Promoting Financial Inclusion - United Nations Development ...

There has been a significant set of regulatory and promotional efforts which, taken together,
could be expected to have a substantive impact on financial inclusion. In sum, these are the
• Big push for the business correspondent model by Banks
• Mandatory Government to Person (G2P) payments in Banks and Post Office accounts using
electronic transfers
• Rolling out of the concept of a “no frills” account for small value transactions
• Enabling of the provision of micro-insurance services through facilitating regulation
• Establishment of funds to finance promotional activities that support the above measures and
reinforce the work of microfinance institutions
• Attempt to revive the cooperative credit system
along with a number of small steps that facilitate inclusion within the existing system like
• Simplified Know Your Customer (KYC) norms and interest rate deregulation for small value
accounts
• An increased emphasis on devising payment systems that address the needs of low income
families
• Small investments but increasing realization of the significance of financial literacy to ensure
meaningful financial inclusion and increased emphasis on consumer protection.
In practice, each regulatory and promotional measure has been constrained by overemphasis on
prudential aspects by regulators:
• The BC model met with limited success for four years before the decision to liberalise it was taken.
Even today, its future success is yet to be determined given the non-existence of an established
replicable business model. Use of the no frills account is minimal despite its linkage to government
welfare payments
• Micro-insurance is yet to be rolled out in a big way outside the limited confines of micro-credit
cover
• The funds allocated to promote financial inclusion are administered within the traditional framework
and do not sufficiently emphasise innovation and
• The cooperative credit system has undergone several rounds of revival and yet its true potential
remains to be tapped.
3 WHAT ARE THE CHALLENGES
AND HOW CAN THEY BE
OVERCOME?
It is apparent from the discussion in this
section that the task of increasing and
maximising financial inclusion faces major
challenges. These cover a range of issues
including
• Social exclusion of low income families
results in illiteracy, inhibition and poor
physical access. It also limits awareness,
ability to overcome prejudice about
their bank-worthiness and enhances the
transaction costs incurred these families
for using the financial services available
in the country
• The small value of accounts and
transactions expected by the banking
system from financially excluded families
results in high cost of operations and
limits the incentive to serve them
• The lack of understanding of products
and services appropriate to the needs
of low income families results in static
approaches like the no frills account
where it has become apparent that mere
availability is not the issue
• Limited experience with business
models suitable for small value accounts
and doorstep service delivery results in
the slow adoption of mechanisms such
as the business correspondent model
EXECUTIVE SUMMARY
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