Financial Inclusion (FI) is defined as the provision of inexpensive, accessible and pertinent financial products to persons and businesses that were so far underserved by these products. The financially excluded people living in the emerging markets of the world have historically not been the target audience for banks until now. Banks did not view these recipients much capable of delivering a profitable segment of their customer base. Nevertheless, the promising technological advancements have resulted in minimising considerably the serving costs for these people of the society belonging to the marginalised segment of emerging markets.
The banks now perceive these underserved people as opportune recipients of inclusion into the mainstream financial services framework. Experts suggest that increasing the reach of financial inclusion will, apart from providing economic benefits such as strong GDP (Gross Domestic Product) growth, will also result in growing revenue numbers of banks. Innovative strategies such as offering customised solutions, using efficient risk mitigation and credit assessment procedures could considerably ease the efforts directed towards serving the financially excluded people.
The logic behind the vitality of inclusion is that by it the income-cycle runs evenly, protection against the unforeseen and disastrous events becomes possible, and also, an avenue is created for these people to save enough money for family celebrations and events—wedding, birthdays, etc. Some of the causes for their financial exclusion are: lack of education, geographical (transport) issues, unavailability of any credit records and identity documents for KYC formalities, and unaffordable prices of financial products.
EY—a consulting firm—states that, according to the World Bank’s “MSME: Finance opportunities and creating jobs,” report, among a total of 1.6 billion of the unbanked population, 200+ million are micro, small, and medium enterprises (MSMEs) having no banking services’ access. EY analysis for India further shows that, 3% of individuals fall in credit value gap (CVG) to GDP ratio to generate US$162billion worth of additional loans. The World Bank Group research states that of all the financially excluded people globally, 20.6% are in India, 11.6% in China, 3.7% in Bangladesh, 1.5% in Myanmar, 2.4% in Vietnam, 2.2% in Philippines, 2.6% in Mexico, 2.4% in Brazil, and 5.6% in Indonesia. The EY analysis also shows that India ranks high on financial inclusion revenue potential, with the size of opportunity being US$27,031 million by 2020.
On the technology-led advancement front, the following measures are crucial for sparking FI innovation: a). strong penetration of digital payments and smartphones. b). national digital identity verification system, e.g. the Aadhaar slack. c). credit record registries framework. d.) easy access to digital (social and behavioural) data. e.) digitalisation (virtualisation) of currency.
The policy level initiatives required for enabling innovation in FI include the following: i. customer-friendly (ethical and unaggressive) sales and credit collection practices for fragile (vulnerable) consumers. ii. organised insolvency (bankruptcy) procedures for safeguarding the lenders and optimistically giving credit access to MSMEs. iii. simplified banking regulations for no-frills account on-boarding. iv. a wider ecosystem of financial services providers including ecommerce companies, FinTech firms, retailers and mobile communication companies. v. interoperable and collaborative financial systems involving government, financial sector, and telecom (digital payment) solutions.
Similarly, availability of startup funds to capital seeking nascent entrepreneurs and the provision of digital finance can also together increase revenues and make finance and investments reachable to the communities of lower incomes group.