Transitioning from Financial Services towards Financial Inclusion
Date: Wednesday , March 30, 2016
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Strong financial institutions contribute to fostering economic growth, and build success in modern economies. There has always been a deficiency of accessible and affordable financial services across nations in the world. Therefore, the need for an inclusive, organised financial system is widely required in all major economies of the world.
It is vital to improve financial access in order to boost the productivity and standard of living. According to the United Nations, the size of the unbanked population in the world is large, comprising approximately 2.5 billion people around the globe. This unbanked population does not receive any formal means of financial services, out of which some are, owning a bank account, credit, insurance, secure savings account, and also a secure and efficient means to receive social benefit payments through a registered financial institution.
Almost half of India\'s population accounts as unbanked. India has the highest number of households (145 million) that is prohibited from participating inbanking services. There is only one bank branch per 14,000 people. Just 18 percent have debit cards and less than two percent have credit cards. The penetration of financial services in the rural areas is very low. It was only observed, lately, that underfinancial inclusion initiative Pradhan Mantri Jan-Dhan Yojana (PMJDY),more than 180 million people in India entered the financial mainstream in August last year, according to a report prepared by PricewaterhouseCoopers India for the Internet and Mobile Association of India (IAMAI) and Payments Council of India (PCI).
Nearly 72 percent of the Indian population lives in villages, highlighting the stark reality that a substantial proportion of about 6,50,000 odd villages do not have access to financial services due to unavailability of a bank, thereby leaving them financially excluded. The fundamental objective of financial inclusion is to encompass the unbanked population with financial services to ensure it reaches its ultimate growth potential. From financial literacy to financial inclusiveness and education for women, to installation of more free ATMs in post offices, and banks incentivising electronic transactions, financial inclusion aims to enable better sustainable economic and social development of the country. The plan aims to take into account the underprivileged parts of the society. The income group is determined by the level of their access to financial services such as a savings and payment account, credit insurance, pensions etc.
There are various factors that contribute to the low level of penetration of financial services, both from the sides of demand and supply. Due to the low per capita income and lack of financial education of the average Indian, there is a low demand for financial services. There are high costs associated with the provision of financial services, and also financial literacy and behaviour is directly proportional. On the one hand, low-income individuals may not want formal services when informal savings, credit, and insurance markets function reasonably well, and the benefits of formal financial market participation may not exceed the costs.
While financial inclusion is an objective in many developed and developing countries, the most cost effective means for financial inclusion needs to be evolved depending on the culture as well as the institutional and legal infrastructure in the country. The benefits of better financial literacy may be great. On a personal level, individuals may save more, and better manage risk, by purchasing insurance contracts. There may even be general equilibrium effects: increased demand by households for financial services may improve risk-sharing, reduce economic volatility, improve intermediation, and speed overall financial development. This in turn could facilitate competition in the financial services sector and, ultimately, more efficient allocation of capital within society.
It could prove very beneficial to connect the unbanked population to mainstream banking in order to improve both society and the economy. By incorporating financial inclusion into the system, it fosters economic growth and leads to the nation getting better opportunities on a global level. It helps reduce economic disparity, and inculcate a sense of ownership in the general population. There is a direct relationship between access to finance, economic growth, and financial equality at a national level. The RBI and the government of India have made dedicated efforts to promote financial inclusion, but the success has been rather slow, which is due to weak network and certain financial instruments not suited to the rural population. It\'s good to see that Banks have quadrupled their activities and initiatives throughout the country in order to achieve their targets with regard to financial inclusion, yet this still has a lot of scope for development.