Financial Inclusion Strategies Commerce YouTube Lecture Handouts

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Title: Financial Inclusion

Financial Inclusion
  • The concept of financial inclusion, extending financial services to those who typically lack access, has been a goal for the Government of India since the 1950s.
  • The nationalization of banks occurred from the mid-1950s to the late 1960s.
  • The Lead Bank Scheme followed nationalization in 1969 as a way to coordinate banks and credit institutions by districts to more comprehensively ensure that rural areas had their credit needs met.
  • It envisages assignment of lead roles to individual banks (both in public sector & private sector) for the districts allotted to them.
  • The lead bank acts as a leader for coordinating the efforts of all credit institutions in the allotted districts.
  • In 1975, the Government of India followed this with efforts to specifically reach rural areas by establishing Regional Rural Banks (RRBs) meant to exclusively meet demand in the rural economy and the number of RRBs has significantly increased over the years.
  • By the early 2000s, the term ‘financial inclusion’ was being used in the Indian context.
  • In 2004 the Khan Commission, created by the Reserve Bank of India (RBI) , investigated the state of financial inclusion in India and laid out a series of recommendations.
  • In response, RBI Governor Y. Venugopal Reddy, expressed concern regarding the exclusion of millions from the formal financial system and urged banks to better align their existing practices with the objective of financial inclusion in both his annual and midterm policy statements.
  • The RBI has continued in its efforts in conjunction with the Government of India to develop banking products, craft new regulations, and advocate for financial inclusion

Financial Inclusion Strategies

  • No frills accounts (NFAs)
  • Know-your-customer (KYC)
  • Business Correspondents (BC)
  • Unique credit cards
  • Electronic benefit transfer (EBT)
  • Self-Help Group (SHG) linkage model
  • Digital financial inclusion
  • Government policy strategies

Financial Inclusion Strategies

  • In India, RBI initiated several measures to achieve greater financial inclusion. These rely on efforts of the financial sector.
  • No frills accounts (NFAs) , now known as basic savings bank deposit accounts (BSBDAs) can be opened with zero or minimal balances, removing a cost barrier to banking. Banks are also meant to charge minimal overdraft fees on NFAs.
  • Basic Savings Bank Deposit Account (BSBDA) is a Zero Balance Savings Account that takes care of simple banking needs with Free ATM card, monthly statement, and cheque book.
  • The RBI continues to change and relax policies regarding these accounts in an effort to better serve bank customers.
  • Expanding financial technology, or fintech, has been proposed as an effective strategy to achieve financial inclusion. Incorporation of technology is used to deliver banking services to those in rural and remote areas who are typically unserved.
  • The United Nation 2030 Agenda for Sustainable Development (UN-2030-ASD) and the G20 High-Level Principles for Digital Financial Inclusion (G20-HLP-DFI) describes the importance of using Fintech to reduce financial exclusion and income inequality which means that the financial inclusion through Fintech may shows significant signs on the reduction of inequality.
  • Banks have been advised to make effective use of information and communications technology (ICT) , to provide banking services to people directly through the BC model where the accounts can be operated by even illiterate customers by using biometrics, thus ensuring the security of transactions and enhancing confidence in the banking system.
  • The new procedure only requires an introduction by an account holder who has been subjected to the full KYC screening. Additionally, banks were permitted to accept more easily produced forms of documentation for proof of identity and address.
  • Know-your-customer (KYC) requirements for opening bank accounts were relaxed for small accounts in August 2005, eliminating a documentation barrier to banking.
  • The business correspondents (BC) model was launched in January 2006, when the RBI permitted banks to engage intermediaries in the banking process. This model enables banks to service neglected areas by allowing intermediaries to facilitate transactions and deliver other banking services directly.
  • Originally, a fairly limited number of entities, including NGO՚s and certain microfinance institutions were eligible to act as BCs, however in 2010 the list was expanded to include for-profit companies
  • In 2018, operators of Common Service Centers (CSCs) who work with local governing gram panchayats also began working as BCs to further improve penetration of banking services.
  • Unique credit cards are now offered by banks, the most popular being General purpose credit cards (GCCs) , and Kisan credit cards.
  • These unique cards offer credit to those in rural and semi-urban areas, farmers, and others with adjusted collateral and security requirements with the objective of providing hassle-free credit.
  • Electronic benefit transfer (EBT) is being implemented by banks at the advice of the RBI with the goal of reducing dependence on cash, lowering transaction costs, and address corruption.
  • Increasing the number of rural banks remains a priority for the RBI.
  • The self-help group (SHG) linkage model has also been proposed to improve financial inclusion.
  • It links community groups to the formal banking sector through government programs, credit cooperatives, NGOs, or other microfinance institutions.
  • Group-based models in which members pool their savings have also been seen as tools for social and economic empowerment, particularly when women are leaders and participants.

Digital Financial Inclusion

  • Inclusive digital financial services refer to mobile money, online accounts, electronic payments, insurance and credit, combinations of them and newer financial technology (fintech) apps, which can reach people who were formerly excluded.
  • Technology-enabled innovations represent an opportunity to promote financial inclusion.
  • For example, digital financial services can provide low-income households with access to affordable and convenient tools that can help increase their economic opportunities.

Government Policy Strategies

  • The Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) is meant to provide supplemental employment at a guaranteed minimum wage and facilitate financial inclusion to empower women and rural laborers.
  • While achieving financial inclusion is not its main goal, the program directly deposits wages into bank accounts as a way to limit corruption, speed delivery of benefits, and connect wage laborers to bank accounts.
  • The Pradhan Mantri Jan Dhan Yojana policy scheme provides “universal access” to banking through the creation of basic banking accounts that come with other basic financial services.
  • On the inauguration day of the scheme, 1.5 crore (15 million) bank accounts were opened and since then, more than 18 million bank accounts have been created.
  • In 2016, the Government of India instituted a sweeping demonetization policy in an attempt to stop corruption and the flow of black money.
  • This move forced people to deposit their money into banks or see its value evaporate, with the goal of integrating citizens into a cashless and taxable economy and banking system.

Measuring Financial Inclusion

  • Several organizations conduct surveys to measure indicators of financial inclusion and collect both supply and demand side data.
  • MIX is one platform that produces data driven reports to track progress towards financial inclusion across the globe.
  • In 2013, Finance Minister of India, P. Chidambaram launched the CRISIL Incuse, an index to measure the status of financial inclusion in India.
  • CRISIL, India՚s leading credit rating and research company is collecting data from 666 districts in India and ranking on a scale from 0 to 100 based on four parameters of financial services.
  • CRISIL publishes semi-frequent reports based on their findings with regional, state-wise, and district-wise assessments of financial inclusion.

MCQs

Q. Name any 5 financial inclusion strategies.

Answer:

No frills accounts (NFAs) , Know-your-customer (KYC) , the business correspondents (BC) model, Electronic benefit transfer (EBT) , General purpose credit cards (GCCs) , and Kisan credit cards, self-help group (SHG) linkage model, Digital financial inclusion, MGNREGA, PMJDY.

Q. The ________ and the ________describes the importance of using Fintech to reduce financial exclusion and income inequality which means that the financial inclusion through Fintech may shows significant signs on the reduction of inequality.

Answer:

The United Nation 2030 Agenda for Sustainable Development (UN-2030-ASD) and the G20 High-Level Principles for Digital Financial Inclusion (G20-HLP-DFI)

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