Great strides have been made toward financial inclusion but instead of resting on our laurels, we must lead the revolution to its logical conclusion
One of India’s most dazzling achievements during the year 2019 has been in the field of financial inclusion. The number of Basic Savings Bank Deposit (BSBD) accounts increased from 73 million in 2010 to 574 million in 2019 following the introduction of the Pradhan Mantri Jan Dhan Yojana (PMJDY). Eighty per cent of the people of over 15 years of age now have a bank account. According to an assessment by the Economist Intelligence Unit (EIU), India has the fifth most conducive environment among emerging countries for inclusive finance. We should now strive to consolidate these gains. Let us not reduce them to mere flag posts and consign our financial revolution to the driftwood of history. Lessons from past experiences caution us against the danger of backsliding on the groundbreaking accomplishments we have achieved.
India’s aggressive drive in financial inclusion has increased banking access dramatically, driven as it is by a strong regulatory push. While efforts to improve financial access and promote usage have brought a staggering number of individuals into the formal financial services sector, the usage of these accounts and the uptake of formal financial services beyond savings accounts have been difficult. Millions have signed up but few use the accounts. Financial inclusion is certainly at the crossroads on account of its myopic vision of restricted role to mere access. If people do not use these accounts, it can be surmised that the policies are ineffective. This lack of usage underlines the importance of creating products and engagement strategies that are better designed to meet the needs of the people so that they can use them in their daily financial lives. Access is one data point among many. It should not serve as the ultimate objective for financial inclusion.
Access to a bank account cannot by itself improve the financial health of vulnerable groups. We have to simultaneously make people aware how they should handle their finances. Change in attitude and efficient savings practices need to be imbibed. The customer must make this account his financial diary and conduct transactions, which can grow into a credit history. Else all these accounts will remain deadweight. Without greater and consistent usage of bank accounts, the promises of financial inclusion — equitable economic growth, growing successful businesses and improving financial security and prosperity — will remain elusive.
There is a need to shift the interventional focus from simple access-oriented measures towards utilisation and engagement-oriented measures. It is vital that we keep in mind that financial inclusion is a means to an end, not an end in itself. It is only when people use financial tools to make their lives better and help their community grow that financial inclusion will be relevant. Arguably, the best way to increase usage of accounts is to fully digitise payments for Government transfers of social benefits. If one is a recipient of a cash transfer from the Government, he/she will receive that cash transfer electronically, which means one needs to have a bank account or some kind of transaction account. These payments include everything from fertiliser and cooking gas subsidies to oil, rural employment wage to scholarships.
With digitisation of Government-to-person transfer (G2P), user frequency is expected to increase. They will give people a reason to use those accounts. However, wherever this has been done, such accounts have remained merely a payment channel rather than bringing a fundamental change in customer use of financial services.
Going beyond mere access: As access increasingly becomes a reality, a second generation of challenges has emerged — to capitalise on the openings made possible through access to offer products and services that truly improve lives. We have to go beyond mere physical accounts if we want to catalyse financial inclusion into broader economic and social growth. People, who regularly use a bank account, are more likely to be financially literate than those who do not as there is a direct correlation between financial knowledge and financial services.
The Jan Dhan Yojana (JAM) is reshaping the financial landscape and has enabled India to surge new heights. The take-off of digital financial services has largely driven this growth. It has also enabled one of the biggest pieces of reform ever attempted in India — direct subsidy transfers. Innovative solutions that can take into account the peculiarities of the people at the bottom of the pyramid are needed. We need to use our natural powers of persistence, concentration, insight and sensitivity to do work, think deeply and solve our problems. As with most trumpeted interventions, our programmes are scrambling to turn rhetoric into reality. We don’t have to reinvent the wheel. Policy-makers can learn lessons from those who have achieved impressive success. The choices of these vulnerable communities are heavily influenced not just by socio-economic and demographic status and geography but also by their context. Hence, financial institutions, which hope to alleviate their financial problems, must have a deep understanding of their motivations and obstacles so that they design products and services that address the consumers’ real needs.
An equally important area is reliable, timely, adequate and fairly-priced credit. Having a bank account is just one side of financial inclusion. Access to credit is another. Credit is an important rung on the financial ladder that can help move people from poverty to the middle class. In fact, businesses face great constraints to access finance because of market imperfections such as information asymmetries and transaction costs. Merely making credit available and glamourising stories of poor women pulling themselves up with the help of a few doses of credit have been counterproductive.
The biggest obstacle to credit expansion is the lack of tangible data points, which can help the credit bureaus put together better underwriting models for unbanked customers. The proliferation of unique credit models backed by increasing data availability for traditional agencies is establishing a new paradigm for lenders. Increasingly, we are seeing large numbers of unique borrowers, who have been beneficiaries of the new lending models built around technology. A large part of the incremental credit is now going to individuals rather than corporate houses, which form the bulk of the outstanding credit. We are now seeing what is being called as the “democratisation of credit.”
It is, therefore, important that we keep in mind the lessons of the past — such as the pointlessness of cheap credit and imprudent lending practices — as also of the present such as the aggressive marketing of expensive credit as a panacea for the poor. To enable the poor to work their way out of poverty, they need to be enabled to move from one step to another of the financial ladder to another through graduated credit. Credit should be made available in staggered doses, with every new tranche disbursed after satisfactory repayment behaviour of the clients. This will also ensure that the vulnerable groups do not get into a debt trap; it will also make credit dispensation more efficient and qualitative. The financial inclusion community now has a huge tent. It is heartwarming that the subject is dominating the mainstream policy agendas. However, we need to be on guard against any unrealistic hype as has happened previously. To quote Nobel Prize winning author, VS Naipaul, “India’s financial inclusion space is ripe for a billion mutinies now.”
(The writer is Member, NITI Aayog’s National Committee on Financial Literacy and Inclusion for Women.)
