Isn’t it a part of your routine life to get unsolicited phone calls every day offering you either easy credit, insurance or any other financial product? Most often than not, you end the call saying ‘Thanks, I don’t need it’. Recall and contrast this with non-availability of finance to the under-served majority of the population and to farmers committing suicide after falling into the debt trap of private moneylenders. Ironical, isn’t it? While on the one hand, a wide range of financial services are available to the upper fraction of the society, the significant lower majority lacks access even to the most basic services. The divide between the two segments of society has grown large. The essence of financial inclusion is to ensure that a range of appropriate services are available to every individual and all those who need these services are made to understand and avail them. I dream of a future when financial services are as easily available to those who actually need it as they are available to you and me. I dream of a future when the marginalised segments too have an option to choose their banker or insurer… just as we choose our brand of soap or biscuit!

Why has the FMCG sector reached areas where financial services still seem to be piloting? Simply, because it acknowledged the strong business logic of reaching the bottom of the pyramid! Taking financial inclusion forward as part of social responsibility or regulatory compulsion can succeed but not at the needed speed. Financial inclusion will gather the required momentum when it makes as strong a business logic for the financial sector as it does for the FMCG sector.

The rural sector poses a real challenge given its backwardness and mass illiteracy, as people there are still caught in ancient financial systems that are as exploitative and futile as ever.

The process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups at an affordable cost is what financial inclusion was defined as by the Rangarajan Committee. Those involved in the cause of financial inclusion understand that the approach to inclusion in developing countries, such as India, is largely different from that in developed countries. In India, we talk about the majority who are excluded. As per the 2001 census, about 72 per cent population lives in the rural segment. The problem of financial inclusion gets aggravated because this segment is scattered over a large geographic expanse.

Moreover, the rural segment is distinct in various characteristics, such as purchasing power, development, social systems, etc. These differences relate directly to the kind of distinct demand patterns that the rural sector has in various product segments, especially when it comes to financial services Further, the sector poses a real challenge given its technological backwardness and mass illiteracy, as people are still caught in ancient financial systems that are as exploitative and futile as ever.

The limited access to affordable financial services such as savings, loans, remittances and insurance services for the vast majority in the rural areas and unorganised sector is acting as a constraint to the growth impetus of not only the rural sector but the Indian economy as a whole. The Indian economy has grown at a steady rate in the last five years or so and, despite the effects of global meltdown, is expected to be back on similar growth track soon. In fact, the non-urban segment of Indian economy has acted as a cushion for reducing the impact of the global meltdown. The demand from the rural and unorganised segment has shown no drop even in the wake of a global recession. This speaks of the potential of the segment.

Access to affordable financial services such as credit and insurance will further enlarge livelihood opportunities, thereby substantially empowering the under-served sections. Hence, financial inclusion is considered to be critical for achieving inclusive growth; which itself is required for ensuring sustainable overall growth.

Financial exclusion primarily is of two types: exclusion from the payments system, that is, not having access to a bank account and exclusion from the formal credit markets. In a study conducted by the Indian Council for Research on International Economic Relations (ICRIER), it was found that India ranked 50th in the world, when ranked on parameters like banking penetration, availability and usage of financial services !

A common measure of financial is the percentage of adult population having a bank account. Available data shows that only 59 per cent of the adult population in the country has bank accounts. Thus, 41 per cent is unbanked and that’s a fairly large part. More importantly, the unbanked segment in rural areas is much higher at 61 per cent. One of the major goals of the 11th Five-Year Plan is to work for financial inclusion and extend the reach of microfinance to meet credit needs of about 80 per cent of the population not directly covered by banks. A lot of ground therefore still needs to be covered.

The real success of a financial inclusion project can be measured by the actual quantity and quality of usage of the newly-opened no-frills accounts. A perusal of sample accounts reveals that 72 per cent of them had zero or minimum balance even after one year of opening. Only 15 per cent of the accounts had a balance of more than Rs 100, leaving 85 per cent of the new no-frills accounts inoperative Early this year, the Reserve Bank of India got an evaluation done by independent external agencies regarding the progress made in the districts that had reported 100 per cent financial inclusion. The study revealed that actual financial inclusion was not to the extent reported; most of the accounts that had been opened as a part of the financial inclusion drive were inoperative due to various reasons such as distance from the branch, illiteracy, lack of interest, non-availability of passbooks, etc.

