Beyond bank accounts

Protect investor confidence to increase financial inclusion

The Reserve Bank of India (RBI) has done well to construct an index to show the extent of financial inclusion in the country. The financial inclusion index (FI-Index) level for March 2021 was at 53.9, compared to 43.4 in March 2017. It captures broad aspects of financial inclusion, like access, usage, and quality in a single value, where zero means complete exclusion and 100 indicates full inclusion. As the FI-Index will be published every year, it will give a sense as to how the country is progressing on this all-important parameter. The reading of 53.9 for March 2021 shows that a large proportion of the population is still outside the formal channels of finance, or is unable to access quality services. In fact, the RBI should share more data — it will help improve the general understanding of strengths and weaknesses.

The need for financial inclusion cannot be overstated and the government over the years has worked to connect more households to the financial system. Financial inclusion got a major push under the National Democratic Alliance government with the opening of Jan Dhan accounts and the use of direct benefit transfers. In the last fiscal year, for instance, over Rs 5.5 trillion was transferred directly into the accounts of beneficiaries. This would have definitely reduced leakages to a large extent. However, just opening bank accounts and transferring government benefits cannot be seen as complete financial inclusion, and the RBI’s index acknowledges this. People should be encouraged through spreading financial literacy to park their savings with the banking system and invest in financial products. But this would only be possible if they are able to access their accounts frequently with relative ease. Technology can be a great enabler in this context. 
 

Better access to formal finance would not only help individuals — particularly in the lower-income group — to smoothen consumption and build assets, but also increase financial savings at the aggregate level. Higher aggregate financial savings will help boost investment over time and increase long-term growth potential. However, as more people get included into the financial system, it will be important for regulators to ensure that mis-selling of financial products is not allowed. There have been a number of instances in the past where financial products — particularly insurance products — have been mis-sold to a large number of middle and upper-middle class investors. A repetition in the lower income group can affect trust and defeat the basic objectives of financial inclusion.  

In this context, at a broader level, it is worth pointing out that the Employees’ Provident Fund Organisation (EPFO) and Life Insurance Corporation are reportedly contemplating investing a part of their corpus in start-ups. It should be avoided. Start-up investing is a complex and high-risk proposition. Institutions collecting funds from small savers and employees making mandatory contributions must avoid such options. Also, they don’t have the capability to invest in start-ups. The EPFO, for instance, has struggled with investments in exchange-traded funds. It should first focus on getting this part of the portfolio right. If financial institutions wish to invest in start-ups, they should raise money from investors with full disclosure. Deliberate misallocation of existing corpus can affect investor confidence, which will derail the goal of achieving financial inclusion and promoting financial savings. The basic building block of the financial system is trust. Thus, the government and all financial regulators must work to protect investor confidence as the project of financial inclusion moves forward.