What is Financial Inclusion ?

Financial Inclusion

Even in areas that are well covered by banks, there are sections of society excluded from the banking system. In the recent period, the government has been encouraging opening of bank accounts by providing government benefits through such accounts. ICT solutions have made such initiatives possible at relatively low cost. Financial inclusion is not merely providing reliable access to an efficient payments system. Financial inclusion is also not just micro-finance. It is not possible to have sound and reliable deposit taking entities and a deposit insurance system without financial regulation. Hence, there is no doubt that financial regulation and financial inclusion work together. One reason of convergence between financial regulation and financial inclusion is that if financial intermediaries have to deliver affordable services, they need to take advantage of technology and economies of scale. Such growth is not possible without capital. Investors and lenders are comfortable with providing more funds only if such entities are regulated. More recently, in the context of the global crisis, it is observed that undue reliance on borrowed funds can be a source of risk and a more stable retail base of deposits is good for both the bottom line and resilience. Looking at the success of credit unions and community banks world-wide in providing financial services to local communities, it can be argued that smaller regional banks can be the answer for financial inclusion. However, our experience with local entities, such as cooperative banks, deposit taking non-banking financial companies and regional rural banks highlighted the risks of poor governance, connected lending, geographic concentration leading to vulnerability to natural calamities and downturns. Small entities also tend to absorb disproportionate share of supervisory resources. Besides, the adoption of ICT solutions that are essential for accessing mainstream payments system requires larger investments and these often prove to be too onerous for small entities and render them uncompetitive. Statutory approvals for branch licenses in more lucrative centers are linked to the number of branches opened in under-banked districts and States, as also other factors such as fulfilling priority sector obligations, offering no frills accounts and other parameters to gauge achievements in financial inclusion and in customer service. However, there are certain barriers that inhibit the active operation of such accounts like the time and cost involved in reaching the nearest branch where the accounts have been opened. In a country where most of the low income and poor people do not have any document of identity or proof of address it is very difficult to have KYC norms that insist on such documents. At the same time, to ensure integrity of financial transactions, it is necessary that each customer is properly identified before accounts are opened. In rural areas, this is addressed by asking for identification by local officials and requiring a photograph of the account holder. Drives for financial inclusion locally have been achieved through active involvement of government in the identification process. In big towns and cities where there are a large number of migrants who do not have any documents, fulfilling KYC norms and opening a bank account continue to be a challenge. Recently, the Government of India constituted the Unique Identification Authority of India (UIDAI) to issue a Unique Identification Number (UID) with biometric recognition to every resident. Banks can benefit by synchronizing opening of bank accounts for those who will be enrolled through this exercise. This project is a unique opportunity to leverage UID, bank accounts and mobile telephony services. Using UID for fulfilling KYC for small value accounts will facilitate financial inclusion. In a country with deep penetration of mobile phones, this is expected to give a boost to the financial inclusion while ensuring the integrity of financial transactions.