What is the right recipe for financial inclusion?

Money is the seed of money, and the first guinea is sometimes more difficult to acquire than the second million.
— Rousseau, Discourse on Inequality

India has recently witnessed profound changes in its financial inclusion ecosystem. The country has actually been one of the early innovators in financial inclusion —creating and supporting financial products and services designed for low-income communities. The term itself was coined by RBI Governor Y V Reddy in 2005. RBI’s original phrase was actually “financial exclusion”. Reddy changed it from “exclusion” to “inclusion”. And it has stuck since because of the greater resonance the fundamental shift in approach found in all sections.

India’s flagship financial inclusion programme, Pradhan Mantri Jan Dhan Yojana (PMJDY) — launched in 2015 with a mission to provide a basic account to every adult — has significantly changed the demographics. According to the Global Findex 2017 report, 80 percent of Indian adults now have a bank account — 27 points higher than in 2014. And 77 percent of Indian women now own a bank account — compared to 43 percent and 26 percent in 2014 and 2011 respectively. India’s flagship financial inclusion programme—Pradhan Mantri Jan Dhan Yojana (PMJDY) — launched in 2015 with a mission to provide a basic account to every adult — has significantly changed the demographics.  

Account ownership in India is certainly impressive (80per cent against the world average of 69 per cent) but usage level is low with 48 per cent inactive accounts against the world average of 20 per cent. India has the world’s highest share of inactive accounts — about twice the average of 25 percent for developing economies. Merely having a bank account is not the right indicator of financial inclusion. Financial inclusion is far broader than having an account.

The field of financial inclusion is certainly at a crossroads on account of its myopic vision of restricting its role to mere access. if people aren’t using these accounts, then it can be surmised that they aren’t having the desired impact   This lack of usage underlines the importance of creating products and engagement strategies that are better designed to meet the needs of consumers to ensure that consumers adopt the new products and use them in their daily financial lives.

The first step in integration is identifying the financial needs of the people. These needs can be broadly classified into three main categories: life cycle events, emergencies and opportunities. The first deals with the needs arising due to events like birth, death, marriage, education, old age and inheritance; the second comprises of personal (for example accidents, illnesses among others) as well as impersonal (mainly, natural disasters) emergencies and lastly, the third refers to the ways of enhancing one’s living standard by acquiring assets like land, housing, consumer durables (like television, refrigerator and such).

Although financial inclusion starts with having an account, its benefits come from actively using that account—forsaking, for managing risk, for making or receiving payments. Financial inclusion will remain meaningful so long as it does not end with just opening accounts. Being able to have access to a transaction account is a first step toward broader financial inclusion.

A transaction account then acts as a means of fulfilling these needs. Further, the context of poor people becomes a major factor in financial inclusion.

Access to a bank account cannot by itself improve the financial health of vulnerable groups. We have to simultaneously make people cognizant of how to handle them by bringing about changes in attitudes to money and savings practices.

The Centre for Financial Inclusion at ACCION, the famous international nonprofit has a very visionary five-pillar template that sums up the whole vision of effective financial inclusion:
l A full range of services: payments, savings, credit and insurance
l Provided with quality: convenience, affordability, safe and respectful
l To all who can use them, including highly-excluded groups
l in a vibrant and competitive marketplace
l Financially capable customers

CFI defines financial inclusion as state in which everyone who can use them has access to a full suite of quality services at affordable prices, delivered by a range of providers in a competitive market, with convenience, dignity and consumer protections to financially capable clients.   

There is a need to shift the interventional focus from simple access-oriented measures toward utilisation and engagement-oriented measures. It is vital that we keep in mind that financial inclusion is a means to an end and not the end in and of itself. It is only when people use financial tools to make their lives better, and their communities’ stronger that financial inclusion will have relevance.

Arguably the single best way to increase usage of accounts would be to more fully digitise payments for government transfers of social benefits. If you’re the recipient of a cash transfer from a government you will receive that cash transfer electronically, which means you need to have a bank account or some kind of transaction account. These payments included everything from fertiliser and cooking gas subsidies, to rural employment wage, to scholarships.

With digitisation of government-to-person transfer, the user frequency is expected to increase. They will give people a reason to use those accounts. Added benefits like lines of credit and highly subsidised accidental and health insurance are further incentives for Jan Dhan account users. Still, these accounts have remained merely a payment channel–rather than bringing fundamental change in customer use of financial services to improve their lives.

As access increasingly becomes a reality, a second generation of challenges emerges — to capitalise on the openings made possible through access to offer products and services that truly improve lives. We have to go beyond mere physical accounts if we want to catalyze financial inclusion into broader economic and social growth. People who regularly use a bank account are more likely to be financially literate than those who do not   as there is a direct correlation between financial knowledge and financial services.  

What needs to be done is to make more and more of these accounts transactional, and actively so. Without greater and consistent usage of bank accounts, the promises of financial inclusion — equitable economic growth growing and successful businesses, and improving financial security and prosperity  — will remain elusive.

When accounts remain dormant (without any transactions) they inevitably become an economic deadweight. A dormant account, unless it has a substantial balance, is of little value to either financial service provider or customer. The banks cannot afford to lose money servicing them. Services are affordable so long as they are sustainable to the provider. There has to be a business case for every financial service to remain sustainable. Banks have to perforce levy penalties and ultimately shut these accounts; sending them out of the financial system to where they had come from, the unbanked. Thus, a counter revolution sets in.

In the end, customers are back to where they began their financial journey. Such poorly thought out policies and programs demoralise all the actors in the ecosystem-the customers, bankers, economic observers, media, academics and the NGOs working for the financial empowerment of ordinary citizens Moreover, it dissipates the enthusiasm of those who propel the entire effort.  It reinforces the prevailing myth, that the banks are anti-poor.

We must all understand the limits of the financial inclusion revolution, and we must make sure it doesn’t turn into a rough and tumble gold rush that ultimately hurts consumers and financial institutions alike. It is true that banks must be conscious of the social dimension of financial inclusion g but sourcing accounts and processing them involves time and costs which pinches the revenues.

Low income people need contextualised and customised services on account of the peculiarities of their financial lives, particularly their irregular/volatile income streams and expenditure patterns. Financial inclusion is not a onetime process. It is requiring concentrated and sustained efforts from all stakeholders, including central bankers, regulators, supervisors, policymakers, financial consumer protection agencies, financial services provider and the community at large.

What we need today are innovative solutions that can take into account the peculiarities of the people at the bottom of the pyramid. We need to use our natural powers-of persistence, concentration, insight, and sensitivity to do work, think deeply, and solve problems. As with most trumpeted interventions, our programmes are scrambling to turn rhetoric into reality.

We don’t have to reinvent the wheel. Policymakers can learn a lot of lessons from those who have achieved impressive success from around the world.

The writer is member of Niti Aayog’s National Committee of Financial Literacy and Inclusion for Women