Discussion Paper on Banking Structure in India – The Way Forward: The RBI has put out a discussion paper in August 2013 on Banking Structure for public comments. One of the main issues relates to “Differentiated Banking Licenses”. The subject of licensing ‘small banks and financial inclusion’ has been discussed therein. A view will be taken by RBI after factoring in the comments/suggestions received from the general public.
4. Progress of financial inclusion since the launch of financial inclusion plans clearly indicates that banks are progressing in areas like opening of banking outlets, deploying BCs, opening of BSBD accounts, grant of credit through KCCs and GCCs. Detailed trends are furnished in the following charts.

 

Advantages of Financial Inclusion:

 

Some other notable benefits to the new users of bank accounts would be :

1. Access to insurance resulting in a cushion against unplanned expenses in the form of emergencies such as illness, death in the family or loss of employment;
2. Help in coming out from the clutches of moneylenders;
3. Receiving social security transfers in the form of old age pensions, widow pensions, monthly aid to handicapped persons and other benefits accruing from state governments directly into their bank accounts without wasting time in collecting the benefits in cash;
4. No need to visit faraway places and tolerating tantrums of intermediaries involved in distribution of social security subsidies;
5. Enabling economic independence and supporting improved economic well-being;
6. If customised bank accounts are opened, then problem of sending the money periodically to native place will be solved. Migrants sitting in urban centres would be able to send money effortlessly and without paying commission to the intermediaries;
7. In foreseeable future, access to loans, insurance, money transfer and overdraft facilities will become available;

 

Benefits to regulators:

 

The main role of regulators is to keenly observe the performance of the regulated. Some of the principle functions of the regulator are:

• To protect consumer;
• To protect the interest of all other stakeholders;
• To see the activities in broader perspective and give purposeful direction to achieve larger societal goals.

 

Benefits to intermediaries:

 

These are still early day for urban financial inclusion. Even the expanded list of intermediaries is yet to be field tested at reasonable scale. But one can safely concluded that individual owners of general stores / medical shops/ fair price shops; individual PCO operators; individual petrol pump owners; agents of saving schemes of government of India; agents of insurance companies will be increasingly used as intermediaries.

 

Benefits to government:

 

Urban financial inclusion will be help state and central government in following ways:

• Remove inefficiency from the system;
• Possibility of making social security transfers such as old age pensions, widow pensions, etc directly into the bank account of beneficiaries through electronic transfer. This will help in minimising transaction costs;
• Accounts will also help in plugging leakage in the distribution network and this will benefit society at large;
• Possibility of stopping the leakage, over the next five years, the central government alone will be spending 11.5 trillion rupees on subsidies, including old age pensions, health care and national jobs for work program . in the current scenario, 40% of this will be siphoned off by the system. If the same subsidies can be transferred directly into the bank account of beneficiaries, then this leakage can be stopped;

 

Benefits to the economy as a whole:

 

Urban financial inclusion is likely to result into number of benefits for Indian economy as a whole. Some of the probable benefits are explained herein:

• An avenue for bringing the additional savings into the savings into the formal financial channel boosting the collective economic resources;
• Probability of higher incomes coupled with reduction in cash economy can lead to overall economic growth;
• Better possibility of unlocking the economic potential of the people residing in urban centres;
• Possibility of tracking individuals financial history ; better utilisation of consumers protection mechanism ; high level of financial literacy;
• Chance to achieve faster growth in the country by way of including the as mainstream of the country.

 

 

 

Disadvantages of Financial Inclusion:

 

1. High maintenance cost: It is a common knowledge that not all the accounts opened by poor households are operated by them on regular basis. As per one estimate, 58% of the total accounts (19 Cr) opened under PMJDY remain transaction-less. These accounts cause a huge financial and operational burden to the banks for maintenance. According to one estimate, the cost of maintaining a dormant account annually is roughly Rs. 10,000. If the total cost is calculated, it would run in thousands of crores.
2. Hitting the bottom line: The inclusion of more customers in the market fosters intense competition that again is aggravated by opening of markets for foreign banks, introducing new categories (payment bank, small finance bank) in the system. This induces an intense price war and the profitability of the entire banking system suffers. (Note: Around 70% of the total banking system is owned by public sector banks. So, this results in loss of critical revenue for government.)
3. Intent of people: The folks in the rural areas, based on my experience of visiting more than 100 villages in Karnataka, are smart. They know how to use the banking system to their benefit. As the disposable income of the masses rises in the largest growing developing country, the monetary security becomes one of the main concerns of the people. Now, though apparently banking system attempts to include all within its hold for their benefits, what if someone is not willing to come under its fold due to different apprehensions, monetary being the main of them? I am happily living my life for 70 years, have created assets and made money. Why would I want to to be banked? As the non-banking life is part and parcel of the everyday culture of theirs, getting into a new system and adapting to it also faces cultural resistance.
4. Replacement of money lenders’ services: The moneylenders have always been, rightly, demonised for having exploited the poor masses by charging them rocket high interest rates (more than 120% annually in many cases) and coercing them for repayments. But the thing to focus on is that the moneylender is basically a service provider who is locally available and there for you to help you with money even at the midnight. Now, can you, being the formal financial institutions, provide the same? If not, there are going to be issues. One of the by-products of this has been an unparalleled growth of the micro finance sector.