Monday, 5 March 2012

WHY IS THE NEED TO PROMOTE FINANCIAL INCLUSION?


Following is the excerpt from an article "Who’s afraid of Aadhar?" by Pratap Bhanu Mehta, published in 'The Indian Express' on Wed Jan 25 2012:-

".... here is a simple true story. A domestic help in Gurgaon wanted to open a bank account. The bank account was important for a number of reasons. Small savings would lose their value if they did not earn interest and, at that margin of poverty, even a few rupees mattered. Vulnerability to violence was likely to increase if the money was kept in possession. She approached several banks to open an account. Despite having West Bengal identity papers, ration card and election card, she was turned away. Banks would refuse to recognise these papers. Despite being “introduced” by people who presumably had sound standing, banks simply refused to open her account. Public sector bank managers were asked why they were refusing to open an account? Did they not have a mandate for financial inclusion? The answer came, “Poor people’s accounts remain dormant.” But more often, the response was “the identity papers are not adequate.” When asked why, the response was “these have been issued in West Bengal. We cannot trust them. The lady might be Bangladeshi.” Eventually, a public sector bank agreed to open the account, but only after an incredible weighty Know Your Customer process was brought to bear.

This story was staggering at many levels. It illustrated the difficulty migrant workers had in opening bank accounts. Identity in India is not portable; it has been made too place-specific, too difficult to authenticate. In this case, despite the fact that there were some identity papers, they were declared untrustworthy. The constant refrain was: “We don’t know who these people are” — even when asked, “why did that matter? After all you are going to hold her money, not the other way around”. " (http://www.indianexpress.com/news/whos-afraid-of-aadhar/903580/ - as accessed on 01 MAR 2012)

Apart from illustrating the difficulty faced by migrants for getting an access to banking facilities due to non-portable nature of identity proofs issued in India, the story highlights following important points:-

1) There is a need for financial inclusion, further:
  • Uneven development at rapid pace may only add to the need for financial inclusion.
  • Modernization is expected to bring about changes to the traditional means of livelihood for financially excluded citizens. Financial inclusion may help in supporting systematic and sensible transitioning in this regards.
2) Returns from micro-financing is not seen as a substantial addition to profitability by the existing banking system, following efforts in this regards could be helpful:
  • Banks deploying innovative financial instruments targeted at financial inclusion could be given special privileges/attractive benefits (like tax-benefits, infrastructure support) based on number of financially excluded citizens these banks may help in becoming financially included.
  • With significant volumes of new financially included account holders on board, banks may start considering them as a target market and streamline their strategy to focus on their banking needs. Thereafter, there is a possibility that these banks themselves may find it interesting (lucrative) to explore ways to convert dormant account holders (belonging to the low income group citizens availing banking facilities on getting financially included) to active account holders.
  • Close association of banks with the low earning capacity people (as their market) may enable banks to understand the financial behavior of different segments in this market. The learning will eventually help in funding (through credible financial mechanism) entrepreneurial endeavors at the grass root level.
3) Probably, majority of financially excluded citizens are themselves not serious to get financially included, therefore this issue is not getting prominence in political agenda. Following could be promoted in this regards:
  • State initiated programs (like benifit for rural un-employed citizens, medical insurance for Below Poverty Line citizens) may be linked through banking services to the beneficiaries to give initial push towards financial inclusion.
  • Awareness programs to make people understand the importance of saving and the benefits of banking services may be launched by the state.
4) Needy citizens face difficulty in getting access to basic banking services, in this regards:
  • Available infrastructure for IT enabled services (in banking sector) may be easily scaled up to expected volumes.
  • Business process re-engineering taking into consideration the requirements for financial inclusion may be required for the special services targeted for financial inclusion.
5) Unskilled labour working as 'domestic help' belong to the unorganized sector in India, probably:
  • It may be helpful to develop an institutional mechanism for the sector.

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