What is the issue?
- While financial Inclusion is viewed largely from the consumer perspective, it also contributes to greater banking stability.
How is this?
- Financial inclusion means granting effective access to all economic agents to formal financial services.
- This has become an important public policy priority following the global financial crisis (sub-prime crisis).
- Financial inclusion helps banks garner ample risk-free, cheap retail deposits, reducing their reliance on volatile, costly money market.
- This effect is pronounced in banks having higher customer deposit funding and lower marginal costs of providing banking services.
- Such trends in countries having stronger institutional quality tend develop greater institutional stability.
What are the benefits?
- Greater access to finance services - increases savings, reduces income inequality & poverty and increases employment.
- Banks operating in an inclusive financial sector along could experience greater operating efficiency in financial intermediation.
- Increasing Deposits - Through innovative technology, banks can provide financial services to a large number of customers.
- This could be potentially at a reduced cost, thereby mobilising large non-wholesale long-term funding.
- As retail deposits are sluggish, cheap and insensitive to risks when compared to wholesale funding, it tends to add considerable stability to the sector.
- Prudent lending – Also, increasing banking sector outreach by opening up in newer areas helps reduce distance for consumers.
- This enables banks to build a good customer relationship and also provides with the opportunity to know consumers better.
- This leads to judicious lending & pricing decisions which helps making the right decisions regarding lending.
What could be the negative spin-offs?
- Despite having many benefits, financial inclusion also has some countervailing effects.
- Informational asymmetries while dealing with poor households or small firms is indeed a problem that may arise.
- Scaling up managerial and technical expertise to serve a wide-ranging customer base might not be easy.
What are the opportunities?
- Broadening banking services to unbanked and under-banked people offers big business opportunities.
- Banks can tap into the potential of customers and aid an inclusive development agenda.
- This will help in streaming resources into more productive areas.
- Thus, the overall benefits may outweigh the costs associated with greater financial inclusion.
Source: Business Line
