Question

Article on financial inclusion in cashless transactions

Answer 1

Cashless transaction and financial inclusion are two sides of the same coin. These problems may seem unrelated but they are really two sides of the same coin.

What is Financial Inclusion & Importance in India

According to Wikipedia, Financial inclusion or inclusive financing is the delivery of financial services at affordable costs to sections of disadvantaged and low-income segments of society

In India bank account penetration surges, but 43% dormant - Indian Express Report

According to The Hindu,” India accounts about a fifth of the global population without bank accounts” ( India accounts about a fifth of the global population without bank accounts)

Demonetization followed by promotion of digital transaction is in a way “forced financial inclusion.”

Transaction in Cashless economy are recorded. This could be used for the benefit of the unfunded section of the society.

A very large section of our society is outside the purview of banking system. This is advantageous for a section and disadvantageous for the rest. People who finance small business (small vendor) thrives in cash economy. They charge very high rate of interest, and deduct the interest at the time of disbursal. The small vendor has no choice but to avail the services of these powerful financiers.

The banks do not fund them because they do not visit banks and many times find “very difficult” to even get any information. Bankers could not disburse loan because of lack evidence of transaction.

Cashless transaction would force small vendors into a more structured financial transactions and financial discipline which could be documented. Based on these evidence the small vendor would be able to procure loan and a much cheaper cost. No more exorbitant interest like “kandhu vaddi, meter vaddi, etc.”

This also provides a scope for business expansion in days to come.

Demonetization has forced majority of (or) all the citizens to “fall into structured” business. Psychologically banks were considered too big for them and hence they never ventured into any branch. But due to technology advancement, the banks are brought to us.

Challenges would be is to go through the process of transformation. Social and financial exclusion so far would make the target group nervous and hence would be reluctant. The powerful group who would be loosing business will try to impede progress.

However, since all the payments to the poor from schemes like MGNREGA, etc is already done digitally, the “bottoms up” growth is bound to take over in time to come.

Every family has youth. These members of the society would be the change agent as far as digitization is concerned.

Answer 2

A World Bank survey reveals that while about half of all individuals in India had bank accounts in 2014, only 12% had made a cashless transaction in the past year. In this article, Bappaditya Mukhopadhyay, Professor of Economics and Finance at the Great Lakes Institute of Management, contends that cashless transactions can be encouraged by ensuring that payments – beyond government transfers - are made directly into the bank accounts of recipients.Historically, the way we have approached financial inclusion is odd. For quite a while now, financial inclusion has merely been about ‘providing access’ to the unbanked population through opening of bank accounts only. Without addressing the question of ‘what next?’, most of these accounts have gone dormant. Whileaccess to bank accounts is a necessary condition for financial inclusion, it is far from being sufficient. ThePradhan Mantri Jan Dhan Yojana(PMJDY)1does provide the necessary infrastructure but how do we ensure that individuals with bank accounts actually start utilising them? The answer lies in encouraging them to go cashless. Going cashless is a measurable objective for financial inclusion and it itself shows the processes and instruments to get there. Integrating the objective of financial inclusion with going cashless would mean that merely opening bank accounts is no longer the end goal. PMJDY, coupled with efforts towards a cashless payment system, can achieve financial inclusion.The decision to go cashlessIn 2014, World Bank undertook asurveyof 146,647 individuals to study financial inclusion across the globe. From India, 3,000 individuals were surveyed. The data from India revealed that 53.14% of all individuals had access to bank accounts out of which 53.12% accounts are dormant, that is, there have been no transactions in the last one year. This means, 28.23% of all individuals have accounts that they use while only 12.44% of all the individuals have made a cashless transaction in the last one year2. The objective of financial inclusion should be to boost up the 28.23%. If one focuses only on the banked population, the major factor that influences the decision to go cashless is the nature of inflow into one’s account. After controlling for education, gender, income and type of occupation, I find that individuals who receive payments in their accounts are twice as likely to make cashless payments as those who do not receive such payments in their accounts (Mukhopadhyay 2015b).The reason is plain to see. The decision togo cashless is mainly driven by convenience. However, if inflows into bank accounts are absent, to make cashless payments an individual has to first incur an additional cost of convertingcash to bank balance (deposit the money into the account) and then use it to make cashless payments. Clearly, to encourage individuals to use their accounts, the accounts must have substantial inflows. The government’s initiative to credit benefits directly into the bank accounts ofrecipients is therefore the right beginning.However, the sole emphasis on government transfers, in the context of moving towards a cashless payments system, is misplaced as (i) less than 6% of all individuals receive such transfers in their accounts, and (ii) such transfers form a small part of most household budgets.