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The Value of Financial Inclusion

Will the richest 1% own more than 50% of the world’s wealth by this time next year? Oxfam certainly thinks so. Their study, based on data from the Credit Suisse Global Wealth Datebook (2013 and 2014) estimated that the richest 1%, currently own 48% of the world’s wealth and would own over 50% of the world’s wealth by 2016. Released just before the World Economic Forum at Davos in January 2015, these findings caused a storm, provoking shock and awe from around the world.

Whether you agree with their conclusions or not, Oxfam’s study drives home a few facts. Some of the richest people could be burdened by heavy debt but will never experience dire poverty levels faced by people at the lowest economic strata in under-developed countries. This difference is explained by wealth inequality, which in turn perpetuates economic and social inequality.

The rich can afford short-term or long-term debt to increase their long term-earnings, ensuring that their place on a list like Oxfam’s is variable. The poor, especially those without access to formal institutions like banks, education institutions and corporations lack this flexibility. The deeper they are in the red, the more likely they are to stay that way. They live in conditions where the quantum of debt is often 100 times the value of their income, investments, savings or assets.

India is a country of vast poverty and wealth inequality that result in an unequal playing field for those at the bottom of the pyramid. The Economic Times found that approximately 85% of India’s workforce are employed in the informal sector. More than half of those employed in the formal sector are temporary workers without access to benefits like insurance, provident funds, gratuity benefits and savings.

Our country is one of the most cash-dependent countries in the world.High Cash Dependence Time-consuming and costly cash payments make up above 90% of transactions. A recent study found that “citizens of Delhi alone spend Rs9.1 crore and 60 lakh hours in collecting cash[1]”. The lack of access to formal money systems increases the reliance on cash and traps the less privileged who have limited awareness about financial instruments that can protect their wealth.

India is keen to change this cash dependence. The Government’s  Pradhan  Mantri Jan-Dhan Yojana (PMJDY), announced in  August 2014 is a key  initiative in extending formal financial  services to the poor. The scheme allows AADHAR card holders to  open a bank account with zero balance. This is a crucial alternative for the poor and unbanked who may not easily fulfil  banks’ stringent KYC (Know Your Customer) norms. Bank  account holders avail of benefits like receiving LPG (Liquid  Petroleum Gas) subsidies as a direct credit thus reducing  dependence on intermediaries. PMJDY account holders are given RUPay Debit Cards which enables fewer cash transactions.

If the government has declared its intent, can the non-governmental sector be far behind?

Bridging the financial services gap

In the past, NGOs and private players have worked with government agencies to bridge this gap for the poor and marginalised. Small borrowers are not profitable for private banks, and may be too spread out to be reached by government banks. An RBI report in 2013 found that “co-operatives, commercial banks, and other formal financial sector programs in rural areas have not displaced informal sources of credit altogether, as 43 per cent of rural households continue to rely on informal finance in 2002.[1]

Institutions like Self-Help Groups (SHGs) were created and promoted by NGOs like MYRADA to increase financial inclusion of the poor. They brought concepts of savings and credit to the poor while addressing limited access to brick and mortar banks. The National Board for Agricultural and Rural Development (NABARD) supported the growth of SHG with a Rs1 million grant to MYRADA in 1987. By 1991 the Reserve Bank of India (RBI) accepted SHGs as an alternative credit model[1]. Kolkata-based Bandhan Financial Services, set up to provide financial services to the poor, was granted a banking license by RBI in 2014.

Other Institutions in the game

In India, Self-Employed Women’s Association (SEWA) felt that women in the informal sector weren’t being taken seriously by banks and financial service providers. They set up a co-operative bank of their own in 1974. By 2013, the Shri Mahila Sewa Sahakari Bank had a working capital of Rs200 crore and under half a million women customers[2]. The need for financial services for women, seen as unworthy of credit by formal systems was also felt by Mann Deshi Foundation, who set up India’s first rural women’s bank in 1997. These organisations help women access financial services, have savings and investments in their name, and encourage them to borrow to start their own businesses.

Meanwhile, social businesses set up to serve the poor are receiving significant attention from private equity (PE) and impact investors. Intellecap reported that microfinance institutions (MFI) in India received 54% of all impact investing in 2013-14, with organisations working in the sphere of financial inclusion receiving the second largest funding at 17%. Their report found that impact investors along with their co-investment partners have cumulatively invested around US$350 million through 20 MFI deals. Ujjivan Financial Services, an MFI which serves the urban poor, has raised Rs600 crores from a consortium of PE investors[3]. Ujjivan stated that they had distributed over Rs21,050 million in loans in FY12, with profits before taxes growing by 71%[4]. Meanwhile, Janalakshmi Financial Services raised Rs325 crore in Series D funding in August 2013, before selling a minority stake to TPG Capital[5]. Janalakshmi has partnered with established corporates like Bajaj Allianz Life Insurance and HDFC Life Scheme to extend services to their customers.

Ease of access

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Mobile payment seems likely to be the area where innovation will drive the most positive change. In Kenya, for instance, 17 million people, or two thirds the adult population, use M-PESA, a mobile money transfer system. M-PESA was developed by Safaricom, a mobile network operator partly owned by the Vodafone Group. The M-PESA system was initially developed as a CSR initiative, and has gone on to become a product of the company itself. It’s been estimated that 25% of the country’s gross national product (GNP) flows through their system. Will India jump on the bandwagon soon? We hope so. Allowing people to deposit and withdraw cash using mobiles will save them time and money.  Mobile payments will reach them before internet banking does!

Conclusion

Widespread financial inclusion is still a distant dream for India. However, sustained political will and support from NGOs and corporates alike can transform it into an achievable goal. It is time to give the poor access to sophisticated systems that will help them grow and protect their money. This will help them avoid sources of credit that will keep them in the red for the majority of their lives. Technology has reduced barriers for the corporate world, and it is time these services are extended to the nonprofit world as well.


[1]History and spread of the self-help affinity group movement in India: The role played by IFAD’, Occasional Papers: Knowledge for development effectiveness, http://www.ifad.org/operations/projects/regions/pi/paper/3.pdf, July 2007

[2]Women’s Bank? SEWA has been doing it for 39 years,’, Kothari, Smita Pranav, http://www.sewabank.com/articles.html,Outlook India, March 2013

[3]Ujjivan Financial Services raises Rs600 crore’, Vishwanathan, Vivina, Live Mint, http://www.livemint.com/Companies/tJA5elnl6Isj6ksy5y5WtK/Ujjivan-Financial-Services-raises-Rs600-crore.html, Mar 20th 2015

[4] Ujjivan Annual Report, http://ujjivan.com/sites/default/files/Ujjivan_Annual_Report_2013-14.pdf

[5] Janalakshmi Financial set for a record PE fund raise’, Badrinath Raghuvir, Business Standard, http://www.business-standard.com/article/finance/janalakshmi-financial-set-for-a-record-pe-fund-raise-114072301824_1.html, July 24th, 2014

[6]Persistence of Informal Credit in Rural India: Evidence from ‘All-India Debt and Investment Survey and Beyond’, Pradhan, Narayan Chandra, ’http://rbi.org.in/scripts/PublicationsView.aspx?id=14986, 9th May, 2013

[7]India’s love for cash costs $3.5 billion a year’, Shetty, Mayur, http://timesofindia.indiatimes.com/business/india-business/Indias-love-for-cash-costs-3-5bn-a-year/articleshow/45934597.cms, Jan 19th, 2015

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