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Financial Inclusion
George Cheriyan, Director, CUTS International    5/30/2011 1:00:35 AM

More than two billion people worldwide go without access to formal financial services, many of them are the world’s poorest. Until the recent global financial crisis, the global economy was adding an estimated 150 million new consumers of financial services each year. Most of these new consumers are in developing countries where consumer protection and financial literacy are still in their infancy. Household use of financial services has been rising rapidly in emerging countries, yet consumer protection and financial literacy remain weak. The recent global recession had further worsened the plight of consumers. The global financial crisis has highlighted the importance of consumer protection and financial literacy for the stability of the financial sector.

Financial Inclusion and Inclusive Growth
Financial inclusion refers to ensuring access to appropriate financial products and services needed by vulnerable groups, such as weaker sections and low income groups, at an affordable cost in a fair and transparent manner from the mainstream service providers.

The biggest challenge India is facing today is to ensure inclusive growth. It is important to ensure that while the Indian economy grows rapidly; all segments of society are part of this growth process, preventing any regional disparities from derailing such growth. Thus, there is an urgent need today to link all households that are excluded from formal financial services.

Financial inclusion includes access to financial products and services such as no frill bank account, check in account, micro-credit, savings products, remittances & payment services, insurance, healthcare, mortgage, financial advisory services, entrepreneurial credit, pension for old age, business correspondence and self help group branchless banking etc. Lack of access to financial services are due to several reasons such as shortage of sources of financial services in our rural areas, high information barriers and low awareness, inadequate access to formal financial institutions etc. among many others. Those who are excluded are: marginal farmers, landless labor, workers in unorganized sector, urban slum dwellers, migrants, ethnic minorities and other socially excluded groups.

Extent of Exclusion in India
However the reality is that out of 1.21 billion Indians, only about 40 percent citizens have access to banking services. Only 38 percent (32,000 branches) of the bank branches are in the rural areas. More importantly, rural India accounts for just nine percent of total deposits, seven percent of total credit, 10 percent of life insurance and 0.6 percent of non-life insurance business. In rural areas 39 percent of the population is banked against 59 percent in urban areas. The un-banked population is higher in the poorer regions of the country, and is the worst in the North-Eastern and Eastern regions. It is well-recognised today that the lack of formal banking facilities has led to non-banking channels as the only available source of credit for large sections of the rural population as well as the urban poor. This has resulted in very high costs of credit delivery to the poor.

In addition, information asymmetry between consumers and banks regarding financial products and services puts customers of financial services at a disadvantage. This imbalance is greatest when customers are less experienced and the products are more sophisticated. Progress on financial inclusion therefore carries the risk of producing more inexperienced and vulnerable customers.

Financial Consumer Protection: Major Concerns
Value for money, safe in use, full disclosure of the product specification etc. are some of the minimum expectations of common consumers with regard to financial services. How ever the major concerns are: violation of data privacy, hidden or inflated charges or fees, unfair contract terms and conditions (including unfair variation of contract terms, interest rates or charges), undisclosed level of financial risk passed to the consumer, contract terms not explained clearly at point of sale, violation of data privacy, after-sale customer service falling below expectations, Aggressive or invasive sales techniques, breach of contract by the service provider, Failure to deliver the services, exclusion from service etc.

Findings of a survey conducted by CUTS International in Rajasthan in 2010, on the theme ‘Our money, our rights’, shows that an alarming 87 percent of the consumers surveyed expressed that they are not fully aware about the details or about the terms and conditions of the financial scheme/product in which they have invested their hard earn savings. 85 percent said they are not satisfied with the services rendered by the banks and 43 percent said they face discourteous treatment from the providers. With regard to credit cards, 80 percent feel the interest charged is heavy. Similarly about interest charged on loans, 51 percent have expressed their dissatisfaction. A shocking, 52 percent consumers of financial services are not aware about the existence of any grievance redressal mechanisms with regard to financial services.

The financial consumer protection framework in India consist of: the information dissemination to customers mandated by the Banking Codes and Standards Bureau of India (BCSBI), Fair Practices Code adopted by the banks, grievance redressal mechanism with in the banks, Banking Ombudsman, Courts set up under the consumer protection act at district, state and national level etc. However most of the consumers are not aware about the existence of these mechanisms or don’t know how to avail the services of these agencies.

Balancing the Asymmetries
Consumer education can help balance information asymmetries between consumers and providers of financial services. New, inexperienced entrants to the market are especially in need of education about their rights and responsibilities. Consumer education may be delivered by government agencies, consumer associations, or the industry, but most often consumer education programs are provided through public campaigns that use the Internet; print, radio, and television media; advertising; publications; and training.

