Financial Inclusion Concept and Application

Concept of Financial Inclusion

Financial inclusion denotes the provision of affordable financial services, (viz. , access to payments and remittance facilities, savings, loans and insurance services) by the formal financial system to those who tend to be excluded. The various formal financial services include credit, savings, insurance, pension and payments and remittance facilities. The most commonly understood objective of financial inclusion is to extend the scope of activities of the organized financial system of banking services mostly, to include within its ambit people with low incomes.

In India the emphasis of the financial inclusion programmes at present is restricted to ensuring a bare minimum access to a savings bank account without frills, to all. Globally, financial exclusion has been observed in a much wider perspective. Merely having a current account/savings account on its own, is not regarded as an accurate indicator of financial inclusion. Narrowly, financial exclusion denotes a situation where people do not possess either a saving account or a loan account with a formal banking institution.

Though this explanation is useful to recognize the “unbanked” individuals uickly, it does not seem to be appropriate to undertake an in depth study on the nature and drivers of financial exclusion. A more comprehensive definition of financial exclusion endeavours to relate it to the exclusion from the main stream financial system, comprising of banks and other financial institutions, insurance companies etc encompassing other ideas of financial illiteracy, financial discrimination and financial exploitation. Financial literacy tends to be associated more with numeracy skills and also the ability to understand more complicated products.

Get quality help now

Prof. Finch

Verified

Proficient in: Banking And Finance

4.7 (346)

“ This writer never make an mistake for me always deliver long before due date. Am telling you man this writer is absolutely the best. ”

+84 relevant experts are online

Hire writer

Financial awareness on the other hand would indicate a cursory nderstanding of what instruments are out there and which one can take advantage of. The low level of financial literacy is sometimes blamed on the failure of many government initiatives to increase financial inclusion. However, in many cases, the lack of information that the target beneficiaries display may be the result of lack of information or lack of financial awareness. While studies show mixed results in the long term impact of financial literacy training, lack of financial awareness should be much easier to correct.

Specifically in the context of the financial inclusion drive, media reports have pointed owards the low levels of financial literacy as one of the reasons why the drive has failed. While ensuring that the entire unbanked population of India becomes financially literate seems like a formidable task, ensuring that the unbanked population hears about the drive, the benefits of a savings account and how to use one seems much more achievable. Absolute financial exclusion results in poverty and this consequently leads to social exclusion. The outcome of social exclusion is again financial exclusion and thus a vicious cycle is shaped.

This also causes financial iscrimination and even worse, financial exploitation of the poorer sections of the society. At a micro level, the division between haves and have-nots keeps broadening, while at a macro level, this shakes national and economic growth. Markets exclude people on the grounds of lack of sufficient income which can be translated into purchasing power, lack of assets whether physical or financial, lack of capabilities acquired through education, training or experience which are translatable into labor, and those sections of people that have no market values such as tribal populations.

In India, most authors have categorised these causes based on atterns in deifferent case studies as: 1. Most frequent including low income, nil or low savings, lack of assets, unemployment and use of inappropriate products. 2. Less frequent including psychological/disability issues, feeling of being excluded, indigenous/ethnic issues, geographical remoteness, lack of pc/internet access etc. 3. Personal factors such as cultural norms, gender, age and legal identity

Various Dimensions of Financial Exclusion

Access Exclusion

People may be monetarily excluded either by denying a savings account or a loan or credit account to them by the banks. Banks appear to be contented in offering saving ccount to people as it does not implicate any risk, except for verifying the identity of the customer. But, banks are very often unwilling in opening loan or credit account as they have to make some risk valuation in respect of the prospective borrower. Thus some individuals do not get access to credit account as they are expected to be assessed credit unworthy by the banks.

Condition Exclusion

Sometimes certain conditions attached to financial products make improper to the disadvantaged people. The most common instance being prescribing margins and asking collateral securities, a problem that was addressed recently by the Ministry of Finance, Govt. of India by directing the banks to sanction education loans up to 4 lakhs without any collateral security.

Price Exclusion

The prices (mainly interest rates) and service charges of selected financial products are not attractive to the prospective borrowers.

If the banks are reluctant to offer these products at reasonable rates, people particularly living on low income may find themselves excluded from the conventional banking system.

Marketing Exclusion

Since the advent of financial reforms in 1991, banks both Public Sector Banks and New Generation Private and Foreign Banks have been in a cut throat competition to ntice high worth customers. They seem to have been implementing marketing tactics for their products targeting at the high valued customers.

This customer categorisation in practice excludes the poor and vulnerable from the banking system. The opening up of large number of NRI branches is enough to exemplify this issue.

Geographical Exclusion

People living in far-flung and geographically terrain places are at the risk of being financially excluded. Bank closures in a specific geographical area may even lead to the “financial desertification” of that area.

