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Use financial inclusion to reduce inequality and speed up growth

GS Paper 3

 Syllabus: Inclusive growth

 

Source: LM

 Context: The article discusses financial inclusion as a tool for reducing inequality and fostering economic growth.

 

What is financial inclusion?

It means ensuring that all individuals and businesses have access to affordable and essential financial services, such as banking, credit, savings, and insurance, regardless of their income or location. It aims to promote economic stability, reduce poverty, and empower marginalized populations by providing them with the tools to manage their finances and participate in the formal economy.

 

Importance of Financial Inclusion:

  • Financial inclusion is essential for reducing poverty and inequality.
  • It helps strengthen the livelihoods of those at the bottom of the economic pyramid.
  • It contributes to global economic growth.

 

Challenges in Promoting Financial Inclusion (globally):

  • Limited Access: Around 24% of adults worldwide lack access to formal financial accounts, hindering their participation in the financial system.
  • Low Savings and Borrowing Rates: Only 29% of adults deposit their savings in financial institutions and just 28% borrow from formal financial institutions on a global scale.
  • MSME Financing Disparities: Micro-enterprises in developing countries face constraints due to loan application rejections or unfavourable terms (21%), while small and medium-sized enterprises experience even higher barriers (30%).
  • Gender Disparities: Women encounter obstacles such as restrictive social norms, limited mobility, and low financial literacy, leading to a gender gap in bank account ownership, especially in low-income and developing countries.
  • Limited Digital Payment Adoption: Men with accounts are more likely to use digital payment methods (6 percentage points higher) in developing nations, further excluding women from digital financial services.
  • Emergency Funds Access: Women in developing nations find it more challenging to access emergency funds, with only 50% claiming consistent access compared to 59% of men.

 

The Way Forward for Financial Inclusion:

  • Pillar 1: Strengthening the Ecosystem:
    • Promote private sector involvement through partnerships.
    • Enhance financial literacy and capacity-building programs.
    • Promote gender-inclusive financial services.
  • Pillar 2: Expanding Financial Services:
    • Increase insurance penetration beyond 7% of GDP.
    • Accelerate financial inclusion for agricultural, rural, and migrant populations.
    • Reduce the cost of capital for financial institutions.
    • Innovate distribution channels and standardize cross-border payments.
  • Pillar 3: Consumer Protection:
    • Formulate policies that balance consumer protection and innovation.
    • Uphold consumer trust in new digital products and services.

 

India’s Case Study with Banking Correspondents/ Business Correspondents (BCs)

 BCs are agents who work on behalf of banks and other financial institutions to provide banking services to underserved communities, including rural areas, where traditional bank branches are often scarce.

  • Origins: BCs are often members of the local community and are seen as trustworthy and reliable by their customers.

  

Role in financial inclusion:

Role Description
Last Mile Connectivity BCs provide crucial last-mile connectivity, bridging the gap to underserved rural communities.
Liaisons They act as intermediaries between banks and customers, offering banking services to those distant from traditional bank branches.
Trust Building BCs help build trust and confidence among customers from target communities, making formal banking services more accessible and acceptable.
Customized Services They offer tailored services to meet customers’ specific needs, such as account opening, cash deposit/withdrawal, and other banking services, enhancing convenience.
Increased Financial Literacy BCs contribute to improving financial literacy, especially among women, by providing guidance on using formal banking services.
Cost-effective BCs reduce operational costs for banks and financial institutions compared to setting up full-fledged branches.
SHG Synergies Women from Self-Help Groups (SHGs) serving as Business Correspondents (BC Sakhis) and Bank Sakhis have played essential roles, including disbursing funds during the COVID-19 lockdown.

 

Insta Links

 

Mains Links:

India still has a long way to go to bridge the gender gap in access and use of financial services. Comment (250 Words)

 

Prelims Links:

Consider the following statements:

  1. National Payments Corporation of India (NPCI) helps promote financial inclusion in the country
  2. NPCI has launched RuPay, a card payment scheme.

 

Which of the statements given above is/are correct?

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither nor 2

 

Answer: C