Need For Financial Inclusion
The Reserve Bank of India (RBI) has intricately planned out an ambitious strategy for financial inclusion till 2024. The National Strategy for Financial Inclusion report aims to fortify the ecosystem for various modes of digital financial services in order to create the necessary infrastructure to move towards a less-cash society by March 2022. While charting out the report for the period 2019–2024, RBI said, “Financial inclusion is increasingly being recognized as a key driver of economic growth and poverty alleviation the world over.”
Similar to the conventional banks, other institutions like payments banks, small finance banks, co-operative banks and other entities such as fertilizer shops, fair price shops, should encourage the use of digital transactions to uphold efficiency and transparency. The NSFI report outlines the need for increasing the reach of banking outlets of scheduled commercial banks, payment banks, etc to provide banking access to every village within a 5 km radius and at least 500 households in hilly areas by March 2020.
The increased global recognition and United Nations Sustainable Development Goals (SDGs) empower financial inclusion as a pivot for achieving sustainable development across the globe, countries are developing strategic policies to increase access and usage of formal financial services.
One of the key objectives of the World Bank is to achieve Universal Financial Access by 2020 (UFA 2020). The intent behind this is to provide adults who currently aren’t part of the formal financial system, with access to a transaction account to store money, send and receive payments to manage their financial lives. (Universal Financial Access 2020, 2018)
To achieve this ambitious goal, the World Bank Group has committed to enable one billion people to gain access to a transaction account through targeted interventions.It also works with countries to fortify the following primary building blocks:
- public and private sector commitment
- initiation of legal and regulatory framework
- strengthening financial infrastructure
- interaction with regulatory bodies on a global scale to provide guidelines that will enable access to transaction accounts.
Objectives of Financial Inclusion:
- To provide awareness and enlighten customers on financial services, procuring various types of products and their highlights.
- An objective has been defined where every eligible & consenting adult enrolled under the Prime Minister Jan Dhan Yojana, will be provided with an insurance scheme and a pension scheme by March 2020.
- Change attitudes to translate knowledge into behavior.
- Help consumers get a clear understanding of their rights and responsibilities as consumers of financial services.
- Enhance the reach of banking outlets to provide banking access to every village within a 5-km radius or a hamlet of 500 households in hilly areas by March 2020.
- By March 2024, every adult should have access to a financial service provider through a mobile device.
Application of Financial Inclusion Across Various Business Sectors
The RBI has drafted the NSFI 2019–24 under the supervision of the Financial Inclusion Advisory Committee (FIAC). The report has been created on the basis of inputs and suggestions from the Government of India as well as other Financial Sector Regulators. The report has also been approved by the Financial Stability Development Council (FSDC).
The NSFI 2019–24 outlines the vision and primary objectives for financial inclusion policies in India to help expand and sustain the process on a national scale. This can be done through a broad convergence of action which includes all the major constituents of the financial sector. As such, certain focus areas have been identified across various business sectors which we will discuss below.
Micro, Small and Medium Enterprises (MSMEs):
- MSMEs are the primary catalysts that drive the growth of the Indian economy. They contribute nearly 31% to India’s GDP, 45% to exports and provide employment opportunities to more than 11.1 crore skilled and semi-skilled people.
- An estimated presence of 6.33 crore MSMEs can be located in the country. Several initiatives have been undertaken to enable credit off take in this industrial sector.
- A special capacity building programme named ‘National Mission for Capacity Building of Bankers for financing MSME Sector’ (NAMCABS) has been devised to familiarise bankers with the entire gamut of credit related issues of the MSME sector.
- Web portals like the ‘Udyami Mitra’ and ‘psb loan in 59minutes’ have also been launched to provide easy access to credit. Trade Receivables Discounting System (TReDS) platforms have been set up to address the problem of delayed payments to MSMEs. In April 2015, the Pradhan Mantri Mudra Yojana (PMMY), an initiative to finance small business enterprises, was introduced. This was to ensure lending institutions would finance micro entrepreneurs up to ₹10 lakh. The interest subvention initiative has been launched for MSMEs to alleviate the cost of borrowings..
- In India, agriculture serves as the source of around 15 percent of GDP, 11 percent of exports and livelihood for about half of the Indian population. The importance of the sector from a macroeconomic perspective is also reflected in the form of bank credit to finance agricultural and allied activities relative to other sectors of the economy.
- Banks have been mandated specific targets under priority sector schemes to give a thrust to agriculture financing from the formal sector, Currently the target for agriculture lending under priority sector for all domestic scheduled commercial banks and foreign banks having more than 20 branches is 18% of Adjusted Net Bank Credit (ANBC) or Credit Equivalent Amount of Off-Balance Sheet Exposure (CEAOBE), whichever is higher.
