Financial Inclusion: A key driver for the economic growth
Nidhi GoelResearch Scholar, Gurukula Kangri Vishwavidyalaya Haridwar, India
Prof. Pankaj Madan
Head & Dean, Gurukula Kangri Vishwavidyalaya Haridwar, India
Abstract
Financial inclusion plays important role in the economic growth of any country. It is a known enabler to reduce the gap between rich and poor. Financial inclusion helps in channelizing the flow of money from central government to last person in the economy. This paper presents a detailed theoretical investigation of the impact of financial inclusion on economic growth. The results show need of education and awareness among the people about the banking products for achieving the target of financial inclusion.
Keywords: Financial inclusion, Financial exclusion, financial literacy Introduction:
Individuals’ inability to access formal financial system whether voluntarily or involuntarily has been identified as main barrier for the socio-economic development of developing economies like India (Demirguc-Kunt and Klapper, 2012; Ardic et al., 2011; Johnson and Nino-Zarazua, 2011; Ssonko, 2010). Claessens and Feijen, (2007) found unconstrained access to finance is a prerequisite for the development of an economy. As per the Collard (2001) and Kempson (2004) U.K was the first nation which realized the importance of financial inclusion. According to World Bank (2014) voluntarily exclusion is a condition where people choose not to use financial product. It happens because either people are not aware or they think that informal sources are more convenient to use. Involuntarily exclusion arises because of inadequate income and risk factors included in it.
Financial inclusion results into cascading effect on any economy such as Indian economy. More involvement of the unbanked population in the economy through the formal financial system can improve the living standard and financial condition of the people, which enables them to create financial assets, generate income and build stamina to face macroeconomic and livelihood shock (Chibba, 2009).
Financial inclusion gained importance in early 2000, because most of the studies done during that period found that financial exclusion have a direct correlation with poverty. Financial inclusion has the potential to fill the gap left by the formal financial institution in providing financial services to the people who are not come under the ambit of formal financial institutions. In Britain, financial inclusion got the maximum benefit of social policy initiatives. Global Financial Development Report (2014) found around half of the world population is unbanked. Financial inclusion is based on the principle of equality and inclusive growth. Financial inclusion helps government agenda of removing poverty. Financial inclusion is becoming the most important aspects for the inclusive growth and development of economies. But merely opening a bank account cannot fulfill the purpose of financial inclusion until the services of a financial system are being properly used by the account holder (Kempson et al, 2004).
Review of literature:
To do a systematic review of literature, different databases were searched using key terms like financial inclusion, financial exclusion, financial literacy etc. The period of search was kept from 1993 to 2017.
Studies of Ramesh Subramanian (2014) and Dipasha Sharma (2016) have shown the relationship between financial inclusion and economic growth. Indian economy is based on the banking system for the smooth flow of fund. Hence in order to achieve financial inclusion, access to bank and finance is primary requirement for the country. They found that financial inclusion and its dimensions: penetration, availability and usage of banking services in terms of deposit ratio have a positive impact on Indian economy.
to them, financial exclusion is a situation in which people do not have access to financial products and services such as bank account, credit card and insurance policies. Greenwood and Javanovic (1990) found financial exclusion can be dangerous for growth of an economy because it has worst impact on financial infrastructure which is definitely a key driver for the economic growth. Kempson and Whyley (1999) defined financial exclusion in broader sense referring to those people who are excluded from mainstream financial products and services such as pension or saving schemes, provident fund and can also lead to cut off from essential utilities.
Santigo Carbo (2007) mentioned the five dimensions of financial exclusion. These are (access exclusion) occurred by the process of risk assessment, (price exclusion) where price of the goods are unaffordable, (condition exclusion) when the conditions related to the goods are unsuitable to the customers, (marketing exclusion) when the marketing strategy of the product is designed for certain segment of customer, (self exclusion) when people exclude themselves from using financial services which could be due to fear or past rejections. This exclusion has proved to be dangerous for the development of a country. European commission (2010) described financial exclusion as the main contributor for the disadvantage and vulnerability in Europe. It was generally seen that financially excluded people are attached with informal sources like money lender for meeting their credit needs. Obtaining loan from the informal source is much costlier and riskier than bank. It has happened because of the lack of bank branches in rural area and lack of awareness among the people about the banking products.
