advantages and disadvantages of financial inclusion
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Financial inclusion affects the entire economic system and significantly the banking sector both positively and negatively. It is worthwhile to understand the causes of both kinds of effects.
Positively
1) More accounts, more money: As under-served masses are covered under financial inclusion drive (http://pmjdy.gov.in/home), the money in form of deposits start to flow from their households into the financial system. This money can be lent at higher interest rates to the borrowers. The State Bank of India's deposit base is so strong that it sources 97% of its funds from deposits (at 4%), which it can lend at more than 10%.
2) More customers, more products: Again PMJDY being the case in point, the government has been able to sell more than 9 Cr accidental insurance policies and roughly 3 Cr life insurance policies. The financial inclusion offers the banks an opportunity to provide the eligible clients with a suite of financial services.
3) High inclusion, high economic performance: The inclusion of left out households in the financial system of the country essentially means that they would be able to contribute financially to the system. The banking system is just an entry point for them. The money, then, gets trickled to capital markets, money markets and booming sectors of money that are in need of funds. The economy grows.
Negatively
1) High maintenance cost: It is a common knowledge that not all the accounts opened by poor households are operated by them on regular basis. As per one estimate, 58% of the total accounts (19 Cr) opened under PMJDY remain transaction-less. These accounts cause a huge financial and operational burden to the banks for maintenance. According to one estimate, the cost of maintaining a dormant account annually is roughly Rs. 10,000. If the total cost is calculated, it would run in thousands of crores.
2) Hitting the bottom line: The inclusion of more customers in the market fosters intense competition, that again is aggravated by opening of markets for foreign banks, introducing new categories (payment bank, small finance bank) in the system. This induces an intense price war and the profitability of the entire banking system suffers. (Note: Around 70% of the total banking system is owned by public sector banks. So, this results in loss of critical revenue for government.)
3) Intent of people: The folks in the rural areas, based on my experience of visiting more than 100 villages in Karnataka, are smart. They know how to use the banking system to their benefit. As the disposable income of the masses rises in the largest growing developing country, the monetary security becomes one of the main concerns of the people. Now, though apparently banking system attempts to include all within its hold for their benefits, what if someone is not willing to come under its fold due to different apprehensions, monetary being the main of them? I am happily living my life for 70 years, have created assets and made money. Why would I want to to be banked? As the non-banking life is part and parcel of the everyday culture of theirs, getting into a new system and adapting to it also faces cultural resistance.
4) Replacement of moneylenders' services:The moneylenders have always been, rightly, demonised for having exploited the poor masses by charging them rocket high interest rates (more than 120% annually in many cases) and coercing them for repayments. But the thing to focus on is that the moneylender is basically a service provider who is locally available and there for you to help you with money even at the midnight. Now, can you, being the formal financial institutions, provide the same? If not, there are going to be issues. One of the byproducts of this has been an unparalleled growth of the microfinance sector.
So, in a nutshell, financial inclusion doesn't have all positives. And given the set of constraints we face, it remains to be the judgement call of the ruling dispensation, whether to include or not.
If it is helpful then mark it as brainlist.
Positively
1) More accounts, more money: As under-served masses are covered under financial inclusion drive (http://pmjdy.gov.in/home), the money in form of deposits start to flow from their households into the financial system. This money can be lent at higher interest rates to the borrowers. The State Bank of India's deposit base is so strong that it sources 97% of its funds from deposits (at 4%), which it can lend at more than 10%.
2) More customers, more products: Again PMJDY being the case in point, the government has been able to sell more than 9 Cr accidental insurance policies and roughly 3 Cr life insurance policies. The financial inclusion offers the banks an opportunity to provide the eligible clients with a suite of financial services.
3) High inclusion, high economic performance: The inclusion of left out households in the financial system of the country essentially means that they would be able to contribute financially to the system. The banking system is just an entry point for them. The money, then, gets trickled to capital markets, money markets and booming sectors of money that are in need of funds. The economy grows.
Negatively
1) High maintenance cost: It is a common knowledge that not all the accounts opened by poor households are operated by them on regular basis. As per one estimate, 58% of the total accounts (19 Cr) opened under PMJDY remain transaction-less. These accounts cause a huge financial and operational burden to the banks for maintenance. According to one estimate, the cost of maintaining a dormant account annually is roughly Rs. 10,000. If the total cost is calculated, it would run in thousands of crores.
2) Hitting the bottom line: The inclusion of more customers in the market fosters intense competition, that again is aggravated by opening of markets for foreign banks, introducing new categories (payment bank, small finance bank) in the system. This induces an intense price war and the profitability of the entire banking system suffers. (Note: Around 70% of the total banking system is owned by public sector banks. So, this results in loss of critical revenue for government.)
3) Intent of people: The folks in the rural areas, based on my experience of visiting more than 100 villages in Karnataka, are smart. They know how to use the banking system to their benefit. As the disposable income of the masses rises in the largest growing developing country, the monetary security becomes one of the main concerns of the people. Now, though apparently banking system attempts to include all within its hold for their benefits, what if someone is not willing to come under its fold due to different apprehensions, monetary being the main of them? I am happily living my life for 70 years, have created assets and made money. Why would I want to to be banked? As the non-banking life is part and parcel of the everyday culture of theirs, getting into a new system and adapting to it also faces cultural resistance.
4) Replacement of moneylenders' services:The moneylenders have always been, rightly, demonised for having exploited the poor masses by charging them rocket high interest rates (more than 120% annually in many cases) and coercing them for repayments. But the thing to focus on is that the moneylender is basically a service provider who is locally available and there for you to help you with money even at the midnight. Now, can you, being the formal financial institutions, provide the same? If not, there are going to be issues. One of the byproducts of this has been an unparalleled growth of the microfinance sector.
So, in a nutshell, financial inclusion doesn't have all positives. And given the set of constraints we face, it remains to be the judgement call of the ruling dispensation, whether to include or not.
If it is helpful then mark it as brainlist.
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