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Financial inclusion? Bank accounts with 80% Indian adults, 53% farmers debt-ridden

By Moin Qazi*
Financial inclusion has been recognised as a key building block which will form the foundation for achieving several of UN’s Sustainable Development Goals. Access to the right financial tools is a key element in overcoming the hard, everyday realities for those who live in penny economies. It can provide them an opportunity to move out of poverty or build resilience to absorb a financial shock without sinking deeper into debt.
As World Bank President Jim Yong Kim highlighted in 2014: “Financial inclusion has moved up the global reform agenda and become a topic of great interest […]. For the World Bank Group, financial inclusion represents a core topic, given its implications for reducing poverty and boosting shared prosperity. The increased emphasis on financial inclusion reflects a growing realization of its potentially transformative power to accelerate development gains.”
India has recently witnessed profound changes in its financial inclusion ecosystem. India has actually been one of the early innovators of financial inclusion – the term itself was coined by RBI Governor Y V Reddy in 2005. RBI’s original phrase was actually ‘financial exclusion’. Reddy changed it from ‘exclusion’ to ‘inclusion’. And it has stuck since because of the greater resonance the fundamental shift in approach found in all sections.
A succinct working definition that incorporates the financial inclusion objectives of different countries can be articulated this way: it is the effective access to and usage of a range of quality, timely, convenient and informed financial services- which include savings, credit , remittances and insurance at affordable prices to enable users to manage cash flows and mitigate shocks .these should be delivered by formal institution through a range of appropriate services with dignity and fairness and are normally complemented by appropriate financial education that enhances financial capabilities and rational decision-making by all segments of the population.
Access to financial services has a critical role in reducing extreme poverty, boosting shared prosperity, and supporting inclusive and sustainable development .it is the key element of financial health and can provide an opportunity for the poor to move out of poverty or absorb a shock without being pushed deeper into debt. Lack of access to financial services makes it harder for people to fully participate in the economy.
In the absence of proper formal financial systems people have to rely on informal means of managing money, like cash-on-hand, family and friends, moneylenders, pawn-brokers or keeping it under the mattress. These choices are expensive, insufficient, risky, and unpredictable. Without access to affordable credit, it is difficult to get a business idea off the ground or to acquire an asset like a house or higher education. Without insurance, all your security can be wiped out by one misfortune. Macroeconomic evidence suggests that economies with deeper financial intermediation tend to grow faster and reduce income inequality. .
While there are no precise figures on the extent of financial exclusion in terms of credit availability in the country, several surveys and studies have pinnted out the extent of indebtedness of rural population to informal sources which give us some idea of credit exclusion from conventional financial institutions.
India’s flagship financial inclusion programme Pradhan Mantri Jan Dhan Yojana (PMJDY) — launched in 2015 with a mission to provide a basic account to every adult— has significantly changed the demographics. India is now at a tipping point, with sharply narrowing gender gaps in financial access. According to the World Bank’s Global Financial Inclusion Database, or Global Findex report (2017) 80% Indian adults now have a bank account — 27 points higher than the 53% estimated in Findex 2014 round. Findex 2017 estimates that 77% of Indian women now own a bank account against respective 43% and 26% in 2014 and 2011.
India’s Global Findex (GFX), was 35 in 2011, 53 in 2014, and 80 in 2017. GFX 2017 stands at 80 for China (79 in 2014), 76 for Russia, 70 for Brazil, 69 for South Africa, 96 for UK, and 93 for US.
According to the All-India Debt Investment Survey 2012, nearly 48 percent farmers across the country took loans from informal sources such as moneylenders and landlords. The number had risen from 36 percent in 1991 to 43 percent in 2001. According to NSSO, the share of institutional credit to farmers declined from a peak of 69.4 per cent in 1991 to 56 per cent in 2012.
