In order to achieve inclusive development and growth, the expansion of financial services to all sections of society (financial inclusion) is important as global trends have shown. Financial exclusion results in widespread inequality in incomes and earning opportunities.
Countries with low levels of income inequality tend to have lower levels of financial inclusion, while high levels of exclusion are associated with the least equal ones. In Sweden, less than two percent to adults did not have an account in 2000 whereas, in Portugal, about 17 percent of the adult populations had no account of any kind in 2000. In the GINI index of income inequality, both Sweden and Portugal have improved with higher financial inclusion.
Well developed and widely spread financial system extends credit facility to those who do not have adequate finance themselves but have business ideas and zeal to carry entrepreneurial activities resulting in acceleration of growth.
On the contrary, the absence of financial penetration and deepening results in absence of debt leverage to micro-enterprises and they have to either borrow at very high rates of interest or have to be contented with their own capital. This leads to restricted growth in economic activities.
For micro-enterprises, consequences of financial exclusion are many:
(i) susceptibility to cash flow disruptions;
(ii) inability to face business cycles;
(iii) absence to benefits from leverage between income and interest outgo;
(iv) lack of long-term financial security and planning;
(v) vulnerability during emergencies like hospitalization and medical bills;
(vi) lack of safety and security of capital; and many more.
The perceived benefits of urban financial inclusion can be subdivided into two subcategories: macro benefits and micro benefits.
Major macro benefits are:
(i) higher and better productivity;
(ii) faster growth in the economy;
(iii) reduction In income inequalities;
(iv) widespread development breaking the barrier of location-specific and centers specific development;
(v) global admiration and recognition; reduction in poverty;
(vi) likely increase in national income;
(vii) increase in employment and income opportunities;
(viii) help in more effective distribution of subsidies;
(ix) helpful in the implementation of social security schemes, such as old-age pensions, window pensions and so on;
(x) helpful in shifting to direct distribution of subsidies by way of crediting the bank account of the targeted beneficiary rather than the indirect distribution of subsidies;
(xi) helpful in plugging the leakage through distribution channels.
Major micro-level benefits are :
(i) smoothing consumption;
(ii) buffer against avoidable expenditure;
(iii) safety of assets from major disruptions;
(iv) better incomes;
(v) rational utilization of saving;
(vi) freedom from clutches of moneylenders;
(vii) increase in risk-taking ability;
(viii) enlarges livelihood opportunities;
(ix) saving of time in the collection of periodic social security payments by state and central governments;
(x) improved self-esteem and a sense of elevation.
BENEFITS OF FINANCIAL INCLUSION
The perceived benefit of urban financial inclusion can also be studied on the basis of various stakeholders:
Benefits to the banker:
At the outset, banks may feel that urban financial inclusion is a burden on them and it will make a dent on their profits but the ground reality is altogether different. The Dharavi experience should give them financial comfort. The benefits accruing to the bankers can be summarized as under:
- The low-cost deposits will offer banks the opportunity to reduce their dependence on bulk deposits from corporates, HNI’s and better help in the management of liquidity risks and asset-liability mismatches;
- The low-cost deposits will result in increased profits with the perspective of medium to long term;
- They will be able to benefit from the fortune at the bottom of the pyramid;
- Huge opportunity for the banks to cross-sell asset products, micro-insurance (both life & non-life), micro pension products, etc.
Benefits to users:
It is rightly said that business opportunity is dependent upon access to financial resources. Such access is especially useful in urban centers where opportunities are many. Financial inclusion provides opportunities to build savings, make investments, and avail credit.
