a significant lowering of loan default rates. Empirical evidence for India shows that targeted distribution of LPG subsidy benefits entails a cost saving of US $1 billion a year to the exchequer (Barnwal, 2015).
Third, the small business is also a beneficiary of financial inclusion. This is driven not only by their improved access to finance as banks have large quantum of lendable resources but also better price (e.g. competitive interest rates) and non-price (e.g. quality and cost of service) terms. In this milieu, increased formal savings can lower the cost of credit and facilitate business expansion, which in turn can have collateral benefits by not only improving the resilience of small businesses but also exert multiplier effects on large businesses through forward and backward linkages. A significant body of research has persuasively documented that finance is a key constraint to SME growth, both in cross-country (Beck et al., 2006, 2008) as well as within-country (Zia, 2008; Banerjee and Duflo, 2014) studies.
Fourth, efforts to include an increasingly larger section of the population within the fold of formal finance can engender the deployment of innovative solutions and outsourcing arrangements. Such financial innovations have the potential of reducing costs and thereby enhance financial stability. Muralidharan, Niehans, and Sukthankar (2016) show that the introduction of biometric smart cards in the distribution of social benefits to intended beneficiaries in India reduced leakages by 40 % and improved household income by over 10 %.
Finally and from a macroeconomic standpoint, financial inclusion can help facilitate reduction in income inequalities and, by bridging the gap between the haves and the have-nots, promote social and political stability. Both theoretical (Aghion and Bolton, 1997; Galor and Zeira, 1993) as well as empirical research (Demirguc Kunt and Klapper, 2012) point to the fact that inequality in financial inclusion is correlated with the overall income inequality within a country.
Amid this changed environment, it would be useful to highlight the role played by the G20 in fostering the cause of financial inclusion. Even though the initiative towards enhancing financial inclusion was put on the G20 agenda in November 2008, its roots pre-dated the crisis. While the liberalization policies undertaken by EMDEs were successful in addressing many of the problems of mismanagement that plagued the financial sector, it proved less than adequate in increasing access by households and firms to financial services. On the contrary, the search for profits led to a gradual withdrawal of services to the poor to the extent these were provided by erstwhile state-owned banks that were re-oriented after liberalization.
Recognizing financial inclusion as one of the main pillars of the global development agenda, the G20 Summit in Toronto in June 2010 articulated a set of nine principles to guide governments that seek to make financial services more inclusive. Encouraged by the response, the 2010 Seoul Summit endorsed a concrete Financial Inclusion Action Plan (FIAP). It also committed to launch the key implementation mechanisms for the Action Plan — the Global Partnership for Financial Inclusion (GPFI) — to institutionalize and continue the work begun by the Financial Inclusion Experts Group regarding furtherance of financial inclusion through better national, regional, and international coordination, including support for capacity building and training and an SME Innovation Fund, focused on improving finance for small businesses.
The G20 initiatives regarding financial inclusion have been a welcome development. On the positive side, greater financial inclusion, which was ostensibly missing from the global policy agenda prior to the crisis, came to occupy center stage. It also heightened the appreciation of financial inclusion among policymakers, practitioners, as well as global standard-setting bodies. A new forum — the Alliance for Financial Inclusion — with over 100 members was created to advance the development of smart financial inclusion policies in developing and emerging countries. The German Presidency of G20 in 2017 provided a fillip to the process by updating the FIAP and developing High-Level principles for digital financial inclusion. With the arrival of mobile telephony and other forms of branchless banking, new technology has enhanced the possibilities of maintaining safe and dependable bank accounts for poor households. Most significantly, it has redirected attention to the huge financing gap for SMEs, straddling the ‘missing middle’ between MFIs — which have neither the balance sheet strength and risk appetite to meet SMEs’ financial needs — and commercial banks — for which SMEs are perceived as too small and risky. In a recent report, the Reserve Bank of India (RBI, 2015) had made several recommendations to address these challenges, such as those relating to certification and training of BCs and a new breed of professionals who would evaluate the financials of SMEs to ascertain their creditworthiness before these being forwarded to banks for subsequent analysis and examination. These recommendations are being closely examined.
These advancements at the international also have their echo in India. The Financial Stability and Development Council (FSDC), the apex body tasked with macroprudential oversight of the financial sector was established in December 2010. Chaired by the Finance Minister, the FSDC is vested with two major responsibilities. The first is to function as an apex level forum to strengthen and institutionalize the mechanism for maintaining financial stability. The second is to enhance inter-regulatory coordination and promote financial sector development in the country. To ensure that the financial sector development is addressed in a holistic manner, a sub-Committee has been established which meets more often than the full Council. A key technical group under the aegis of the sub-Committee is the Technical Group on Financial inclusion and financial literacy to deliberate on issues related to this area.
This is not to deny that many a times, an excessive penchant for financial inclusion might not necessarily be congruent with financial stability (Ghosh, 2010; Hanning and Jansen, 2010; Khan, 2011). One has to look no further than the recent subprime episode and earlier, the US savings and loan crisis in the 1990s, to appreciate this fact. More generally, it is worthwhile keeping in view the following considerations.
First, financial inclusion often involves venturing into new business segments or markets. Not only does this involve substantial upfront costs, but also the attendant risks of lending to new segments that are difficult to ascertain, a priori.
Second, the potential risks of lending to households with low and uncertain income are difficult to establish. Besides involving high operating costs, the informational inefficiencies and lack of credit history often put enormous burden on loan officers to judge a good credit risk. Since banks have to make provisions for loans gone bad based on defined criteria, erratic or irregular repayment schedules can increase the fragility of banks’ balance sheets.
Third, there are also systemic as well as concentration risks for the banking industry relying on a few vendors to address the ‘last mile’ problem.
Fourth, the pursuit of financial inclusion through innovative financial products needs to be carefully and thoroughly understood. As was the case with Collateralized Debt Obligations (CDO) during the US subprime crisis, during times of stress, the risks inherent in such products can magnify as market players run for cover to shield themselves from the excesses committed in good times.
Finally, several of the smaller entities involved in financial inclusion often suffer from poor governance and correlated risks emanating from lending to same set of clientele as commercial banks. While commercial banks might have the balance sheet strength to shield themselves from the vicissitudes of adverse economic outcomes, these smaller entities might find it difficult to successfully withstand serious market upheavals, jeopardizing financial stability.
Emerging Areas of Focus
In this section, we focus on several areas of financial inclusion that have assumed prominence in recent times. Salient among these include issues relating to gender, emerging role of technology, Pradhan Mantri Jan Dhan Yojana, Government-to-Person (G2P) payments, and new institutional initiatives. On a related note, we also touch upon some of the demand-side factors such as financial literacy and customer protection. We discuss each of these in turn.
Gender and Financial Inclusion
Gender disparity is commonplace in most economic and social spheres. Evidence suggests that on average, women earn 10–30% less than men for comparable work and have