Despite many successes, various barriers still prevent the poor from accessing financial services
India now has sophisticated banking markets, but it has yet to find the right formula for serving vulnerable and low-income people. What it means to be financially excluded in the country and, inevitably, banks are not close to finding the solution. Banks’ engagement with financial inclusion is critical, but some believe their legacy structures and systems are insurmountable obstacles to reaching low-income people. Financial exclusion can be highly oppressive and stifling for talented individuals in low-income communities.
Poor people often lack access to safe, affordable, convenient and reliable ways to manage the meagre resources they have under their control. As a result, they face exclusion from the financial system that the rest of us rely on. Access to finance is critical for a country’s development—as much a part of its basic infrastructure as access to roads, electricity, or the internet.
The process by which low-income and financially excluded communities access formal finance is known as financial inclusion. Conversely, the absence of this access is known as ‘financial exclusion”. Financial exclusion is the inability of individuals, households or groups to access the necessary financial services in an affordable, convenient, secure and hassle-free manner. Three gradations of financial exclusion, viz
- core exclusion: those who operate their financial affairs entirely outside the regulated financial system
- limited access: those who may have a basic bank account but poor financial habits and little advice;
- unpleasant access: included but not able to derive positive benefits and to use inappropriate products
There is enormous evidence showing that economies with deep financial sectors and well-functioning financial systems perform better in all spheres. Contrary to common impressions, poor people need and use the same variety of financial services for the same reasons as wealthier clients: to save securely, invest in business opportunities, improve their homes, transform their lives and cope with emergencies caused by the vagaries of nature.
Despite tremendous efforts and many successes, various barriers remain to prevent the poor from accessing financial services, resulting in financial exclusion. Physical access is a deterrent in remote, hilly, and sparsely populated areas with poor infrastructure. Demand-side lack of awareness, low income/assets, social exclusion, and illiteracy are significant impediments. On the supply side, distance from a branch, complicated and annoying processes, unsuitable products, arcane language in documents, and staff attitudes are common reasons for exclusion.
Self-exclusion Access does not equal inclusion. There has, in recent times, been a significant increase in bank accounts, but consumers are not using them. This underlines the importance of creating products and engagement strategies that are better designed to meet the needs of consumers to ensure that they adopt the new products and use them in their daily financial lives.
Exclusion by the group in group-based microfinance programmes, members who gradually improve their economic situation often avoid including the poorest of the poor in their group on the pretext of retaining group discipline. They feel poor members may undermine the homogeneity and credibility of the group. Project Staff sensitize the members to align their objective with the broader goal of enhancing financial access in their community.
Exclusion by staff Absence of quality last mile interface is another deterrent for rural clients joining the banking mainstream.it is important that consumers not feel threatened by official processes. Loan officers may have explicit or implicit incentives to exclude the poorest. This may be based on a perception that the poor are problematic and will not be viable clients. This can be compounded by an organizational culture where the financial mission overrides the social mission.
Exclusion by design many aspects of the methodology design of a financial programme may deliberately or accidentally exclude the poorest. These may include entry fees, rules that exclude those who do not have an existing business, inflexible loan terms, compulsory savings, penalties for non-adherence to the group’s regulations, group liability rules, providing services by financial institutions from main offices rather than community locations, or locating the program in difficulty accessible areas. Other aspects of program design may not exclude the poorest but may be biased towards the less poor.
Non-viability for service provider Financial inclusion is not about providing subsidized financial services that are high quality but at the same time self-sustaining. Rural markets need mass but customized products. Informal financial services are more convenient and affordable to low-income communities. But they lack the same level of reliability, security, affordability, value and potential for scale that formal institutions offer. However, form finance providers find serving these communities expensive and difficult
Lack of a good ecosystem: Even though no shortage of financial products and services could help low-income workers, there is a lack of efficient distribution channels. Villagers have ended up stuck in long queues and struggling with ATMs that often run out of cash or break down. The Business Correspondent model has shown promise of addressing this issue. But it is also facing problems of viability and sustainability.
High costs: Many clients are not satisfied with the transaction fees associated with the bank accounts. According to their calculation, they may lose more by paying transaction fees than they would recoup in interest earned on their deposits in a year. In such cases, the customers must be aware of the safety of their savings and the protection offered by the government in case the bank undergoes liquidation.
Misalignment of products and services, Products that are misaligned and not designed with the unique needs of users in mind are primary drivers of low penetration of financial services. There are so many technology-integrated financial services that are cheap but are uncomfortable for the illiterate and neo-literate, as well as women
We need increased investments in products that are well suited to the needs of poor consumers and the infrastructure and capital to get them to scale. This needs to be supported with appropriate training and education for adapting to these financial services. A lack of comfort with technology or low literacy may discourage use.
Financial inclusion holds the promise of harnessing the power of technology for financial institutions to create a business opportunity and help achieve social good by bringing reliable, low-cost, secure financial tools to people who have never had access. Banking access through accounts and other risk mitigation services should be a common right of humanity. Financial access can give them a passport for participation in the economy using all financial tools available and doing what most people do daily—manage their money for a better life.
(The writer is a well-known development professional of international repute. The views expressed are personal)
