Financial competence integral to any customer-centric financial inclusion model

In the last many years, India’s financial inclusion strategy has become truer by the incorporation of many new elements.

By Manavendra Prasad

Nobel laureate and economist Amartya Sen opined that poverty is the deprivation of opportunity. Financial inclusion is the panacea for this as it provides equality of opportunities to access financial services and hence improves the financial well-being of the financially vulnerable.

Financial inclusion in India
In practical terms, financial inclusion in India has traditionally been about making credit available to the financially weak. From the All-India Rural Credit Survey Committee report of 1954, the nationalisation of banks, to the introduction of the mandatory system of priority sector lending in 1972, all efforts have been about access to credit. Even the concept of the Lead Bank Scheme introduced in 1969 or the establishment of Local Area Banks in 1996 was with the primary objective of meeting the credit needs of the local economies and, as a result, achieving financial inclusion.

In spite of this multi-decadal institutional effort, an overwhelming majority of Indians, especially in rural areas, remain financially weak and are effectively excluded from the formal economy.

In the last many years, India’s financial inclusion strategy has become truer by the incorporation of many new elements. With the mission mode effort of Jan-Dhan bank accounts, almost 80% of adult Indians now have bank accounts. The use of Aadhaar and mobile phones for direct transfer of social benefit payments and digital payments has powered a dramatic rise in financial inclusion. However, the real financial inclusion that can support poverty alleviation will happen only when the poor not only have access to microcredit to generate additional streams of income or can receive social benefits in their bank accounts, but when they can also channel their savings into investments and create assets; or can buy insurance products that protect them financially in times of disease, disability and death, and can help fund their children’s education. It is this kind of financial inclusion that will create significant changes in the economy.

What is the new perspective?
India’s financial inclusion strategy needs to bring in a new element of comprehensive financial awareness. A financial awareness programme that helps lay-citizens become financially-competent and improves financial security.

There is currently no single source of independent and unbiased information related to personal finance. All effort is product-specific. In the absence of a comprehensive solution, there is no entity harmonising the conflicts between various financial products. Therefore, access to comprehensive application-oriented solutions will aid financial inclusion through improved financial health.

Armed with adequate knowledge, a lay-citizen can make his/her money work harder for him/her and that can allow families to save, manage cash flows and reduce the need to sell assets in times of crisis. It can enable them to build their assets and cushion themselves against external shocks. It will help them purchase livestock and consumer durables or expand their business.

Citizens will learn that their small businesses can also avail of insurance or that fixed deposits are not the only way to create wealth. They will appreciate that the primary function of insurance is protection and not wealth creation, or the fact that they can often deposit money in their bank accounts from anywhere in the country. Efficient management of their limited resources will increase savings and allow poor mothers and fathers to make the transformation from everyday survival to planning to fulfil their life-stage goals. Parents will be able to pay for their children’s tuition, better their living conditions, and seek out and pay for healthcare services as they are needed. The multiplier effect achieved by this cannot be underestimated.

It is only with this knowledge that one can prevent mis-selling and protect lay-citizens from Ponzi schemes. The lower-income category lives under the constant shadow of financial duress and any mis-sold product can make the equation go awry.

The objective of strengthening the financial protection of weaker sections of the society, with special social schemes, often remains unfulfilled because the information is not adequately available. A strong financial awareness programme will help lay-citizens benefit from numerous government schemes.

Advantages of the new perspective
Financial awareness as an important tool to achieve financial inclusion is easier to implement than making credit available. It is also more cost-efficient. It is only with widespread and efficient financial awareness, will India witness a revolution in the prevalence of financial instruments. It will lead to an effective ‘retail-isation’ of our capital markets and make them robust. Lending a helping hand to citizens in achieving their financial goals is politically very sound.

It is apt to assert that achieving financial competence needs to be integral to any customer-centric financial inclusion model.

The author works on skill development among the youth