Why banking the unbanked should be a national priority
By Kumar Abhishek
Financial services and development are closely related. Apart from the World Bank, coalitions like Global Partnership for Financial Inclusion under G20 and International Network on Financial Education under Organization for Economic Co-operation and Development (OECD) are guiding other countries on their respective financial inclusion strategies. India is an active member in both coalitions. But what is stopping India to achieve such a noble goal benefitting individuals, industries and government? Can technology really change the landscape of financial inclusion? The answer lies in understanding issues from both demand and supply side.
According to the National Commission on Population report, India’s population is expected to be around 1.52 billion by 2036. People will need financial products to meet their life goals and safeguard it against unforeseen risks. More so, they will need capital for economic functions to raise income levels. However, people are not always inclined to financial products as an option primarily because of mistrust in the system, insufficient income, accessibility and approach of traditional banking, absence of documents, low consumer awareness and financial behavior.
The National Strategy for Financial Inclusion 2019-24 acknowledges all of them in some form or the other. In the absence of uniform financial literacy, common perception is that all the institutions dealing with money are a sort of bank. The recent chit fund scandals in some states deteriorate the trust of community in financial institutions. Further, low awareness on financial products and its unethical selling practices by representatives is also a massive contributor.
The access to banks to the remote corners of the country is a huge challenge. Even if they are accessible, they tend to operate with minimum human resources resulting in procedural delays. A customer approaching banks faces asymmetric paternalistic relationship with respect to bank officials. Most of the bank officials see themselves as superior officers and look down upon their customers as if catering them is a favor to them. It is the lack of competition in rural areas on which banks have sustained practicing the ‘Maai Baap’ culture. Competition and responsive banking could be the possible ways to draw people closer to the banks.
Bank branches must pro-actively disseminate their eligibility requirements and invest maximum in forging relationship with the community of their respective catchment areas. Such is the state of the current banking system that customers are so under confident with their application that despite possessing all the required documents and meeting eligibility they apply at multiple banks for a same product. This causes inefficiencies and duplication.
It can be resolved to a great extent by engaging outreach experts like Panchayati Raj Institutions and Non-Government Organizations (NGOs), who can talk to community with empathy in the language they understand and impact their financial behavior and choices positively.
In India, banks and post offices are major drivers of financial inclusion. India’s banking system has evolved a lot since the establishment of The Bank of Hindostan in the year 1770 to the merger of banks in the year 2020. With 1,58,318 active branches; 2,33,066 ATMs; deposits worth INR 1,44,80,784 crore and more than 80 percent Indians having bank accounts, this sector will grow exponentially with increased use of technology in next 5 years. What has remained unchanged during the entire period is access of its services is still limited to a certain class and geography. No doubt, rise of Fintech has changed the way people bank. There is enormous evidence across the world suggesting its ability to foster new businesses and how it provides cushion against financial risks by easily connecting two interested parties for friendly loans. But the question remains, can Fintech boost entrepreneurship and capital formation which is much needed for our push towards self-reliance?
Businesses thrive on capital provided by the banks, determined by extensive vetting of the proposal. More than paper business, credit is based on trust between customer and bank and to formalize that one-to-one human interface is a must in economy like India where contract reinforcement remains a perennial challenge. So, for the time being Fintech does help by reducing cash from our lives especially bringing efficiency in government’s direct benefit transfers (DBT) but offers limited help to wealth creation by means of credit supply to businesses. It is helping in mobility of money, its safety and reduced cost at both bank’s and customer’s end but it’s the user’s money doing the rounds.
Committee on Financial Inclusion under Chairmanship of Dr. C. Rangarajan, RBI, defined it as “the process of ensuring access to financial services, timely and adequate credit for vulnerable groups such as weaker sections and low-income groups at an affordable cost”. Role of banks is of paramount importance in ensuring that poorer regions do not miss the opportunity to acquire capital. We must prioritize basic trinity of bank penetration, customer grievance and quality service by doing away with its current way of operations. Expansion of banking services is not only key to delivering government schemes but also provide credit access which is fundamental for wealth creation. However, one must note that expansion does not mean just opening of a branch with limited staff. It must be opened with a strength which could effectively cater to the community. In lack of access to financial products, the only fall back option people have are money lenders. The access to finance is a hope for many and motivates people to positively pursue their life goals.
Savings, credit, and management of financial risks are all aspects of financial inclusion. Government’s initiatives like JAM, Jan Dhan and Mudra are positive steps towards achieving financial inclusion. Introduction of SWAMITVA card is going to unlock massive business opportunities for financial institutions by providing them scope of economic viability at remote locations. At the least, it will give a massive boost to individual housing by creating numerous employment and raw materials market. It is definitely going to improve existing FINDEX figure of less than 10 percent servicing housing loan across developing countries. While moving the wheel of financial inclusion, we must strive for better customer experience, empower regional banks, reduce gender gap, make industry more competitive and undertake massive drives to bring youth under the banking umbrella.
The author is currently pursuing PGP in Public Policy from the Takshashila Institution. Views are personal and do not represent Takshashila’s recommendations.