What is Financial Inclusion? Why are the recently introduced Payments Banks being seen as a significant step towards financial inclusion? Explain. (10 marks)

What is Financial Inclusion? Why are the recently introduced Payments Banks being seen as a significant step towards financial inclusion? Explain. (10 marks)

Approach:

  • Introduce with the meaning of Financial inclusion and talk briefly of its importance
  • Describe briefly what Payment Banks are
  • Explain how payments banks enable financial inclusion
  • Conclude appropriately
Model Answer :

There are significant gaps in India in the banking services area and a large proportion of country’s population remain unbanked or underbanked. Financial inclusion denotes delivery of financial services at an affordable cost to the vast sections of the disadvantaged and low-income groups. The various financial services include but not limited to credit, savings, insurance and payments and remittance facilities etc. Financial inclusion ensures that benefits of growth are reaching to weaker sections of society by integrating them into the formal economy, thus it is an important component of inclusive growth.

Payments banks:

Payment Banks is one of the several steps taken by the Government to promote financial inclusion. A payments bank is a differentiated bank with the specific objective of catering to the unbanked and underbanked. Non-banking financial organisations are granted the authority to offer basic bank services like accounts for small demand deposits (up to Rs 1 lakh), remittance services, mobile payments/transfers/purchases and other banking services like ATM/debit cards, net banking and third party fund transfers. They can offer non-risk sharing simple financial products like mutual fund units and insurance products, etc.

The Payment banks are seen as a significant step towards financial inclusion because:

  • Payment banks will essentially rely on technology and limited range of products to promote financial inclusion while remaining economically viable.
  • Payment banks will bridge the last mile between bank branches and the remote customerliving in a rural areas.
    • Example: India Post Payments Bank (IPPB) will use technology and its 1.5 lakh post offices and more than 3 lakh postmen and Gramin Dak Sevaks in the country to facilitate financial inclusion in lakhs of villages.
  • It will offer small savings accounts and allow payments and remittance services to various sections of the society, especially the migrant labour workforce and the unorganized sector.
  • This innovation is also expected to accelerate India’s journey into a cashless economy, as well as facilitate schemes like Jan Dhan Yojana and DBT.

Despite the good intentions, issues like KYC norms, competition from regular banks, differences between government and RBI on the need for independent regulator for payments sector etc. have meant slow growth in participation so far in this sector. However, these issues are resolvable and payments banks are expected to bring a big leap in financial inclusion in the country.

Subjects : Economy

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