From financial inclusion to financial integration

I was travelling to Kolhapur in Maharashtra when we stopped at a roadside restaurant. Proprietor, Kamal Bai was an enterprising lady. Widowed with three children, she started the restaurant to make a living. She had a Unified Payment Interface — Quick Response (UPI-QR) code posted on the counter and a bank account opened under the Pradhan Mantri Jan Dhan Yojana (PMJDY).

The government’s efforts for financial inclusion were paying off even in remote areas.

‘Women empowerment’ is a central theme of many programmes across government, non-government, and multilateral bodies.

However, labour markets in developed and developing markets are strikingly different. Developed markets are largely non-agricultural, with higher formal wage earners while emerging markets are more agrarian and aligned towards self-employment. In such a scenario, entrepreneurship becomes one of the few viable options for women to actively participate in the workforce. Access to finance has been acknowledged as a major supply-side challenge for entrepreneurship.

As cited in the MSME Annual Report, 2021 India has 63.8 million unincorporated Medium, Small and Micro Enterprises (MSMEs); of which 99 per cent are micro. A substantial number is outside the ambit of formal finance. The International Finance Corporation (IFC) estimates that the MSME segment has a credit gap of ₹25.8 trillion, and is growing at a Compound Annual Growth Rate (CAGR) of 37 per cent.

Low access

As per the 6th Economic Census, only 20 per cent of women-owned enterprises access formal finance. Without adequate, timely, customised and affordable access to credit, micro-entrepreneurs are forced to continue operating sub-optimal livelihood means that generate just about enough to cover some basic familial needs. Self Help Group linkages and Micro-Finance Institutions focus on providing access to credit at the bottom of the pyramid, primarily through Joint Liability Group (JLG) lending.

While SHGs are a homogenous group of 10-20 individuals who come together voluntarily for saving and internally helping each other in times of social and economic need, JLGs are formed for availing loans. For customers migrating from JLGs to individual loans there are operational and credit risk challenges, where in banks find it difficult to lend to these customers possibly due to the challenges faced by financial institutions in balancing outreach and profitability.

For customers like Kamal Bai, the lending product innovation of JLG happened more than two decades ago, wherein credit policy is institutionalised in group/social guarantee through JLG lending. While considerable strides have been made in terms of innovation in payments, the equivalent innovation has not been observed in lending to the mass market.

Financial products need to be designed from the demand perspective and not only from the point of view of the lenders’ convenience. Products such as small overdraft, cash credit, daily loan are a need of the demand side; however smaller individual loans, if at all, continue to be priced at substantially higher rates.

Customer-centric product design needs to be prioritised by financial institutions, irrespective of the type of segment. With the advent of data and payment systems in India such as UPI, financial institutions of innovative scoring and credit framework can provide risk-based pricing for institutions; which in turn can benefit the borrowers of the missing middle.

Jan Dhan’s reach

India has 43.9 crore bank accounts under PMJDY. The overall banking penetration among Indian adults is close to 80 per cent. Sixty-six per cent of the PMJDY accounts are in rural/semi urban areas, of which 80 per cent belong to women. More than one-third of the total bank accounts in India can be attributed to PMJDY.

If we assess our progress against the definition of ‘financial inclusion’, which pertains to the accessibility of banking and availability of credit, we can congratulate ourselves on significant progress. However, if we ask whether or not the industry has offered products for these newly included people that suit their needs, our performance is not quite favourably.

Can we confidently say that the products a typical banking customer has access to are available to nano- and micro-entrepreneurs as well?

Herein lies the difference between financial inclusion and financial integration. Financial inclusion refers to offering different financial products and services to different segments in different geographies. Financial integration, on the other hand, encompasses offering the same products and services to different segments in different geographies.

To facilitate empowerment in the true sense of the term, it is not enough to be included, but also important to be integrated. The financial services industry is a key stakeholder and should aim to adopt innovations for addressing supply-side challenges such as limited underwriting ability, lack of product relevance/innovation, higher cost of operation and challenges in last mile distribution.

In this journey from financial inclusion to financial integration, it is not only about making products available and accessible, but also about making them relevant, applicable, and acceptable. Kamal might be financially ‘included’ but she is not financially ‘integrated’, just yet.

The writer is Director with Development Monitoring and Evaluation Office, NITI Aayog. Views expressed are personal

COMMENT NOW