In recent years government policies have taken several initiatives to push for a more formal economy to promote the idea of financial inclusion, by encouraging online payments and going cashless and the opening of basic saving bank deposits accounts for certain sections of the society, under the Pradhan Mantri Jan Dhan Yojana(PMJDY), etc. These bank accounts can maintain a zero balance at zero or nominal charges. The government along with the RBI too has played a major role in promoting financial inclusion with the RBI now preparing the Financial Inclusion Plans (FIPs) that encourages banks to be committed toward their plan of financial inclusion. Apart from encouraging opening of basic savings account, the RBI has encouraged the opening of more rural branches with population of more than 2000 persons, promoting electronic payments, encouraging Kisan Credit Cards (KCC) and General Credit Cards (GCC), etc.
But what does having such financial inclusion driven schemes mean to economically weaker sections of the society?
Who are the economically weaker sections (EWS) of the society?
While the definitions of the economically weaker sections are evolving over the years, the government of India recently declared a reservation of 10% for the EWS in among the General Category candidates for government jobs. They have stipulated the EWS as the category of people earning less than INR 8,00,000 per annum. The status of EWS is ascertained by an income certificate, which then helps individuals gain access to housing and education schemes run by the government. The reservation is extended to those families who own less than five acres of agriculture land, a house less than 1000 sq. ft, or a plot larger than 100 yard plot in a notified municipal area or a plot larger than 200 yards or above in a non-notified municipal area. Roughly 55 million homes are to benefit under this new definition, according to news reports.[1]
What is financial inclusion?
Financial inclusion pertains to the idea of giving access to financial products and services to one section of the society that is considered un-bankable. It is to make sure that each person is permitted to access these services irrespective of their limited financial history or “lack of a financial history”. Why would does this section of people “lack a financial history”? This would probably be because they are a part of the cash economy of the country and have never had any reason to consider financial services are important. The scope and the reach of these products and services might be limited to the un-bankable (considering their limited baking history) but the financial institution should have no issues with opening their doors to the un-bankable. As long as they have the right to gain admission into these institutions, they are financially included. Apart from the opening of a bank account, financial inclusion as noted by Dr. Rajeshwari M. Shettar, also includes “micro credit, branchless banking, saving products, pension for old age, microfinance, self-help groups, entrepreneurial credit”[2] which help promote social security needs of the person.
Who are the un-bankable? Why are they termed as un-bankable?
One of the preliminary steps taken to include a person financially, is to open their bank account. There are some pre-requisites to open a bank account and it includes having certain KYC documents (including Pan Card, Aadhaar Card, etc) in place. So a bank account can essentially be opened by a person who is socially included, that is a person who possess the said documents. So the un-bankable would be that category of people who do not possess these basic documents even to open a basic bank account. The first step therefore would be to make sure that everyone in the country is accounted for and every citizen possess these documents. Once these documents are with the citizens, they can go ahead and open bank accounts. So in theory, the opening of the basic saving bank deposits accounts means that the person has completed the first step towards financial inclusion.
Why is financial inclusion so pertinent in India?
The major chunk of the Indian economy is run by the Informal Sector[3]. The Informal sector employs about 80% of the total population. Because of the nature of their work, it is not uncommon for the worker to be paid in cash. This means that they do not have an incentive to open bank accounts. Apart from this, “Cash is King” in India, which further discourages the use of banking. It is hence not surprising to learn from the RBI[4] of the following –
41% of the population in India is unbanked.
40% is unbanked in urban areas.
60% is unbanked in rural areas.
What this also means is that the worker is unlikely to take the time to get their KYC documents. This in turn means that they are socially excluded. This is because these KYC documents are key to include everyone socially because they have the capacity to extend social safety nets to persons who qualify for the same. For instance, having an Aadhaar card could help a widow secure her widow pension without hassle. [5] When much of the population is financially included, it also means that they are likely to be financially literate. Horror stories of the economically weak being exploited by local money lenders are still heard of today. Once the person has access to these bank accounts, they can avail business / personal loans with lower interest. These loans while fostering their economic growth can effectively displace the person from the economically weaker category to a more financially secure future.
What this also means is that the worker is unlikely to take the time to get their KYC documents. This is the case for many migrant labourers who work from one site to another, moving wherever their work takes them. For them to be stationed in one place long enough to obtain KYC documents might not be feasible. Not getting their documents in place would mean that they are socially excluded, since these KYC documents are key to extend social safety nets to persons who qualify for the same. The migrant worker could then avail facilities like insurance and job security. Aadhaar has tried to address this issue, but progress still needs to be made. Social safety programmes like employee insurance, widow pension, disability pension, LPG subsidy are all linked to opening a bank accounts and the first step then is to get these documents in place.
