Inclusive Growth – Role of Financial Sector

Below are some excerpts from a lecture at a University by Dr. K. C. Chakrabarty, Deputy Governor, Reserve Bank of India on Inclusive Growth – Role of Financial Sector

• Here he talks about Inclusive Growth what it means ? why is it important ?. Inclusive growth means allowing people to contribute to and benefit from economic growth.
• Off late it has caught policy makers attention because the benefits of economic growth happened in the past few years are not shared equally among people.
• Growth is inclusive when it creates economic opportunities along with ensuring equal access to them.
• The Indian economy, though achieved a high growth momentum during 2003-04 to 2007-08, could not bring down unemployment and poverty to tolerable levels.
  
• Further, a vast majority of the population remained outside the ambit of basic health and education facilities during this high growth phase
• Over 25% of Indians continue to live in abject poverty. As a result, Inclusive growth has become a national policy objective of the Union Government.
  
• Govt has identified agriculture, infrastructure, health care and education as critical areas for achieving higher inclusive growth.
  
• The policies aim at increasing the income and employment opportunities on the one hand and on the other; it tries to finance programmes which are capable of making the growth more inclusive.

Financial Inclusion--Financial inclusion is the process of 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 by mainstream institutional players

Role of Financial Sector

• Banks and other financial services players largely are expected to mitigate the supply side processes that prevent poor and disadvantaged social groups from gaining access to the financial system.
  
• Access to financial products is constrained by several factors which include: lack of awareness about the financial products, unaffordable products, high transaction costs, and products which are not convenient, inflexible, not customized and of low quality
• The empirical evidence shows that countries with large proportion of population excluded from the formal financial system also show higher poverty ratios and higher inequality.
• However, we must bear in mind that apart from the supply side factors, demand side factors, such as lower income and /or asset holdings also have a significant bearing on inclusive growth.

Bottlenecks

• The gigantic nature of the task, keeping in view the number of financially excluded people.
• Lack of proper Business Models. Banks still perceive this as a burden and an imposition and not as a viable Business Model
• The costs of administering low value transactions and of financial intermediation are perceived to be on the higher side.
• Lack of cost effective scalable Delivery Models.

Strategy

• Banks must view Financial Inclusion as a huge business opportunity and perfect their Delivery Models. BC based delivery model has been made more flexible and inclusive
• Involve all the stakeholders in the process. Governments, both Central and State, NGOs, technology vendors, Industry Associations, Insurance and Mutual Fund companies, society at large

Myths about Financial Inclusion

• It is not their willingness but the lack of ability to deliver which is coming in the way

And he concludes that current policy objective of inclusive growth with stability is not possible without achieving universal Financial Inclusion.