The need for speed & stability

Financial Inclusion

Dr B K Mukhopadhyay & Dr Boidurjo Mukhopadhyay

(The writer, a noted management economist and international commentator on ongoing economic and business affairs, can be reached at m.bibhas@gmail.com

The writer is an international development and management economist based in the UK.)

It is commendable that India is charted amongst the best nations for creating an enabling environment for financial inclusion in terms of allowing non-banks to issue e-money, proportionate customer due diligence and effective consumer protection, thus spoke a report this week. According to The Economist Intelligence Unit’s 2019 Global Microscope on Financial Inclusion report, the ecosystem for financial inclusion has improved globally with India, Colombia, Peru, Uruguay and Mexico leading with the most favourable conditions for inclusive finance.

The need for speed

Contemporary evidences across markets suggest that finance need not besolely pro-growth but also rather more importantly pro-poor. Economies with better improved financial systems experienced faster and sustained reduction in both income inequality and levels of poverty. For ensuring fast and consistent economic and social development, a well-functioning financial system is an essential pre-requisite while also the depth, capability and efficiency of the financial system. An appropriate set of financial sector policies calls for encouraging on the one hand competition and providing the right incentives to the individuals, while on the other hand extending necessary support to foster growth, poverty reduction and better distributive justice making full use of the capabilities. Improving financial access in a manner that is tailored to needs of the poor calls for adoption of strategy for inclusion that looks beyond credit for poor households, it is vital to broaden the focus of attention by improving access for all who remain excluded.

Ordinarily, financial inclusion means providing financial services to the vast sections of the population that is not yet covered by the formal financial system, while in a holistic sense it means providing access to a bank account backed by deposits insurance, access to affordable credit and the payments system. It is a fact that this aspect of promoting broader access to financial services, despite the emphasis placed on this score, receivedless attention that it should until recently. The accessibility dimension, in particular, had been overlooked/ignored over the decades.

Elsewhere, other lands abroad

Several studies from all over the world and institutions recognize that the poor and small enterprises are left to rely on their own resources / borrowing from others [usury] to invest in education, health or take advantage of promising growth opportunities - without inclusive financial systems. People outside the realm of mainstream financial services - who have access to none of the products in the full suite of basic services like savings, credit, insurance, and payment services - suffer from various forms of financial disadvantages, for example, usury, lack of insurance, higher interest credit, higher cost utilities and no account into which wages, income, payments can be routed.

Financial inclusion remains a key concern even in developed countries and therefore well-governed legislative or regulatory measures to achieve the same remains in place. Research confirms that countries with low levels of income inequality typically tend to have lower levels of financial exclusion, while countries with high levels of inequality record higher levels of financial exclusion. To illustrate, in Portugal, about 17 per cent of the adult population had no bank account (of any nature) in 2000, while less than four per cent of adults in Canada and five per cent in Belgium lacked a bank account. In France it is termed as ‘right to banking’ – Article 58 of the Banking Act 1984 recognized the principle of the right to a bank account. In the UK, where the number of adults without a bank account fell from 2.8 million in 2002-03 to 2 million in 2005-06, the accessibility is also through the Post Offices. In Sweden - where lower than 2 per cent of adults did not have a bank account in the year 2000, compared to Germany where the same was around 3 per cent, banks cannot refuse to open a savings or deposit account under Section 2 of the Banking Business Act of 1987.

Countries such as France and Belgium have undertaken proactive initiatives to committing banks to open an affordable account with bare minimum facilities. Termed ‘call deposit account’ in Belgium, it offers three basic types of transactions: money transfers, deposits and withdrawals, and bank statements. However, individual banks may opt to offer other services if they wish. In Germany, a voluntary code was introduced by the German Bankers Association dating back to 1996 which makes provision for an ‘everyman’ current account, offering basic banking transactions, without an overdraft facility. Likewise, access to basic banking in the United Kingdom and Australia has been achieved through voluntary arrangements with banks and has not involved formal charters. The U.K, for instance, has drafted a Banking Code, that requires banks to inform customers about their basic bank account and its suitability for their needs. A Financial Inclusion Taskforce, instituted in April 2005, monitors access to basic banking services.

Some other countries have introduced specific legislation that gives both, a universal right to a bank account and, spells out the precise nature of banking services to be provided.

Back in India

Though in India the focus of the financial inclusion, at present, is confined to ensuring a bare minimum access to a savings bank account without frills, to all, yet internationally, the financial exclusion has been viewed with a much wider and holistic perspective. Having a current account / savings account on its own, is not regarded as an accurate indicator of financial inclusion. There could be multiple levels of financial inclusion and exclusion. On the one hand, extreme, it is possible to identify the ‘super-included’, i.e., those customers who are actively and persistently courted by the financial services industry, and who have at their disposal a wide range of financial services and products.

Caution…slippery road ahead

A good number of inclusive practices have been quickly and reasonably promoted by the RBI. Opening of the no-frills accounts, availing of the services of BC BF branchless banking, wide publicity on various media regarding the banks schemes have been creating quicker awareness. In a word, genuine attempts have been on to bring in large section of the urban and rural poor within the banking system and creative schemes and programmes have been launched with the help of directives from the RBI. Technological development initiated on this score counts no less. But it is to be ensured that proper leverage of technology vis-a-vis customers’ education should run simultaneously so that the fund deployed for technological development becomes fully productive. Though technology enables spread of banking among masses and leads to reduce transaction costs, yet it should not remain like watertight compartments between the customer and the banks. Leveraging Indian strengths in mobile banking simultaneously with the UID reaching the unreached becomes possible temporally, spatially, functionally and hierarchically.

A strategic vision

The vision is to put the customer at the forefront rather than technologies while also recognizing the fact that the financial-service needs of the poor have similarities to those of the better off. Hence, the focus is on four major planks, a) what is provided, e.g., savings, credit, insurance, payments mainly; b) how it is provided [e.g., affordability, safety, convenience and then obviously dignity of treatment]; c) who are the recipients [e.g., each and every one – poor, rural, informal, groups, women, disabled, ethnic minorities and the like]; and finally d) who provides [e.g., mainstream financial players reflecting transparency – the characteristic of quality financial inclusion via complete disclosure of information by the financial service provider] the same. A supportive well-coordinated environment could ensure protection of the customer since the latter remains the key highlight in a market-led system. In fact, financial inclusion, in true sense of the term, has to fold both the demand [good financial decision making] and supply [access to suitable products and services] factors to reach the equilibrium.

Any grant-subsidy based drive seeks for a trade-off between profitability and services rendered to the poor. It has been located that compared to credit subsidies subsidizing payment and services – the basic services required for increasing participation in a modern market economy - is a better alternative.

Bringing in the non-banking financial intermediaries into this fold at a greater speed may be thought of as their reach is also a point to see. Post Offices, like the UK Brand, may be steadily netted in to foster the pace. Reaching the hitherto unreached spatially is, no doubt, a stupendous work but surely not an impossible one. The challenge is not only to bring them into the formal fold but to ensure a smooth payment system to excluded rural locations while combating the infrastructural bottlenecks.