Some other notable benefits to the new users of bank accounts would be:
- Access to insurance resulting in a cushion against unplanned expenses in the form of emergencies such as illness, death in the family or loss of employment;
- Help in coming out from the clutches of moneylenders;
- Receiving social security transfers in the form of old-age pensions, widow pensions, monthly aid to handicapped persons and other benefits accruing from state governments directly into their bank accounts without wasting time in collecting the benefits in cash;
- No need to visit faraway places and tolerating tantrums of intermediaries involved in the distribution of social security subsidies;
- Enabling economic independence and supporting improved economic well-being;
- If customized bank accounts are opened, the problem of sending the money periodically to native place will be solved. Migrants sitting in urban centers would be able to send money effortlessly and without paying commission to the intermediaries;
- In the foreseeable future, access to loans, insurance, money transfer, and overdraft facilities will become available;
- The stronger urge for saving; let the money earn for you; a better life, better living, and real income;
Benefits to regulators:
The main role of regulators is to keenly observe the performance of the regulated. Some of the principal functions of the regulator are:
- to protect the consumer;
- to protect the interest of all other stakeholders ;
- to see the activities in a broader perspective and give purposeful direction to achieve larger societal goals.
If banks can initiate urban financial inclusion on their own, then the regulator will be relieved of its social responsibility.
Benefits to intermediaries:
These are still early days for urban financial inclusion. Even the expanded list of intermediaries is yet to be field-tested at a reasonable scale. But one can safely conclude that individual owners of Kirana stores / medical shops/ fair price shops; individual PCO operators; individual petrol pump owners; agents of saving schemes of government of India; agents of insurance companies will be increasingly used as intermediaries.
These urban intermediaries stand to benefit by way of:
(i) Additional income: Howsoever small it may be but the additional income will come to the intermediaries. This income will come without any additional investments.
(ii) Additional clientele: The financially excluded persons opening the account through them are likely to stick to them for their other needs. That way urban intermediaries stand to gain indirect benefits also;
(iii) Brings greater honor and dignity: Working as extended hands of banks, intermediaries are more likely to earn better respect and dignity for them in society.
Benefits to technology providers:
- Wider markets for smart cards;
- Sense of satisfaction by way of contributing to national social agenda;
- The opportunity of new business.
Benefits to society at large:
- Will encourage the central and state government to shift subsidies distribution form indirect system to direct in the hands of target groups by way of directly crediting their account;
- Distribution cost of subsidies as well as social security payments will get substantially reduced;
- This will help in plugging the leakage. These leakages are likely to cost more than 1000 billion rupees every year.
For example, grain in the public distribution system ( PDS) passes through 19 levels from farmer to consumer. If these 19 levels are removed from the system then this will result in substantial savings in the form of subsidy distribution costs.
Benefits to government:
Urban financial inclusion will be to help the state and the central government in the following ways:
- Remove inefficiency from the system;
- Possibility of making social security transfers such as old-age pensions, widow pensions, etc directly into the bank account of beneficiaries through electronic transfer. This will help in minimizing transaction costs;
- Accounts will also help in plugging leakage in the distribution network and this will benefit society at large;
- Possibility of stopping the leakage, over the next five years, the central government alone will be spending 11.5 trillion rupees on subsidies, including old-age pensions, health care, and national jobs for work programs. in the current scenario, 40% of this will be siphoned off by the system. If the same subsidies can be transferred directly into the bank account of beneficiaries, then this leakage can be stopped;
Benefits to the economy as a whole
Urban financial inclusion is likely to result in a number of benefits for the Indian economy as a whole. Some of the probable benefits are explained herein:
- An avenue for bringing the additional savings into the formal financial channel boosting the collective economic resources;
- Probability of higher incomes coupled with a reduction in cash economy can lead to overall economic growth;
- Better possibility of unlocking the economic potential of the people residing in urban centers;
- Possibility of tracking individuals financial history; better utilization of consumers protection mechanism; high level of financial literacy;
- Chance to achieve faster growth in the country by way of including the mainstream of the country.
Urban financial inclusion is a win-win opportunity for the left-outs, for the banks, for the intermediaries, and for the economy as a whole. Because of growing incomes, better access to communications and media, improving awareness levels, aspirations of the urban left-outs are on the rise. Banks can ignore these opportunities at their own peril. The need of the hour is to awaken, start, and grab the opportunity aggressively.