Financial Inclusion: Demand- Supply perspective

This is the title of another superb speech from Subir Gokarn, Deputy Governor of RBI. He keeps coming up with some really useful speeches on Indian economy. The speeches are a good mix of economic research and analysis.

In this speech he gives a nice demand-supply perspective on financial inclusion. There is always a question – Is lack of financial inclusion a supply problem (not enough banks etc) or a demand problem (people do not want these services)? The speech does not answer that definitely. But it does show there could be a certain demand for some financial products which help manage medical and wedding planning costs. Hence the focus of the speech is to use demand and supply of financial inclusion to design better financial products.

He sums up the key messages from his analysis:

The first message emerges from the preliminary discussion on the current scenario on financial inclusion, both at the aggregate level and across income categories. The data suggest that even savings accounts, the most basic financial service, has low penetration amongst the lowest income households

The second message is that the process of financial inclusion is going to be incomplete and inadequate if it is measured only in terms of new accounts being opened and operated. From the employment and earnings patterns, there emerged a sense that better access to various kinds of financial services would help to increase the livelihood potential of a number of occupational categories, which in turn would help reduce the income differentials between these and more regular, salaried jobs.

The third message emerges from the analysis of expenditure patterns is the significance of infrequent, but quantitatively significant expenditures like ceremonies and medical costs. Essentially, dealing with these kinds of expenditures requires either low-cost insurance options, supported by a correspondingly low-cost health care system or a low level systematic investment plan, which allows even poor households to create enough of a buffer to deal with these demands as and when they arise. As has already been pointed out, it is not as though such products are not being offered by domestic financial service providers. It is really a matter of extending them to make them accessible to a very large number of lower income households, with a low and possibly uncertain ability to maintain regular contributions.

The fourth message comes strongly from the motivations to both save and borrow, which, as one might reasonably expect, significantly overlap with each other. It is striking that the need to deal with emergencies, both financial and medical, plays such an important role in both sets of motivations. The latter is, as has been said, amenable to a low-cost, mass insurance scheme, with the attendant service provision. However, the former, which is a theme that recurs through the entire discussion on consumer characteristics, certainly suggests that the need for some kind of income and consumption smoothing product is a significant one in an effective financial inclusion agenda.

The fifth and final message is actually the point I began the lecture with. It is the critical importance of the principle of commercial viability. Every aspect of a financial inclusion strategy – whether it is the design of products and services or the delivery mechanism – needs to be viewed in terms of the business opportunity that it offers and not as a deliverable that has been imposed on the service provider

Read the whole speech for details. There are some interesting charts etc as well. Slide 10 shows urban households prefer to keep more pf their savings as cash at home compared to rural. This is really ironical as one should expect reverse to be true. The urban areas also have larger presence of banks and other savings options. Clearly, there is more to the story than a simple demand/supply gap. Lack of Financial inclusion has many psychological insights as well. The story remains incomplete by just looking at the story from the rational perspective alone..

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