Financial Inclusion

Situations

1 Will you give a loan to some one who - Do not have any credit

record - Do not have any income

record - Do not have any

collateral to pledge?

2 If some one is a breadwinner, and does not have an insurance because the product is costly or there is no such product. How will the person and his family protected?

3 How will this person, when becomes old and cannot work, can live with dignity without asking for charity? Is there any pension products available in the market?

Credit

Credit Insurance

Credit Insurance Savings / Pension

These are three main facets of finance many don’t have or they are financially excluded

Adopted from world bank 2014

Financial Exclusion is of

two types

Voluntary & In-voluntary

Financially excluded

Voluntary

Involuntary

For whatever reason, some people don’t like / want credit from anyone


Voluntary

Involuntary

For some the product don’t suit the culture or religious reasons…

• No need of financial service


Voluntary

Involuntary

So voluntary exclusion is—the demand side i.e. borrower excludes themselves

• Cultural or religious reasons



Voluntary

Involuntary

Involuntary exclusion is—the demand & supply (banks) don’t find a trade off




Voluntary

Involuntary

Either the banks may find the borrowers too risky or has no sufficient income




Voluntary

Involuntary

Or the borrower finds the service is too costly


• Insufficient income or high risk



Voluntary

Involuntary

Or it interrupts the normal business hours





Voluntary

Involuntary

Or the borrower is not aware- lack of financial literacy





Voluntary

Involuntary

Or the service is not good.. Or the contract is unenforceable





Voluntary

Involuntary



• Lack of financial literacy

• Lack of product

• High cost

• Physical outreach / logistics

• Weak contract enforcement

• Poor quality of service



Voluntary

Involuntary





• Lack of product

• High cost




If some one gets themselves excluded, nothing can be done

about it…


Voluntary

Involuntary





• Lack of product

• High cost




But if it is going to be any of these reason, then it is a

“MARKET FAILURE”

Market hasn’t found a product to deal with this

problems.

Cut to the chase… Financial Inclusion is opposite of Financial exclusion… MAXIMIZE inclusion…

Financial Inclusion is: steps taken to provide

Credit

Insurance

Pension / Savings

With two key features

If these two features fail, there will be still financial exclusion

1 Ease of Access

2 Low Cost

But who are these people anyway who get financially excluded?

Is it only applicable to poor countries?

But how is this overcome?

Financial Literacy • Financial Planning

• Credit Management

• Revenue Management

• Legal & compliance

First and foremost, financial Literacy has to be improved

Risk Management Tools

Financial Literacy

• Credit Bureau

• Collateral Registry

• Trade Credit Registry

• Credit Score

• Financial Planning




After this Risk Management tools need to be introduced

Market


Financial Literacy

• Bonds / Debentures

• Equity participation

• New Products : Insurance, Pension, Micro Loans





Once armed with tools technique and knowledge, the market should bring in new products

• Credit Bureau



• Credit Score

Market


Financial Literacy








Last but not least, there should be policy to govern all these…

• Credit Bureau



• Credit Score

Policy

Market


Financial Literacy

• Product Features

• Cost of funds

• Usage of Tools & Techniques

• Statistical Monitoring tools








• Credit Bureau



• Credit Score

Seems to be easier said than done! Let’s see how India has taken this up

Po

licy

Ser

vice

P

rod

uct

s Te

chn

olo

gy

Too

ls

Fin

anci

al

Lit

erac

y

1970’s 1980’s 1990’s 2000’s 2010’s

• Nationalization of Banks

• Branch Expansion program

• Set up focus banks

• Specialized institutions

Before 1969, most of the banks were private banks and the shareholder’s interest (profit) was not favouring nation’s interest (financial inclusion). So the first step was nationalizing these private banks to balance the interest

• Advertorials

Po

licy

Ser

vice

P

rod

uct

s Te

chn

olo

gy

Too

ls

Fin

anci

al

Lit

erac

y

1970’s 1980’s 1990’s 2000’s 2010’s





Secondly they started setting up specialized institutions that serves Rural, Agriculture, Industries, Housing, SMEs, Cooperative etc

• Advertorials

Po

licy

Ser

vice

P

rod

uct

s Te

chn

olo

gy

Too

ls

Fin

anci

al

Lit

erac

y

1970’s 1980’s 1990’s 2000’s 2010’s





Then there was a branch expansion program so that the penetration could be expanded.

• Advertorials

Po

licy

Ser

vice

P

rod

uct

s Te

chn

olo

gy

Too

ls

Fin

anci

al

Lit

erac

y

1970’s 1980’s 1990’s 2000’s 2010’s





For every new branch in Urban area, four Rural branches has to be open… Later this was extended when ATMs were introduced

• Advertorials

Po

licy

Ser

vice

P

rod

uct

s Te

chn

olo

gy

Too

ls

Fin

anci

al

Lit

erac

y

1970’s 1980’s 1990’s 2000’s 2010’s





In Nationalized bank staff Rural Area service was made mandatory for certain period of their service

• Advertorials

Po

licy

Ser

vice

P

rod

uct

s Te

chn

olo

gy

Too

ls

Fin

anci

al

Lit

erac

y

1970’s 1980’s 1990’s 2000’s 2010’s





At this time, there were advertorials that cautioned, explained, questioned people and indirectly the financial literacy program started

• Advertorials

Po

licy

Ser

vice

P

rod

uct

s Te

chn

olo

gy

Too

ls

Fin

anci

al

Lit

erac

y

1970’s 1980’s 1990’s 2000’s 2010’s





Priority sector definition was key initiative. By this definition, Banks were mandated to have 40% of their asset portfolio as priority sector. This sector was one banks were shying previously.

