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06 Jun
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Is 2016 the year when India pulls the trigger of financial inclusion to target prosperity and economic growth?

Financial inclusion is a particularly relevant topic for India, which is home to 21 per cent of the world's unbanked population even till today. Even as the country boasts of higher economic growth than several developed countries, it still has a large section of its population who do not have any access to financial services or products. A direct result of this is widespread inequality in income and opportunities between the urban and the rural areas.

So why does India need financial inclusion?

Faster economic growth, reduction in inequalities of income, increase in employment are some of the important benefits of financial inclusion.

Apart from this, here are the three main reasons why India benefits from financial inclusion.

  • India is, by and large, a cash-based economy, where people still believe in keeping the paper money hidden in the aata or dal ka dibba. Unfortunately, the lower income group of our country has continued to live in the shadow of monetary coercion because of lack of savings. This makes them a highly vulnerable section in the country's huge economy. By making banking services available to them, the most important tool that they will acquire is the habit of saving. From the age-old and conventional parking of savings, the rural section needs to be streamlined with the concept of country's capital formation through financial inclusion. This will not just dent the nation's cash-based economy, but will also help in motivating the use of Banking Ecosystem.

  • Easy availability of transparent and adequate credit will boost entrepreneurship, thus leading to wealth creation and more opportunities.

  • A large sum of money is spent by the government on the poor, yet, not the full amount trickles down to the bottom of the pyramid. As it moves through the bureaucratic cycle, money leaks and is lost. This can be resolved by executing direct cash transfers in individual bank accounts, something that the government is pushing for.

RBI Governor Raghuram Rajan probably puts it best when he says, "Simplicity and reliability in financial inclusion in India, though not a cure all, can be a way of liberating the poor from dependence on indifferently delivered public services and from venal politicians."

Though India has a long way to go, the right buttons are definitely being pressed with financial inclusion being made one of the important policy goals. For the first time, it's not just banks being nudged to play a key role in the extending their services to the semi-urban and rural areas. For the first time, small finance banks and payments banks, which have low entry level barriers, are being invited by the RBI to get involved in offering a complete range of financial services that a bank can offer. Apart from that, there is also a strong push towards digital financial inclusion, being brought about by the convergence of fin-tech startups, technology players, telecom players and the government's renewed focus on the financial empowerment of the unbanked population. Technology adaptation is definitely being seen as a key feature in achieving financial inclusion, given the limitations of physical bank branches.

Financial Inclusion: Initiatives by the present government

Hero FinCorp

Under the present government, a number of measures were launched to boost financial inclusion. There is the flagship Pradhan Mantri Jan Dhan Yojna (PMJDY), which is the largest drive so far in India to open bank accounts for the unbanked. This is backed by the Sampoorn Vittiya Samaveshan, which aims at extending the coverage of basic financial services even further through Sub-Service Areas and Business Correspondent Agents. RuPay debit cards will also be issued to enable customers to operate their accounts. Apart from this, the government has also been making regulatory changes that broaden the kind of firms that can offer financial services, and developing mobile money solutions for the underprivileged.

In the second phase, there are also plans to offer pension schemes in the unorganised sector and offer microfinance products through government-owned insurance companies.

The challenges of PMJDY-

Under the government's ambitious financial inclusion scheme, the Pradhan Mantri Jan Dhan Yojana (PMJDY), 21.93 accounts have been opened so far with deposits of more than Rs 38,047.65 crore. But the road ahead is not going to be easy. Here are a few challenges that the PMJDY faces.

KYC Documents: The biggest hindrance that lies in the road of this financial instrument is insistence on KYC regulations. KYC or Know Your Customer documents (which serve as the identity proofs) have remained a trouble, even in the urban areas, leave alone the rural sector. Great significance can thus be given to electronic - KYC (e-KYC). In this process, Aadhar card can play a significant role. Linking Aadhar for KYC will bring along a range of advantages, such as, biometric authentication, branchless banking through Business Correspondents (BCs) - Independent & Mobile or local store owners, traders, etc.

Need to bring business correspondent model (BC) to smaller entities: The local stores, such as kirana shops, corporate or others need to be brought under this scheme. BCs should have a complete backing of banks in such a scenario. And, it is required that banks should have a connection with common service centres (CSCs).

