There are several components to being healthy; physical aspect is only one of them. The World Health Organization (WHO) defines ‘Health’ as a state of complete physical, mental, and social well-being. This means that health is not the mere absence of disease or infirmity.
This is the case with financial inclusion as well.
What is financial inclusion
There are several components to financial inclusion; banking is only one of them. The Reserve Bank of India (RBI) has a clear definition for ‘Financial Inclusion’. It is the access to appropriate financial products and services for all sections of the society. It needs to be available at an affordable cost in a fair and transparent manner through mainstream institutions.
A physically fit person is not considered healthy if they suffer from mental illness. The same way, a person with a savings bank account is not financially included if they do not have insurance. The analogy above is not a mere anecdote. Studies have shown that the major cause of indebtedness among the poor is health-related emergencies.
Components of personal finance
We can bracket financial services products into three mainstream buckets:
- Banking: regulated by the RBI (Reserve Bank of India)
- Insurance: regulated by the IRDAI (Insurance Regulatory & Development Authority of India)
- Capital Markets: regulated by the SEBI (Securities & Exchange Board of India)
The below examples illustrate the importance of comprehensive financial inclusion:
Example 1: An auto driver saves for many years and builds a corpus of INR 1.5 lakhs for a family home. Albeit, he does not have insurance coverage. Now, a member of his family gets cancer. The savings would wipe out with treatment. He’ll borrow money, from both formal and informal sources, to aid the treatment.
Example 2: A teacher works and saves for 30 years to build a retirement corpus. The modes of savings are bank FDs and LIC policies. The rate of return on these financial products would most likely be well below inflation. This does not include periodic spikes which take place in India on staples, for e.g. onions. Due to the overall negative return, the teacher would run out of money during the period when she and her dependents are the most vulnerable.
The first example addresses access to banking services, but not insurance services. The second example addresses access to banking and insurance services, but not capital markets.
The current state
Arguably, the focus and rhetoric in India have been thus far predominant in the banking space. We see that the RBI and the government is upping the ante over the last few years. Insurance is now becoming a focus, with the launch of the RBSY (‘Rashtriya Swasthya Bima Yojna’). Capital Markets would still be a relative non-priority. This reflects the level of penetration of these three products across the nation. As of now, banking is in the lead. However, insurance and capital markets are still at single digit coverage.
What the future holds
India is to enjoy the benefits of a demographic dividend over the next several decades. The youth is comfortable with the adoption of technology. Increasing smartphone penetration and data availability give a unique opportunity. The government and the regulators need to educate the citizens on financial products. Educating and making financial products available to all would drive true financial inclusion. If we do not act now, we may face the same issues, albeit at a much larger scale, that many western countries now face. The elderly would have inadequate savings, pensions, and health emergency coverage.