According to NABARD All India Rural Financial Inclusion Survey (NAFIS 2016-2017) Incidence of Indebtedness (IoI), which is a proportion of households having outstanding debt on the date of the survey, was 52.5 per cent and 42.8 per cent for agricultural and non-agricultural households, respectively.
The first step in integration is identifying the financial needs of the people. These needs can be broadly classified into three main categories: life cycle events, emergencies and opportunities. The first deals with the needs arising due to events like birth, death, marriage, education, old age and inheritance; the second comprises of personal (for example accidents, illnesses among others) as well as impersonal (mainly, natural disasters) emergencies and lastly, the third refers to the ways of enhancing one's living standard by acquiring assets like land, housing, consumer durables (like television, refrigerator and such).
A transaction account then acts as a means of fulfilling these needs. Further, by becoming account holders, people are more likely to utilise other financial services like credit, investment and insurance, which can improve the overall quality of their lives. However, the context of poor people becomes a major factor in financial inclusion. To harness the full potential of financial services, people with low incomes require products that cater to their contextual needs. This requires attention to issues such as quality of access, affordability of products as well as supply-side sustainability and extent of outreach of services.
There is a need to enhance penetration of insurance in general and life insurance sector with simple, contextual and small-ticket products, based on the needs of the segment. However, inclusive finance does not require that everyone who is eligible uses each of these services, but they should be able to choose to use them, if they so desired. To this end, strategies for building inclusive financial sectors have to be creative, flexible, and appropriate to the national situation and if necessary, nationally owned.
We now have reliable systems of measuring and monitoring financial inclusion .The main types of indicators to consider when measuring financial inclusion are:
Access indicators reflect the depth of outreach of financial services, such as the penetration of bank branches or point of sale (POS) devices in rural areas, or demand-side barriers that customers face to access financial institutions, such as cost or information.
Usage indicators measure how clients use financial services, such as the regularity and duration of the financial product/service over time (e.g. average savings balances, number of transactions per account, number of electronic payments made).
Quality measures describe whether financial products and services match clients’ needs, the range of options available to customers, and clients’ awareness and understanding of financial products.
Meaningful financial inclusion is very challenging and tough, involving a complex interplay of factors, viable business models and significant behavior change by new account holders. For certain segments, regulatory frameworks, legal and cultural norms and distance represent significant barriers.
We have to be realistic about how long it will take to fully address these challenges. We now have a whole slew of providers that are beginning to find firm roots. Progress will happen, but certainly just not according to our wishful time frames. Low income people need contextualized and customized services on account of the peculiarities of their financial lives, particularly their irregular/volatile income streams and expenditure patterns.
Financial inclusion is not a onetime process. It requires concentrated and sustained efforts from all stakeholders, including central bankers, regulators, supervisors, policymakers, financial consumer protection agencies , financial services provider and the community at large.
What we need today are innovative solutions that can take into account the peculiarities of the people at the bottom of the pyramid. We need to use our natural powers-of persistence, concentration, insight, and sensitivity to do work, think deeply, and solve problems. Social innovation is taking place at multiple levels, driven by passion and is making a great difference to our societies. But as with most trumpeted interventions, our programmes are also scrambling to turn rhetoric into reality. A lot of lessons have already been learned from around the world. We don’t have to reinvent the wheel. The learning curve in the digital world is certainly steep, but regulators and policy makers can learn from those who have achieved impressive success in digital financial inclusion.
The wisest credo for all players in the financial inclusion ecosystem can be found in ex-RBI Governor Raghuram Rajan‘s conceptualization of what inclusion should be. “Simplicity and reliability in financial inclusion in India, though not a cure all, can be a way of liberating the poor from dependence on indifferently delivered public services and from venal politicians,” he said.
Further, “in order to draw in the poor, the products should address their needs — a safe place to save, a reliable way to send and receive money, a quick way to borrow in times of need or to escape the clutches of the money lender, easy to understand life and health insurance and an avenue to engage in savings for the old age.”
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*Member of NITI Aayog’s National Committee on Financial Literacy and Inclusion for Women

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