Financial inclusion in a diverse country like India needs a spectrum of services in order to encapsulate the different dimensions of the diverse populations they reach
Finance is one field where we have witnessed significant innovations in recent decades. Earlier, we could only visualise social change in rural India because villages were so deeply mired in caste conflicts. These issues had engendered local tyrannies and subverted the social order, resulting in bondage and servitude for a significant portion of the population for generations. In the 1970s, the locus of change shifted to other areas, which worked towards levelling caste divisions and neutralising feudal overlords. Finance was the pivot of this process of change.
When I began life as a rural banker in the 1970s, outsiders rarely visited the villages. Those who did, other than the occasional anthropologist, Government extension officers, family planning staff of the Government or census worker, were missionaries of various religions. Over the years, I noticed that the balance shifted to agents toting financial schemes. Of course, those who lived in the villages already had both. As an ancient Indian proverb has it — a village can be formed wherever the three come together: A river, a priest and a moneylender. This gradual change in the profile of visitors and reformers was my first introduction to the then embryonic revolution in development finance, which later grew into the niche of social banking.
Bankers, who began showing up in villages on their bicycles, motorcycles or jeeps in the 1970s and 1980s, were usually employees of local branches of State-owned banks. Their mission, as assigned by their Governments and assorted international donors, was to find trustworthy villagers to whom they could provide credit. This, it was thought, would help villagers start small businesses, thereby increasing rural economic growth while at the same time empowering people to climb out of poverty.
The bankers and missionaries, who shared much of the same client pool, were curiously alike in some ways. Usually outsiders to the local community, members of both groups tended to discover their own preconceptions in the villages, rather than the local realities and dynamics. However, many of them genuinely cared about helping poor people increase their incomes and better their lives. Some were even quite successful. They came with powerful ideas, found other similarly powerful plans already present and often became catalysts for the cross-fertilisation of their own ideas of social and economic reforms and wisdom of the locals.
A unique characteristic of bankers visiting villages was the refreshing change in their academic credentials and their willingness to adapt to the harsh realities of rural life. Most of them were from technical backgrounds, endowed with a vision that focussed more on the technical and practical, rather than the financial aspects of the problems of the poor. This was particularly seen in the innovative practices they fostered in agriculture, dairy and small enterprises and artisanry. Their overarching goal was energisation of the rural economy and promotion of entrepreneurial approaches. Development finance was just one of the many sources into which they dipped.
They brought a range of weaponry to combat poverty and agricultural regress: High-yielding varieties of seeds, new techniques for pest management, a modern range of equipment and chemical fertilisers. Veterinary doctors brought exotic breeds of cattle, a range of new drugs and nutritional supplements to combat mortality and improve cattle health. Artificial insemination techniques built superior breeds of cattle.
Financial inclusion or access is a component of financial development, along with depth, stability efficiency and financial development, which is important for economic growth. Financial inclusion in particular has a bearing on equity as well. Access to a transaction account is a first step towards broader financial inclusion as it serves as a gateway to other financial services like credit or insurance; lowers transaction costs for daily economic activities; and enables the creation of a buffer for emergencies. Other potential benefits of financial inclusion include: Improving efficiency and targetting of Government welfare programmes; reducing corruption through better monitoring and regulation of financial transactions through digital technology. Transfers made directly to the citizen’s bank accounts can eliminate corrupt and inefficient intermediaries. Digitisation of finance and economy holds the key to myriad problems.
Building inclusive digital economies requires the collective action of Governments, industry, financiers and the civil society. Before speeding ahead, we need to build the infrastructure, align our policies and create the tools that will enable the poor to board the digital train. India has a highly vibrant and innovative high-tech ecosystem in the world. However, along with it, there exist hundreds of millions of people, who live in villages, who are happy with a technology that is hardly more sophisticated than a bullock cart and a plough. Since systems are meant to work for the user, the onus is on the designer to make sure the users can access the system comfortably. There is a need to integrate various modules — savings, credit and insurance among others — into a technology framework for the development of holistic strategies for comprehensive financial inclusion. Low-income groups, women in particular, have the lowest access to formal financial instruments, forcing them to rely on age-old informal mechanisms: Money under the mattress, money guards, relatives, friends and money-lenders. These informal mechanisms are insufficient and unreliable as well as highly expensive. Thus, financial exclusion imposes large opportunity costs on those who suffer from it the most.
While policy and financial regulatory initiatives enabled substantial progress in terms of financial inclusion indicators — branch penetration, account density or deposit and credit figures — there is a need to strengthen enabling institutions, which actively promote financial deepening in our country. Alternate service channels such as agents or business correspondents have tremendously expanded their outreach. They are better positioned to serve remote pockets as they operate in a limited geographical area, enjoy greater acceptability among the rural poor, have greater understanding of the issues specific to the underprivileged and have flexibility in operations, providing a level of comfort to their clientele. Formal financial services such as savings, loans and money transfers can enable the poor improve resistance to shocks, boost productivity of business, facilitate empowerment of marginalised groups, such as women and rural residents, and help reduce poverty. Life is one long risk for them as they are just a tragic event away from a financial catastrophe.
One way to ensure that the past wrongs are not repeated is to have mandates and subventions in the financial inclusion space so that banks and other financial institutions vigorously expand their outreach to cover even remote populations. The cost involved in the implementation of these mandates is quite stiff and need serious consideration. Instead of banks recovering these costs by overcharging ordinary customers, or by demanding recapitalisation by the Government, one alternative can be that the Government pays for these mandates. These costs can be determined by an independent agency. Not only will the cost of the mandate become transparent, it will make services accessible. The Government will also have to make a reasoned decision about how long to impose the mandate. Moreover, only efficient service providers will come forward to bid for these mandates.
On the demand side, financial literacy is an important tool for financial inclusion. Consumers have to understand the nature of the products and services they are buying as well as the implications of these purchases. There is also the need for substantial research on how vulnerable groups manage their complex financial lives. This can aid product design and solutions of financial instruments that can be tailored to their needs. Financial inclusion in a diverse country like India needs a spectrum of services in order to encapsulate the different dimensions of the diverse populations they reach.
Financial services need to be tailored to the needs of the disadvantaged groups, especially the women, poor people and first-time users, who may have low literacy and numeracy skills. Fintech is now providing platforms that allow financial institutions to carry on personalised, electronic conversations with customers through text messages using powerful data analytics that tailor messages to customer behaviour. All stakeholders must now realise that financial inclusion can succeed only through the (convenient) marriage of all four paradigms: Digital, finance, literacy and numeracy.
(The writer is Member, NITI Aayog’s National Committee on Financial Literacy and Inclusion for Women)