Effort taken by the leading countries for the promotion of Financial Inclusion:
Most of the countries in the World have realized the importance of financial inclusion. In The United State of America, the community reinvestment act 1997 necessitates bank to provide credit to all people and prohibited them to mark only to rich people. In 1998, French government passed the law of exclusion which put emphasis that every person has a right to have a bank account. In South Africa government launched a bank account called Mzansi in 2004 which was especially designed to target the unbanked low income group. In United Kingdom, government constituted a committee named financial inclusion task force which was designed for monitoring the progress of financial inclusion. For addressing the issue of financial inclusion government passed micro finance act in 2006. Brazil also directed there state banks to make efforts to reach the masses. In Brazil banks have to keep up to 45% of their deposit with the central bank out of which 2% is strictly used by the banks for providing credit to poor people. Republic of China also promoted their micro finance schemes for targeting the reach of poor people.
Steps taken by the Indian government for the promotion of Financial Inclusion
After independence of India in 1947, economic condition of the country was in a dismal condition. Government of India took large number of initiatives over period for strengthening of financial services to all segment of population. Various actions which have been taken by the RBI and Government of India for the promotion of financial inclusion:
• Nationalization of banks (1969, 1980) • Priority Sector Lending requirements
• Establishment of Regional Rural Banks (RRBs) (1975, 1976) • Service area approach (1989)
• Self-help group-bank linkage program (1989,1990)
The other steps taken by GOI, RBI and National Bank for Agriculture and Rural Development (NABARD) are shown in following table:
Table 1
Measures taken by GOI, RBI and NABARD Customer Service
Centres
Credit Counselling Centres
Adhaar Scheme
The National Agricultural Insurance Scheme
No-frill Account Know Your Customer General Credit Card Project on Processor Cards
Micro Finance Development Fund
Role of NGOs, SHGs and MFIs
BF and BC models Micro Pension Model Nationwide Electronic Financial Inclusion System Project Financial Literacy National Rural Financial Inclusion Plan
Financial Inclusion Fund Project on “e-Grama” SHG-Post Office Linkage
Financial Inclusion Technology Fund
Separate Plan for Urban Financial Inclusion and Electronic Benefit Transfer Scheme
Financial Literacy through Audio Visual medium - Doordarshan
Support to Cooperative Banks and RRBs for setting up of Financial Literacy Centres Farmers’ Club Program Rural Volunteers as Book Writers
Source: RBI, Economic Survey, Government of India, Various Issues Conclusion:
Attainability of economic growth depends on equal distribution of opportunities and benefits and in this aspect financial inclusion plays the most crucial role. Financial inclusion helps in poverty eradication. Innovation in terms of branchless banking and banking business model are very helpful in making their way towards the goal of financial inclusion. Financial inclusion is based on financial tripod which shows the triangular relationship among financial inclusion, financial literacy and financial stability. Jamison et al. (2014) considered financial literacy as a pro saving instrument for the financial inclusion. Providing financial literacy and organizing awareness camp in the rural area can remove this hurdle.
World Bank (2008) differentiated between the access and usage of the financial inclusion, access comes under the supply side where as usage comes under both the demand and supply side. Financial inclusion is affected by both the demand and supply side barrier. Penetration of banking facilities is identified as the major supply side barrier. In country like India, Government can easily remove supply side barrier by opening bank branches in the rural areas. Lack of awareness of the customer about the banks comes under demand side barrier. In order to improve upon the demand side barrier, Government should provide financial education to the people. To achieve the target of financial inclusion, financial literacy can provide the platform of social infrastructure which facilitates economic growth.
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