Technological Exclusion

In the recent technological era banks have undergone a transformation from the Brick mortar infrastructure staffed banks to internet and mobile banking.

Such new generation banking techniques cannot be practiced by people having no basic understanding in computer related processes. Hence such people are likely to be excluded from the contemporary banking operations. Financial inclusion has many benefits. Following are some of the benefitssummed up. ???It paves the way for establishment of an account relationship which helps thepoor to avai a variety of savings products and loan products for housing ,consumption, etc. ??An inclusive financial system facilitates efficient allocation of productiveresources and thus can potentially reduce the cost of capital. ??This also enables the customer to remit funds at low cost. The government canutilize such bank accounts for social security services like health and calamityinsurance under various schemes for disadvantaged. From the banks point of view, having such social security cover makes the financing of such personsless risky. Reduced risk means more flow of funds at better rates. Access to appropriate financial services can significantly improve the day-to-day management of finances.

For example, bills for daily utilities(municipality, water, electricity, telephone) can be more easily paid by usingcheques or through internet banking, rather than standing in the queue in theoffices of the service. ???Transfer of money can be done more safely and easily by using the cheque,demand draft or through internet banking. ???A bank account also provides a passport to a range of other financial productsand services such as short term credit facilities, overdraft facilities and creditcard.

Further, a number of other financial products, such as insurance andpension products, necessarily require the ccess to a bank account Lastly, the Employment Guarantee Scheme of the Government which is beingrolled out in200 districts in the country would bring in large number of peoplethrough their savings accounts into the banking system. Cross country experience t has been estimated by Consultative Group to Assist the Poor (CGAP) that about2. 5 to 3billion people around the world are still excluded from basic financialservices. The situation is particularly dire in the Least Developed countries.

In mostof the developing countries like India & China the extent of exclusion is in the rangeof 25%-65%. So, taking into cognizance the importance of financial inclusion, theinternational community has taken a number of measures to mitigate the hiatusbetween the financially excluded & non- excluded. The following analysis describesthe extent & measures taken by different countries to mitigate financial exclusion. USA In USA of total households & 22% of the low income households gowithout the banks there to provide banking services to all the needy.

Some stateslike New York made it mandatory for the banks to provide accounts to all citizens. U. K. Nearly 12 percent of England’s households are unbanked. Free face to face moneyadvice to targeted groups in the areas of high exclusion is in vogue. The govt has setup a Financial Inclusion fund of 120 mn pounds to support initiatives to tacklefinancial exclusion.. An enhanced legislative environment for credit unions hasbeen established, accompanied by tighter regulations to ensure greater protectionforinvestors.

A Post Office Card Account (POCA) has been created for those who areunable or unwilling to access a basic bank account. The concept of a SavingsGateway has been piloted. This offers those on low-income employments El fromthe state for very El they invest, up to a maximum of E25 per month. In additionthe Community Finance Learning Initiatives (CFLls) were also introduced with aview to promoting basic financial literacy among housing association tenants. Australia Only 3% of adults lacked bank account in Australia till 2002-03.

This has been theresult of continuous Joint efforts by government & the banks in educating the peopleabout the benefits of financial products. France In 1984 the bank of France through “Banking Act” made access to bank accounts alegal right in France. In 1992 the banking industry in France signed a charter oprovide bank account to all. Bangladesh. Grameen bank of Bangladesh under the stalwartship of Md. Yunus hasrevolutionized the movement of financial inclusion. It targeted low income peopleespecially the women (97% of total borrowers) who were denied credit by othercom. Banks.

It has successfully posted a recovery rate of 98. 85%. It has also recentlyincluded the beggars within its credit network under a special program i. e. Struggling Members programmed. Approximately 81000 beggars have already beenbenefited by the programme. South Africa. More than half of the population here are below poverty line. Only 4% of otalpopulace has bank accounts & 1% only avail credit from formal sources. To dealwith the situation Dakar Conference ha been organized under the banner of U. N. ln2004, UNDP & UNCDF Jointly lunched a program called Building Financialsecurity in Africa. MF, U. N. & World Bank have extended very good support for building an inclusivesociety in the world. U. N. has framed ‘Blue Book in consultation with thedeveloped & underdeveloped countries as a tool & guide for policy makers whoseek to build inclusive financial growt Calculation of financial inclusion index Several factors have been used to determine the extent of financial inclusion in ifferent calculations across the globe. The most commonly accepted indicator has been the number of bank accounts (per 1000 adult persons) yet this has been regarded as not being the sole indicator in India .