- Within the 18 per cent target for agriculture, a sub-target of 8 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher is prescribed for Small and Marginal Farmers. The banks have been advised to extend collateral free loans to small and marginal farmers upto ₹1.6 lakh. To provide adequate and timely credit support from the banking system under a single window to the farmers for their cultivation & other needs, an innovative product called the Kisan Credit Card Scheme (KCC) was launched in August 1998 as a flexible source of cash credit for easy access and delivery.
- RBI has adopted a bank oriented system to strengthen financial inclusion. The banks were mandated to open branches nationwide especially in under-banked pockets which led to a considerable increase in bank branches and later Automated Teller Machines (ATMs) in the 1990s to early 2000.
- The banks were instructed to draw up a road map for having banking outlets in villages with population more than 2000 (in 2009) and less than 2000 (in 2012). Consequently, the banks were advised to open brick and mortar branches in villages with populations of more than 5000. The banks were also advised to prepare Financial Inclusion Plans for a period of three years comprising key parameters viz., modes of delivery of financial services, access to Basic Savings Bank Deposit Accounts (BSBDAs) as well as transactions via the BC Channel.
- To fortify financial inclusion, RBI has relaxed the branch authorization guidelines in 2017 wherein fixed-point Business Correspondent(BC) outlets serving for more than 4 hours a day and five days a week are treated in a similar fashion to branches with physical infrastructure. An exclusive fund viz., Financial Inclusion Fund (FIF) has been created to support adoption of technology and capacity building with an initial corpus of ₹2000 crore.
- As a measure to improve financial inclusion, RBI has issued differentiated banking license viz., Small Finance Banks (SFBs) and Payments Banks in 2015. The objective of setting up of SFBs was to further financial inclusion by provision of a savings vehicle and supply of credit to small business units, small and marginal farmers, micro and small industries as well as other unorganized sector constituents. This can be done with high technology-low cost operations. Payments Banks have been set up to provide small savings accounts and payments/remittance services to migrant labor workforce, low income households, small businesses and other unorganized sector entities / other users.
- In order to strengthen the business correspondents(BC) model of delivery and help prospective users to identify BCs having good service track record, the BC Registry has been launched under the aegis of Indian Banks’ Association (IBA). For capacity building and to ensure certain minimum standards of service rendered by the BCs, a BC Certification course through Indian Institute of Banking and Finance (IIBF) has also been introduced.
- The key initiatives undertaken in the insurance sector include increasing awareness among citizens on the benefits and appropriateness of insurance and enabling greater availability of insurance products (including micro-insurance). This can be done by increasing the number of delivery channels which consist of corporate agents as well as Common Service Centers.
- Further, with the use of technology, Web Aggregators and Insurance Repositories have been erected to provide ease of access and storage of insurance policy details to enable issuance of insurance policies in an electronic form.
- Towards the interests of policyholders and also in building their confidence in the system, the institution of Insurance Ombudsman has been created. The objective is to quickly dispose of grievances of the insured customers and also mitigate their problems involved in redressal of their grievances. To protect the interests of policyholders and customers catered to by the insurance companies / intermediaries under the Health insurance segment, separate guidelines have been issued.
To monitor and control the National Pension System (NPS) and other pension schemes which are not subject to any other enactment, the Pension Fund Regulatory and Development Authority (PFRDA) was set up under the PFRDA Act, 2013. Some of the key initiatives undertaken in the pension sector include expansion of NPS via increased channels of distribution, developing efficiency of the officials of its intermediaries and increasing the awareness on old age income security and retirement planning. The regulatory authority has also leveraged technology in an effort to drive efficiencies & improve ease of access to NPS for the subscribers and service providers.
Future Scope of Fintechs in NSFI
The policies on financial inclusion would be incomplete if digital financial inclusion and the role of fintechs is not meaningfully integrated. While the Jan Dhan-Aadhaar — Mobile trinity has been a benefactor to Indian economy over the last few years, adequate measures are needed to strengthen the ecosystem for digital financial services, including increased awareness on usage of digital modes of transactions, increased access points/ acceptance infrastructure and a safe environment incorporating the principles of consent and privacy.
Based on the report, it is expected that over the next few years, the fintech space may evolve from its present structure, calling for adequate understanding among regulators, financial service providers and most importantly the customers availing financial services through the digital mode. It is important to primarily address the newly-included digital customers through sufficient awareness and literacy.
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