Role of NBFCs in financial inclusion

Hero FinCorp

Another significant move taken by the RBI is increasing the income limits for the eligibility of the micro-loan borrower and the total borrower indebtedness. By doing this, the central bank has indicated that it is strongly in favour of NBFCs and Micro-finance Institutions playing a role in the financial inclusion of India. It's also a recognition of the fact that in a large country like India, NBFCs and MFIs play an integral role in the financial services ecosystem. They have, to a large extent, helped to fill the gap in offering credit to customers in underserved and unbanked areas of the country.

These companies have been able to reach out to the financially- excluded low income group- something that the larger banks have failed to do. Another advantage is that by virtue of their business focus, the NBFCs are better positioned to assess the risk appetite of these customers, build relationships with them and help them reach the bank to open an account.

A case in point is Hero FinCorp. Over 70% of their rural customers had never banked before getting two-wheeler financed through them. The Hero FinCorp sales executive who gets the bike financed for the rural customer also takes him to the bank for opening a new account in order to apply for a loan. In the process, the customer not only buys a bike but also becomes a part of the organized financial eco-system. It's this reach of the NBFCs, like Hero FinCorp, that makes them a perfect fit for playing the part of great enablers in the Financial Inclusion agenda.

The use of technology and connectivity can also play a vital role here. For example, the Hero FinCorp's Android based application for sourcing customers in rural/ remote locations, allows them to serve the customers in the remotest corners of India as well.

Hero FinCorp

Other enablers on the road to financial inclusion

  • Mobile Internet - A large section of the rural population now uses the Internet through the mobile. The low cost of smartphones and cheaper data cost has turned the mobile from a simple mode of communication and entertainment to a device through which payments are made. Add to that the fact that 50% of the mobile users in India are in the age group of 18-35, and are keen to experiment with gadgets and explore digital financial services.

  • The magic of JAM - The combination of the Jan Dhan and Aadhar and the mobile has brought in a winner. People are increasingly using bank accounts through their mobiles and using their Aadhar IDs to access better financial service.

  • Rise of Fin-tech startups - Fin-tech startups are leveraging technology to deliver financial services at affordable costs. They are effectively the last mile connectivity for the millions who have never banked before or who have been financially excluded. For these people, financial inclusion does not move through a bank but through their mobile wallet or their apps. In the new economy, it's the Fintech players who are expected to play a huge role in bringing about financial inclusion at the grassroots level.

The road ahead - What does India need to achieve financial inclusion?

Hero FinCorp

With the combination of finance, technology and better regulatory policies, the road ahead definitely looks better than it did before. It also needs to be remembered that financial inclusion would be possible only with better physical infrastructure, which will also boost gainful employment. Nevertheless, here are a few things that can make the dream of total financial inclusion a reality for India.

  • Strong political leadership - Strong political intent and the progressive financial and regulatory policies from the central bank can lead to acceleration in implementation of the financial inclusion agenda.

  • All stakeholders on a common platform - All stakeholders, including telecom regulators, telecom companies, financial supervisors and the banks, have to be brought on a common platform so that their working frameworks can be matched and obstacles removed.

  • And finally, a good framework which the people can trust - Quoting the current RBI Governor Raghuram Rajan, "In order to draw in the poor, the products should address their needs - a safe place to save, a reliable way to send and receive money, a quick way to borrow in times of need or to escape the clutches of the money lender, easy to understand life and health insurance and an avenue to engage in savings for the old age."

All in all, it wouldn't be wrong to say that streamlining the unbanked masses into the banking ecosystem of the country will require dogged persuasion by country's central bank, bureaucratic support and more importantly, the political will. Addressing public trust issues is also vital for achieving financial inclusion and by following the aforesaid points, financial inclusion can bring the entire population on a common platform.

Did You Know

Disbursement

The act of paying out money for any kind of transaction is known as disbursement. From a lending perspective this usual implies the transfer of the loan amount to the borrower. It may cover paying to operate a business, dividend payments, cash outflow etc. So if disbursements are more than revenues, then cash flow of an entity is negative, and may indicate possible insolvency.

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