With over 40% of the Indian population unbanked and over 80% working in cash / informal economy as noted by the Wire here, it is no surprise that Cash is king in India. So how does banking work in such a scenario? How can we encourage people to want to be included in formal financial sectors? The informal economy runs on cash. The incentives of being financially included are not seen as important as cash. The idea is to change this norm and create more financial literacy / awareness among the general population.
So What does ‘financial inclusion’ mean for economically weaker sections of society?
Financial inclusion hence is a getaway ticket for those categorised under economically weaker sections. This getaway ticket will ensure a more formal economy of the country, which in turn can ensure a smoother process towards the poorest of the poor achieving their economic targets. The idea would then be to simplify banking to suit their needs, instead of hoping that they catch up with the complicated system of banking. Once they have access to a bank account they can start building on the same. If regular savings are maintained, the bank account can be used to gain access to other banking services, including net banking, private insurance, credit, etc. Micro credit in particular has helped boost the informal economy as it encourages small scale entrepreneurs to kick off their growth by providing them with adequate liquidity to do so. Financial inclusion also means increased social safety nets, through which, one can guarantee poverty reduction and ultimately it can lead to a higher human development.
So how does financial inclusion work for those who do not save or the poorest of the poor?
The economically weaker sections of the society also include another category of persons who are under the below poverty line (BPL). As reflected by Down To Earth, here, the poverty line is defined as the follows – At Rs. 27 a day in rural areas and at Rs. 30 a day in urban areas. With this, an estimated 216.5 million people of rural India are poor while 52.8 million of urban India are poor. All in all a total of 269 million people of the country survive on Rs. 27-30 a day. So what does financial inclusion mean to these persons who roughly earn about INR 11000 annually? It is likely that they are not saving much. One way to include them would simply be to suggest to increase wages / livelihood opportunities (which was encouraged with the implementation of MNREGA) but this is easier said than done. So what is the solution? Can bank services then be extended to persons with meagre earnings?
With the right will and determination as proven by the Mumbai based co-operative, Sangini Mahila Sewa Cooperative Society Ltd., we surely can. Sangini was launched in the red light area of Mumbai to foster saving habits among the most informal of all sectors – sex work. They have even watered down the required documents and only expect a potential joinee to be part of the local worker collective. The savings are collected on a daily basis by collection agents at client’s homes.
So the idea would then be to think smaller rather than big in order to financially include every single citizen of the nation.
In conclusion I quote Mohammad Yunus, in the Banker to the Poor,
“..things are never as complicated as they seem. It is only our arrogance that prompts us to find unnecessarily complicated answers to simple problems.”
Once we implement this simple thought, we surely can set the path that ensures financial inclusion for all. With 1.5 Crore bank accounts opened owing to PMJDY, India seems to be on its course towards financial inclusion for all.
References –
https://economictimes.indiatimes.com/political-limits-to-financial-inclusion/articleshow/2973905.cms (retrieved on 12th March 2019)
https://www.bankbazaar.com/personal-loan/financial-inclusion.html (retrieved on 12th March 2019)
http://www.iosrjournals.org/iosr-jbm/papers/Vol18-issue2/Version-1/F018213744.pdf (retrieved on 12th March 2019)
https://www.nldalmia.in/PDF/financial_inclusion.pdf (retrieved on 12th March 2019)
https://rbi.org.in/scripts/FS_Speeches.aspx?Id=912&fn=2754
https://yourstory.com/2013/10/financial-inclusion-banking-unbanked-relook
https://www.financialexpress.com/money/why-cash-is-still-the-king-in-india-heres-all-you-need-to-know/1382741/
[1] https://www.financialexpress.com/india-news/reservation-for-upper-castes-around-55-million-homes-that-earn-rs-8-lakhs-per-year-may-benefit-from-new-quotas/1436815/
[2] http://www.iosrjournals.org/iosr-jbm/papers/Vol18-issue2/Version-1/F018213744.pdf
[3] https://www.ilo.org/newdelhi/areasofwork/informal-economy/lang–en/index.htm, retrieved 12th March 2019
[4] https://www.omicsonline.org/open-access/financial-inclusion-and-social-change-2223-5833-1000144.pdf, retrieved 12th March 2019
[5] https://www.indiafilings.com/learn/indira-gandhi-national-widow-pension-scheme/ (retrieved 12th March 2019)
- Linda Shaji, Research Associate