It is often felt that the underserved sections require a formal credit system more than deposit banking or insurance services. The extent of exclusion from credit markets is severe. Out of 203 million households in the country, 147 million are in rural areas. Of the 89 million farmer households, 51.4 per cent have no access to formal or informal sources of credit while 73 per cent have no access to formal sources of credit. Therefore, efforts to extend credit have yielded more cooperation from the rural section in furthering financial inclusion. But credit must be supplemented by insurance coverage to provide the needed financial cushion to a family in the absence of the bread-winner. Therefore, insurance becomes an integral part to complete financial inclusion.

The irony is that while a wide range of financial services are available to the upper fraction of the society, the significant lower majority lacks access even to the most basic services.

Financial inclusion, no doubt, is an essential step to alleviate poverty in India. But to achieve this, the institutions involved must rise above the perspective of social responsibility and consider the vast segment as a business opportunity. There is a need to pursue the innovations necessary to reach low income consumers and still make a profit. There is need for financial service providers to learn more about consumers in the rural and under-served segments and develop new business models to reach out them.

The reason for slow pace of financial inclusion in the country is multi-faceted. The distribution cost itself gets more than double the value of product or service being made available. Further, the geographic expanse poses the problem of coverage. With the automation of core banking processes and the use of channels such as ATM, IVR-based tele-banking and Internet banking, the banking industry has become lean and more profitable. 

Banks and other financial service providers, however, face an uphill task in reaching out to mass customers in remote locations such as villages. The infrastructure cost, operating expenses, security, understanding of client behaviour and associated risks, and low and slow return on investment inhibit the institutions from expanding into the rural market. 

Information and communication technology can prove to be a solution for financial services organisations trying to reach the scattered financially excluded segment. This fact has been acknowledged by the central government, as is evident from the setting up of two funds for promoting financial inclusion. These are the Financial Inclusion Fund for Developmental and Promotional Interventions and Financial Inclusion Technology Fund to meet cost of technology adoption. 

A study undertaken by JuxtConsult estimated Indian internet users to be 35 million. Out of these 5 million were from rural India. Even though internet has reached rural India through broadband, its use is still restricted through cyber cafés.

The fact that most usage from rural India is coming from cybercafés is a little disappointing. Affordability and availability of power are at the root of such limited access. Internet access through set-top boxes of the cable TV could be a good way to more deeply penetrate the rural segment. 

Despite the presence of internet in rural India, its limited use can be expected to be an issue for some more time. Against this, mobile subscriptions have penetrated much deeper and are growing at an exponential rate. The current subscriber base is around 250 million. Keeping the increasing reach of mobile phone in rural segments, it is evident that mobile phones and not the computer is the right medium to reach the masses. Among financial services, mobile banking has already taken off. With the adoption of mobile banking, transaction costs can be radically brought down even in remote locations. The International Telecom-munication Union (ITU) estimates that over half the people of low income countries are within reach of wireless services and aims to connect the world by 2015. Basic banking services can be made available remotely through low-cost wireless phones. The ultimate level of wireless penetration depends on the cost to consumers and the profitability of providers.

The use of wireless technology is a huge way to forward the cause of micro finance if the communication network is available at all locations and the processes are standardised. For user authentication, bio-recognition technology, like fingerprint recognition, can play an important role. Leveraging the existing network penetration and launching more services with ease can be a solution to profitably increase financial inclusion. For this, the recently released 3G spectrum will help tremendously. It is estimated that there will be 270 million users subscribing to 3G by 2012. Mobile-enabled 3G instruments can be the newest application for rural India. For that to happen, however,  mobile phones have to become more sophisticated and should come at a cheaper price. Subsidising such mobile devices can even be considered. But economies of scale and competition can be a better way to drive the prices down. n India, 270 million 3G users out of a 1.2 billion population is no small feat. If they access internet from their phones, it will lead to an increase of over 800 per cent on of current internet usage.

It is becoming increasingly apparent that addressing financial exclusion has to rise above the perspective of mere social responsibility on part of the financial service providers. The providers must take a holistic view in creating awareness about financial products, education, money-management advice, debt counselling, savings and affordable credit.

Financial inclusion is not just a social responsibility but is potentially a strong business opportunity. The institutions involved will have to evolve specific strategies to expand the reach of their services in order to promote financial inclusion. For this to be a profitable proposition, it calls for redesigning business strategies and operations. The low margins will be more than compensated by the huge volumes!

Let’s look forward to the time when today’s underserved will have the option to choose their own financial service provider from their rural marketplace

(D K Mehrotra is Managing Director, Life Insurance Corporation of India)