Financial Inclusion



By Moin Qazi


Finance is the cementing force that holds all the pieces of our life together. It enables money to be in the right place, at the right time, and for the right situation. To borrow and save is to move money from the future to the present or from the present to the future. To insure is to move money to a “good” situation from one that is “bad”. Ideal financial societies are those that provide safe and convenient ways of managing these simple monetary affairs. The process by which people have access to formal financial tools for managing their financial affairs is known as financial inclusion.


India’s financial inclusion revolution received a steroidal boost when deposits in bank accounts opened under Pradhan Mantri Jan Dhan Yojana (PMJDY crossed the 1-lakh crore mark. According to government data, the total balance in PMJDY accounts stood at INR 1, 00,495.95 crore as on June-end 2019.


The total number of beneficiaries is 36.06 crore. This puts the average account balance of a Jan Dhan account at Rs 2,787. The number of zero balance accounts under PMJDY declined from 16 per cent of the total accounts in March 2018 to 14.37 per cent in March 2019. Recall, the PMJDY was launched on August 28, 2014, with an aim to provide universal access to banking facilities and accounts opened under it are Basic Savings Bank Deposit and carry an overdraft facility.


Enthused by the success of the scheme, the government enhanced the accident insurance cover to Rs 2 lakh from Rs 1 lakh for new accounts opened after 28 August, 2018. The overdraft limit has also been doubled to Rs 10,000. The government also shifted the focus on accounts from ‘every household’ to ‘every unbanked adult’. Over 50 per cent of the Jan Dhan account holders are women.


There are several reasons for financial exclusion and these will have to be addressed to make India financially inclusive country. Financial exclusion could be due to several reasons. One of these is the design of the products or services or the way they are sold. There may be barriers such as requirements of minimum balances, credit scores or other thresholds that cannot be met by a large number of people. 


Financial institutions are leveraging technology to revolutionise product development, distribution, risk management, and a deepening understanding of lower-income customers to develop sustainable business models that meet the unique needs of the poor. Technological advances are improving data transmission, collection, and analysis, enabling organisations to develop low-cost distribution models and scalable risk-management practices.


By delving deep into data available from mobile usage and other sources and using algorithms, we can get insightful findings and variables that can help building surrogate financial histories of individuals, who do not have formal financial documentation.


Tech companies may be disrupting financial services, but they lack the solid relationships built up by traditional banks over generations. Traditional banks will continue to be the most trusted financial allies of people despite the fact that stringent regulation is effectively hamstringing them in remote areas which are being mostly served by banks weak digital and communications infrastructure and non-standardised processes has impeded shift towards digital banking.  


The need of the hour is for the Modi-II Government to reinvigorate, through a two-pronged strategy, the policy focus on financial inclusion, by one, meaningful access to bank accounts, and two, adopting a life-cycle approach to inclusion, where the account forms the gateway to access an entire gamut of products and services, including long term savings, investments, and insurance.


The biggest barrier to account usage is the lack of proximity to transaction points, and policy has tried to increase this through two routes, namely through payments banks and business correspondent (BC) networks. But viability remains a serious concern given multiple parallel networks of BCs in a geography has resulted in fragmentation of income streams and profitability.


Allowing for white-label BCs will ensure optimal utilisation, with multiple banks sharing the same BC. For this, the white-label BCs must meet certain prudential criteria and real-time technology capabilities for obtaining direct access to settlements systems.


Financial exclusion denies people the stability of a savings account, established credit and insurance. Since low income women live entire lives outside the formal banking system, they struggle with poor credit history and are most likely to fail in getting a loan.


Primarily, financial products are distributed through two systems — branch and non-branch delivery. However, due to the limited reach and poor viability of the branch system in rural areas, a large number of initiatives have been taken to reach the last mile through the non-branch route. Some of the initiatives have been mobile ATMs, smart cards and mobile banking, use of intermediaries including SHGs, MFIs, post offices, and the business correspondent/facilitators model.


A revolutionary concept born out of it is the business correspondent model — in which one financial institution or an agent carries out transactions on behalf of another, often because it has no local presence. It is a technology-driven model. This alternate service channels have tremendously expanded the outreach. These agents are better positioned to serve the remoter pockets as they operate in a limited geographical area, enjoy greater acceptability amongst the rural poor, have a greater understanding of the issues specific to the rural poor, and have flexibility in operations providing a level of comfort to their clientele.


It is one of the most effective initiatives that is now being replicated by many players to register rural footprints. The intermediaries chosen to spread banking services are called business facilitators and business correspondents. Facilitators identify borrowers, process loan applications, and create awareness about savings and banking products. Correspondents handle money directly, collecting deposits, disbursing loans, accepting loan repayments, and also selling mutual funds, pension and insurance products. Under the BF model, banks utilise the network of intermediaries such as not-for-profit organisations, microfinance institutions, post offices, non-banking finance companies, and retired bank employees to promote and sell financial services to rural households.


We cannot have one sector solution. There is need for convergence among all the players in the ecosystem. Every player offers unique strengths. By harnessing these mutually-beneficial strengths — from financial players, telecommunications providers, NGOs and government institutions — financial inclusion can be fast-tracked.


We also need an overhaul of the customer protection regime. The new regime must be one that can hold all entities to a common standard of institutional conduct in how they deal with the individual customer, including how they sell products. A misalignment of incentives between the provider and the customer leaves the customer worse-off, and therefore, we need to enforce a dynamic that keeps the customer’s interests above everything else. North Block must pay heed.—INFA