Including the Masses Financially

By Aditi Khanna

Edited by Namrata Caleb, Senior Editor, The Indian Economist

Financial inclusion is the buzzword in national circles today after the stupendous take-off of the Pradhan Mantri Jan Dhan Yojana. On its nation-wide launch date 28^th August, less than a fortnight after the Prime Minister made the pledge for financial inclusion from the pulpit of a tri-colour rich Red Fort, 15 million accounts are said to have been opened in a single day: a record of sorts if you will. But is that all there is to financial inclusion? Is just handing a pass-book and credit card enough for the excluded masses to be brought to the mainstream?

The RBI’s Khan Committee on Financial Inclusion defined the term as the process of ensuring access to financial services and timely and adequate credit when needed by vulnerable groups such as weaker sections and low income groups at an affordable cost. The first step in all inclusion programs that have been floated till date is to get the household to open a bank account. While few may doubt the fact that this indeed has to be the first step to get the excluded masses into the financial mainstream, the process of inclusion can neither start there, nor can it be said that it is complete with that bank account. There have to be two more equally important legs for the initiative to have long term durability and success:

1. The incentive for the people to continue using these accounts and the related facilities
2. The incentive of the banks to offer them the same low cost service that they offer to their other high-profit customers; and to innovate to geographically reach out to the rural areas.

The former can only come about with extensive financial education programs. The rural poor having spent most of their life saving in real physical assets like land and cattle need to be familiarized and made comfortable with the idea of financial savings. A reasonable degree of comfort with the concepts and trust on the products based on community participation will be the starting point for the process of inclusion. In order for the rural poor to trust the financial services, the product on offer for them should be able to address their basic needs, the Governor of the RBI said in a recent statement. He pointed out that the financially excluded should be able to find the following in the product for them to be reasonably engaged and included:

• a secure place to save,
• a dependable medium of sending and receiving money,
• a fast way to access credit in times of need (or to escape the vicious moneylenders),
• an easily understandable life and health insurance policy and
• an opportunity for people to engage in savings for old age

The other requirement for making financial inclusion a viable business model for the intermediaries, most notably for the big PSU banks given their physical network is of utmost importance. For example, in the Jan Dhan Yojana, the accounts being offered are primarily zero balance accounts. This doesn’t give any incentive for the banks to ensure proper services to such customers as they do not provide it with any funds that it can lend and make money on. Some small minimum balance (that is not frequently withdrawn) in such accounts would go a long way in changing the bank’s orientation towards them, much more than stringent regulation would. An innovation in the field ‘Financial Access at Birth’ or FAB ensures this in a unique fashion. Under this scheme, for each child that is born, a certain small amount of money be deposited into the account, which stays put until the child becomes 16 or 18. This way there are savings for the child’s future as well as a monetary inclusion for the bank to be adequately incentivized. Else, the banks will find ways around.

With half the country still not accessing formal financial intermediation, the massive country-wide campaign to remedy the situation is an amazing idea to being with. But instead of bombarding the poor with products they either don’t understand or don’t trust right away, the more important issue to be addressed should be that of placing correct incentives in place for all stakeholders.

Aditi Khanna is presently pursuing her Post-Graduate diploma in Business Management from XLRI Jamshedpur. She has completed her graduation in Economics (Hons.) from Lady Shri Ram College, Delhi University, where she was a part of the department editorial board. She is an avid reader of anything interesting that catches her eye. Economics stimulates her and baking soothes her. She doesn’t shy away from putting the occasional poetic twist to her words when her restless mind wanders. And when not found anywhere, she must be window-shopping online!