If we look at the global scenario at present, more than 2 billion adults in their working age don’t have any account in a formal financial institution. In a country like India, financial inclusion holds much importance in economic growth. Though the economic growth in India is much higher than in most developed countries, the majority of the population is unbanked.
As income from rural areas increases over time, there will be a need to help earners save and manage their funds. There are several reasons why financial inclusion should be one of the major focus areas of the Indian economy, listed as follows:
- Encourage Savings: As the rural earnings increase, so does the need for saving. Because most of the people in rural areas have little or no access to financial services, they don’t get into the habit of earning. As an economy, savings need to be encouraged to boost capital formation.
- Facilitate Formal Credit Avenues: Dependence on informal channels of credit needs to be uprooted. To reduce lending from such informal avenues, such as borrowing cash from friends and family, proper avenues need to be made available to all sections of the society. Available of adequate credit from formal credit providers will help the masses take up more entrepreneurial responsibility and add to economic growth.
- Allow Direct Cash Transfers: Physical cash payments are cumbersome and risky. Moreover, there are no guarantees that the funds will actually reach the right person. Having a proper account with a banking or financial institution enables direct cash transfers, which reduces the risks associated with physical cash payments.
- Ensure Money Reaches the Right People: Availability of direct cash transfers also helps keep a check on the system’s bureaucracy, and that poor people receive their due sum from public subsidies in time.
Apart from these four major reasons why financial inclusion is important, there are few other reasons to consider, including:
● Making day-to-day monetary transactions smoothly
● Helping households manage their cash flows better
● Making funds available at the time of unexpected events and calamities
● Helping small and medium scale businesses to grow and invest
Measures to Assist Financial Inclusion
The government of India, along with the Reserve bank of India took various measures to assist financial inclusion in the country. Among the measures that have been taken include:
Easing out the KYC norms
KYC norms are eased to make sure bank accounts, even with balances as low as ₹50,000 can be easily opened. Also, banks can Aadhaar cards to verify identity and address.
Compulsory Opening of Branches in Unbanked Villages
Banks must follow the directive to allocate at least 25% of the total number of branches they plan to open in an year for opening branches in unbanked villages.
Licensing New Banks
The whole exercise of licensing new banks will include considering the business models that promote furthering of financial inclusion efforts using innovative approaches.
Encouraging Banks to Open Basic Saving Bank Deposit
Banks are advised to open Basic Saving Bank Deposit (BSBD) Accounts that allow customers to maintain accounts with no minimum balance. These BSBD accounts will have other common features such as the provision of ATM cards, easy withdrawal and cash deposits.
India as an economy needs to bring into practice certain strong and effective financial inclusion methods. Policy makers should focus on making financial services available to rural and weaker sections of the society, at affordable costs. Making a proper system accessible to these sections can significantly bolster overall capital growth of the country, and also diminish the rich-poor gap.