• The Financial Literacy Cell

Is financial inclusion necessary?

Updated: Mar 5, 2020

Financial inclusion has been claimed to be a catalyst for economic growth and a direct link between them has also been established in various studies. Therefore, at first sight it seems frivolous to question its significance in connection with economic growth. Despite large number of empirical studies that vouch for the notion of financial inclusion being a growth trajectory, it'll add little value in a fragile financial system and amidst inefficient policies. Fortunately in India, in the presence of a robust financial ecosystem, the efforts put in streamlining appropriate policies for financial inclusion are paying off.

Financial inclusion, if comprehended simply, means that every person – individuals and businesses – in an economy has access to the financial products and services for which the person is eligible. But in Indian context, if the same has to be broken down, it means access to provision of financial services to the most vulnerable and underprivileged sections of the society – the lack of which is the reason for economic disparity and economic growth amidst expanding disparity is sheerly unsustainable. The process of financial inclusion seeks to neutralize the aspects that demur people from participating in the financial mainstream. The platform that the financial institutions pave in an economy is starkly remarkable which should be used to its fullest extent. The financial institutions work as a passage between the savers and the investors. The idle surplus money in the economy that's latent and uninvested in any sort of economic activity when injected through the financial institutions are channeled towards the most fitting investment avenues, for instance: business financing, personal lending and for other economic purposes.

The population that’s left out of the financial mainstream operate in the informal economy. The underpinning of their shortcomings, in this sector, is not being able to set up an asset class capable of generating a steady income source. The problems, hinge on their inability to transact on a regular basis due to unsteady income source and that hinders them to be financially independent. Also, lack of financial access means limited access to credit. A majority of our economy's population is involved in informal jobs like agriculture, small scale retailing, small scale vending, animal rearing, cottage industries et cetera. Their dependency on informal borrowing keeps them from growing their enterprises effectively. Amidst the burden of hefty interest rates and business failures, they fall in a cohesive trap of debt under the informal lenders. Their inability to pay off their debt causes the whole financial mismanagement, withholding them from building a healthy asset class. Access to formal credit would enable these small enterprises to judiciously invest in proper assets and make their enterprises more profitable, as formal lenders like banks would lend meticulously for feasible business options. That would reduce the chances of delinquencies to a much lower level again. Expansion and growth of these enterprises would again create more job opportunities. Furthermore, there's an array of financial services which they are never introduced to such as saving options, several types of insurance and old age financial security.

Savings can take a person long way into his future. At unforeseen circumstances, the assets created by efficient financial management come in handy to fix the problems. Likewise risks related to human health, business risk, and crop risk are never taken care of by the people left out of the financial mainstream.

The shocks faced by them are never properly absorbed, which leaves them terribly devastated and broke. Most of our demography lying in the informal sector overlaps the rural population. Precisely 66.4 percent of India's population was rural based as of 2017 as per World Bank Group data. In the year 2011, only 33.2 percent of rural population had bank accounts and that, in 2014 and 2017 rose up to 52.2 percent and 79.3 percent respectively [ Source : Databank–World Bank Group (WBG) ]. The economic growth measured through GDP in India has also been steady and globally competitive. This suggests that at least in India, financial inclusion has been a factor amidst others in economic growth.

The growth model through financial inclusion is quite simple. For the economy as a whole, through formal intermediaries like banks and other financial institutions, the uninvested monies are channeled to the most appropriate investment avenues. The World Bank, putting extreme emphasis and recognizing the role of financial inclusion in the growth of nations and the global economy as a whole, has envisioned the goal of Universal Financial Access (UFA) by 2020, whereby it aims to include every adult in the world under the financial mainstream. It has quoted, 'Financial inclusion has been identified as an enabler for seven of the seventeen Sustainable Development Goals'.

The focus on adults is because they include the potential entrepreneurs or the drivers at the forefront of economic growth.

A basic transaction account is the first step towards financial access that would work as a gateway towards financial services such as credit, insurance, business expansion, investment in education and health and prepare for financial shocks which can improve the overall lifestyle of a person.

Secondly, from account access to usage of the same is the next step. Different nations across the globe have adopted a national financial strategy for financial inclusion and India is no exception.

The set of reforms introduced in India have been exemplary, particularly Aadhaar and Jan Dhan accounts. The introduction of Jan Dhan accounts was done in the year 2014 when around 53.1 percent of India's population had bank accounts. (Source : Databank – WBG). The same increased to around 80 percent in the year 2017 as per WBG. Various other measures were undertaken to make these accounts operational in nature viz. term insurance schemes such as Pradhan Mantri Suraksha Bima Yojana and Pradhan Mantri Jeevan Jyoti Bima Yojana that was affordable to the weakest of the sections, pension schemes, MUDRA loan scheme et cetera.

A very vital factor however for causing frequency in the operations has been the digital infrastructure in the form of mobile based applications. India has perfectly delved in the digital revolution. The Unified Payment Interface (UPI) based platforms such as BHIM application have been pivotal in shaping the notion of a cashless economy that's more transparent and efficient.

Besides the people for whom it's targeted for, the benefits of financial inclusion has spread across several sectors in the economy. The banking sector for instance gets access to low cost deposits, which reduces their dependency on bulk deposits from companies and individuals having high net worth, reducing the risk of liquidity. Likewise, technology providers also perceive it to be a massive fortune as it would expand their market for providing digital infrastructure, as there would be increased number of users in the economy.

The people, after being included under the financial mainstream would be able to avail various financial services like saving products, term and endowment insurance schemes, eased and secured transactions, pension et cetera. Besides these services, every official transaction with the government would be facilitated through the bank accounts registered in their names like transfer of subsidy, pension, farmers' sales proceeds and the like, which previously were on cash basis which went through malpractices and unscrupulous acts by the intermediaries.

Financial inclusion thus, ensures optimal benefit to the true beneficiaries.

Young adults are recognized as potential entrepreneurs who can start up their own enterprises. Getting introduced to the financial system, they can avail credit for financing their enterprises which otherwise they couldn't have. By properly managing their finances, they can turn their small enterprises into profitable ones. An enterprise would again work as a job engine that would employ the job seekers. It's fascinating to consider how pennies idle at homes if deposited in banks can contribute to job creation.

All in all, in an economy, financial inclusion brings together unused monetary resources which are again utilized for the betterment of the economy. All of this in a way doesn't instantly eradicate economic disparity though but somehow adds up to shrink it, if not fully.

As mentioned in the very beginning, financial inclusion in the absence of a strong and ethical financial system is of little significance. The penetration of the financial institutions in India is limited and for better inclusion, the number of branches has to be increased and the outreach through Banking Correspondents has to be strengthened.

But again, all the same, financial illiteracy will have the same effect as a weak financial system. Everyone being financially included would mean nothing until everyone is financially savvy.

India had a population of 294.1 million adults as of 2017 as per World Bank statistics that was not yet under the financial cover. That number was outlooked as a set of opportunities, in the form of future enterprises and jobs but that would happen if people know what it means to be financially included. In other words, they must understand how to smartly tackle financial issues and constantly work on towards building a wholesome asset class by the aid of various financial services available to them.

By Siddharth Paikray

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