FINANCIAL INCLUSION- AN OVERVIEW

FINANCIAL INCLUSION- AN OVERVIEW

Introduction

Financial Inclusion broadly refers to universal access to a wide range of financial services at a reasonable cost. These include not only banking products but also other financial services such as insurance and equity products.

It refers to a process by which individuals and businesses can access appropriate, affordable, and timely financial products and services. These include banking, loan, equity, and insurance products.

FI efforts typically target those who are unbanked and under banked, and direct sustainable financial services to them.

FI at World level

In 2018, it was estimated that about 1.7 billion adults lacked a bank account. Out of those a significant number were women and poor people in rural areas and often those who are excluded from financial institutions face discrimination and belong to vulnerable or marginalized populations.

Irrespective of the need and want, the goal of financial inclusion is to remove all barriers, both supply side and demand side.

Supply side barriers include financial institutions (lack of nearby financial institutions, high costs to opening accounts, documentation requirements, infrastructure etc.)

Demand side barriers refer to aspects of the individual seeking financial services and include poor financial literacy, lack of financial capability, or cultural or religious beliefs that impact their financial decisions.

The term “financial inclusion” has gained importance since the early 2000s, a result of identifying financial exclusion and it is a direct correlation to poverty according to the World Bank. The United Nations defines the goals of financial inclusion as follows:

Access at a reasonable cost for all households to a full range of financial services, including savings or deposit services, payment and transfer services, credit and insurance.
Sound and safe institutions governed by clear regulation and industry performance standards.
Financial and institutional sustainability, to ensure continuity and certainty of investment.
Competition to ensure choice and affordability for clients.

Why Financial Inclusion?

It broadens the resource base of the financial system by developing a culture of savings among large segment of rural population and plays its own role in the process of economic development.
FI brings low income groups within the perimeter of formal banking sector; thus, protects their financial wealth and other resources in urgent circumstances.
FI also mitigates the exploitation of vulnerable sections by the money lenders through facilitating easy access to formal credit.

Financial Inclusion in India & RBI Policy Initiatives

In 2004, the Khan Commission, created by the Reserve Bank of India (RBI), investigated the state of financial inclusion and laid out a series of recommendations. In response, RBI expressed concern regarding the exclusion of millions from the formal financial system and urged banks to better align their existing practices with the objective of financial inclusion. RBI and GOI both gave priority on FI and results came when Mangalam, Puducherry became the first village in India where all households were provided banking facilities. Subsequently, Pondicherry, Himachal Pradesh and Kerala announced 100% financial inclusion.

Pradhan Mantri Jan Dhan Yojana scheme was launched in August 2014 in an effort to provide “universal access” to banking through the creation of basic banking accounts that come with other basic financial services.

RBI initiated several measures to achieve greater financial inclusion.

To open Basic Saving Bank Deposit (BSBD) accounts with minimum common facilities such as no minimum balance, deposit and withdrawal of cash at bank branch and ATMs, receipt/credit of money through electronic payment channels, facility of providing ATM card.
Simplified KYC norms to facilitate easy opening of bank accounts, especially for small accounts with balances not exceeding Rs. 50,000 and aggregate credits in the accounts not exceeding Rs. one lakh a year. In addition, banks are allowed to use Aadhar Card as a proof of both identity and address.
Simplified Branch Authorization Policy, to address the issue of uneven spread bank branches, domestic SCBs are permitted to freely open the branches.
Compulsory Requirement of Opening Branches in Un-banked Villages, banks is directed to allocate at least 25% of the total number of branches to be opened during the year in un-banked rural centers.
Activation and mobilization of banking correspondent (BC) at rural level for BSBD accounts opening, KCCs, GCCs issued and others. This BC model enables banks to service neglected areas by allowing intermediaries to facilitate transactions and deliver other banking services directly. In 2018, operators of Common Service Centers (CSCs) who work with local governing gram panchayats also began working as BCs to further improve penetration of banking services.
Financial Literacy Centres (FLCs), Financial Literacy Camps are organized to educate the people.
The self-help group (SHG) linkage model has also been proposed to improve financial inclusion by linking community groups to the formal banking sector through government programs, credit cooperatives, NGOs, or other microfinance institutions.

Measuring financial inclusion in India

The CRISIL Inclusix, an index to measure the status of financial inclusion in India was launched in 2013. CRISIL is India’s leading credit rating and Research Company collects data in India and ranking on a scale from 0 to 100 based on four parameters of financial services.

Achievement

Countries that have achieved the most progress toward financial inclusion have:

Policies delivered at scale, such as universal digital ID – India and Aadhaar/PMJDY accounts- more than 1.2 billion residents covered.
Leveraged government payments. (Approx. more than 35% of adults in low income countries like India receiving a government payment opened their first financial account for this purpose.)
Allowed mobile financial services to thrive.
Welcomed new business models, such as leveraging e-commerce data for financial inclusion.
Taking a strategic approach by developing a national financial inclusion strategy (NFIS) which bring together diverse stakeholders including financial regulators, telecommunications, competition and education ministries.
Paying attention to consumer protection and financial capability to promote responsible, sustainable financial services.

FINANCIAL INCLUSION- AN OVERVIEW

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