Tuesday, September 17, 2013

Financial Inclusion

Financial Inclusion essentially means that every person can access and afford financial products and services transparently. This becomes all the more important for vulnerable groups of the society.

In India, despite a large-scale branch expansion of commercial banks, a significant portion of the population remains outside the financial system, that is, remain financially excluded making them vulnerable to exploitation.

How is financial inclusion beneficial?
a) It helps poor people to avoid exploitation - Poor people generally resort to non institutional sources of finance like village moneylenders, village traders, etc. for meeting their credit requirements. Such funds often come at an exorbitant rate of interest which the poor is unable to repay. They even go in for fresh lending without repaying their earlier debts, getting trapped in a cycle of debts. Such a situation can be avoided if they can access funds from the institutional sources of finance such as banks that charge a reasonable rate of interest.

b) It can help the government to disburse its benefits - If financial inclusion is complete and every person has a bank account, then it can help the government directly transfer the benefits into the bank accounts of the beneficiaries. This can avoid layers of intermediaries involved in the disbursal of benefits and help cut leakages.

c) It inculcates the habit of savings in individuals - Savings come in handy in times of distress and with financial inclusion and savings, such times can be sailed through easily.

d) It helps in economic growth - Financial Inclusion helps in raising savings of individuals. High savings imply greater capital formation and resultant economic growth.

How to achieve the goal of financial inclusion?
a) Self-Help Groups (SHGs) - SHGs have proved to an effective tool for micro-financing and achieving financial inclusion. SHG is a village-based intermediary formed as a group of 10-20 women which helps its members get finance from banks. Still the coverage of SHG network is low. It needs to be expanded, upgraded and made more professional.

b) Awareness - Poor people should be made aware of the benefits of financial inclusion so that they voluntarily associate themselves with banks and avoid resorting to moneylenders for their fund requirements. In this context, the role of civil society in creating awareness is important.

c) Greater use of IT - Use of IT has been limited in promoting financial inclusion. Once a network of broadband connectivity is laid down in our rural areas, it should be leveraged to access bank accounts and make transactions with the banks.

That said, a number of other innovative measures can be put in place for achieving the desired goal. In fact, the use of micro-ATMs, banking correspondent model, etc. are some such measures.

The goal of financial inclusion will elude us as long as we do not bring it to the forefront of our development agenda.

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