India’s tryst with Financial Inclusion is not new. Although the RBI formally introduced the term in its annual policy statement of 2005-06, prior initiatives, such as the nationalization of banks and the imposition of priority lending targets were aimed at improving the weaker sections’ access to financial services.
However, the nation’s performance leaves much to be desired. CRISIL Inclusix, which measures India’s progress in Financial Inclusion, rates it quite low, at 40.1 on a scale of 1 to 100. Only 50 percent of Indians have a bank account, and barely 15 percent have access to credit even today.
Part of the problem lies in the solution itself. Financial exclusion in India has many facets – the inability to open an account owing to lack of documentation; the inability to transact on an account because of inadequate literacy or savings; the inability to avail of credit because of cost; and so on. However, the approach to achieving financial inclusion is largely one-dimensional, relying overly on channel expansion as if it were a magic bullet. Accordingly, the regulators mandate the opening of rural branches; banks recruit business correspondents and establish kiosks; and technology vendors extol the role of mobile platforms in extending financial services to the unbanked.
Clearly, that’s not enough. While channels are important, they should be tailored to suit the context in order to be effective. For instance, Spain’s high bank branch density of 900 per million population has been instrumental in taking the country to 90-percent-plus financial inclusion. This is appropriate, given the country’s cultural preference for branch banking. On the other hand, countries like Norway and Sweden have achieved near universal coverage with a far lower branch density. These nations have been quick to adopt online and mobile channels. Kenya sits at the other end of the spectrum, where a mere 50 branches serve a million Kenyans; here branches have contributed to just 20 percent inclusion, but the mobile (financial services) has achieved more than 65 percent.
In contrast, most channels of inclusion, including the branch, kiosk and ATM, have underperformed in India owing to a variety of social, cultural and economic barriers. But even as the Indian financial system discovers the optimal channel mix from an inclusion perspective, it needs to take action on other fronts.
Imposing the right amount of regulation, appropriate to the level of risk, is extremely important. Here, one can cite the case of Bangladesh, which has modified its regulations to suit microfinance, and thereby enabled microfinance institutions to grow sustainably. Mexico applies differentiated norms for the opening of bank accounts, depending on the associated risk. This tiered strategy has allowed it to spread the use of basic, low value accounts, while curbing the possibility of money laundering.
Also, there is a need to strengthen savings, even before easing access to credit. A comparison within the developing world shows that while India avails of formal credit at a rate similar to other countries, it saves less than better-off nations such as China. The Philippines has reported that farmers who save more by using “commitment” savings accounts are able to deploy better inputs and reap higher crop sales. India must learn from that experience to focus on creating products that enable the poor to build savings.
Last but not least, there is a need to revise the mindset of the unbanked, who are still quite wary of using formal financial services. This can only happen with patient and persistent literacy and awareness building initiatives.
So, unless India takes a holistic approach as above, the country’s financial inclusion agenda will continue to languish.