Some other indicators are the number of bank branches (per million people), total number of ATMs (per million people), amount of bank credit and amount of bank deposit. Banking sector outreach penetration, loan and deposit accounts per capita, loan-income and deposit-income ratios and so on. All these indicators offer significant and valuable evidence on outreach of the financial system of an economy. However, when used individually, each of these factors provide only fractional information on the inclusiveness of the financial system.

A new index on financial inclusion released by ratings firm CRISIL reveals that the number of loan accounts per lakh of population in the southern States stands at 17,142. However, this healthy fgure can be easily offset by the under-penetration of formal banking facilities in most parts of the country Just one in two Indians has a savings account, and only one in seven Indians have access to banking credit! CRISIL used bank branch, credit and deposit penetration (per lakh opulation) to assign scores to each district and then arrived at a score for every State and Union Territory.

RBI policy initiatives to foster financial inclusion The Indian economy switched gears in the early part of thiscentury and has been growing at a healthy pace since then. Asbehemoth in the next few years, the average level of prosperityattained by its populace and the degree of equitable distribution of wealth will, in no small measure, be determined by the scaleof inclusive growth that would have been achieved. Financial inclusion is certainly not Just a recent phenomenon. n India, the earliest effort at financial inclusion can be traced back to 1904, when the co-operative movement began in thecountry.

A focal event in its evolution was the banknationalisation programme in 1969, when 14 major commercialbanks were nationalised, and the lead bank scheme was, subsequently, introduced. As a consequence, branches wereopened in large numbers across the nation, even in areas thatwere until then unreached by banks. The agenda for financial inclusion was galvanised in the early2000s in India following the publication of a spate of findings about financial exclusion and its direct correlation to overty. Varied studies have proved that xclusion from the bankingsystem results in a loss of 1 per cent to the countrys grossdomestic product (GDP).

Policymakers in India are acutely aware that, in a phase of highgrowth, the ramifications of leaving a huge section of the peopleout of the development process could be disastrous and arehence designing appropriate policies for financial inclusion. Complementing the government’s efforts, the Reserve Bank oflndia (RBI) has, over the years, undertaken numerous initiativessuch as introduction of priority sector lending requirements for anks, establishment of regional rural banks (RRBs), and selfhelpgroup-bank linkage programmes to augment theavailability of financial services to the poor and marginalisedsegments of society.

In the last few years, RBI also initiated the requirement thatbanks provide no-frills accounts, improve the outreach ofbanking services through the business facilitator and business correspondent models, and set up the goal for banks to provideaccess to formal banking to all 74,414 villages with a populationover 2000. This target of covering villages with a population ofover 2000 was largely achieved as of end March 2012 (99. 7 percent). The goal towards financial inclusion has accordingly beenrefined in June 2012; in the next Financial unbanked villages with population of less than 2000 withbanking services. n February 2011, the Government of India and the Indian Banks’ Association (IBA) Jointly launched Swabhimaan, anationwide programme on financial inclusion, to bring thedeprived sections of society under the banking network, andensure that the benefits of economic growth percolate to alllevels. This programme targets facilitating opening of banks accounts, providing need-based credit, remittance facilities andpromoting financial literacy in rural India.

Although the target groups may differ from country to country orregion to region, financial inclusion refers, in its broadest sense,to the delivery of financial services at affordable costs to allsections, including the disadvantaged and low-income groups RBI has come up a number of policy initiatives to expand financial inclusion in the country . It has focussed on four aspects of reach, access, transactions and products. It has been successful to some extent in achieveing the objective of inclusion but the result of these policy initiatives are yet to be checked on the touchstone of statistical reality. Reach a. Branch expansion in rural areas Branch authorisation has been relaxed to the extent that banks do not require prior permission to open branches in centres with population less than 1 lakh, which is subject to reporting. To further step up the opening of branches in rural areas, banks have been mandated to open at least 25 per cent of their new branches in unbanked rural centres. In the Annual Policy Statement for 2013-14, banks have been advised to consider frontloading (prioritizing) the opening of branches in unbanked rural centres over a three year cycle co-terminus with their FIPs.

This is expected to facilitate the branch expansion in unbanked rural centres. b. Agent Banking – Business Correspondent/ Business Facilitator Model In January 2006, the Reserve Bank permitted banks to utilise the services of intermediaries in providing banking services through the use of business facilitators and business correspondents. The BC model allows banks to do ‘cash in – cash out’ transactions at a location much closer to the rural population, thus addressing the last mile problem. c.

Combination of Branch and BC Structure to deliver Financial Inclusion The idea is to ave a combination of physical branch network and BCs for extending financial inclusion, especially in geographically dispersed areas. To ensure increased banking penetration and control over operations of BCs, banks have been advised to establish low cost branches in the form of intermediate brick and mortar structures in rural centres between the present base branch and BC locations, so as to provide support to a cluster of BCs (about 8-10 BCs) at a reasonable distance of about 3-4 kilometers.

