Indian Independence Day Gift – The New Avatar of Financial Inclusion Drive
[Government would do well to ‘Target the Outcome of Financial
Inclusion Drive’ as a ‘Means’ and ‘Not an End’ to ‘Attain Overall Prosperity’. –
Use the FI Drive for Inclusive Growth and Not an End on merely Banking
Inclusion]
The current policy objective of inclusive growth with
financial stability cannot be achieved without ensuring universal financial
inclusion and bridging the gap between the supply and demand side on one hand
and lead the vision of inclusive growth on the other. The Government of India
is likely to provide a positive impetus and boost the ongoing financial
inclusion drive by unveiling a comprehensive program envisaging banking account
along with an insurance and pension cover, apart from a default cover for
lenders. The NDA Government’s drive is
likely to be opening 150 million more bank accounts, 120 million of which will
be in rural areas over next four years. Apart from providing basic banking accounts, pension
and insurance services, the government will also focus on financial literacy as
well as creation of a credit guarantee fund for coverage of defaults in
overdraft accounts. The government plan also proposes to channel all government
benefits (Centre, state and local body) to the beneficiaries using these
accounts and pushing the Direct Benefit Transfer (DBT) scheme of the Union
government.
This is certainly a big giant leap to inclusive growth in the
regulated financial sector and the formal announcement shall be made by the
Indian Prime Minister on the Independence Day (15th August) next
month. However, there are certain issues that the Government as well as the
Central Bank ought to reckon with before embarking such an ambitious plan. Globally,
a paradigm shift is being observed in the micro space which draws one’s
attention from the financial institution ‘back to the client’. Indicators of a
renewed concern for clients include research to quantify the ‘unbanked’,
rallying calls for consumer protection, and efforts to better meet customer
needs with diversified products. A key driver of this change in focus is the
now widely embraced goal of ‘financial
inclusion’. Governments in developed economies, in G 20 summit agreement,
have recognized financial inclusion and consumer protection as integral to
achieving financial stability and integrity as a multidimensional, pro-client
concept, encompassing ‘improved and increased access’, ‘better
products and services’, and ‘better use’
Need for Financial
Literacy Along With Inclusion: The challenge in developing
nations like India is that without the third element, ‘use’, the first two,
despite the best efforts of the Central Bank as well as the Government, at best
are worthless. Technological innovations are bringing both new customers,
potentially including millions of unbanked cell phone owners, and new service
providers – a diverse array of retail outlets, telecoms and others into the
market. Diversification of products and services has already started resulting
in rich, and complex, choices for consumers, especially compared to the early
days of one-size-fits all working capital loans. Yet, increased access and
better choices do not automatically translate into ‘effective use’. The path
from uptake (i.e. opening an account) to usage is still an uncharted course. For,
‘effective
use’ is hampered by asymmetries of information / literacy and power
between financial institutions and poor consumers, an imbalance which grows as
customers are less knowledgeable, illiterate and inexperienced while the
products they can choose could be more sophisticated. Financial education is an
important tool to address this imbalance and help consumers both ‘accept’
and ‘use
the products’ to which they increasingly have access. As it facilitates
effective product use, financial literacy becomes critical to financial
inclusion and can help clients to both to develop the skills to compare and
select the optimum combination of products for their needs and empower them to
exercise their rights and responsibilities in the consumer protection equation.
Current developments in microfinance sector including RBI’s concurrence to
allow NBFC MFIs to be BCs are both exciting and potentially perilous. To take
advantage of the former and protect against the latter, those placing the
client at the center of their efforts have to be embracing financial literacy.
Challenges :
Challenges of money management are never static, nor are the solutions.
Therefore the Central Bank and GoI have to be watchful in launching the drive along
with a prudently designed financial literacy tool that is tailored to the
client’s specific context, helping them to understand how financial
instruments, formal or informal, can address their daily financial concerns,
from the vagaries of daily cash flow to risk management. Its power lies in its
potential to be relevant to anyone and everyone, from the person who
contemplates moving savings from under the mattress to a community savings
group, to the saver who tries to compare account choices offered by competing
MFIs and banks. As such it spans the informal and formal financial sectors, innovatively
supporting clients’ access to, and more importantly, ‘use of’, diverse
financial services. The ‘use’ factor is an element of innovative
and effective financial education because when the client applies new knowledge
and skills, she increases her chances of retaining them. Therefore, some of the
best opportunities for financial literacy occur when the target group faces new
financial situations or decisions. These are ‘teachable moments’; the
learner might be in transition from the familiar to the unfamiliar, or have an
opportunity that will be enhanced with relevant information and skills on a
more permanent and sustainable basis.
Ownership
of Inclusion: The Government would do well to target an outcome of the
financial inclusion drive as attaining overall prosperity and not use the
financial inclusion as an end in itself. Earlier drives of Financial Inclusion were
limited to targeting opening up of banking accounts and India has a classical case
distinction where millions of such no frill, zero balance accounts remained in
the core banking without a single transaction. In fact, many of such accounts
holders are not even aware that they possess a bank account, as they do not Own
it. Thus the literacy drive and awareness campaigns should be targeted to make
people realize that they actually ‘Need’ a bank account for a variety of
purposes and the same has not just been offered free to them to complete the
targets of the bankers. Awareness campaigns should be held in a camp mode and in
order to resolve multiple issues like the KYC (Know Your Customers), bank
account opening, G2P (Government to People), credit availability etc., GOI
should hold camps to expand the interaction and interface between the lenders
and borrowers. It should target more direct interaction between them so as to
resolve various issues of negligence and knowledge using different camp modes
where stakeholder bankers including Regional Rural Banks (RRBs), Self Help
Group (SHG) members, NABARD (National Bank for Agriculture and Rural
Development) and even government officials share a common platform and resolve
‘on spot’ issues. At supply side there is a need to sensitize the banking
officials including BCs and BFs who interact at the grass-root level and
interface with rural public at large. This may include, but not limited to
human relations and skills in meeting customers, strategically planning
increasing the customer base, broadening the scope of financial services and
deepening the availability of products and cash in the system. The FI drive should encourage individual
women / SHG members towards Voluntary Savings by assisting them
open individual bank accounts, revive existing “no frill accounts” and
depositing the surplus to facilitate and steadily graduate from community
banking to individual banking. Bankers should organize capacity building
workshops and training of trainers to train SHGs and individuals towards
encouraging them to save individually. As the increasing reach for banking
access has been an area of concern the bankers should ensure coverage
of all unbanked villages in the identified areas over next 2 years with an
emphasis on increasing rural accounts by opening of bank accounts for all
eligible individuals and an increased savings and banking pattern. Similarly,
there lie large chunk of accounts that are rarely or never used and hence
increasing transactions on these accounts shall be the focus area of the drive.
Suggestions:
The Government should reconsider the decision of a phased financial
inclusion drive and instead perform literacy, banking accounts and offer other
regulated products in a single phase. It
makes little sense to open a bank account in year one and then teach them its
usage in year 2 and offer saving products in year 3. In most case, people tend
to forget that they even got an account opened in year 1 and learnt about something
like a saving, insurance and pension product
in year 2 and finally wait for it in year 3. Opening of bank accounts
should not be treated as an end to FI and instead be treated as a means to
attain ‘Overall Prosperity’
(The blog article also acknowledges a commissioned workshop paper
by Monique Cohen and Candace Nelson of Microfinance Opportunities, USA)
