Disclaimer: this is a prize-winning essay that I wrote in the final year of my Bachelor’s course in 2016, for an intercollegiate competition organised by MES College, Zuarinagar, Goa. I’m posting it as I found in the archives, with minor edits for grammatical errors. No other updates have been made.
Muhammad Yunus, in 1983, officially founded the Grameen Bank in Bangladesh and gave the world the mantra of microfinance, while setting up the foundations of Financial Inclusions in Asia.
India took up microfinance way back in late 1990s, but it was only in 2005 that “Financial Inclusion” came here as a government policy. Since then, India has made efforts to provide the formal financial services to more and more people. However, a lot remains to be done yet; even after what seems to be the success of the Pradhan Mantri Jan Dhan Yojana. What are the matters that need to be looked into by the Government and Banking sector of India?
- Local Customization v/s Central Standardization of financial products.
Government formulated policies often roll out of a few crude, standardized financial products all around a country. However, due to the vast differences across the Indian subcontinent, it is close to impossible that central standardization will be efficient in financial inclusion. Control needs to be delegated to locals, and it should be up to them to devise plans for themselves – albeit to a certain degree. A golden equilibrium between the two strategies must be found through trial and error.
This will dilute the problems caused by Policy makers’ lack of knowledge about local problems and ways of doing things. Either policy makers need to go to local levels or locals need to be consulted while policy making.
- Failure of Microfinance
Over time, the microfinance sector has seen systematic increase in the risks that it has taken on. The fact that MFIs (MicroFinance Institutions) operated in under-served areas led to regulatory forbearance in the initial years, leading to excessive lending before the unavoidable bust in 2010, popularly known as the Andhra Pradesh Microfinance crisis.
We must not forget that Subprime Mortgage crisis in the US, which wreaked a global havoc, had its origins in the forced drive for financial inclusion. India’s Microfinance sector seems to have learned little from this.
- Population characteristics
A large number of the poor reside in India’s villages. They are the target population for the MFIs. In the rural economy, the poor can avail the financial services of a moneylender with minimal documentation, although at unreasonable costs. Whenever they migrate to the cities, due to absence of identity documents, they often cannot avail any banking services. Therefore, a link between rural and urban systems needs to be established. The aadhaar card has helped by leaped and bounds to solve this issue, but there is still more to be done.
Financial illiteracy is another major problem. Banks need to understand that financial inclusion is not over with opening of a bank account, but starts with it. Large chunks of population are still unaware about the basics of Insurance and credit. Small credit is still given out only due to government regulations and not voluntarily.
- Banking bottlenecks and ignorance
Banks need to provide Doorstep service and flexible timings in order to take on the unorganized financial sector. Providing small savings schemes is crucial, since the poor save in small amounts.
Public banks have the best chance of achieving financial inclusion since they are under direct government control, have higher rural reach, and play bigger role in government sponsored schemes.
Business Facilitators/Correspondents have been working hard but their earnings from commission on small transactions is still lower than the minimum wages prescribed by the government. The costs of serving the poor can be significant in the short-term, thereby, impacting profitability.
- Innovation
The reason why above discussed problems are not getting solved is because the commercial banking system simply cannot solve them. We need to think out of the box and innovate. Our approach to banking needs to change, the way banks charge needs to change. Banks need to go out of their brick and mortar branches and interact with poor to give traditional money-lenders a run for their buck, and make complete financial inclusion a reality.
For example, poor invest a large part of their income in housing – since they do not tend to live in a fixed place and are migrating. However, these houses are not acceptable to banks as collateral since they are set up on encroached land, do not have proper titling, and other reasons. However, among the poor these houses are freely traded, just like in the organized sector. In such cases, we must find ways to bridge the organized and unorganized sector in some way.
Banks need to learn from both corporate India and the informal sector: Banks need to innovate and improve service levels in order to provide the same level of accessibility as the local money lender, friend or relative as inclusive banking goes beyond the conventional notions of commercial banking.
- Technology
Banks need to make significant investments in Technology based applications, related research and development efforts, comprehensive Management Information Service (MIS) and monitoring and evaluation systems on one hand and collaboratewith technology service providers (TSPs), mobile network operators (MNOs), corporate houses and various categories of Business Correspondents to develop efficient delivery models with a strategy aiming to create a facilitating eco-system.
Cash dependency of Indian economy is a huge hindrance. However, solving it is as hard as solving a paradox – to make them go cashless, financial inclusion is necessary; but because of their cash dependency it is hard to do so. So, for now, we will have to do with cash dependency.
Having said all that, there is one paradigm-shifting argument left to be made in the debate of Financial Inclusion. Maybe our ambitions for financial inclusion need to be tempered a little bit, because the financial system can grow only as fast as the rest of the economy. Given India’s income levels, it is doing neither worse nor much better than its peers, as far as key parameters of financial inclusion are concerned. A cross-country survey by the World Bank shows that the proportion of Indians reported taking a loan from a financial institution in the past year and saving at a formal financial institution, is similar to the comparative statistics of lower middle-income countries.
To conclude with, I would say that by far the biggest challenge for financial inclusion in India is of altering the mindset – of banks, policy makers and customers, potential and existing. Borrowers should be seen as clients of the business and not beneficiaries of just another government scheme. Only then we will see professionalism in the services provided under Financial Inclusion schemes. Policy makers must understand that this is not just a social obligation but a huge opportunity in disguise. Also, sometimes the poor and uneducated will accept our ways, but it CANNOT be a one way street. The other times, the organized sector will have to adapt to their ways and find a way to make things work. That, will be the real innovation.
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