India is on the cusp of a vibrant financial revolution and is poised to making full financial inclusion a reality. But it will require bold innovation, hard timelines, practical policy reorientations and fundamental shifts in business models to make the financial lives of the poor simple and fulfilling.
Recently, Union Finance Minister Arun Jaitley launched the Financial Inclusion Index Department of Financial Services (DFS), wherein the Ministry will release an Annual Financial Inclusion Index (FII) which will be a measure of access and usage of a basket of formal financial products and services that includes savings, remittances, credit, insurance and pension products. The index will have three measurement dimensions–Access to financial services; Usage of financial services and Quality.
The single composite index gives a snap shot of level of financial inclusion that would guide Macro Policy perspective. The first such Index will be released in January, 2019.
Financial services are like clean water, electricity, transport and communication — essential to leading a better life. In fact, these provide an enabling infrastructure for other development goals — from clean water to quality education to affordable healthcare to gender equality. As a corollary, ideal financial societies are those that provide ways that enable people to navigate their daily financial lives.
Low income people need contextualised and customised services on account of the peculiarities of their financial lives, particularly their irregular/volatile income streams and expenditure patterns. The process of initiating the poor into formal financial systems is known as financial inclusion. Financial inclusion has three key elements — broadening of financial services to those people and enterprises which do not have access to financial services, deepening of financial services and greater financial literacy and consumer protection.
Poor people operate almost entirely in the cash economy, particularly in the developing world. They use cash, physical assets (such as jewellery and livestock), or informal providers (such as money lenders and payment couriers) to meet their financial needs. However, these informal mechanisms can be insecure, expensive and complicated to use. Moreover, they offer limited recourse when a major problem arises, such as a serious illness in the family or a poor harvest.
When more people have access to affordable and high-quality financial services, they have more opportunities to thrive. This is especially true for women, who are often under-served by traditional financial institutions. In all societies, howsoever oppressed or illiterate their women are, they remain the stewards of household savings. They require financial products and services that appreciate their experience and perspective.
Financial inclusion of women enhances their self-confidence and places financial decision-making power in their hands resulting in large development payoffs. New kinds of financial products and services can be developed that are aimed expressly at women. Access to microfinance loans provides resources to women to undertake home-based work, thereby augmenting family income. Product design should give adeequate consideration to pricing, quantum, seasonality, duration and risk the customer needs and demand-side requitements should be prime consideratins in the design.
Financial inclusion focuses on removing obstacles to the use of these services, whether the obstacles are price or non-price barriers. Financial market imperfections, such as information asymmetries and transaction costs, are likely to be highly imposing on the talented poor and on micro and small enterprises that lack collateral and documented financial histories which may lead to self-exclusion.
With billions of people already using mobile phones, and the rapidly falling prices of smartphones, the means to introduce people to formal banking and financial services are now available. Technology can rapidly scale financial services where these are needed most. Mobile phone penetration is growing far more quickly than access to financial services. Mobile network operators can now immediately connect villages that are half a day away from bank branches and unreachable by road, giving real-time connectivity and access to people.
The JAM trinity (Jan Dhan accounts, the Aadhaar ID system and mobile technology) can allow us to design completely new business models that offer highly efficient, scalable and reliable support.
There are now a variety of devices and non-conventional methods that involve lower processing costs, provision of home-grown customised systems such as the low cost, multi-lingual ATM — all of which enable banks to provide financial services closer to the consumer at relatively low cost. There are also other innovations that include the use of smart cards combined with a point-of-sale or point-of-transaction device, banking correspondents and mobile money agents.
Banks can further deepen their financial inclusion initiatives by creating products that are simple, intuitive and tailored to meet the needs of those at the bottom-of-the-pyramid. Transactions are processed in a matter of seconds, thanks to the “micro-ATM” which is a lightweight device comprising a Chinese-made touchscreen and a fingerprint scanner, which she uses to verify the customers’ identities through the government’s new biometric ID system. Moreover, institutions can use new models which have data-driven templates so that bank staff is saved the intensive legwork.
However, the importance of physical and human interface should not be trivialised. The last mile customer integration has to be friendly, close and intensive to generate trust and confidence in consumers. The human touch is particularly important for low-income customers, where faith in the individual is greater than that in an institution.
Financial analysts have now developed several useful metrics for measuring financial inclusion so that it can be monitored by implementing agencies. These are:
Branch Penetration — it is measured as number of bank branches per one lakh population. This refers to the penetration of commercial bank branches and ATMs for the provision of maximum formal financial services to the rural population.
Credit Penetration – it takes the average of the three measures: number of loan accounts per one lakh population, number of small borrower loan accounts per one lakh population and number of agriculture advances per one lakh population.
Deposit Penetration – it is measured as the number of saving deposit accounts per one lakh population.
Insurance Penetration – it is measured as the ratio of premium underwritten in a particular year to the GDP.
One of the most evolutionary recent developments in the financial inclusion space is the entry of two categories of small and nimble financial institutions. Designed to offer financial services to the underserved, small finance banks (SFBs) and payments banks began their operations in 2017. It’s still early days to assess the impact of these entities on financial inclusion. But these can complement the efforts of mainstream banks in expanding the footprint in the financial inclusion space.
A number of government agencies are also actively involved in efforts to deepen financial inclusion. Most of these are reaching previously grossly neglected groups, such as women. Their contribution has been quite significant and noteworthy.
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. —INFA