Financial Exclusion: India’s war against this apartheid

Financial ExclusionThe World Bank Group has put forward an ambitious global goal to reach Universal Financial Access (UFA) by 2020. This objective has become a key mission for regulators, development agencies and governments as financial access is now being perceived as key ingredient for inclusive growth.

Poor people often lack access to safe, affordable, convenient and reliable ways to manage the meager resources they have under their control. As a result, they face   exclusion from the financial system that the rest of us rely on. Access to finance is critical for a country’s development—it is as much a part of a country’s basic infrastructure as access to roads, or electricity or the internet.

The process by which the low income and financially excluded communities get an access to the formal financial mainstream is known as financial inclusion. Conversely absence of this access and the deprivation of financial services is known as “financial exclusion”. Financial exclusion can be described as the inability of individuals, households or groups to access the necessary financial services in an affordable, convenient and hassle-free manner.

According to the European Commission, financial exclusion is “a process whereby people encounter difficulties accessing or using financial services and products in the mainstream market that are appropriate to their needs and enable them to lead a normal social life in the society in which they belong.”

There are three gradations of financial exclusion viz. core exclusion: those who operate their financial affairs completely outside the regulated financial system; limited access: those who may have a basic bank account but poor financial habits and little advice; included but using inappropriate products: victims of inappropriate products  .

Financial exclusion has consequences such as dependency, inability to access benefits due to living exclusively with cash, the impossibility of saving money or access to credit and therefore to buying a house or starting a business, and finally the inability to improve their situation via financial tools.  It also has regressive influence on women. Melinda Gates, co-Chairperson of the Gates Foundation once said: “When women have money in their hands and the authority to choose how to spend it, they grow in confidence and power by taking control of their economic future.”

There is enormous evidence that shows that economies with deep financial sectors and well-functioning financial systems perform better in all spheres. Contrary to common impressions, poor people need and use the same variety of financial services and for the same reasons as wealthier clients: to save securely, to invest in business opportunities business opportunities, improve their homes, to transform their lives and cope with emergencies caused by the vagaries of nature.

Despite tremendous efforts and many successes, there still remain a variety of barriers preventing the poor from accessing financial services, resulting in financial exclusion. In remote, hilly and sparsely populated areas with poor infrastructure, physical access itself acts as a deterrent. On the demand side, lack of awareness, low income/assets, social exclusion, illiteracy are major impediments.

On the supply side, distance from branch, complicated and annoying processes, unsuitable products, arcane language in documents, staff attitudes are common reasons for exclusion. All these result in higher transaction cost apart from other issues. On the other hand, the ease of availability of informal credit sources makes them popular even if they are costlier. A granular slicing will reveal more micro reasons:

Self-exclusion Access does not equal inclusion. There has in recent times been  a significant increase in bank accounts, but consumers are not using them. This 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.

Exclusion by the group: ;in group-based microfinance programmes , members who gradually improve their own economic situation t  often avoid including the poorest of the poor in their own group or Center On the pretext of retaining group discipline. Staff must pay special attention to this and sensitise the members to align their objective with the broader goal of alleviating poverty in their community.

Exclusion by staff: Absence of quality last mile interface is another deterrent for rural clients joining the banking mainstream .it is important that consumers should not feel threatened by official processes. Loan officers may have explicit or implicit incentives to exclude the poorest. This may be based on a perception that the poor are problematic and will not be viable clients. This can be exacerbated by an organisational culture in which the financial mission heavily overrides   the social mission.

This will encourage loan officers to focus on achieving greater productivity, increasing portfolio outstanding, and reaching larger number of high revenue yielding clients, rather than achieving greater poverty impact. Maximising the customer time and effort required for the purpose may appear to be a deliberate strategy to eventually discourage low-income

Exclusion by design: Many aspects of the methodology design of a financial programme may deliberately or accidentally exclude the poorest. These may include entry fees, rules that exclude those who do not have an existing business, inflexible loan terms, compulsory savings, penalties for non-adherence to group’s rules, group liability rules, providing services by financial institutions from main offices rather than community locations, or locating the program in difficultly accessible areas. Other aspects of program design may not exclude the poorest, but may be biased towards the less-poor.

Non-viability for service providers: Financial inclusion is not about providing subsidised financial services but one those are high quality but at the same time self-sustaining. Rural markets need mass but customised products. There are many layers even in the rural pyramid and each has its own unique profile. Informal financial services are more convenient and affordable to the low-income communities. But they lack the same level of reliability, security, affordability, value and potential for scale that formal institutions offer.

Lack of proper ecosystem: Even though there is no shortage of financial products and services that could help low-income workers, there is a lack of efficient distribution channels for these market-based financial products, both from traditional and non-traditional financial institutions. As institutions do not know how to get to the sector of informal workers, inking some welfare benefits to bank accounts, villagers have ended up stuck in long queues and struggling with ATMs that often run out of cash or break down.

High costs: Many clients are not satisfied with the transaction fees associated with the bank accounts. According to their calculation, they may lose more by paying transaction fees than they would recoup in interest earned on their deposits in a year. In such cases, the customers have to be made aware of the safety of their savings and of the protection offered by the Government in case the bank undergoes liquidation.

Poor Service: The primary interface for the consumers is the counter staff who have been found to be hostile to those wanting to open these accounts. They misrepresent both product availability and client eligibility, effectively denying financial access to low-income customers solely upon their discretion.

Misalignment of products and services: Products that are misaligned and not designed with the unique needs of users in mind are primary driver of low penetration of financial services . There are so many technology-integrated financial services that are cheap but are uncomfortable for the illiterate and neo-literate as well as women. We need increased investments in products that are well suited to the needs of poor consumers, and the infrastructure and capital to get them to scale. These need to be supported with appropriate training and education for adapting to these financial services. A lack of comfort with technology or low literacy may discourage use.

Banks can deepen their financial inclusion initiatives by creating products that are simple, intuitive and tailored to meet the needs of those at the bottom-of-the-pyramid. Attention must be paid to human and institutional issues, such as quality of access, affordability of products, sustainability for the provider of these services and outreach to the most excluded populations.

(Views expressed in this article are a personal opinion of Moin Qazi, Member of NITI Aayog’s National Committee on Financial Literacy and Inclusion for Women.)

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