Financial Inclusion can be defined as the ease of access to appropriate financial services such as loans and credit to the weaker sections of the society at an affordable cost and in a fair, transparent and efficient manner. The term has been a buzzword for a few years now, with most developing and underdeveloped economies promoting the concept to ensure the less fortunate gain access to capital as well.
The term Financial Inclusion was first popularized in India way back in 2005 by then RBI Governor Y. Venugopal Reddy. The major concern was that although the middle and upper class still get access to loans and mortgages at decent rates, most poor folk weren’t even under the banking umbrella, let alone having access to loans. This has a lot of implications, which go on to show how important the concept really is.
First of all, access to financial services enables the poorest and most vulnerable in society to step out of poverty and reduces the inequality in society. Now this is not an understatement. A significant portion of the population of India lives for under a dollar per day. Access to funds would feed a lot of mouths.
Secondly, access to capital would enable people to open up their own businesses, thus fostering the entrepreneurial spirit in people. In addition, this gives people an opportunity through micro-financing schemes for example to better long term prospects, a stepping stone for larger opportunities. Further, it gives them the ability to handle uncertainties that require ad-hoc and unexpected payments or ‘financial shocks’.
Third, it leads to a reduction in cash economy as more money is brought into the banking ecosystem, which also means direct cash transfers to beneficiary bank accounts, instead of physical cash payments against subsidies will become possible. This also ensures that the funds actually reach the intended recipients instead of being siphoned off along the way by greedy middlemen and whatnot.
Finally, the most important aspect is that all this inclusion and boost to entrepreneurship would only lead to more jobs being created and the quality of life improving. An example would be how the advanced credit system in the US has ensured the prosperity of its citizens. Anybody with a decent credit score can get a house or a car if he doesn’t have the means to pay for it right now. Sure, some people abuse this privilege and start living beyond their means and finally end up homeless in a dank alley shooting heroin but, more often than not, this system has benefited people.
Now that it is established that financial inclusion of all the strata of the society is important, the next question is how exactly do we go about achieving it. While I cannot speak for other countries, there are certainly some measures that have been taken up by India to ensure better inclusion.
First of all, the banks should promote no frills accounts i.e. accounts with no minimum balance requirement. Usually, the charge for not maintaining minimum balance is high enough to deter people from joining the banking juggernaut. In fact, last year the State Bank of India collected Rs 1,771 crores from accounts failing to keep up the minimum balance. Needless to say, this needs to go.
Further, there should be a relaxation in Know Your Customer (KYC) formalities. You cannot deny a man a bank account just because he didn’t provide a driving license four times in a year. In this regard, the importance of Aadhar Card is highlighted, as it can serve as the one document required for registration that contains all basic details of the individual.
Finally, the banks and other financial service providers need to open up more branches in remote rural areas and curb the uneven branch distribution. This can also be helped by the use of technology with better branch integration and the fact that a bank agent can go door to door using so much as a tablet and easily open up bank accounts of simple village folk who earlier had to walk 30 km to gain access to a bank branch.
So we discussed why financial inclusion is important and how should we go about ensuring it in a country like India. The government initiatives such as the Pradhan Mantri Jan Dhan Yojana are also a welcome move to ensure that every single person in the country has access to capital. With these steps, we can ensure economic growth and prosperity and equitable distribution of wealth.
How would you promote financial inclusion? Let me know about it in the comments section below. Also, do not forget to follow me on Twitter if you haven’t already. For any queries or collaboration, you can always contact me.