India's war against its citizens' financial exclusion

Poor people often lack access to safe, affordable, convenient and reliable ways to manage the meagre resources they have at their command. As a result, they face exclusion from both the society and the financial system that the rest of us rely on. Access to finance is critical for both an individual’s and a country’s development. Finance is as much a part of a country’s basic infrastructure as roads, transport, and housing or electricity. There is enormous evidence to show 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:  educate their children, improve their homes, cope with unexpected emergencies, protect against hazards, seize business opportunities and build assets.

Access to formal financial services is increasing, but many people in the developing world still do not have savings accounts, and many of those who have them do not use them. While some people exhibit no demand for accounts, most are excluded because of barriers such as travel distance, cost and the amount of paperwork that prevent people from accessing financial services. The process by which the low income and financially excluded communities get an access to affordable, convenient, properly regulated, appropriate, fair and safe financial products and services from mainstream providers to low income communities is ‘financial inclusion.’ It is commonly understood as “banking to all?. Conversely absence of this access and the deprivation which the exiled populations undergo 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. Financial exclusion often leads to broader social 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. People that are financially excluded might; not be able to access affordable, adequate and timely credit; they may struggle to budget and manage money or plan for the unexpected and they may not know how to make the most of their money.

There are three gradations of financial exclusion. These are:

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.

Unpleasant access: Included but not able to derive positive benefits and using inappropriate products.

Financial exclusion has several serious consequences for low income communities 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.  Many households may be forced to take on debt or sell assets to remain afloat. Those with access to accumulated savings are able to maintain consumption levels with consistency and avoid more drastic measures, such as distress sale of assets or agricultural produce, when faced with income shocks associated with unexpected events such as natural disasters or health emergencies. The socio-cultural  and economic factors that drive financial exclusion are complex, so the solutions must be holistic.

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:

India has now sophisticated banking markets, but when it comes to serving vulnerable and low-income people, it has yet to find the right formula.  what it means to be financially excluded in the country, and it is certain that banks are not close to finding the solution. Banks’ engagement with financial inclusion is key, but some believe that their legacy structures and systems are insurmountable obstacles to reaching low-income people financial exclusion can be highly oppressive and stifling for the talented individuals in low income communities.

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.

There are a variety of barriers prevent the poor from accessing banking facilities, thereby resulting in financial exclusion. In remote, hilly and sparsely populated areas with poor infrastructure, physical access itself acts as a deterrent. From the demand side, lack of awareness, low income/assets, social exclusion, illiteracy act as barriers. From 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 these popular even if they are costlier. The uptake and usage of appropriate financial products and services boosts productivity of businesses, and helps improve people’s resistance to shocks, facilitates female empowerment, and helps reduce extreme poverty and increases shared prosperity

Some stakeholders may have a credit-focused view of financial inclusion; others may view financial inclusion purely from the view of savings; several others may view it   primarily in the context of corporate social responsibility. But If genuine claimants for financial services are denied the same, then that is a case of exclusion. Since it may involve the issue of credit worthiness or bankability, it is also necessary to develop ways to make the claimants of institutional credit bankable or creditworthy. This would require re-engineering of existing financial products or delivery systems and making them more in tune with the expectations and absorptive capacity of the intended clientele.

Financial services should be provided on the simple principle of a physician: diagnose the ailment and prescribe the appropriate medicine. We must know what customers need, and then suggest the products that would help them. Lack of a proper understanding   can lead to person borrowing money while all that he/ she needs may be an insurance product or a savings account. This can set off a vicious cycle of indebtedness   

In his book The Paradox of Choice, the well-known sociologist Barry Schwartz talks about how   excessive choice contributes to consumer misery5. Too many similar-looking options actually confuse consumers making them adopt status quo to rather than taking any proactive decision. Every financial product has a cost embedded into it and we require some insight to unravel the costs and understand the risk post-cost return.

Schwartz explains how a culture that thrives on the availability of constantly evolving options can also foster profound dissatisfaction and self-blame in individuals, which with increased choice can make us miserable because of regret, self-blame and opportunity costs. Worse, increased choice has created a new problem: the escalation in expectation. All of this confounds the idea that human beings act in such a way that they maximise their wellbeing and minimise their pain

In many cases, the use of financial services is constrained by malfunctioning markets or regulatory impediments .Policies to expand account penetration—such as requiring banks to offer basic or low-fee accounts, allowing correspondent banking, granting exemptions from onerous documentation requirements, and using electronic payments into bank accounts for government payments — are very effective among those people who are often excluded: the poor, women and rural residents. Financial services can be fully utilised if the low-income people get products well suited to their needs along with appropriate training and education for adapting to these financial services. Attention must be paid to human and institutional issues, such as quality of access, affordability of products, familiarity and comfort in use, sustainability for the provider of these services, proper training and outreach to the most excluded populations to achieve efficiency.