Financial inclusion and financial literacy are twin pillars. Financial literacy stimulates the demand side, making people aware of what they can and should demand. Financial inclusion acts from the supply side, providing what people demand in the financial market. While we have traditionally focused more on addressing financial exclusion through many supply-side measures so as to help “connect people” with the banking system, we have come to recognize the demand side imperative also, that financial literacy and education should be developed hand in hand with improving access to financial services.

Increasing Competition
The financial services sector in India has grown rapidly in the past two decades after the economic reforms initiated by the government in the early 90s. Increasing competition from private sector banks and multinational banks has forced the state-owned banks to revamp their marketing strategies and revamp their operational models. Promoting competition in financial services is a key element in ensuring good consumer protection. The creation of a more competitive environment in banking was one of the explicit objectives of the banking sector reform in India and the degree of competition has increased to some extent within the banking system. Several new private banks have started operations and foreign banks have also been allowed to expand their branches more liberally than in the past.

Innovative Technologies and Alternative Business Models
Recent developments in technology have transformed banking from the traditional brick-and-mortar infrastructure to a system supplemented by other channels like automated teller machines (ATM), credit/debit cards, internet banking, online money transfers, etc. The most recent development of internet-based non-bank financial services (including money transfers) mobile-phone-based financial services etc. Mobile banking is one of the models, which is gaining momentum across the world.
Globally, about four billion mobile phone subscriptions were reported in 2009, well over half of them in the developing world. Mobile phone penetration in developing countries has almost tripled in the past five years, with Asia in particular showing high growth rates. As on February 2011, India alone accounts for 752 million mobile users. Out of this only 54 percent (406 million) are having Bank accounts. Hence proliferating mobile phones open another delivery channel for basic financial services to poor people. This technology drastically reduces the costs of convenient and real-time financial transactions, expands access points, lessens the need to carry cash and attracts previously unbanked customers. Several country cases illustrate the promise of mobile payments for financial inclusion.

Road Map
Many a times, the poor, migrants, disadvantaged and marginalised people, struggle to open a bank account in the absence of a proper identification or address proof. Even the onus of proving identity has been transferred to the individual. Hence they are cut of from the formal chain of financial services.

Hence a key facilitator for enabling the country’s banking system to spread its reach in the coming days can be the unique identification (UID) number. UIDAI (Unique Identity Authority of India), targets to provide unique identity to 600 million residents in next five years, which will address many of the current challenges faced by the banks in delivery of financial services. UIDAI have identified financial inclusion as the main driver for UID and enabling e-governance.

Today, the most popular vehicles of taking Micro Finance to the rural hinterland are the Self Help Groups (SHGs) and the Micro Finance Institutions (MFIs), bank linkage models. The model enables members of an SHG to make small, but regular, savings, which are then revolved or loaned to its members. But recent issue of MFIs charging high interest rate in Andhra Pradesh, resulted in over regulation of the sector by the state, need to be noted.

The concept of ‘bank account number portability’, which is in practice in some countries, is that consumers would own their identity reference and could move it between Banks. It is the same way mobile phone numbers are portable and would further stimulate competition within the banking industry. Once gain momentum this would be a dramatic shift forward for consumers of financial services.

Efforts at International level
In the G20 summit held in South Korea in November 2010, the leaders recognized financial inclusion as one of the main pillars of the global development agenda. This prominence and commitment was manifested in a concrete action plan endorsed by all parties, who also agreed to report back on their progress in one year’s time when France hosts the summit in 2011. The main implementing mechanism of the action plan is a new Global Partnership for Financial Inclusion (GPFI). Financial Stability Board (FSB) is entrusted with the responsibility to examine the issue in collaboration with other international organisations, and to report back to the next G20 Summit. The GPFI will be an inclusive platform for G20 countries, non-G20 countries and relevant stakeholders for peer learning, knowledge sharing, policy advocacy and coordination. The G20 recognizes the importance of enhancing the role of developing countries in deepening and stabilizing the global financial system and accelerating economic growth to eradicate poverty. So the consumer groups and organizations across the world need to make use of this opportunity to raise concerns of the consumers of financial services and to demand to put in place an effective mechanism to deal with it. 

(George Cheriyan is currently the Director of CUTS International, an Indian origin International consumer organization, and heads the CUTS Centre for Consumer Action, Research & Training (CUTS CART). Presently George is representing CUTS, in the Consumers International’s (CI) international working group on financial consumer protection, and involved in the G20 financial services global campaign to increase consumers' access to stable, fair and competitive financial markets. He has written and published a number of articles in leading national news dailies, news magazines, journals, periodicals etc. and edited books.

The views expressed in the article are personal and do not reflect the official policy or position of the organisation.)


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