Access

a. Relaxed KYC norms Know Your Customer (KYC) requirements have been simplified to such an extent that mall accounts can be opened with self certification in the presence of bank officials. RBI has allowed ‘Aadhaar’ to be used as one of the eligible documents for meeting the KYC requirement for opening a bank account. b. Roadmap for Banking Services in unbanked Villages In the first phase, banks were advised to draw up a roadmap for providing banking services in every village having a population of over 2,000 by March 2010.

Banks have phase, Roadmap has been prepared for covering remaining unbanked villages i. e. with population less than 2000 in a time bound manner. About 490,000 unbanked illages with less than 2000 population across the country have been identified and allotted to various banks. The idea behind allocating villages to banks was to ensure availability of at least one banking outlet in each village. Ill. Products Bouquet of Financial services In order to ensure that all the financial needs of the customers are met, we have advised banks to offer a minimum of four basic products, viz. ??A savings cum overdraft account A pure savings account, ideally a recurring or variable recurring deposit ??? A remittance product to facilitate EBT and other remittances, and ??? Entrepreneurial redit products like a General Purpose Credit Card (GCC) or a Kisan Credit Card (KCC) ‘V. Transactions Direct Benefit Transfer The recent introduction of direct benefit transfer, leveraging the Aadhaar platform, will help facilitate delivery of social welfare benefits by direct credit to the bank accounts of beneficiaries.

The government, in future, has plans to route all social security payments through the banking network, using the Aadhaar based platform as a unique identifier of beneficiaries. In order to ensure smooth roll out of the Government’s Direct Benefit Transfer (DBT) initiative, banks have been advised to: Open accounts of all eligible individuals in camp mode with the support of local Government authorities. Seed the existing and new accounts with Aadhaar numbers.

Put in place an effective mechanism to monitor and review the progress in implementation of DBT.

Measures Taken to Improve Financial Inclusion

Few of the factors listed above have already been addressed by the RBI and other banks. KYC – Know Your Customer norms has been simplified. Credit cards are made available at an affordable price. The community-bank linkage programme has been initiated. The Indian financial system which is effectively controlled by the GOI and RBI has een reacting positively in order to solve the problems of FE.

Detailed study has been conducted by various committees and they have suggested several STEPS to be taken by the RBI AND GO’. These steps were RECOMMENDATIONS given by expert committees. Steps or recommendations were : BRANCH EXPANSION PROGRAMMES were given a thrust. Incentives were given to those who willingly managed RURAL BRANCES. SHG-Self Help Groups-Bank Linkage programme Support to MFI – Micro Finance Institutions Establishing Kiosks in rural locations Kisan Credit Card GCC SBI has been very active in introducing tiny credit cards and other related benefits.

Money Management: How to proactively manage money Debt Management: How to control debt and avoid over-indebtedness [1 5] Managing Savings: How to save regularly and in a safe location Financial Negotiations: How to strengthen clients’ bargaining position vis-?¤-vis input suppliers, other household members, and financial institutions Use of Bank Services: How banks work and impose charges; How clients can maximize bank services, interact with banks, and effectively use ATMS COMMITTEES ON FINANCIAL INCLUSION 0 Dr.

Nachiket Mor Committee To develop a comprehensive monitoring framework to track the progress of financial nclusion and deepening efforts on a nationwide basis 0 Sambamurthy Committee A technical committee on mobile banking to examine the options and alternatives including the feasibility of using encrypted SMS based funds transfer using an application that can run on any type of handset for expansion of mobile banking in the country.

Conclusion

0 Drift from objective of social impact to profit maximisation 0 Rates of interest 0 No scientific evidence or statistics on strategies and products. 0 Minimal level of education required. 0 Cost of small value transactions. 0 Psychological facts still persist. The issue of financial exclusion is widespread in India. The existing financial inclusion strategies are not seemed to be effective in creating an inclusive financial system which is very important in attaining inclusive growth.

Opening “no frill accounts” does not seem to be the only panacea for solving this problem. Measures will have to be taken by the government to economically activate the people so that the demand for financial product arises, leading to the effective financial inclusion of people. In countries with diverse social and economic profile like India, financial ducation is particularly relevant for people who have poor resources and who operate at the margin and are vulnerable to persistent downward financial pressures.

With no established banking relationship, the un-banked poor are pushed towards expensive alternatives. The challenges of household cash management under difficult circumstances with few resources to fall back upon could be accentuated by the lack of skills or knowledge to make well informed financial decisions. Financial education can help them prepare ahead of time for life cycle needs and deal with unexpected emergencies without assuming unnecessary debt.