FINANCIAL INNOVATIONS AND FINANCIAL INCLUSION – THE LINKAGE

K.P. Radhika

Assistant Professor – SIMS

 

Financial Inclusion and Financial Innovations are the two buzzwords that Indian economy is witnessing as a result of the radical measures taken by our Honourable Prime Minister to restructure the growth path and curb corruption. Financial innovation and inclusion are widely recognised tools to be adopted and accepted for enhancing the financial system of the country across the globe in a sustainable manner.

Financial Inclusion – the roadmap for policy reforms

The World Bank noted that “financial inclusion” is the key enabler for reducing poverty and boosting prosperity and has called for Universal Financial Access (UFA) by 2020. Financial inclusion means that individuals and businesses have access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit and insurance – delivered in a responsible and sustainable way.(Source: World Bank Report)

The concept of financial inclusion is the use of formal and regularised methods of banking for transactions to promote the various financial products associated with it. This system of operation of financial transactions through banks and other financial institutions ensures increase in the quality of life of households. Households become more responsible and accountable towards their savings, business transactions, risk management, investments and planning of optimum utilisation of resources available.

According to World Bank’s Global Financial Inclusion Survey (2012), only 35% of adults in India had access to a formal bank account and only 8% borrowed from institutional and formal sources. (b) As per Census 2011, only 58.7% of households are availing banking services in the country. The current scenario of India has posed severe challenges to the government on issues of various policy regulations and implications. Research indicated that countries that have well defined financial inclusion strategies have increased the pace and impact of reforms and development. The challenges that India is currently posed with the achieving of 100 percent financial inclusion are:

• Gender based disparity in financial inclusion
• Rural – urban divide in adoption and accessibility of financial resources
• The MSME sector with inadequate reach to formal financial sector for sourcing and operations.
• Appropriate measures and regulations to ensure responsible provision of financial services.

These challenges liquidate the operational efficiency of major policy reforms aimed towards promoting growth and development of the country. For example, the MGNREGA, Micro Finance programmes were targeted towards eradicating poverty and unemployment, but with the large unbanked population of the country, these initiatives have not yielded the desired results owing to informal methods of transactions and no regulatory checks for the same.

Financial Innovations – an aid for financial inclusion

Financial innovations have emerged as a great catalyst to the financial system of the country. Financial innovations lower cost of capital, reduce financial risks, improve financial intermediation, and hence welfare enhancing. Thus financial innovations can be seen as the central force driving the financial system toward greater economic efficiency. Countries where financial institutions spend more on financial innovation are better able to translate growth opportunities into GDP per capita.

In India the financial sector reforms since the early 1990s have triggered the growth of the financial innovations in the banking sector, with the various measures by the RBI. The banks have moved from the traditional ‘brick and mortar’ model to a ‘product-centric’ model by exploring, developing and promoting their innovative products that have been stimulated by the technological shocks. These financial innovations have brought many improvements in the financial environment of the country and have become a necessary part of the financial market to meet the needs of present global financial system and environment.

The challenges that India faces in the achievement of 100 percent penetration of financial innovations are

• Technological challenges of upgradation of systems across banking sector.
• Regulatory measures and protection from misuse and exploitation.
• Rural urban divide in provision of innovations.
• Creating awareness on the innovative product.

The Linkage

The individual aspects of financial inclusion and innovations thus create a natural coherence and congruence between innovation and inclusion on the financial arena. Policy makers should therefore take into account the linkage and integrate on the working platforms to make innovations work in line with inclusive policies thereby ensuring growth of the economy. The immense potential of the financial innovations should not be overlooked by the financial agents and every effort should be made to make innovations as the aid to foster financial inclusion and inclusive growth of India.