Financial Inclusion is a contextual term; deliverable and objectives of the financial inclusion have been changing rapidly with technological advancements and its implementation. This article talks about the stage of financial inclusion in India by retrospectively scrutinizing the actions taken in the past & steps need to be taken in future. To understand the whole landscape, it’s very much important to understand what is financial inclusion, where we were a decade ago, factors that acted as a catalyst, and where are we heading to & what are the things we missing out on? Let’s start with an understanding of what Financial Inclusion is?
Financial Inclusion, in simple terms, means providing access to financial services to the population outside its fold, which is essential to the participation of each segment of society in the modern economy. Primarily these services are Savings, Credit, Insurance & Payments. From an economics perspective, these services become very much essential to the individuals’ growth and in turn contributing to the economy’s growth. In India’s diversity context where 68.84% of the population stays in rural parts, Financial Inclusion has a crucial role to play. Country’s economic growth has higher dependency over the financial inclusion of this population. Various studies have shown that exclusion from the banking/financial services has led to 1% GDP loss to economy y-o-y. [India’s GDP is $2.6 Trillion, 1% of it, is $26 Billion]. Let’s understand how these services impact the whole economy & individuals.
Formal savings facilities generate low-risk interest income. Combined with formal credit facilities, they can help reduce fluctuations in consumer spending subdued by income shocks. The poor stand to gain the most from increased income stability and access to credit. Credit allows resources to be used more optimally over time. Credit from within the formal financial sector is typically cheaper and has better terms than informal credit, with all the problems arising from lender oligopolies and doubts about creditworthiness. Informal market lenders often run as monopolies and charge exorbitant interest rates. Informal markets are also incapable of providing auxiliary products(such as insurance), which can serve as a cushion against shocks such as bad harvests, illness, or the death of the principal wage earner. Without access to efficient payment systems, business grinds to a halt. A modern economy cannot work without efficient, reliable and cost-effective payments. This was the impact on the economy, understand a situation where a person/farmer staying in a rural area and having the income less than 1 lac per annum but does not have access to the formalized financial sector. In this case, he/she is being forced to take credit from the informal sector at an exorbitant rate of 30% and above [Mortgaged loan]. In case of unforeseen events of income shocks, this individual won’t be able to pay interest [forget the principal amount]. Ultimately it’s leading to loss of mortgage to the lender. This leads to two things, one it widens the gap between rich and poor, two failure of such individual will lead to the downturn of economic growth. Hence access to these services becomes critical. Furthermore, financial inclusion fosters “social inclusion”. For example, by depositing savings in a current account, individuals are protected by property rights. If they put their savings into jewellery or just stash money under the mattress, they may fall victim to theft or devaluations. But the main question remains that have we covered the journey of financial inclusion and if yes, to what extent.
An avid reader, travel enthusiast and digital payments evangelist, Deep Shah is associated with National Payments Corporation of India for more than 3 years. He is one of the fastest emerging Lead in payment & financial inclusion sector. Being payments professional, he has contributed to enhance the system efficiencies by 50% in Aadhaar Enabled Payment system. A financial inclusion strategist, who is working on digitization of EMI collection for MFI sector to enhance the MFI productivity by 10-20%. He strongly believes combination of technology and empathy towards Rural India, can drive the results in Financial Inclusion. He holds Post Graduation Diploma in Rural Management from IRMA (PRM-36).