1990’s

• Self Help Groups, MFI

• Micro Finance

• ATM • Credit Cards


• School syllabus

• Priority Sector • Loan incentives

• Incentive & Subsidy loans

• Advertorials

Po

licy

Ser

vice

P

rod

uct

s Te

chn

olo

gy

Too

ls

Fin

anci

al

Lit

erac

y

1970’s 1980’s 1990’s 2000’s 2010’s





Government came up with a scheme called “Prime Minister Rogar Yojana Scheme” –PMRY One of the feature of the loan is to give incentive to banks if the loan turns good and to subsidize impact of any loss. There were targets for each banks under PMRY

1990’s


• Micro Finance



• School syllabus



• Advertorials

Method A: Direct Subsidy

A Subsidy Budget 1000,000

B Subsidy per person for business start-up 10,000

C = A/B Number of beneficiaries 100

Subsidies Loss and Incentive gains? How would this work?

So, if there is a direct subsidy 100 people gets benefited

Now instead if loan is given

Method B: Indirect Subsidy

A Loan Amount 5,000,000

B Loan Per business 1,0,000


D Expected Non-performing-loan 20%

E= D x A Capital Loss 1,000,000

F Subsidy 1,000,000

So if it is indirect subsidy 500 people gets benefited for the same amount of 1,000,000







F Subsidy 1,000,000

But the game here is this expected NPL. It should be under subsidy budget







F Subsidy 1,000,000

Well, that is why incentive is given if the loan is good. So the bankers have to be diligent but at the same time be assured of backing

Po

licy

Ser

vice

P

rod

uct

s Te

chn

olo

gy

Too

ls

Fin

anci

al

Lit

erac

y

1970’s 1980’s 1990’s 2000’s 2010’s





Technology was catching up, ATMs, Credit Cards, were catching up in 90’s

Chit funds and Micro Finance was gaining ground

The Industry set up a Trade credit registry under the chamber of commerce and trade unions

1990’s


• Micro Finance



• School syllabus



• Advertorials

Po

licy

Ser

vice

P

rod

uct

s Te

chn

olo

gy

Too

ls

Fin

anci

al

Lit

erac

y

1970’s 1980’s 1990’s 2000’s 2010’s





Last decade saw a big shift in Financial Inclusion

Technology was exploited to bring ease of access and it also reduced the cost Credit Bureau was established

1990’s


• Micro Finance



• School syllabus



• Advertorials

• Financial Information Network & Operations

• Financial Planning • Facilitators • Door to Door Banking • Market / Weather updates

• General Credit Card • Farmer Credit Card • Micro Insurance

• SMS Banking • Mobile ATM • Door to door banking

• Credit Bureau

• Comics for kids • PPP Trainings • Dedicated TV channel for

education

Po

licy

Ser

vice

P

rod

uct

s Te

chn

olo

gy

Too

ls

Fin

anci

al

Lit

erac

y

1970’s 1980’s 1990’s 2000’s 2010’s





Collateral Registry was set up, Employment Guarantee was given New funds were set up focusing Financial Inclusion

1990’s


• Micro Finance



• School syllabus



• Advertorials





• Credit Bureau


education

• Fin. Incl Dev fund • Fin. Incl Tech Fund • MNEGRA • Collateral Law

• National Pension scheme

• Voice Banking • Direct payment

System


• No Frills account

Po

licy

Ser

vice

P

rod

uct

s Te

chn

olo

gy

Too

ls

Fin

anci

al

Lit

erac

y

1970’s 1980’s 1990’s 2000’s 2010’s





All along, financial literacy were improved at various stages

1990’s


• Micro Finance



• School syllabus



• Advertorials





• Credit Bureau


education




System


• No Frills account

Po

licy

Ser

vice

P

rod

uct

s Te

chn

olo

gy

Too

ls

Fin

anci

al

Lit

erac

y

1970’s 1980’s 1990’s 2000’s 2010’s







• Micro Finance • General Credit Card • Farmer Credit Card • Micro Insurance





System

• Credit Bureau • Collateral Registry • Trade Credit Registry

• Advertorials


education

• School syllabus




• No Frills account 35-40%


In spite of all these efforts, India has succeeded only 35-40%

That means, lot of work still pending and to be done innovatively

key positive disruption is expected for this decade that will change Financial Inclusion action plan

2

This decade will witness two key changes in Financial Inclusion

Mobile Payment Virtual Currency

Technology will aim at

Both of them key to Financial Inclusion

https://in.linkedin.com/in/karty

@karthigeyans

[email protected]

To get connected or follow or write :

All images used are adopted from

Karthigeyan Srinivasan is a Chartered Accountant and a Project Management Professional, works in financial services focusing technology; specializes in data driven decision systems, credit bureau, credit risk, core banking. Pursues interest in start-ups, mobile technology and digital currency & payments. Currently he is Advisor to Central Bank of Brunei Darussalam, Autoriti Monetari Brunei Darussalam (AMBD)

Economy & Finance

Financial Inclusion